Date

NB. See updates listed below.

How to estimate terminal dues distortions

In a 2014 report for the U.S. Postal Regulatory Commission, a Danish economic consultant, Copenhagen Economics, explained that, "In order not to distort incentives for agents in the value chain, a non-distortionary system for terminal dues must be non-discriminatory (same rate applied for the same service across all delivery operators, also non-designated ones). Moreover, non-distortionary terminal dues would have to equal the price for last-mile handling of domestic letter post items."

Therefore the financial distortions implied by the UPU terminal dues system may be estimated by calculating (1) the terminal dues charges and (2) the equivalent domestic postage (EDP) charges for the flow of letter post items, in each direction, between all UPU countries, where EDP is the domestic postage that would be charged for providing delivery services similar to those compensated by terminal dues. Then,

(1) The price preference created by the terminal dues system is the difference between terminal dues charge and EDP. In any given bilateral flow between post offices, the preference may be positive or negative. The preference measures the extent to which private carriers are disadvantaged compared to post offices and domestic mailers are disadvantaged compared to foreign mailers.

(2) The net financial transfer from post office A to post office B is measured by subtracting the net cost of the preference that A gives to B in the delivery of inbound letter post (terminal dues minus EDP) from the net benefit of the preference that A receives from B in the delivery of outbound mail (EDP minus terminal dues). In exchanges with multiple post offices, the net financial transfer by post office A is the sum of the net financial transfers from individual bilateral exchanges. The net financial transfer measures the extent to which a post office benefits or is harmed by the terminal dues system

(3) The total financial transfers by post office A in exchanges with multiple post offices is the sum of the absolute values of the positive and negative net financial transfers from individual bilateral exchanges. The total financial transfer measures the extent to which the allocative efficiency of the international postal system is compromised.

A Terminal Dues Model

While simple in principle, calculating the difference between terminal dues and EDP is handicapped by the fact that key quantities are unavailable, including the current volumes, weights, and other necessary details of bilateral flows of the international letter post. The only way to estimate the distortions created by the UPU terminal dues system is to develop a mathematical model that is based upon reasonable estimates and assumptions about key quantities.

The author has developed a Terminal Dues Model (TDM) that can be used to estimate economic distortions implied by the UPU terminal dues agreements for the 2014 to 2017 cycle and the 2018 to 2021 cycle. The model estimates separately the volumes of the letters (P), flats (G), and small packets (E) that flow, in both directions, between 136 UPU countries that account for more than 99% of international letter post mail. It allows for differences in the "structure" of the letter post — i.e., the allocation of mail between shapes (P, G, and E) and weight steps and the average weight of each division — for flows between different countries or groups of countries since mail structure affects the calculation of both terminal dues and domestic postage. The model calculates the terminal dues and EDP charges due for each bilateral flow of letters, flats, and small packets. In operating the model, the user may input different future scenarios, that is, different sets of assumptions about how key quantities will change in future years.

The Terminal Dues Model is a set of linked Excel 2010 spreadsheets. A full explanation of the current version of the model is set out in the attached paper, "A Terminal Dues Model". A complete set of Excel files used in the model may be downloaded from www.jcampbell.com/TDM/. To use the model, see the "A Terminal Dues Model: Quick Start Guide". These files may be revised or updated by the author without notice.

Copyright notice. The content of all Excel files and documents relating to the foregoing Terminal Dues Model is copyright 2016 by James I. Campbell Jr. The content may be used by anyone for purposes of analysis of the UPU terminal dues, whether for commercial or non-commercial purposes, but the content may not be sold, resold, or incorporated in other works without permission of the author. Results derived from the model may be included in any papers and presentations without permission but with appropriate attribution. The author reserves the right to modify the terms of the copyright permission at any time.

Three Scenarios

The Terminal Dues Model has been used to estimate the distortions implied by UPU terminal using three scenarios. These scenarios demonstrate the effects of different assumptions on the estimates of the model. Spreadsheets with the full calculations for each scenario, the "TDM_9p" files, may be downloaded from www.jcampbell.com/TDM/.

