A Brief History of Canada’s Postal Transformation

Canada_Post_fleet_2010

The modernization of Canada Post — an ambitious plan that started with the ideal of being self-funded with little debt has escalated into billions of borrowed funds and now has straddled the company with serious money issues. A total reverse of six years ago when Canada Post had no debt at all. What happened?

It is necessary to delve into the recent history of Canada Post to find the answers.

The 2007 Canada Post Annual Report introduced the framework and official cost of the modern post:

“Over the next five years, we could invest up to $1.9 billion of capital to support these major improvements. This is in addition to the $1.1 billion of capital investment that is needed to support ongoing operations. We will prioritize our investment based on the greatest need and spend only what we can afford.”(1)

It also outlined a general idea of how to accomplish this $3-billion total:

“Funding will also be derived from an employer-contribution holiday to the Canada Post Pension Plan. More than $750 million of supplementary contributions have created a healthy surplus, but financial markets also have an important impact on the valuation of our pension plan and related funding requirements.

To mitigate these risks, Canada Post is reviewing its cost structure and developing contingency plans to ensure our investment plans are prudent and flexible.”(2)

Canada Post was in a positive position with the pension plan. There was no longer any solvency deficiency payments required. This potentially rendered up to $414 million dollars annually for other purposes.(3) The Pension Plan was also in a surplus position and afforded Canada Post a two-year release from making any contributions. This amounted to $270 million over two years.(4) There was projected small annual profits anywhere from $50 to $200 million from the Corporation that could be rolled into the transformation. Plus, if the Federal Government waived its dividend requirement on any profits, (which it later did) this could also generate anywhere from $20 – $60 million annually.

The above are just conjectures of what was available, but it is clear that Canada Post was especially banking on what they believed was $750 million savings from Pension monies for Postal Transformation, believing that this would provide the necessary funding for the first two critical years:

“Based on the assessment of these factors, it is expected that the Corporation will have sufficient liquidity and will not need to borrow in 2008 or 2009 to meet planned commitments and investments.”(5)

These savings for 2007 were to be the self-funding catalyst for postal transformation. It is not clear how the money would be financed after 2009.

It was a risky and aggressive approach. Sean Silcoff of the Financial Post warned in 2008 that this may be too aggressive and a cash reserve should be created in case the financial markets changed:

“But volatile markets mean Ms. Greene may need to conserve cash in case there is a shortfall in the post office’s pension plan. Ms. Greene inherited a $1.4-billion plan deficit when she joined in 2005. That was gradually whittled down by rising markets and $719-million in special contributions.”(6)

The enormous burden of the pension plan was also the subject of Ms. Louise Thibault’s question in a June 22nd, 2006 Parliamentary standing committee. She asked Moya Greene, then President of Canada Post, if the company had a rationalization plan. Moya Greene replied, “No, we have no such plan. Such decisions are made naturally, as the situation evolves.”(7)

There was no public consultation on the modernization plan, nor was a detailed business plan introduced. They did not answer basic questions such as, why would you invest so much money, equipment and infrastructure now in a sector that has decreasing volumes? If Canada Post was a private company and presented a business plan with a projected loss of 1.7% yearly in volume, would shareholders invest in such an upgrade plan? This question and many more have been posited for well over four years, and still remain unanswered.

Canada Post, being a crown corporation, is only accountable to one shareholder, not like publicly traded companies whose business plans are heavily scrutinized by public investors. Canada Post’s only shareholder is the Federal Government and is not required to publicly open its business plan. It is also at arms length from the Federal Government. It historically has been a regular generator of small profits and a yearly dividend to the Government, because of this, it has been allowed to chart its own course.

In 2008 the markets crashed. It put Canada Post into a $2-billion dollar pension shortfall. Growth was no longer in the 5% but in the negatives. There was no money for the transformation. There was no cash reserved for such a premise to occur either.

Financial and lease commitments had already been made. Canada Post was caught unprepared. Federal law stipulated the corporation could only borrow up to $300-million dollars and the commitment to the transformation was pushing this limit

Costs for the Modernization had also risen considerably over the one-year period. The 2008 Annual Report came up with higher figures:

“Over the next five years, investment of up to $2.7 billion, including $2.3 billion of capital expenditures, would be needed to support Postal Transformation. This amount is in addition to almost $1 billion of capital investment needed to support ongoing operations.”(8)

The total was now over $3.7-billion dollars instead of $3 billion.

