Could Denmark’s decision to abolish the universal service obligation mark the start of a new era in postal sector regulation worldwide?
On January 1, 2024, the universal service obligation (USO) was removed in Denmark due to a change in Danish postal law, reigniting a decades-long debate concerning the suitability of USOs worldwide in an increasingly digital market that has seen letter volumes plummet in recent years. Denmark’s drastic action could mark the start of a new stage of postal sector regulation, with rules relaxed around universal service, which typically requires a national postal operator to deliver letters to all its citizens throughout the country on a set number of days.
In Denmark, PostNord has had the task of providing the universal postal service for almost 400 years. In recent years, however, this has been an increasingly challenging task. Since the start of this millennium, Denmark has seen a 90% reduction in letter volumes; the country was the fastest in the world to digitalize its mail. Maintaining the USO became extremely expensive, with the post receiving compensation from the Danish state since 2020 to cover any losses incurred. In 2023, this compensation was estimated to amount to Dkr150m (US$22.5m).
Danish changes
Recognizing the dwindling mail market, in 2023 the Danish government made the bold move to amend the Postal Act and allow the market to take care of providing a nationwide postal service from the start of 2024. Exceptions apply to mail for small islands and visually impaired people, and international mail, for which procurement processes are currently being carried out. PostNord Denmark is negotiating a transitional agreement with the Danish state to ensure delivery of such items of mail until the procurement processes have been completed.
“The move has no immediate impact on PostNord’s parcel operations in Denmark,” PostNord said in a statement. The new law, however, creates a “new reality, which in turn means the implementation of a series of changes to our prices, offerings and organization,” the organization added.
Specific details of this “new reality” are yet to be revealed by PostNord, which was unable to provide further comment to Parcel and Postal Technology International regarding the abolishment of the USO. It did, however, confirm that, “The adaptation of the mail business will be carried out in line with continuing market developments in Denmark.”
It remains to be seen how customers will react to the new situation, but what is evident is that Denmark has sparked discussion around a potential new era of postal regulation, with other countries now also exploring how their USOs can be altered to help national postal operators survive in a highly competitive market.
“USOs once provided an opportunity to build additional services onto a letter delivery spine, but as that operational backbone erodes it becomes an expensive liability rather than an asset,” says Alan Barrie, chair at Delivering London/YEEP! Lockers and chair at Stamp Free. “Postal operators can no longer justify an everyday service to all addresses, and they are exposed in an increasingly competitive parcel market.”
The UK situation
Other countries currently considering changes to their USOs include the UK, Australia and Germany. In the UK, the postal regulator Ofcom has recently called for a national debate on the future of the universal postal service, stating that reform is necessary to secure the service’s long-term future. According to Ofcom’s Post monitoring report: Postal services in the financial year 2022-23, the overall trend for letters has seen accelerated decline in 2022-2023 following the post-pandemic recovery in 2021-2022, with UK addressed letter volumes decreasing by 9.5% to 7.3 billion items in 2022-2023. This compares with an average 5% yearly fall between 2015-2016 and 2019-2020.
Ofcom is currently inviting views from interested parties on its analysis of the USO and on two primary options for change, in particular. Those options are making changes to existing First and Second Class and business products so that most letters are delivered through a service taking up to three days or longer, with a next-day service still available for any urgent letters; or reducing the number of letter delivery days in the service from six to five or three. This would require the government and parliament to change primary legislation. Ofcom stressed that under any scenario, Royal Mail must modernize its network, become more efficient and improve its service levels.Last year, the postal operator was fined £5.6m (US$7m) for poor performance.
Ofcom estimates that Royal Mail could achieve a net cost saving of £100m to £200m (US$126m to US$253m) if letter deliveries were reduced to five days; and £400m to £650m (US$506m to US$823m) if reduced to three days. The regulator will close its discussion period on April 3, 2024. After carefully considering the feedback, it will provide an update in the summer.
“Ofcom’s report demonstrates that reform is urgently needed to protect the future of the one-price-goes-anywhere universal service,” said Martin Seidenberg, group chief executive officer at Royal Mail. “We are doing everything in our power to transform, but it is not sustainable to maintain a network built for 20 billion letters when we are now only delivering seven billion.
“While other countries have grasped the opportunity to change, the UK is being left behind. There has been a lot of discussion about dropping Saturday letter deliveries in the UK, but as other countries have shown, there is a range of options to consider. A modern and sustainable postal service is crucial for our people, our company and the customers we serve.”
