financing the universal services obligation in belgium

Financing the Universal Service Obligations in Belgium

Background, Past and Current Situation in a Nutshell Presentation BIPT (not binding) Bern, 9 April

CA Session 2014

1

Agenda 1. Belgium

2. Key figures of the Belgian postal market

3. Designated USP – bpost

4. European framework – Postal Directive

5. Universal Service Obligations

6. Calculation and financing of the USO until 31 December 2010

7. Calculation and financing of the USO from 1 January 2011

8. Reference work of the European Regulators Group for Postal services (ERGP) – reference scenario

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1. Belgium

3

2. Key figures of the Belgian postal sector (1)

• Postal incumbent: bpost (designated until 2018)

• 5 postal services providers acquired their licences under the system which was applicable before the adoption of the Act of 2010

• May 21, 2013: BIPT granted TBC-POST a postal licence

• Express sector: major international integrators such as DHL, FedEx, TNT, UPS

• More than 90% of turnover generated on the postal services market is generated by 9 players. The rest of the market is represented by more than 700 small companies or self-employed

• Total turnover: ± 3 billion EURO in 2012

• Number of letter-post items per capita per month: 18.4

• Employment: ± 1% of total employment in Belgium, representing close to 33,000 direct positions

• Quality: in 2012, almost 94% of priority mail was delivered next day on time

4

Principal actors on the Belgian market for the provision of postal services in 2012 (Revenue)

These actors account for more than 90% of the revenues and market shares of the Belgian postal sector.

5

Operators Addressed mail Parcels/Express Advertising mail Press Intl mail

bpost

DHL Intl

DPD Belgium

Federal Express Europe

G3 Worldwide

Geodis-Ciblex Belgium

GLS Belgium

TNT Express Belgium

UPS Belgium



Revenues and market shares of the postal service for 2010, 2011 and 2012

6

0 500 1000 1500 2000 2500 3000 3500

2010

2011

2012

2002

2128

2158

971

1007

897

Revenues (m€)

bpost others

2973

3135

3056 71%

29%

69%

31%

70%

30%

Market shares

3. Designated USP bpost

Year 2007 2008 2009 2010 2011 2012 2013

Operating income (€ Mio)

2276 2262 2250 2318 2365 2416 2429

EBIT (€ Mio)

183 222 240 319 359 404 436

Profit (€ Mio) 117 179 163 210 (57) 174 288

Employees (FTE) 32 571 30 660 29 618 29 311 27 973 26 625 25 683

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bpost till 31 December 2018

4. European framework – Postal Directive (1)

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Green Paper in 1992

If no change,

1. postal services will disappear or at least will not enjoy growth in communication and transport sector

2. postal services will focus on business customers who represent 4/5 of postal operators turnover

3. clear obstacle to internal market (essence of EC)

4. In many cases subsidised by the telecom sector

Important Focus on Universal Services


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Postal Directives

1. Subsidiarity very important

2. Gradual establishment of a level playing field

• Via the gradual shrinkage of the reserved area • Via an important focus on USO

EU 12 EU 15 EU 25 EU 27

1992 1995 1997 2002 2003 2004 2006 2007 2008 2011-2013 (16 MS) – (11 MS)

Green Paper

Postal Directive 1

Market Opening 1: Domestic and cross border > 350 g or 5 times the standard tariff

Postal Directive 2

Market Opening 2: Domestic > 100 g or 3 times the standard tariff and the whole cross border

Market Opening 3: Domestic > 50 g or 2.5 times the standard tariff

Postal Directive 3

Full Opening

1998

EU 28

Different Postal Directives

Postal Directives Objectives 1. Protect and promote reliable, affordable and efficient universal service 2. Promote a fully operational international market

Directive 97/67 1. Minimum definition of USO 2. Maximum definition of Reserved Area

Directive 02/39 1. Modernisation of postal sector explicitly addressed by Lisbon 2. Decrease of Reserved Area

Directive 08/06 1. Rules for financing the USO 2. No more reserved area


5. Universal Postal Obligations (1) European directive

At the European level, the postal directives of 1997, 2002 and 2008 define the general framework of the Universal Postal Service (UPS) obligations. These directives provide for:

the right for every user to enjoy the permanent provision of postal services within the UPS of specified quality at all points in the territory and at affordable prices for all users;

a density of the points of contact and of the access points taking account of the needs of users;

one collection a day, at least five working days a week;

one delivery to the home or premises of every natural or legal person (or to appropriate installations by way of derogation), at least five working days a week;

the collection, sorting, transport and delivery: o of postal items up to 2 kg; o of postal parcels up to 10 kg;

the services for registered items and insured items. 11

5. Universal Postal Obligations (2)

Belgian legal framework

Which products? Which obligations?