Scenario 1. Base Scenario

Summary tables and charts for Scenario 1

The Base Scenario continues a relatively conservative interpretation of recent trends in the 2014-2017 cycle, as indicated by recent UPU studies, followed by a moderation of those rates of change in the 2018-2021 cycle. The calculations which estimate recent trends are found at the end of TDM files 9b (domestic postage) and 9f (flows).

Key features of the Base Scenario including the following:

For the Industrialized Countries (ICs), the volumes of outbound international letters and flats are assumed to decline by 8.5% and 12% annually, respectively, in the 2014-2017 cycle and by 5% and 8%, respectively, in the 2018-2021 cycle. Small packets are assumed to increase by 10% annually.
For Developing Countries (DCs), the volumes of outbound letters and flats are assumed to decline by 6% annually in the 2014-2017 cycle and by 4% annually in the 2018-2021 cycle with no change in the volume of small packets.
For three countries specializing in e-commerce (China, Hong Kong, Singapore) (ECs), changes in letters and flats are assumed to be the same as for DCs, but the volume of outbound small packets is assumed to grow by 30% per year in the 2014-2017 cycle and by 20% in the 2018-2021 cycle.
Domestic postage rates in the ICs are assumed to increase annually by 4% for letters and flats and by 2% for small packets in the 2014-2017 cycle and by 3% for all shapes in the 2018-2021 cycle.
The domestic postage equilvalent to terminal dues (Equivalent Domestic Postage) is 70% of the retail domestic postage rates for "first class" or "priority" domestic service.

Although the TDM allows for user-defined changes in the average weight per shape, none of the scenarios developed so far provide for changes in average weight because there is no obvious basis for defining such changes.

Under the Base Scenario, the volume of international letter post mail declines from 3.5 billion in 2014 to 3.3 billion in 2017 and then rebounds to 3.6 billion in 2018 due to increases in small packets. Small packets will increase from 24% of the mail stream in 2014 to 54% in 2021. The total value of the market for delivery of inbound international mail (measured by EDP)will increase from $3.8 billion in 2014 to $6.5 billion 2021. Over the eight-year period, the posts in the ICs will charge each other about 60% of EDP for inward delivery. In the 2018-2021 cycle, IC posts will raise the price for delivery for letter post items received from DCs and ECs from about 30% of EDP to 45% of EDP. Almost all of the net costs of the UPU terminal dues system will be borne by about 15 IC posts (and their mailers) who will suffer a negative net financial transfer of about US $2.6 billion in the 2014-17 cycle and $4 billion in the 2018-2021 cycle.

Scenario 2. High Change Scenario

Summary tables and charts for Scenario 2

The High Change Scenario modfies the Base Scenario to reflect a more expansive view of recent trends for the 2014-2017 cycle followed by a more subdued estimate of changes in the 2018-2021 cycle. The High Change Scenario assumes that

Annual growth in EC outbound small packets will be 70% in 2015, declining to 50% in 2016, 40% in 2017, and 30% per year in 2018 and thereafter.
Domestic postage rates for small packets in the ICs will increase by 5% per year over the 2014-2021 period due to factors such as loss of economies of scope with document delivery, a need to increase service quality to compete in the market, and/or an increase in inflation.

Under the High Change Scenario, the volume of international letter post mail grow to 5.1 billion in 2021. Small packets will increase to 68 percent of the letter post in 2021, and the total value of the market will increase to $11.7 billion. The percent of EDP that ICs charge each for delivery of inbound letter post will decline from about 60% to 50%. In the 2018-2021 cycle, IC posts will raise the price for delivery for DCs and ECs from about 30 percent of EDP to 40 percent. Again, almost all of the net costs of the UPU terminal dues system will be borne by 15 IC posts who will suffer a negative net financial transfer of about US $3.2 billion in the 2014-17 cycle and $6.9 billion in the 2018-2021 cycle.

Scenario 3. Low Change Scenario

Summary tables and charts for Scenario 3

The Low Change Scenario modifies the Base Scenario to reflect an assumption that the pace of change will slow, that is, that:

The volume of EC outbound small packets will increase by 15% over the entire 2014-2021 period.
In other cases, annual declines in the volumes of letters and flats and annual increases in the volume of small packets will be substantially less than in other scenarios.
Domestic postage rates will increase at 2% per year over the entire 2014-2021 period.

