Privatizing Canada Post: Lessons from Germany

Economic Note showing that liberalizing the postal sector and privatizing the public monopoly would enable Canadians to benefit from better service and more competitive prices

Appendix

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This Economic Note was prepared by Vincent Geloso, assistant professor of economics at George Mason University and Senior Economist at the MEI, and Gabriel Giguère, Senior Policy Analyst at the MEI. The MEI’s Taxation Series aims to shine a light on the fiscal policies of governments and to study their effect on economic growth and the standard of living of citizens.

According to its latest annual report, Canada Post has been registering chronic deficits for seven consecutive years.(1) Over the past decade, the Crown corporation’s accumulated deficits exceed $3.6 billion, a sum for which Canadian taxpayers are ultimately responsible.(2) This situation was already projected in a 2016 report of the Standing Committee on Government Operations and Estimates presenting an analysis by Ernst and Young, which anticipated significant deficits of $700 million by the mid-2020s.(3) Nothing has been done to alter the public monopoly’s trajectory, particularly its excessively high labour costs, which remain one of its main challenges and hinder its competitiveness in the parcel sector.(4)

Canada Post’s Lack of Competitiveness

The Crown corporation’s inability to adapt to the competitive parcel market in the wake of the pandemic has caused its market share to plummet, from 62% in 2019 to 24% in 2024.(5) Recent decades have also seen a substantial decline in letter volumes, from 5.5 billion in 2006 to 2 billion in 2024, a 64% decrease.(6)

This is not the first time that financial difficulties have plagued Canada Post, nor is it the first time raising stamp prices has been proposed as a solution.(7) With a government monopoly on Canadian letter mail, this is the easy solution of getting consumers to foot the bill for inefficiencies.

Germany’s experience liberalizing the postal sector and privatizing its former public monopoly should serve as a model to inspire Canadian policymakers.

The underlying problem, though, is the inherent incentive structure of a publicly owned monopoly: without competition, there are no consequences for failing to control costs, and political considerations further discourage cost management, as consumers (and taxpayers) can always be charged more. A new approach must be considered in order to better meet Canadians’ needs and reduce the financial burden caused by Canada Post’s chronic deficits. Germany’s experience liberalizing the postal sector and privatizing its former public monopoly, Deutsche Post, should serve as a model to inspire Canadian policymakers to improve postal service quality while stabilizing public finances.

German Privatization and Liberalization

In Germany, the reform of the postal market was enacted in multiple phases.(8) Liberalization started in 1989, as the scope of the state monopoly’s privilege was reduced by allowing competition for a narrow segment of postal services.(9) In 1998, that scope was further reduced, notably allowing competition for items of correspondence up to 200 grams and bulk mail up to 50 grams. In 2003, further reductions in the scope of monopoly privilege were enacted, with full opening up to competition in 2008.(10) Thus, in the span of approximately 10 years, the degree of market opening in the German letter market passed from 3% in 1997 to 100% in 2008.(11)

Meanwhile, in 2000, the privatization of the corporation began, with a third of the firm’s equity being offered on financial markets. The government continued to sell shares in Deutsche Post, and by 2005, private investors owned the majority of the shares of the firm.(12) The government remained a minority shareholder, but it now owns only 16.99% of the stocks.(13)

Simultaneously, close to 100 private competitors emerged at the local level.(14) As such, while Deutsche Post continues to carry most of the letter mail in Germany, there is a sizable amount of competition (accounting for 14.55% of the market in 2023) and, more importantly, market entry is feasible, which keeps competitive pressure on the former monopoly.(15) It also faces stiff competition in the market for parcels.(16) The government involvement that remains in the sector is tied to a regulatory body that approves licenses for firms seeking to deliver letters of up to 1,000 grams and regulates business-to-business rates.(17)

Thanks to the reform, letter prices in Germany fell rapidly. This is in contrast to Canada Post, whose price is 50% higher than it was in 1989.