Postal items < 2 kg

• Uniform and affordability tariff • Postal items delivery to all the

houses • One access point per municipality

National postal parcels < 10 kg Incoming postal parcels < 20 kg

Registered items Insured items

• Per municipality: at least one

collection, one sending and one delivery 5 days/week

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6. Financing of the USO until 31 December 2010 (1)

Description Advantages Disadvantages

All costs of the financial accounting are allocated to the products. Costs = direct costs (variable and fixed), shared costs, overhead costs and "sunk costs" are distributed among the products. Distribution criterion: e.g. the volumes

Easy conciliation with the balance

- Easiest method to implement

- Reflects the real situation of the company

- Very widely used

- Distribution of indirect costs: causality link hard to establish

- The costs of inefficiency are included

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FDC (Fully Distributed Cost)

14

Activity base costing principles

Costs

Activities Drivers Cost objects: products, customers

cost distribution first activity based

second activity based cost distribution to driver based cost objects


Resources

15 15

Resources Activities Cost objects

About 2000 Responsibility centres with

+/- 20 kinds of cost

About 500

activities

About 1000

products

Drivers: FTE’s time standards

Drivers: weighted volumes


The costing model of bpost - some figures

16 16

The ABC method is an internal accounting method that starts from the principle that any cost within a company is caused by a specific activity.

Direct investment costs

Direct labour costs

Overhead costs

centre 1

Overhead costs

centre 2

Overhead costs

centre N

Production costs

Centre 1

Production costs

Centre 2

Production costs Centre

N

Products

6. Financing of the USO until 31 December 2010 (4) Current method: ABC methodology: basic principles

17 17

+

...

...

...

Cost of reserved and non-reserved universal services (R and U)

Total revenue of US (US = Universal Service)

Result of US

Burden resulting from universal service obligations (R and U)

Compensation by the reserved sector (R)

Burden to be compensated (if < 0) by the compensation fund?

FDC Cost Product US P1

FDC Cost Product US P2 FDC Cost

Product US PN

Profit Product US P1

Profit Product US P2

Profit Product US PN

Loss Product US P1

Loss Product US P2

Profit Product US PN

Total losses of the Universal

Service

Profits from profitable reserved services

Unfair burden remaining to be covered

+

...

...

...

Universal Service Cost reserved or not (R and U)

Total of US revenues

Result of US

Extra burden (R and U)

Compensation by the reserved sector (R)

Burden to be compensated (if < 0) by the compensation fund



FDC Cost Product US PN

Revenues Product US P1

Revenues Product US P2

Revenues Product US PN

Loss Product US P1

Loss Product US P2

Profit Product US

PN

Total losses of the universal service

Profits of profitable reserved

services

Unfair burden remaining to be covered

6. Financing of the USO until 31 December 2010 (4) Calculation of the burden to be compensated according to the FDC

Former mechanism of compensation funds laid down by the Act

§ 1. At the earliest on the date determined by the Decree referred to in Article 144novies, § 1, all the companies licensed according to Article 148sexies to provide non-reserved services included in the universal service, for which these companies make a turnover of more than EUR 1, 240, 000 (and La Poste), are obliged to contribute towards the compensation fund. This contribution depends on the turnover made by the services as defined in the previous paragraph provided to the users who have their usual headquarters, establishment, domicile or place of residence in Belgium. The first (EUR 1, 240, 000) are not taken into account in the determining of the turnover made. § 2. The contribution is calculated as follows: the cost of the universal postal service that is still to be covered, considering the reserved services, added to the compensation fund handling charges, is multiplied by the part obtained when dividing the turnover of the contributor referred to in §1 by the sum of the turnovers of the contributors referred to in §1.

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7. Calculation and financing of the USO from 1 January 2011 (1)

European framework Since 01/01/2011, the reserved service does no longer exist; it is now expected that a

compensation could be given to the provider of the UPS for the provision of the UPS, insofar as this financial transfer results in the least distortion to competition.

