As U.S. cyclist Lance Armstrong won his fifth consecutive Tour de France, he brought widespread attention to the sport of cycling -- and, improbably, to the U.S. Postal Service -- whose $40 million sponsorship over the past six years was seen in the blue logo plastered across his jersey and cap.

Unfortunately the joy of Armstrong's victory will not carry over to this week's reform report issued by the President's Commission on the United States Postal Service.

The report -- to be voted on this week by the postal reform commission -- will contain many good and needed changes, but will fall short if -- as the preliminary documents indicate -- it rejects fundamental change to the Postal Services' protected, government status.

Significant Reforms Needed

Don't expect the publicity to rival Armstrong's finish - no outstretched hands in victory or pictures on the front page. Yet the results - and the reform efforts that may follow, will likely be much more significant to Americans than any sporting event.

Based on preliminary recommendations released over the past few weeks, it appears that the commission will propose a number of much needed reforms that will help improve USPS, and are sure to generate controversy. Unfortunately commissioners largely avoided structural changes - such as privatization or the elimination of its monopoly on letter mail - that would change the core incentives of the service. Until these issues are addressed, reform will remain incomplete, to the detriment of American consumers.

Transformation Needed

The postal reform commission was established last December by President Bush, and charged with "articulating a proposed vision for the future of the United States Postal Service" and recommending reforms needed to "ensure the viability of postal services." The report is widely viewed as being the most important for postal services since that of the Kappel Commission - whose recommendations led to the creation of USPS in 1971.

The need for substantial change at the postal service is clear.

The General Accounting Office, in a report on USPS last year ( pdf), concluded the future of USPS is in doubt, stating that "A transformation [is needed] if USPS is to remain viable in the 21^st century." This is in large part due to the challenge posed by e-mail and other forms of electronic communication, which has increasingly displaced postal services. As a result, postal volume is stagnant or shrinking, with fewer and fewer people mailing fewer letters. This hits the bottom line: although a surplus is expected for 2003, the postal service ran substantial deficits for the past three years.

The question for the postal commission, and ultimately for Congress, is how to respond to this fundamental challenge. Over the past few weeks, the commission has tipped its hand, publishing reports and recommendations from its various sub-committees.

Among these are a number of long-needed reforms to improve efficiency and reduce waste at USPS. These include:

• Creation of a "Postal Optimization Commission," modeled on the highly successful military base closure commission, to make recommendations regarding consolidation of post offices and other USPS infrastructure. The recommendations would become final unless reversed by Congress within 45 days.
• Provision of more postal services at non-post office locations, such as banks and grocery stores. Not only would this make life easier for consumers, but would allow the closure of unneeded and expensive post offices.
• Increased outsourcing of functions to the private sector, wherever it can be performed better and at lower cost.
• Reforming USPS's famously wasteful procurement rules to reflect commercial best practices.
• Bringing postal employment levels down through attrition, creating what the commission euphemistically refers to as "an appropriately-sized workforce."
• Restructuring management to eliminate redundant positions and clarify job functions.

These reforms are sorely needed, and long overdue. Implementing them will not be easy. At least one postal union has already promised stiff opposition. Whether they go forward will be a significant test of USPS' and Congress' commitment to reform.

A second category of recommendations is aimed at increasing the accountability and oversight of USPS. These include:

• Creation of a new Postal Regulatory Commission with broad powers to review USPS activities, including regulation of rates, definition of the universal service obligation and scope of the letter monopoly. The board would have three members appointed by the President.
• A voluntary commitment by USPS to adhere to Securities and Exchange Commission reporting requirements, as well as to periodically report on the allocation of costs among mailing services.

Monopoly Accountability

Again, these reforms would be important steps in the right direction. The current regulatory body, the Postal Rate Commission, has very limited powers, leaving the actions of the monopoly, USPS, too often unchecked. Adoption of SEC rules is also needed, helping to ensure accountability and transparency in USPS books.

The recommendation falls short, however, in that USPS should be required by law to follow SEC rules - not simply commit to them voluntarily - and compliance should be enforced by the SEC, as it is with other companies.

More broadly, however, the recommendations regarding accountability fall short because they exclude the two most critical sources of accountability for companies:

1.      Competition

2.      Shareholders

The preliminary recommendations, in fact, specifically affirm the postal services status as a government organization, rejecting privatization. Perhaps even worse, it affirms the postal service's statutory monopoly on letter mail. The commission even supports the current rule that bans homeowners from allowing private companies to put items in their mailboxes.

This is a mistake. Few firms in America enjoy the kind of legal monopoly that the postal service does for letter mail - potential competitors can go to jail if they run afoul of it. Moreover, because of USPS' government status, it enjoys a wide range of other perquisites and protections not enjoyed by private firms, ranging from exemption from taxation to implied guarantees from the U.S. treasury. This protectionism creates very real concerns that, despite increasing use of Internet communication, the Postal Service could distort markets to the detriment of competitors and consumers alike.

Market Competition

Eliminating these special privileges is key to putting the Postal Service itself on the right path. After all, an insulated and protected status fostered much of USPS's notorious inefficiency in the first place. This insulation is only compounded by federal ownership of USPS - meaning there are no stockholders to demand accountability and performance. The fundamental culture and incentives of the Postal Service need to change, and eliminating its protected status, and transforming USPS into a competitive, private-sector business will spur such change.

The report to be voted on this week by the postal reform commission will contain many good and needed changes. Ultimately, however, the commission's report will fall short, if - as the preliminary documents indicate - it rejects fundamental change to the Postal Services protected, government status. It would be ironic if - in the same week the USPS team emerges victorious in the world's most challenging bicycle competition -- policymakers protect USPS from market competition at home.

For further background, see Comments of James L. Gattuso to The President's Commission on the United States Postal Service, February 14, 2003.