Under the Low Change Scenario, the volume of international letter post mail declines to 3.3 billion in 2021. Small packets will still increase in relative importance, but only from 24% in 2014 to 40% in 2021 The total value of the market will increase to US $3.3 billion. The percent of EDP that ICs charge each for delivery of inbound letter post will increase slightly to about 64%. In the 2018-2021 cycle, the IC posts will also raise the price for delivery for DCs and ECs from about 30 percent of EDP to 45 to 50 percent. Almost all of the net costs of the UPU terminal dues system will be borne by 15 IC posts who will suffer a negative net financial transfer of about $2.4 billion in the 2014-17 and $3.0 billion in the 2018-2021 cycles.

Implications of UPU TDs for an Individual Country

The TDM can also the used to calculate the implications of UPU terminal dues for an individual country, selected on tab "OneCty" in the summary workbook (file 9o or 9p). Calculations relating to individual countries should be considered illustrative only, not as firm estimates.

Country	TDM Results Grouped by ICs, ECs, DCs	TDM Results Grouped by UPU TD Groups
United States	Base, High Change, Low Change Scenarios	Base, High Change, Low Change Scenarios

Analysis by Copenhagen Economics (May 2016)

In May 2016, the economists of Copenhagen Economics issued presented a paper at the 24th Conference on Postal and Delivery Economics, 18-21 May, Florence School of Regulation, Florence, Italy. The methodology of this paper is similar the analysis described above. The paper estimates total net financial transfers due to UPU terminal dues for the years 2014 and 2018 for the world and for several individual countries. In brief, the paper concludes that "e-commerce trends in shipment of bulky items (e.g. e-commerce) will exacerbate significantly the financial transfers resulting from the terminal dues remuneration. Moreover, the proposed changes to the terminal dues remuneration (being considered for the 26th Universal Postal Congress in Istanbul) will imply a very small moderating effect to this development, leaving the pattern and magnitude of forecasted subsidies unchanged."

See Dr. Henrik Ballebye Okholm, Dr. Bruno Basalisco, Jimmy Gårdebrink & Anna Möller Boivie, “Forecast e-commerce impact on international subsidies from Terminal Dues” (Draft , 5 May 2016).

Updates to this page

27 Apr 2016 (rev 1). (1) substantially revised the paper A Terminal Dues Model to provide a more detailed and mathematical desciption of the terminal dues agreements for 2014-2017 and 2018-2021; (2) revised the Excel files of the Terminal Dues Model to correct for a minor update in the cap rates for 2021 made by the UPU; and (3) revised the summary charts for scenarios 1, 2, and 3 to reflect (2).

11 May 2016 update. (1) Revised file 9o (summary) to improve summary tables and charts for single country and for world. (2) Revised 9p files (output files) to reflect revisions in file 9o. (3) Added 9p files to show results of alternative assumptions for Scenario 1 (Base Secenario) that Equivalent Domestic Postage equals 60% and 80% of domestic postage.

25 Jul 2016 update (rev 2). Revised the Excel files of the Terminal Dues Model (1) to reflect Prop 20.28.1 Rev 1 (25 May 2016) which changed the threshold for substituting a per kg terminal dues rate for a per kg/per item rate in a bilateral flow in the target system from 75 tonnes per year to 50 tonnes per year (in most flows); (2) to revise the calculation of domestic postage so that the scenario assumptions about changes in domestic postage rates are first applied in the national currency and then converted to SDRs based the SDR exchange rate assumed in each year; (3) to include the reduction in US domestic postage rates in April 2016 due to the lapse of a temporary increase allowed to cover "extraordinary or exceptional circumstances"; (4) to revise estimated German international volumes and domestic postage rates; (5) to redesign the annual calculation files (9h and 9n) to substantially speed up the calculation of a scenario. Revise the paper A Terminal Dues Model to reflect these changes. Recalculated all summary charts for scenarios 1, 2, and 3. Add TDM Quick Start Guide.

8 Dec 2016. Minor update. Minor revisions and corrections.