Privatization

The third annual Postal Vision 2020 conference will take place this week in Washington, DC.  The conference brings together speakers from a variety of backgrounds for what the Postal Vision website describes as a "provocative, candid conversation about what Americans should have in the way of ‘postal services’ in 2020 and beyond and who should provide them.”

The title of this year's Postal Vision 2020 is "Positioning America for the New Millennium," and much of the conference will be about innovations in the mail industry, like digital solutions and eCommerce.  But that reference to "postal services" and "who should provide them" indicates that the conference may be about something else as well.  Judging by who's speaking at Postal Vision 2020, it's likely that one of the conference's main themes will be privatization of the Postal Service.

Three of the conference's big name speakers were recently involved with a study about a proposal to privatize half the Postal Service by creating a “hybrid public-private partnership.”  The study was conducted by the National Academy of Public Administration (NAPA) with funding from Pitney Bowes, one of the two platinum sponsors for Postal Vision 2020.  The proposal calls for transferring the retail and processing operations of the Postal Service to the private sector, leaving the Postal Service with the delivery end.  Over half the Postal Service — $35 billion in operating costs — would be handed over to private companies — companies like Pitney Bowes.

The Postal Vision 2020 website doesn't say a word about the NAPA-Pitney Bowes privatization study, but you can be sure it's on the agenda.

The NAPA-Pitney Bowes privatization study

The NAPA study was conducted with financial support from Pitney Bowes, amount unknown.  The study purports to be objective and independent, but Pitney Bowes is anything but a disinterested observer of the country’s postal system. 

The corporation received over $30 million from the USPS in 2012, and it's number 49 on the list of Top USPS Suppliers for 2012.  Besides benefiting from direct payments for services rendered, Pitney Bowes profits off the Postal Service in other ways.  PB is the country’s largest presort corporation.  It consolidates, processes, and transports mail, which then qualifies for workshare discounts with the Postal Service.  The system ends up giving private companies work that could be done (and used to be done) by postal workers, and many of the deals cost the Postal Service money because the discounts are larger than the costs avoided 

If the hybrid public-private model were implemented, something on the order of $30 billion in mail processing costs would be transferred from the Postal Service to the private sector.  Pitney Bowes stands to make billions off such a privatization scheme.  No wonder it was happy to fund the NAPA study and to provide generous support to the Postal Vision conference, where the study can be discussed in a high-profile way.

About three weeks from now, postal insiders and innovative outsiders will convene in Washington DC for the PostalVision 2020/3.0 conference to discuss the future of the Postal Service.  Called "Positioning America for the New Millennium,” the event will focus on "a constructive approach to re-inventing today’s broken Postal Service model for future generations."

Among the headliners speaking at the event will be David M. Walker, a former Comptroller General, the first President and CEO of the libertarian Peter G. Peterson Foundation, and currently Founder and CEO of the Comeback America Initiative, which promotes fiscal responsibility (by cutting social programs).

Mr. Walker will probably devote much of his talk to discussing the privatization of the Postal Service.  That’s because he is the chair of a five-member panel that the National Academy of Public Administration (NAPA) asked to review a recent proposal on privatization. 

The proposal is called “Restructuring the U.S. Postal Service: The Case for a Hybrid Public-Private Partnership.”  It describes a postal system in which the private sector would take care of the “upstream” — the retail and mail processing work — while the public sector would remain responsible for the “downstream” — delivering the mail through its network of “trusted letter carriers," the “feet on the street,” as the proposal puts it.

NAPA has a long-standing interest in postal matters, and its President and CEO is Dan Blair, a former member of the Postal Regulatory Commission, so it’s not surprising that NAPA would focus on the Postal Service right now.  With funding support from Pitney Bowes, NAPA assembled a panel to subject the proposal to what it describes as a “rigorous evaluation.” 

Despite the apparent conflict of interest involved with taking money from a key player in the mail industry, a company that would profit significantly from privatization (as discussed in this earlier post), the NAPA report is officially titled “An Independent Review of a Thought-Leader Concept to Reform the U.S. Postal Service.” 

When the panel was first announced, the NAPA website provided brief biographies for the participants, and in the bio for one member of the study team, the review was referred to as “the Pitney Bowes study.”  That bio was subsequently revised and the reference to Pitney Bowes purged.  In the discussion that follows, we’ll refer to the original proposal as the Thought-Leader Concept, and we’ll refer to Mr. Walker’s review of the proposal as the NAPA/Pitney Bowes study.