According to Barrie, Royal Mail cannot move forward until “the USO question is clarified”. He continues, “It needs to find a new formula to optimize letter deliveries at the same time as it seeks to transform its parcel delivery operations, and it must then dovetail these redefined services into a sustainable employment model for its much-valued workforce.”
Barrie believes that as an absolute minimum there must be a reduction from six to five mail delivery days in the UK. “But my concern is that this may not be enough, resulting in a second bout of uncertainty for customers and postal workers as has already happened in Sweden, Denmark, Belgium and Norway. The question is whether it is best to change in small steps or to make a more ambitious change from the outset,” he adds.
John Tuohy, chief executive officer at OOHPod, believes that if USO change doesn’t happen soon then, “Royal Mail will find itself in a deeper commercial hole.” The post made a £419m (US$530.5m) adjusted loss last full year. “Discussion around changes to the USO simply requires objective consideration of what type of national service people want or need, and that will be gleaned more from communities than the House of Commons. Logic rather than sentiment should be the principal factor in any outcome,” Tuohy says.
Using PUDO networks
Tuohy also believes that Royal Mail could make better use of the roughly 60,000 PUDO and locker points across the UK for letters and parcels to help it meet its delivery targets. “This makes both commercial and environmental sense,” he adds.
Marek Rózycki, managing partner at Last Mile Experts, agrees. “If a very convenient and proximate out-of-home delivery alternative for letters were offered, this could dramatically improve economics,” he says. “Imagine if your letters are left in a locker or PUDO point ‘slipper distance’ from your home – and only delivered to your doorstep if you are unable to physically collect due to age or illness, for example.”
Community consultation in Australia
In December last year, the Australian government announced proposed changes to postal services, with daily letter deliveries set to be scrapped to help reduce Australia Post’s losses. The post recorded an A$200m (US$131m) pre-tax loss for the 2022/2023 financial year, its first annual loss since 2015 and only its second in the past +30 years. In Australia, letter volumes have reduced by two-thirds since their peak in 2008. The average Australian household now receives just over two addressed letters per week.
The Australian government’s proposals state that mail deliveries can be made every second day to 98% of locations. Parcel deliveries will continue to be made daily. The regulations are currently at draft stage, with community consultation ongoing.
“The reforms will establish a platform for Australia Post to build a more sustainable business, while still providing secure employment for tens of thousands of posties and other team members, as we continue to deliver for our customers and the community every day,” comments Paul Graham, CEO and managing director of Australia Post. “We will also continue to prioritize and protect vulnerable people, maintaining discount stamp pricing for pensioners and charities, while continuing to offer some of the lowest stamp prices in the developed world.”
Australia Post has already worked cooperatively with its workforce and the Communication Workers Union (CWU) to trial a new model for mail delivery at selected sites nationally. It intends to refine the model for a national rollout over the next 12 months.
Additionally, the government has agreed to update the outdated methodology used to classify the post’s network in rural and remote Australia, which was based on the 1991 census. The decision to use the most recent census data means it accurately reflects the significant population and geographic changes over the past 30 years.
“The changes will enable us to focus on what matters most to Australians – fast and reliable parcel delivery with better tracking technology and quicker turnaround times for e-commerce,” Graham adds.
Changes afoot in Germany
Germany is at a similar stage to Australia when it comes to USO amendments. The German federal parliament is currently discussing a new draft Postal Law Modernization Act, which contains amendments to the USO, especially changes to the transit times for lettermail delivery. “We expect the new law to enter into force in summer 2024,” explains Alexander Edenhofer, a DHL Group spokesperson.
“In Germany, the legal provisions for the postal universal service still date back to the late 1990s,” he continues. “No significant changes have been made in the past 25 years. Deutsche Post/DHL believes that the USO needs to be adjusted to consider changes in communication behavior and technical developments. The universal service should reflect today’s user needs for a basic postal service.”
Contrary to developments in Denmark, Deutsche Post/DHL does not believe that the USO should be abolished entirely. “For the foreseeable future there will be a need for a basic nationwide postal service at affordable prices in this country,” adds Edenhofer.
This opinion has been echoed by several postal organizations around the world, including bpost in Belgium, Posten Bring in Norway and the Universal Postal Union (UPU). It is also evident in the fact that Denmark is the only country to have completely abolished the USO, whereas others have only made amendments.
