Why an Australia Post restructure is in the bag

The continuing speculation that the Abbott government will announce the privatisation of Australia Post in the federal budget is probably premature, but on the right track.

The National Commission of Audit did list Australia Post as one of the government business enterprises that should be privatised, but put it within the group to be sold in the ‘medium term’.

That fuzzy timeline reflects the reality that Australia Post isn’t currently positioned for privatisation and there would need to be a significant restructuring of the business and considerable thought put into its continuing community service obligations before a sale could sensibly be contemplated.

Whether or not an eventual sale occurs, a major restructuring is inevitable given the trends in its regulated and non-regulated businesses.

Last year Australia Post’s non-regulated businesses, which operate in competitive markets like parcel delivery, made profits of $648 million. Its regulated mail delivery services lost $218m. Australia Post’s chief executive Ahmed Fahour warned last week that those services would lose about $350m this financial year and more than $1bn a year in the not-too-distant future.

Despite the rising profits of the group’s commercial businesses, they will eventually be overwhelmed by the losses from the regulated services because of the impact of technological change on communications. Emails, SMS, Facebook and Skype are killing the volumes on physical mail. As the national broadband network rolls out, that trend will accelerate.

Australia Post’s chairman, former Telstra chief financial officer John Stanhope, made it clear last week that regardless of whether or not a sale is on the government’s agenda, the group will be seeking structural change within its regulated services.

Having already increased the price of stamps by 10 cents to generate an extra $100m a year, Australia Post is contemplating tiering its letter services, reducing the frequency of standard mail deliveries and introducing a user-pays model under which those who wanted more frequent deliveries would pay premiums, including perhaps an annual fee for more timely mail.

That’s similar to the two-tiered pricing structure adopted in the UK, where the bulk of the Royal Mail service was privatised last year.

Apart from its obligation to provider domestic and international letter services, with a single uniform rate for the domestic service and set delivery schedules, Australia Post also has to maintain at least 10,000 street post boxes and 4000 retail outlets (2500 of them in rural and remote areas). In the UK, the retail network remained in government hands.

Ahead of any sale, and even if there were no privatisation, Australia Post would need to think through its optimum distribution footprint and how best to leverage its physical network. There are particular sensitivities around its rural and regional presence.

Australia Post’s management has done a good job of expanding the range of services and products offered in the retail network and has made a pitch to be used to deliver more government services and payments to drive more volume through it.

If the retail network were to be preserved and remain in government hands, it would make particular sense to use it for a broader range of government services.

Regardless of whether or not Australia Post is to be privatised, whether in the near or medium term, the status quo is unsustainable while mail volumes are falling at an accelerating rate. Fahour has said they could be half their already greatly-reduced rate within five years.

There is no rational case for retaining the non-regulated services in public ownership when they are competing head-on with private sector organisations. The argument that they help subsidise the loss-making regulated services will be exposed once their losses overwhelm the profits from the competitive activities.

Structural changes in the sector dictate structural responses. The issue of privatisation is secondary to remaking Australia Post for the very different and challenging 21st century communications environment in which it now operates.

Australia Post will submit its latest corporate plan to the government mid-year. The comments from Stanhope and Fahour indicate it will be seeking structural rather than incremental change, as it should.