Canada Privatization

Diagnosis, or into the privatization matrix (Canada Post, Part 1)

There is little doubt that Canada Post’s recently-announced plan to eliminate home delivery, raise prices and lay off thousands of workers is not aimed solely at streamlining operations, but is likely a prelude to future privatization of postal delivery in Canada. Canada Post is ripe for the picking: it is a profitable, socially-useful public enterprise with n updated, nation-wide infrastructure of retail outlets, other properties, vehicles and IT systems. One bad year in 2011, when the post office recorded a loss  due in part to rotating strikes and a 2-week lockout, has been used to create an image of unsustainability and justify the current cost-savings plan.

Any future privatization attempt can play out in a number of ways. While we typically think of privatization as a sell-off – the government transferring ownership of a public service provider into private hands – the exact nature of the transition between public and private service provision can take on a number of unique forms. Breaking a concept as broad, and at times nebulous, as privatization into more concrete and discrete strategies not only makes it easier to analyze particular episodes, but also aids in developing effective opposition.

I propose one way to differentiate between privatization strategies that is simple and universal. Four possible strategies emerge based on answers to two questions. First, are the majority of operating expenses of the public service to be privatized covered by internal revenue or government funds? Second, is the public service provider exposed to private competition before privatization? Looking at these two questions simultaneously produces the following grid of privatization strategies that can be used to assess what may lie in store for Canada Post and compare this to other privatizations, in particular those of postal services in other countries.

Figure 1. A privatization matrix.
Figure 1. A privatization matrix.

At present, Canada Post is funded out of its own revenues and has not been exposed to competition in its core business of lettermail delivery. This puts it firmly in the upper left quadrant of our matrix. On the other hand, the Crown corporation faces intense competition in the increasingly important parcel delivery market from private logistics companies like UPS and Fedex and is predicting a deteriorating funding crisis going into the future, with anticipated losses totaling over $1 billion by 2020. Although this last claim has been (rightly) disputed, its seed has been firmly planted in the popular imagination and is taking on a life of its own. In various respects – some based in reality, some in convenient fictions – Canada Post thus also fits in other quadrants and is open to a range of potential privatization strategies.

Let us now take a look at each of the four strategies from the matrix in turn.

[1] Cherry picking. Recent European experience is a good window onto this one. Indeed, this strategy has been popular in the European Union as postal service markets there have undergone complete liberalization over the past decade, with all member states having been obligated to open their postal markets to competition by January 1, 2013 at the latest. Some countries responded to this imperative by leaving existing public infrastructures in place while letting private competitors enter the market – others took their free market with extra cream and sugar and went with the double trouble of liberalization and privatization.

Either way, under such a strategy, private players are able to enter a market where there is demonstrated potential for profitability and effectively cherry-pick the most profitable aspects. This undermines the public service provider: it is liable to lose high-volume, high-profit services in major centres first. The fact that public post offices almost everywhere have a legacy of strong unions, whereas the broader economy has seen EU-driven shifts towards more flexible and precarious labour gives the new private entrants another unfair advantage in much lower labour costs. Postal market liberalization in Europe has been especially damaging for workers. Labour costs are driven down by making work increasingly part-time, self-employed, temporary or some combination of the three; for example, deliveries can be carried out by self-employed workers paid at piece rates. Low wages and meager benefits mean low overhead costs; cherry-picked markets mean high revenues. The result is high profits. In many EU countries, private entrants have taken over 10% or more of the lettermail market in a few short years, even up to around 45% in the UK.

At the same time, most EU countries have imposed a requirement for the public or now-privatized-ex-public enterprise to maintain costly universal service. This means that the universal service provider still has to provide low-volume services to smaller markets and maintain an infrastructure that allows for the delivery of mail to all citizens. Increased competition, however, means that efficiencies of scale are lost and the potential for generating losses vastly increases. For this reason many European countries have created contingency funds should the enterprise charged with providing universal service go into the red. Regardless if the universal provider is still public or already privatized, such a fund, if used, is a simple bail-out, a transfer of public funds into private hands. The public funds rescue the universal provider, but they is proportionately spread between the new private competitors who have captured the profitable segments of postal delivery.

This strategy is a slow replacement of public with private service provision – one whose end result is not so much a fully-privatized service but a sizeable and thriving private sector alongside an unprofitable public, or private-but-publicly-subsidized, rump. This rump not only ensures that a large part of any potential losses are absorbed by the public, it also provides additional grist for the mill of right-wing opinion that chracterizes public provision as inherently less efficient and loss-making. Given that the most profitable parts of a service are cherry-picked away, there is nothing inherent about this outcome; rather, it is a self-fulfilling prophecy.

While lettermail has not been opened up to any competition in Canada, the variety of different services offered by Canada Post means that maintaining profitability will depend in part on how well it can maintain its presence in each one. For example, cherry picking around parcel delivery is already under way and may undermine future profitability.

[2] Create-a-crisis. A much faster alternative to the slow-motion privatization via liberalization described above is an outright sell-off of a public service provider without first opening its market to competition. This strategy, however, hits a snag if the public service provider in question is profitable. Nosy citizens can ask, why sell-off something that is not only providing a valuable service, but is, on top of that, adding money to government coffers, money that can be used to fund other services? Even ideological arguments that extoll the virtues of private enterprise may not be able to satiate the curiosity that gives rise to such concerns.