“Many countries have altered their USOs, from New Zealand, which was among the first to switch to a three-day model, to the Netherlands, which reduced from six days to five,” explains Barrie. “More recently there has been a big switch to alternate-day services in a wide range of countries such as Sweden, Portugal, Iceland, Belgium, France and Norway. The common goal of these changes has been the maintenance of a regular and reliable service to all communities and consumer groups.”
Bpost, which in 2020 reduced the frequency of non-priority lettermail from five days a week to every other day – while still delivering priority mail, parcels and registered mail every day – believes that USOs should be more flexible to meet changing consumer needs and ensure financial sustainability. “The USO should not be abolished, however,” says Laura Crespo, the post’s spokesperson. “In the coming years, there will still be a need for lettermail, even if volumes are continuously decreasing. Offering a basic lettermail service for all citizens remains important.”
In Norway, Posten Bring reduced the number of letter delivery days from six to five per week in 2016; in mid-2020 this went down to every other day. Then in January 2024 the Norwegian government appointed an expert committee to look at the future of postal services in the country and whether Posten should be given new tasks to meet societal needs, other than postal distribution alone. The committee has been given one year to submit its recommendation.
“How the USO is defined is a political question,” comments Posten Norge’s press officer, Kenneth Pettersen. “We might see a future where the USO will move from a one-size-fits-all approach to one that is more targeted at different groups’ actual needs.”
Price caps and rural deliveries
One area of concern about abolishing the USO is that it removes the “one price goes anywhere” service. In Denmark, where the market will now take care of letter delivery, prices and service options are still being defined. Meanwhile, the UK regulator Ofcom has stressed that letter delivery prices must remain affordable if the USO is amended.
“To make sure the universal service remains affordable, Ofcom periodically reviews whether stamp prices should be capped,” the organization has noted. “In doing so, we must consider the impact of any cap on the financial sustainability of the universal service. We set our last cap in 2019 and have now reviewed prices for the period April 2024 to March 2027.
“Royal Mail continues to be the UK’s only door-to-door deliverer of letters on a national scale. This means we cannot rely on competition to ensure prices remain affordable. So, we have retained a safeguard cap on Second Class letters. On average, these prices can rise by no more than inflation (CPI) from today’s prices [£0.75/US$0.95].”
Another area that requires specific consideration when amending or abolishing USOs is delivery to rural areas. “Although nearly 85% of UK customers live in urban environments, the 15% of rural dwellers will need special attention and potentially a special solution,” says YEEP! Lockers’ Alan Barrie. “As a Scottish Highlander
I’m acutely aware of the heightened dependency on Royal Mail in rural areas and, although I’m generally against subsidies, this is the one area where a government subsidy or ‘social network payment’ may be justified to protect services to remote communities.”
The UPU’s viewpoint
According to Siva Somasundram, director of policy, regulation and markets at the UPU, USOs are crucial because they ensure the entire population within a territory has continuous access to basic postal services at affordable prices and with a specified standard of quality. “The mission of the UPU acknowledges universal postal services as one of the cornerstones of the postal industry,” he adds.
However, given declining letter volumes, he does believe that amending USOs could help posts adapt to changing realities. “Modernizing the scope and delivery of postal services would allow posts to better align with current and future demands, ensuring their financial viability and continued provision of services. Beyond addressing declining letter volumes, amending the USO is also necessary to respond to new trends such as technological advancement and the emergence of e-commerce, ensuring postal services remain relevant and effective in meeting the needs of the public and businesses alike,” he explains.
To establish a comprehensive postal reform strategy, the UPU launched the Integrated Postal Reform and Development Plan (IPDP) in 2005, which is complemented by the Postal Reform Guide (PRG). The IPDP and PRG collectively provide UPU member countries with a strategic framework for reforming the postal sector, focused on ensuring that states’ obligation to provide USOs is clearly defined and fulfilled.
“Given the evolving economic, market and regulatory changes in the postal and delivery market, as well as shifting customer, citizen and business expectations, the need to revise and update the current IPDP and PRG has been recognized,” explains Somasundram. “Consequently, the UPU is undertaking a comprehensive review of the existing IPDP and PRG. This review is aimed at bolstering the support for the postal sector reform agenda, ensuring it adequately addresses current challenges and leverages opportunities, particularly those related to the USO.
“Nevertheless, the provision of universal postal service should be recognized as a fundamental human right, emphasizing its essential role in facilitating global communication and ensuring that every individual has access to postal services,” he concludes.