Overall, the result of this gradual reform was to introduce competition forcing the state-owned operator to innovate and improve its efficiency.(18) In other words, the firm faced outside pressures. Simultaneously, privatization meant that the firm itself faced inside pressure. Shareholders, unlike politicians, care little for political priorities, seeking instead to maximize profits. This therefore has a similar effect to the outside pressure imposed by competition.(19) Notably, a program of cost controls was enacted, including layoffs of close to 50% of the workforce between 1990 and 2004.(20)

Thanks to the reform, inflation-adjusted letter prices fell rapidly (see Figure 1). Even in 2024, they remained 10% below the level observed at the beginning of the 1989 reforms (after accounting for inflation). This is in contrast to Canada Post, whose price is now 50% higher than it was in 1989.(21)

The decrease in real prices in Germany was not accompanied by reduced quality standards. The International Post Corporation reports annually on the quality of mail service according to the average number of days it takes for letters to move between countries. For 2023, Germany generally outperformed other European countries by this measure.(22)

The entrepreneurial dynamism of the German postal sector is evident. Instead of having one monopoly, German customers can make use of the postal services provided by approximately 400 companies that provide universal services or equivalent, and 11,000 companies offering other postal services, well ahead of all other European countries.(23)

How to Reform the Canadian Postal Market

The German case provides lessons on how to enact reform in Canada. First and foremost, it is important to understand that privatization tends to be more successful in reducing operating costs (holding quality and quantity constant) when it is accompanied by liberalization, which allows for competition.(24)

One problem with the German reform is that the process was stretched out over many years, and so the inefficiencies of public provision lasted longer. Extended privatization and liberalization processes also allow special interest groups to organize and establish privileged relationships with regulators such that regulated entities end up being clients of the regulator—a process known as regulatory capture. While there is no evidence that regulatory capture was a serious issue in Germany, it is nonetheless a potential concern that Canada should guard against. The longer the process, the greater the odds of such capture, whereas the quicker introduction of competition limits this possibility.

On the other hand, rapid privatization carries with it the risk of “asset stripping.” This occurs when insiders leverage privileged information to acquire assets at prices significantly below their true market value, effectively depleting the company (and so, the public) of its valuable resources.(25) To limit this risk and preserve the advantages associated with rapid liberalization and privatization, the Canadian government should allow employees of Canada Post to buy company shares in the first moments of the reform (or simply gift them such shares).

Through the competitive process, information about best practices would emerge, allowing Canada Post to adapt.

Selling (or giving) employees company shares during privatization offers multiple advantages.(26) First, employees of the firm, as shareholders, would have strong incentives to resist attempted asset-stripping (by virtue of their shares and any associated pension obligations). Second, this increases the odds of successful privatization. State-owned corporations often increase their operational costs to distribute indirect benefits to employees, who typically cannot receive direct monetary compensation in the form of bonuses. Through privatization, these inefficiencies—originally absorbed as non-monetary perks—are transferred to the shareholders, which in this case are the employees themselves. This shift encourages employees to actively engage in stringent cost control, as any inefficiencies directly reduce their potential profits.

When employees hold shares, their interests align more closely with those of the company owners. This alignment motivates them to leverage their unique insights to boost the firm’s market position, as they directly benefit from any resultant profit increase.

For these reasons, the federal government should ensure that Canada Post shares are given to employees.

These two tweaks to the German model—faster implementation and the distribution of shares to employees—would result in a reform process that looks like what is depicted in Table 1, as a hypothetical example. Immediately after the acquisition of shares by employees, the Crown corporation’s scope of privilege should be curtailed to allow the market entry of multiple firms, domestic or foreign. During the first year of transition, competitors could match Canada Post’s stamp prices for all letters but would not be permitted to offer lower prices.

From the second year on, full competition would be introduced with complete pricing freedom, and the remaining scope of privilege would be eliminated. Through the competitive process, information about best practices would emerge, allowing Canada Post to adapt. Moreover, the remaining shares held by the government should be sold, while also allowing employees to sell their shares to other parties if they so choose.

The issue of rural postal service must be considered in the context of sector liberalization, which could lead to a decrease in the services offered to this population that is more expensive to serve. On the one hand, individuals who live in rural regions enjoy benefits such as lower housing prices, less traffic, and cleaner air, and so higher prices and reduced access for some goods and services might just be considered normal and acceptable downsides. If we do want to ensure that every Canadian consumer has the same access to postal service, however, direct compensation to those concerned would be more effective and less expensive than subsidizing the service with regulated prices, which hides its real cost. There already exists the Northern Residents Deduction, for instance, which provides taxpayers in certain prescribed zones with a deduction ranging from $5.50 to $11 a day, and this measure could simply be enhanced to account for higher postal rates.(27)

Conclusion

Canada Post’s chronic deficits and inability to adapt in order to remain competitive demonstrate the need to privatize the Crown corporation and liberalize the sector. To achieve this, policymakers would do well to draw inspiration from successful international postal sector privatization and liberalization, such as took place in Germany, with the tweaks discussed above. This proposed change of direction would enable Canadians to benefit from better service and more competitive prices.