The solution is as simple: why fight for hearts and mind, when you can fight facts as well? Indeed, creating a crisis – whether of profitability, accountability, financing or some other important aspect of enterprise performance – that provokes calls for privatization is not that hard to pull off when you have influence over how an enterprise is run and are already waging an ideological battle. The on-going privatization of Japan’s postal system – started in 2005 – is an example of this strategy at play. The post and its associated financial arms in banking and insurance had made a profit in 7 of the 11 years prior to privatization and had a long history of providing safe banking and financial services to a large portion of Japan’s citizens. Nevertheless, charges of corruption and cronyism were used to argue for the wholesale privatization of the system – with the additional effect of eventually moving a large portion of the savings in the postal bank into riskier investment products. This last point demonstrates why greater transparency and democratic control – plausible solutions to a crisis in accountability – were not seriously considered: privatization is often part of a broader strategy of introducing greater reliance on markets and spreading risk throughout society. Privatization can be the answer even if profitability and public opposition are high, as is the case in Japan.

Back home, it is certainly possible that the current cuts at Canada Post and allegations of pension unsustainability are the opening salvos in a campaign of crisis-creation.

[3] Partners in crime. Many public services that are the exclusive purview of government or its agencies, are not expected to generate significant revenue (that pop machine at the hospital is not paying for open-heart surgery) and are funded from general government receipts. Others generate some revenue, but not enough and so are systematically subsidized by government funding. Such services are not as immediately attractive to private investors as those that are already profitable. This, however, does not mean that privatization opportunities do not exist. On the contrary, recent history has seen the rise of a variety of creative means to enable private companies to cash in handsomely on the delivery of public services.

The most pernicious version of this strategy has been the public-private partnership (or P3). At its simplest, it is a scheme by which a private investor agrees to deliver a public service that also involves building a piece of infrastructure, such as a hospital, care home, section of highway, water-treatment facility and so on, in exchange for the right to “lease” it back to the government for a fixed amount of time. Investors profit because they are in theory taking on a variety of risks, but the government is always left with the tab if something actually goes wrong. The litany of criticisms of such projects is as long as the list of P3 failures from the across the globe.

Beside P3s, the privatization of a service that is funded out government revenue can also occur via subcontracting. This is in some ways the mirror image of cherry picking. While cherry picking relies on creating competition to strip a profitable public service to its unprofitable core, subcontracting allows the private sector to find the profitable bits hiding underneath the cloak of an overall lack of profitability. As with cherry picking, the profitability of individual bits of service delivery may be imposed through cuts to labour costs and union breaking that together bring significantly worse employment conditions. Here, privatization is additionally a tool for labour control that helps profits across the same sector, whether public or private. The subcontracting mechanism has been particularly popular in the privatization of numerous support services in the health sector across Canada.

With Canada Post’s funding model supposedly in crisis and no external competition in the key lettermail category, some of these strategies that privatize from the inside out may well find their way into the discussion of its future.

[4] Starve’n’sell. This last strategy relies on the difference between a subsidized publicly-delivered service and its market-based equivalent. The existence of a profitable market version of a public service makes the latter all the more attractive to private investors wanting to realize potential profits latent in the part of the market controlled by the state. This is a change in the flow of funds: rather than subsidies flowing via citizens from government as recipient to government as service provider, the same money could flow from government through via people as consumers to the private sector now providing the same services. The trick is to find a pretext to enact the transfer of assets from public into private hands.

The following scenario is a common one to this end, especially in an age of austerity – that of ideological attacks on the public sector and its role in social life. First, there are claims of a funding crisis – either general or particular to the service in question. Either way, service quality falls. Soon the government approaches the public with its hands apparently tied: either we raise taxes somewhere or cut the service in question further. We cannot compete with the efficiency of the market version. The ideological battles of the past decades have made both the press and the public in general wary of increased public spending, making it easier to generate a swelling anger and frustration using the alleged mismanagement that now has to be paid for by everybody…

Unless, of course, something could at least be salvaged. A minister appears with a grave face: “we need to cut loose this drain on our resources, but luckily we’ve found a willing buyer.” That the buyer is offering a low price is irrelevant. Losses much be cut while they haven’t piled up too high; the money-loser must be eliminated to forgo higher taxes and/or future debts. This picture clearly calls to mind the crisis at several prominent public university systems in the United States, notably that in California.

This is but one way to look at the matrix of possibility we face looking into the future of public institutions such as Canada Post. The flip side of this matrix, however, is a matrix of opportunities for resistance. Coming soon: part two on strategies of resistance, aka the escape from the matrix…

2 replies on “Diagnosis, or into the privatization matrix (Canada Post, Part 1)”

[…] Introducing the Political Eh-conomy Radio podcast, a new podcast on economic issues in Canada and beyond. The inaugural episode tackles postal banking: why cut valuable services and jobs at Canada Post when it is instead possible to create financial services run by the post office, at the same ensuring the Post’s future sustainability? Canada Post put it best in its secret report: postal banking is a “win-win” – unless of course your aim is to dismantle public services and set the stage for privatization. […]

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