In addressing a parliamentary committee, Moya Greene stated that it could go to $4-billion dollars:

“I am looking at us spending $2 billion to $2.5 billion to modernize the facility and to help our people adapt to change, and I am looking at us probably having to commit another $1 billion to the pension. Therefore, I am looking at us managing close to between $3.5 billion and $4 billion worth of liability.”(9)

The initial response was to curtail the Postal Transformation until additional sources of funding could be found:

“Given the current economic climate, we intend to monitor our financial position closely and adjust spending as needed. Current commitments over the five-year plan period have been limited to the most critical investments, which are expected to total $750 million until we can ensure adequate financing.”(10)

The initial solutions considered were twofold. The Canada Post Corporation Strategic Review recommended that Canada Post, as a crown corporation, “should be either exempted from funding solvency deficits or the government should agree to guarantee payment for any such deficit.” This would relieve between $250 to $500 million annually. They also recommended that Canada Post have an increased borrowing limit.(11)

Canada Post went even further. They directly addressed the Minister of Finance. On March 16th, 2009, Moya Greene, CEO of Canada Post wrote a letter to the Hon. Jim Flaherty, Minister of Finance to “Exempt federal Crown Corporations from solvency deficit rules,” and the second option was to change the way defined benefit plans work.(12) Ms. Greene was looking for a way to not immediately re-pay the pension shortfall so that the money could be used for the transformation. A reply to this request has not been found but it must have obviously been turned down.

Ms. Greene then tried a second approach. According to a Toronto Star writer and ex-CEO of Canada Post, Michael Warren, she went to Stephen Harper to ask permission for Canada Post to partially privatize in order that she could arrange funding. She was denied.(13)

The borrowing limit was officially increased. In December 2009, it was extended to $2.5-billion dollars.(14) In July, 2010 Canada Post issued a $1-billion bond debt issue, which were snatched up fast because they were backed by the Government of Canada.(15) They have also established a $400-million-dollar credit facility (16). The Federal Government also allowed Canada Post to borrow up to $500 million from the Government’s Consolidated Revenue fund.(17)

In 2011, the pension shortfall payment methodology has also been changed. This was not done specifically for Canada Post but for all Federally regulated pension funds under the same financial pressures. This has alleviated significant monies having to annually be contributed to the pension shortfall.(18)

The 2007 and 2008 Annual Reports do not cite labour costs as a critical factor to control in regards to its financial outlook. Contrary, it envisioned that “Anticipated benefits will be achieved through leveraging the coming wave of attrition, as close to one-third of our employees become eligible for retirement within ten years.”(19) A high number of these positions were to be eliminated. This was where a large portion of the savings were to come from.

During the midst of this crisis, Moya Greene resigned on May 27, 2010(20) and moved over to the Royal Mail in Britain to lead their transformation. There is no reference in any Canadian political or business journal that she was compelled or forced to leave over the handling of the upgrade and neglecting to have cash-reserves in the business plan.

Canada Post continues to proceed on transformation, though it has begun to pull-back in the full expenditure. The Summary of 2010-2014 Corporate Plan by Canada Post states that it has reduced transformation expenditures $1.1 billion less than planned. $2 billion instead of $3.1 billion but failed to give any specifics.

“Our financial experience in 2009 has also caused us to re-prioritize the next phase of PT. In addition to dealing with obsolescence we also plan to focus on the critical investments and those with the highest return on investment. We have revised our investment to $2 billion overall, $1.1 billion less than last year’s Plan.”(21)

Canada Post cited its first official loss after 16 years of consecutive profits in its 2011 Annual Report. It cited four main factors for the loss: eroding mail volumes, pension liabilities, the rotating strikes and subsequent lockout, and labour costs. Mail volumes were already eroding before the transformation began, this is not a valid argument. They knew there were great risks associated with using allocated pension money, but failed to build-up cash reserves for a just-in-case scenario. They knew this was a huge risk and lost. Labour costs were not an initial concern at the beginning because at least 16 to 20 percent of positions were going to be eliminated through attrition. The cost savings alone from this would propel the transformation into a profit position. However, the combination of the pension losses, eroding mail volumes, the higher-than anticipated costs of Postal Transformation, and high debt, has caused Canada Post to focus on severely cutting current labour costs.

The above are true contributors, but the problem of poor initial planning needs to be included in Canada Post’s recent history and is suspiciously absent.

Michael Warren, a former CEO of Canada Post from 1981-1985, believes that there is a lack of a clear plan and this may bring on future financial problems. In a Toronto Star article, The Future of Canada Post, he argues that there are serious inherent problems with the plan:

“The larger concern is that Canadian taxpayers are being asked to guarantee a multi-billion-dollar investment in a process that lacks a clear, long-term business plan.

If these billions are simply intended to speed up the processing of hard-copy letter mail to add some efficiency to today’s unsustainable postal business model, then they will be wasted. This money will also be wasted if the government allows Canada Post to indulge in its costly vision of a separate e-post electronic service when the Internet is readily available.”(22)

The story of Canada Post’s postal transformation from a financial perspective is not over yet. As more information comes to light, this website will be updated.

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First published February 22, 2011. Revised June 17, 2013

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