University of St. Gallen University of Zürich Jaag/Trinkner - 1 Tendering Universal Service Obligations in Liberalized Postal Markets An Outline of Thought Christian Jaag University of St. Gallen and Swiss Post Urs Trinkner University of Zürich and Swiss Post GPREN Postal Research Conference April 28th 2008

University of St. Gallen University of Zürich Jaag/Trinkner - 2 Introduction Tendering is often used to confer to someone –a right (e.g. to use a certain spectrum for mobile telecommunication) –A duty (e.g. to build a tunnel across the alps) In these cases, the winning party usually operates in a well defined market environment. Recently, tendering has also been used to assign universal services, e.g. in telecommunications. What will the market environment be? In the postal market Tendering of postal USO envisioned in Germany, Netherlands, Switzerland.

University of St. Gallen University of Zürich Jaag/Trinkner - 3 Public Procurement Public provision Contracting TenderingNegotiation Definition of a package of duties and rights, possibly including exclusivity Subcontracting TenderingNegotiation Public or private provision Public need Tendering / negotiation

University of St. Gallen University of Zürich Jaag/Trinkner - 4 Issues with Universal Service Provision Allocative options –Exogenous choice –Beauty contest –Tender / reverse auction Distributive options –Ex ante compensation (based on estimated cost) –Ex post compensation (based on „true“ cost) Goal: Efficient provision a)By most efficient operatorselection problem b)With most efficient technology incentive problem c)At the lowest possible public cost transfer problem

University of St. Gallen University of Zürich Jaag/Trinkner - 5 Tendering USO will solve all problems… Why? It applies market forces where a market would otherwise not exist  „competition for the market“ Why not? Competition has to be well designed to work properly…

University of St. Gallen University of Zürich Jaag/Trinkner - 6 Simple Case: Homogeneous Operators Winner‘s curse: The operator who underestimates the cost the most wins the auction  High risk taken by bidding operators If operators realize this, they ask for a high price! If operators do not realize this: Renegotiation! Given its „design cost“, USO tendering is expensive; the transfer problem remains unsolved. True cost no selection / incentive problems Cost estimates

University of St. Gallen University of Zürich Jaag/Trinkner - 7 The Net Cost of Providing Universal Service The net cost of providing universal services depends on Universal service provider (efficiency?) Competitors (strategy) Regulator (network access, labor market) Technology Consumer behavior / preferences

University of St. Gallen University of Zürich Jaag/Trinkner - 8 More realistic case: Heterogeneous Operators Tendering solves the incentive problem. How important is the a) selection problem? b) transfer problem? a) large if technology is „volatile“ b) large if competitive/regulatory risk is high True cost (operator-specific) Cost estimates

University of St. Gallen University of Zürich Jaag/Trinkner - 9 Contract Design – Dimensions of US Ubiquity –Collection –Delivery –(Sorting) Quality –Frequency of Delivery –Timeliness Price –Uniformity –Level (affordable, moderate, reasonable) Cost Predictability

University of St. Gallen University of Zürich Jaag/Trinkner - 10 Contract Design – Trade-Offs Duration –Long-term contracts for investment incentives –Short-term contract for technological flexibility Level of Aggregation –Global approach for economies of scale and scope –Disaggregated approach allows for yardstick competition Concreteness –Detailed contracts to avoid renegotiation –Openness allows for commercial/technological flexibility Ownership of Postal Operators –Fairness calls for full privatization –State ownership facilitates governance

University of St. Gallen University of Zürich Jaag/Trinkner - 11 Conclusion Tendering is a potentially powerful tool for efficient universal service provision. There are fundamental issues to be considered, e.g. that tendering introduces new risks. Trade-offs in design hard to solve. Do we know what we are doing?

University of St. Gallen University of Zürich Jaag/Trinkner - 12 Thank you. Christian Jaag Swiss Post Regulatory and International Affairs Viktoriastrasse Bern