The retail end of the upstream

The NAPA/Pitney Bowes report runs to over 50 pages, but very little of it examines one of the key parts of the Thought-Leader Concept — the privatization of the retail end of the Postal Service’s operations.  All told, there are maybe two pages’ worth of discussion on this topic. 

The Thought-Leader Concept says that “the new postal system” being envisioned “will reinvent the concept of retail access for consumers.”  Under the new system, “there will be an explosion of options for the public to conduct postal business.”  You’ll be able to do postal business at retail stores, gas stations, schools, coffee shops, movie theaters, or any other location that is interested and meets USPS requirements. 

The proposal also suggests that the Postal Service would continue to operate a small number of retail centers, for locations where no other postal options are available or where it is more beneficial to maintain the USPS offices.

In its review of the proposal, the NAPA/Pitney Bowes study has little more to say about this reinvention of the retail system.  It explains that Contract Postal Units (CPUs) and Village Post Offices (VPOs) are postal operations housed in private businesses, and it provides a few numbers (drawn from a recent GAO report) about how many there are right now.  There's also reference to the fact that some people have recommended creating a BRAC-like commission to help close facilities (it adds, in bold, “Congressional action would help”).

But that’s about it.  There’s no discussion of how much money privatization of the retail network might save, nothing about how postal services might decline and push away revenues, nothing about how small businesses might suffer, and so on.  We're just supposed to imagine an "explosion of options" that will make it much easier for people to do postal business.

The National Academy of Public Administration (NAPA) has just published a report about a proposal to create a "public-private hybrid" postal system.  The full title is worth noting: “An Independent Review of
 a Thought-Leader Concept to Reform the U.S. Postal Service.”

Under the proposal, two-thirds of the Postal Service — the retail and processing components (the “upstream activities”) — would be privatized, while the third leg, the“downstream” delivery network, would remain a government entity. 

The NAPA study does not fully endorse the proposal, but it says the concept “merits serious consideration as part of a more comprehensive policy reform effort,” and it encourages the Postal Service to analyze how implementation might be accomplished and to work with stakeholders on expanding the role of the private sector.

No way in hell

Privatization as described in the proposal is not going to happen anytime soon.  Or, to put in the more colorful terms used by Gene Del Polito, president of the Association for Postal Commerce: “There’s no way in hell that Congress would allow this to happen.  And there’s no one in the Postal Service that’s going to make it happen.” 

If Mr. Del Polito is right — and there aren’t many people who know more about the inside world of the mailing industry and what’s going on in Congress — then what was the purpose of the NAPA study, and why did Pitney Bowes help pay for it?

Bloomberg News has a very good article by Angela Keane, which goes a long way toward providing an explanation.  It begins this way: “The U.S. Postal Service should consider keeping door-to-door delivery while privatizing the rest of its operations, a panel led by former Government Accountability Office head David Walker found.”

The lede thus gives credence to the idea of privatizing the Postal Service — a goal that has generally been viewed as an extremist position associated primarily with conservative think tanks like the Cato Institute and American Enterprise Institute.

The NAPA report thereby shifts the discussion of privatization from the right-wing fringe to a mainstream center and gives advocates of Draconian downsizing — like Congressman Darrell Issa — more leverage in the debate over postal reform.

As it happens, Mr. Walker will also be one of the VIP speakers at the Postal Vision 20/20 event in April, so the report is likely to get plenty of attention there.   Members of the NAPA panel, as well as the authors of the original proposal, will probably also be making the media circuit, talking up the idea.

The NAPA report lends an air of respectability to  discussions of privatization, and it will fuel speculation in the media about the possibility that it might actually happen.  That, in turn, will aid those who want to downsize the Postal Service by slashing the workforce, closing facilities, and cutting services.  Thus, even if the proposal never gets implemented, the NAPA report will have done its work.

A “rigorous” and “independent” review

The Foreword to the report provides the background on the "Thought-Leader Concept."  The whole thing got started when “four nationally recognized and experienced mailing industry leaders authored a White Paper in 2012” describing a public-private hybrid model for the postal system.  Then NAPA decided to assemble its own panel to review the white paper.