According to the 2008 directive,

the net cost of the UPS obligations represents "the difference between the net cost for a designated universal service provider of operating with the universal service obligations

and the same postal service provider operating without the universal service obligations.

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Revenues Revenues

Costs

Costs

Costs linked to the US provision

UPS net cost

Revenues linked to the UPS provision

Operator with the UPS

obligation

Operator without the

UPS obligation

Costs and revenues linked

to the UPS

UPS net cost

Simplified schematic representation of the cost model to

calculate the net cost of the UPS as proposed in the directive 2008/6/CE

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NAC: Net Avoided Cost)

Revenues, including the US

obligations Revenues

without the US obligations

Costs, including the US

obligations

Costs without the US obligations

Costs linked to the US provision

US net cost

Revenues linked to the the US provision

Intangible and market benefits

Situation of an operator with the US obligations

Situation of an operator without

the US obligations

Costs and revenues directly linked to the US

Revenues indirectly linked to the US

US NET COST

R BIC

C C-R-BIC

The net cost of the universal service obligations represents "the difference between the net cost for a designated universal service provider of operating with the universal service obligations and the same postal service provider operating without the universal service obligations".

Directive 2008/06/EC, Annex I


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Adopted principles and method of the economic modelling. As a reminder: Reference scenario and counterfactual scenario

Definition of the services provided by the postal operator assumed in the reference scenario without its obligations to provide the UPS.

It comes to calculating the level of the postal operator costs in both situations (provider and non-provider of the UPS)

R BIC

C

2 3

4

Cost modelling of an operator

Definition of a counterfactual scenario

Transversal costs

Joint costs Services A, B, C

Joint costs Services D, E

Dire

ct c

osts

Se

rvic

e B

Dire

ct c

osts

Se

rvic

e C

Dire

ct c

osts

Se

rvic

e D

Dire

ct c

osts

Se

rvic

e E

Dire

ct c

osts

Se

rvic

e A

UPS

Transversal costs

Joint costs Services A, B, C

Joint costs Services D, E

Dire

ct c

osts

Se

rvic

e B

Dire

ct c

osts

Se

rvic

e C

Dire

ct c

osts

Se

rvic

e D

Dire

ct c

osts

Se

rvic

e E

Dire

ct c

osts

Se

rvic

e A

UPS UPS

excluded UPS

- =

Situation of an operator with the UPS obligations

Situation of an operator without the UPS obligations UPS net cost

UPS excluded

1

2

• The application of the avoided cost method comes to calculating the difference between the costs structures of the postal operator providing the UPS and of the same postal operator without the UPS obligations.


BIPT objective: Determine the net cost

of the UPS

Regulatory framework

Operational elements

• Efficiency • Objectivity/opposa-

bility of the UPS net cost calculation

• Incentive for the UPS provision

• Inclusion of the regulatory accounting

• "Net avoided cost" method

• Data availability • Transparency • Objectivity of the cost

allocation • Acceptance by the

operator • Dynamic aspect of the

approach

What is possible?

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BIPT objectives and context. Which margins for manœuvres for the determination of the UPS net cost?


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• Modelling of the Belgian postal operator currently designated to provide the UPS (bpost)

• Bpost situation and context of the postal market corresponding to the year of the UPS net cost calculation

• Bottom-Up approach

• The postal delivery is considered to be the decisive process for drawing up the counterfactual scenario From an operational perspective, the delivery

sizes the transmission network, represents the majority of the postal activity costs and cannot be avoided

From a commercial perspective, the delivery is the main link between the service user/prescriber and the postal operator

Reference situation Counterfactual scenario

Identification of the operational constraints linked to the UPS

Adopted principles and method of the economic modelling. The counterfactual scenario is obtained by identifying the operational constraints linked to the UPS provision in the reference situation


24 24

The unfair burden is compensated by the State budget. (art 144 novies)

The net cost implies an unfair burden to the universal service provider if it exceeds 3% of the turnover that the universal service provider achieves in the universal service segment.

The new mechanism for financing the net cost of the US laid down in the future legislation


8. Reference work of the European Regulators Group for Postal services (ERGP) – reference scenario ERGP Report on net cost calculation and evaluation of a reference scenario

Link: http://ec.europa.eu/internal_market/ergp/documentation/documents_en.htm

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financing the universal services obligation in belgium

Government & Nonprofit