A new stage for postal regulation? Insights from recent developments in Denmark

What will be the next stage for postal sector regulation in the EU? According to the Danish example, where letter volumes have declined faster than anywhere else in Europe[1], the answer seems to be the abolishment of the universal service obligation (USO).

On 28 June, the Government and a broad political majority in Denmark reached an agreement where they decided to abolish the postal USO applying to Post Danmark[2] as the designated universal service provider (USP). However, a few targeted measures will still be applied where and when needed. This includes the safeguarding of postal services to island communities, free shipments for the blind, and international mail.[3]

The rest of the services currently covered under the USO (see Annex 1) are expected to be provided by the market at the desired quality without any regulatory intervention, but the national regulator will increase its monitoring of the market to ensure that this will be the case.[4]

How will this work?

To ensure that the three services mentioned above will continue to be provided, the Danish Government will make several public tendering processes. Post Danmark can participate in the tender process on equal terms as other postal operators.

The tenders will be launched at different times as they require different degrees of preparation. In the meantime, politicians will try to agree with Post Danmark that it continues to manage the three areas until the operator winning the tender process takes over the task.

Moreover, the Danish regulator will increase its monitoring to safeguard that the market provides a nationwide uniform service, apart from the three elements mentioned above. If any shortcomings are identified through the monitoring, the Ministry of Transportation can designate a postal operator to provide services at the desired quality (i.e., a fall-back provision to re-introduce a service obligation for some specific services).

Why is the Danish Government abolishing the USO?

A postal USO safeguards the provision of essential services. While the market covers some, others are only covered by the USP, see Figure 1. The provision of such unmet needs entails a benefit to society but may also constitute a cost to taxpayers.

The increased digitalisation of societies means that the essential nature of physical postal services is losing its importance. At the same time, the expansion of e-commerce delivery markets means that the scope of traditional postal services provided by the free market is increasing. Consequently, the size of the unmet demand shrinks, which reduces the need for broad market intervention. 

Furthermore, the cost of providing the USO in Denmark has changed significantly in recent years. This is a natural consequence of having to maintain an extensive infrastructure to deliver on regulatory service requirements at the same time as volumes (and thereby revenues) are falling drastically. Prior to 2017, Post Danmark did not receive any compensation for its provision of the USO. However, during the period 2017-2019, the Danish and Swedish authorities granted Post Danmark a compensation of approx. €160 million to support its transformation and for carrying out the USO. For 2020, Post Danmark received €30 million.[5]

Is Denmark an outlier, or is this a recipe for other countries too?

Some market circumstances make Denmark look like an outlier, thereby indicating that the route taken there would not be relevant for other countries. First, Denmark is a relatively small country with a population of 5.9 million and a geographic size of 43 thousand square kilometres (less than 10 per cent of the size of France). Second, Denmark experienced an extraordinary decline in mail volume, amounting to close to a 90 per cent decrease[6] from its peak in 2000 to 2022. Third, Denmark has one of the most digitised societies.

However, the fundamental dynamics are similar across many postal markets. First, an increasing number of countries in Europe experiencing an accelerating decline in mail volumes and an increasing need for financial support to maintain the level of universal services. Second, e-commerce delivery markets are expanding, providing more options in terms of delivery operators and services across larger geographical areas. Third, concerns over environmental sustainability increasingly shape policy agendas in the transportation sector. This further makes the trade-off between a broad postal USO and more environmentally friendly options more evident.

Could postal sector regulation be entering a new stage?

Depending on market developments, governments need to adopt different approaches to postal sector regulation. We have historically observed three stages of postal sector regulation, see Figure 2. 

 In the first stage, the postal sector regulation’s focus is on taming old postal monopolies by resolving existing market failures to promote efficient competition.

In the second stage, the postal sector regulation shifts focus from ensuring competition to ensuring a financially sustainable provision of the USO. This is normally a consequence of declining mail volume. The financial sustainability of universal services typically requires increased pricing flexibility or operational flexibility for the universal service provider.

Source: Based on Copenhagen Economics (2019), Postal services in the EU.

In the third stage, the postal sector regulation focuses on providing effective financial subsidisation of the USO. Continuous decreases in mail volume eventually means that countries reach a stage where more commercial flexibility cannot be provided without jeopardising the provision of universal postal services.

But what happens when mail volumes decline even more and even to a point where the cost of safeguarding all the essential services will be disproportionate to the social benefits of doing so? In Denmark, the solution seems to be the abolishment of the USO, which could mark the start of a new stage in postal sector regulation in other countries as well.

To determine if the decision in Denmark could be a model for other countries, a thorough analysis of the costs and benefits of the USO must be conducted. Such review is best achieved using a cost-benefit approach that compares the impact on the net cost of the USO to the consequences on users and other stakeholders.[7]

A cost-benefit analysis must account for country-specific circumstances and cannot merely be based on generic assumptions. It is, therefore, not to be taken for granted that the abolishment of the USO in Denmark is the best solution in other countries. Nonetheless, it could indicate that Denmark is pioneering a new stage of postal regulation.

[1] Copenhagen Economics (2022), “Main developments in the postal sector (2017-2021)”, page 44.

[2] Post Danmark is a wholly owned subsidiary of the PostNord Group.

[3] It ensures that Denmark complies with the EU Postal Services and the UPU convention.

[4] Agreement on the framework for the future organization of the postal sector from 1 January 2024.

[5] Case number SA.49668 and SA.57991.

[6] PostNord Annual- and Sustainability reports.

[7] Copenhagen Economics (2018), “Main developments in the postal sector (2013-2016)”, chapter 5.