“In order to subject this idea to rigorous evaluation,” the report proceeds to say, “Pitney Bowes Inc. made a contribution to the Academy to support the conduct of an independent review of this White Paper.”  A few pages later we're told again, “This independent review was supported in part by a contribution from Pitney Bowes Inc.”

One has to wonder how an “independent” review and “rigorous evaluation” could be conducted using funds provided by one of the biggest stakeholders in the mailing industry.

News reports about the initial proposal and the NAPA review have raised the same question.  CBS News noted, for example, “The study is being underwritten by Connecticut-based firm Pitney Bowes, which already contracts with the Postal Service for portions of its operations and could stand to benefit from the agency's further privatization.” 

Yesterday’s Bloomberg report quotes Sally Davidow, a spokeswoman for the American Postal Workers Union, saying the same thing: Pitney Bowes “stands to benefit enormously from privatizing mail processing operations.” 

The Bloomberg article also points out that Pitney Bowes did $30 million worth of work for the Postal Service in 2012.  But that’s just the tip of the iceberg.

With 36 major mail-processing centers across the country, Pitney Bowes possesses the “largest national pre-sort network.”  In 2011, the company had total revenues of $4.7 billion.  (It may have topped $5 billion in 2012.)  Over $567 million of its revenues came from what its 10-K financial statement describes as “mailing services,” i.e., the pre-sort business.

The $30 million USPS outsources directly to Pitney Bowes thus represents less than one percent of the company's annual revenues, while its pre-sort business accounts for over 12 percent.  That’s where the real money is, and that’s where the potential for growth is.

Here’s how that pre-sort revenue works out.  The Postal Service gives a hefty “workshare” discount to mailers who deliver their mail to a postal facility already sorted into three or five-digit ZIP codes.  A mailer who doesn’t have enough volume or resources to do the pre-sorting can contract with Pitney Bowes to do the work.  They then split the savings from the discount.  Also, since Pitney Bowes consolidates mail from many sources, its discount is much bigger than an individual mailer would have been able to get.

For example, the Postal Service might offer a discount of 10 cents per piece for pre-sorted First Class mail (the rate chart is here).  Pitney Bowes passes, say, 2.6 cents of the savings on to the mailer and keeps the rest. 

Those pennies add up, especially when you consider that Pitney Bowes handled 14 billion pieces of mail in 2011.  If the company averages, say, four cents per piece, that comes to $560 million a year in revenue — approximately the number cited in its 10-K for “mailing services.”

The potential windfall

Let's consider what would happen if the entire USPS mail processing network were privatized as discussed in the NAPA report.

The leaders of the Postal Service have made no secret of their plans for reforming the postal system.  They have issued white papers, given speeches, presented “optimization” programs, and appeared before Congressional committees.  The plans are clear: eliminate the layoff protections in union contracts; cut the career workforce by nearly half while tripling the number of non-career workers; reduce service standards for first-class mail; do away with Saturday delivery; give management control of workers’ benefit plans; consolidate away over 250 processing plants; and close 15,000 post offices.

What we don’t see very often are the players making this all happen.  We assume the Postmaster General is making the decisions, but he is merely the front man.  Behind him are the USPS Board of Governors, the mail industry stakeholders, and the corporate class as a whole.   These businessmen (and women) prefer to keep a low profile, so we rarely hear from them in public.  They leave it their surrogates — journalists and academics, politicians and pundits — to speak for them.  But it’s the businessmen who fund the think tanks, endow universities, make campaign contributions, pay lobbyists, and run the news media.  Yet for the most part, they are not to be seen.

In her excellent book Invisible Hands: The Businessmen’s Crusade Against the New Deal, historian Kim Phillips-Fein paints a very revealing picture of how the corporate class operates.  Her theme is the way conservative businessmen worked behind the scenes to undo the New Deal.  Believing all would be right if government stayed out of the economy and left everything, in Adam’s Smith famous expression, to the “invisible hand” of the market, these businessmen have spent decades working to weaken unions, eliminate social welfare programs, minimize government regulation of their companies, and diminish public services.

While the U.S. Postal Service is obviously not a product of the New Deal, that same conservative agenda is behind the attack on the Postal Service we’re witnessing today.   Cutting the workforce, closing post offices and plants, and moving toward privatization through outsourcing and divestiture of assets — these are all part of an effort to shape the postal system in ways that serve the interests of an elite business class rather than the good of the country as a whole.  The free-market ideology and greed for profits that drove efforts to undo the New Deal are basically what’s driving the “postal reform” movement today.  

Think it would take an act of Congress to privatize the postal system?  They’ve been privatizing the post office for four decades, piece by piece, step by step.  It’s called “piecemeal privatization,” and it works like this.

Step One: Marketization

Marketization is “the process that enables state-owned enterprises to act like market-oriented firms.”   It’s achieved by reducing government subsidies, deregulation, organizational restructuring, and decentralization, and it often paves the way for complete privatization.

It was the Postal Reorganization Act of 1970 that began the marketization of the postal system.  It transformed the U.S. Post Office Department – a government agency and part of the Cabinet — into the independent U.S. Postal Service – a government-owned corporation that is self-supporting and receives no tax dollars.  The post office thus came to be viewed in terms of a business model.  Like a private corporation, it was expected to adopt the methods and values of the marketplace — cut costs, streamline operations, fight unions, don’t run in the red — rather than operating as a public service “to bind the nation together.”

That’s why you keep hearing politicians and USPS leaders say “the Postal Service is a business,” and it needs to “optimize its infrastructure facilities” and “shed under-utilized assets.”  And that’s why a few weeks ago Dennis Ross’s committee on postal infrastructure brought in a couple of corporate execs to explain how they run their businesses. 

The Reorganizaton Act, it's worth noting, was the product of a presidential commission in 1967-68, chaired by retired AT&T Chairman Frederick R. Kappel, who, in testimony before Congress, said, "If I could, I'd make it a private enterprise and I would create a private corporation to run the postal service and the country would be better off financially.  But I can't get from here to there."  It would be left to others to "get from here to there."

Step Two: Contracting Out

The main strategy for piecemeal privatization is, as postal workers know well, “contracting out.”  Throughout its history, almost all of the work of the government’s Post Office was done “in house.”  That changed in 1988 when President Reagan’s Commission on Privatization submitted its report Privatization: Toward More Effective Government, and outsourcing came into fashion across the spectrum of government agencies.  The commission recommended that the Postal Service more actively pursue contracting out opportunities in all of its functions.  (It also recommended that the private express statutes, which mandate the postal monopoly, be repealed to allow competition in the provision of any postal service.)

Also in 1988, the Postal Service introduced the USPS Procurement Manual, which made it easier for management to outsource without worrying about “full and open competition.” The manual made “adequate competition” sufficient, it introduced “simplified purchasing,” such as replacing sealed bids with “competitive negotiations,” and it downgraded the procurement regulations into “non-binding guidelines.”  That paved the way for the big FedEx deal in 2001, which was criticized for failing to go through a rigorously competitive bidding process.  No matter, there are now thousands of FedEx boxes in front of post offices across the country, and no one seems to mind.

The Postal Service now contracts out $12 billion annually.  FedEx is at the top of the list, with $1.37 billion in 2010, automation supplier Northrop Grumman is next, at $494 million, and UPS is 12^th on the list, taking in $95 million of USPS business.  By outsourcing work to private corporations, the Postal Service in effect sells parts of its own business to the highest bidder or the company it chooses to negotiate with.  The Postal Service has contracted out transporting the mail, equipment repair, retail postal stations, cleaning services,  implementation of the bar code system, and many other elements of its operations, in addition to promoting the huge pre-sort business through bulk mail discounts.

Contracting out got to be such a problem that Congress held a hearing about it in 2007 called “Inquiring Minds Want to Know: What is the Postal Service Contracting Out?”  APWU President William Burrus testified at the hearingthat the USPS “has begun to travel resolutely down the road of privatization without authorization from Congress” — or the American people. The subcontracting of postal work, he warned, “is just one aspect of a dangerous trend: the wholesale conversion of a vital public service to one performed privately for profit.”

Step Three: Divestiture

The next stage in piecemeal privatization is “divestiture”—selling off assets.  The 1988 Presidential Commission on Privatization said that “divestiture of federal assets should be pursued” in the interest of ensuring the “highest and best use” of the Postal Service’s assets.  But there are many “Barriers to Network Retail Optimization” (laws, regulations, unions, politicians), and over the past 40 years only 4,000 post offices have closed.

On June 27, 2011, Postmaster General Donahoe said that the Postal Service will close half of its 32,000 post offices over the next six or seven years.  This obviously represents a significant change in the country’s postal system, and any such change is supposed to be reviewed in an Advisory Opinion by the Postal Regulatory Commission.  But the Postal Service is going at it “piece by piece” and arguing that no such significant change is happening.  The League of Postmasters and National Association of Postmasters have filed legal complaints with the PRC, but thus far, to no avail.  The closures continue.

It took the country a couple of centuries to develop a network of brick-and-mortar post offices, and the government built thousands of post offices along the way, post offices that were designed to display the power and prestige of the nation.  In the early 1900s, post offices were designed in the classical style, to call to mind the great democracies of Greece and Rome, and to inspire confidence in the federal government.  During the New Deal, FDR personally took a hand in designing several post offices near his home in Hyde Park, NY, and the country built 1,100 beautiful post offices in the midst of a Depression.  The post office — if it was built before the 1950s —is often one of the grandest buildings in a town or city. 

For the past twenty years, the Postal Service has been preparing the way to dismantle this legacy of brick-and-mortar post offices, as if it were a burden to be disposed of rather than an inheritance it was responsible for protecting.  It started with research papers by right-wing think tanks, government reports by the GAO and other agencies, and detailed USPS space inventories—how much is used for this and that, how much is owned or leased, how much business each facility does —all intended to demonstrate the money that could be saved by consolidating and selling.

Then came the consolidations of post offices and relocations of workers.  The Postal Service has typically moved workers from a large downtown post office to a suburban annex.  That has left a post office, once a hub of community, with a small retail staff and a lot of empty space—space now used to justify calling the building “obsolete” and making a quick sale to the highest bidder. 

The Postal Service has also been going from owning to renting. It now leases three-fourths of the space for its operations.  Leases make it much easier to consolidate processing facilities and to close an “under-performing” post office.  Since a post office can’t be closed for strictly economic reasons, it helps to have a lease “problem” to justify a closure — a practice that has been criticized by the Postal Regulatory Commission.

Post offices themselves, owned or rented, are being replaced by the 70,000 “alternative retail outlets,” like supermarkets, Office Depots, and kiosks, that the Postal Service boasts about with its USPS Everywhere PR program.  These are the places the Postal Service recommends to people when they lose their post office — that is, when the Postal Service doesn’t simply suggest staying at home and using the internet.

That’s where things stand right now.  We’re witnessing the Great Sell-off of Postal Service assets.  Unlike the earlier stages, which were relevant mainly to postal workers, USPS management, and the companies that do business with or compete with the Postal Service, this current transformation is being experienced by the entire country.  People are seeing their post office being targeted for closure, and a few months later, it’s gone.  In some cases, the post office is closed in a day or two—thanks to an “emergency” issue with the lease, a broken leg, or a dispute over a few dollars a day.

Step Four: What Comes Next?

The marketization, contracting out, and divestiture will continue, at ever-increasing speed.  The Postal Service will cut the work force again and again (over a half million career employee positions have been cut since 2000), increase the percentage of part-time and flexible employees, end Saturday delivery (which will be picked up by some private company), expand the network of alternative retail outlets, and close half of the country’s 32,000 post offices.  Then the Postal Service will be a “lean and mean” corporate entity, ready for the final stage of privatization. 

What shape this will take is hard to predict. Perhaps, as suggested by the 1988 Presidential Commission on Privatization, the Postal Service will be turned into an employee-owned company through an employee stock ownership plan (ESOP).  Perhaps it will be broken up into smaller units and sold off, piece by piece.  Perhaps it will be taken over in its entirety by a FedEx, which can then skim the cream and sell off the less profitable parts.  Or perhaps, as they’ve talked about doing in Great Britain, there will be an IPO and the Postal Service will sell itself in shares on the stock market.

Trust the corporate elite to figure all that out.  Regular citizens will probably have as much to say about it as they do when a Postal Service manager comes to town and tells them their post office will be closing.

(Image sources: Chicago main post office (built 1932, auctioned off in 2009); Privatization book cover; Funny Times cover; FedEx box in front of Utica, MI post office; Hyde Park, NY post office; Greenwich CT post office for sale; Office Depot USPS counter; Uncle Sam auction cartoon (from "Privatization: Selling America to the Lowest Bidder" by Al Bilik)