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A Brief History of Canada’s Postal Transformation

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 Postwarned 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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(1) Canada Post 2007 Annual Report. This was repeated at least two other times in the report. See also Pg. 4 and Pg. 52
(2) Canada Post 2007 Annual Report. Pg. 5
(3) Canada Post 2007 Annual Report. Pg. 59
(4) Canada Post 2007 Annual Report. Pg. 59
(5) Canada Post 2007 Annual Report. Pg. 61
(6) http://www.financialpost.com/related/topics/Volatility+Canada+Post+upgrades+hold/464307/story.html
(7) Louise Thibault’s question and answer with Moya Green at the Standing Committee on Government Operations and Estimates EVIDENCE CONTENTS Thursday, June 22, 2006
(8) Canada Post 2008 Annual Report. Pg. 38
(9) Moya Greene’ s presentation at the Proceedings of the Standing Senate Committee on National Finance Issue 4 – Evidence – April 27, 2010
(10) Canada Post 2008 Annual Report. Pg. 38
(11) Submission to the Strategic Review. Canada Post: A Blueprint for Change. September 2nd, 2008. Pg. 4
(12) http://www.docstoc.com/docs/53877461/The-Honourable-Jim-Flaherty-PC-MP-Minister-of-Finance
(13) The Future of Canada Post, August 9, 2010
(14) http://www.canadapost.ca/cpo/mc/aboutus/news/pr/2010/2010_jan_special_report.jsf
(15) http://www.canadapost.ca/cpo/mc/aboutus/news/pr/2010/2010_july_debt.jsf, see also http://business.financialpost.com/2010/07/07/demand-high-for-canada-post-bond-offering/
(16) http://www.ogilvyrenault.com/en/clientWork_10520.htm
(17) Canada Post Annual Report Pg. 120 http://www.canadapost.ca/cpo/mc/assets/pdf/aboutus/annualreport/Consolidated_Financial_Statements.pdf
(18) 2011 Canada Post Annual Report. Pg. 49
(19) Canada Post 2008 Annual Report. Pg. 38
(20) http://en.wikipedia.org/wiki/Moya_Greene
(21) The quote taken from the following link has been removed from the public domain: http://extranet.canadapost.ca/html/documents/ar_summaries/2010_2014_corporateplan-e.pdf Page. 6. However, the same sentiment can be found at: http://www.canadapost.ca/cpo/mc/assets/pdf/aboutus/annualreport/Management_Discussion_and_Analysis.pdf Pg. 38 “Our financial position and operations in 2009 have caused us to re-prioritize the next phase of Postal Transformation. We have revised our total project investment plan downward to $2 billion.”
(22)https://www.thestar.com/opinion/editorialopinion/2010/08/09/the_future_of_canada_post.html

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

What exactly are the billions for?

Moya Greene, as then CEO of Canada Post, made a startling financial disclosure on what some of the billions of dollars Canada Post was requesting and collecting was for – and it was not just for modernization.

In an April 27th, 2010 representation on behalf of Canada Post to the Standing Senate Committee on National Finance, she disclosed that some of the monies was for the pension deficit, management buyouts, and assembling a new corporate credit structure. She also projected the total amount of monies needed would be higher – up from the original 1.7 billion estimate, which was later changed to 2.7 billion and now suggests around 4 billion.

Ms. Greene state before the committee, “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.”(1)

When asked more closely, she was asked if some of the money was for management buyouts. She concurred but did not have the exact figures available.

She also felt confused that Canada Post has not historically carried a level of debt and believed that this should change, “There is a permanent level of debt that a company this size should be carrying, and it is not $300 million. It should be at least $1 billion dollars.”(2)

Since this conversation Canada Post has completed the first round of issuing bonds for 1 billion dollars and has established a $4oo-million dollar credit facility with the Toronto Dominion Bank and the Royal Bank of Canada.(3)

A Former CEO on Canada Post’s Modernization

Michael Warren, a former CEO of Canada Post from 1981-1985, has given a critical analysis of the present Canada Post Modernization program.

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.”

The 2009 Annual Report – Some Answers

The 2009 Canada Post Annual Report contains many details that answer a few key-questions as outlined in the previous post, “Important Questions…”.

The 2009 version is much improved over the 2007 one, which the questions were based on. Much more will be pulled out of this document, but in reference to some of the important questions:

• Food Mail program: (Pg. 28) A large portion of this was covered by the Government of Canada. Canada Post attributes to absorb 11 million in ‘foregone’ revenue on the difference between what the Government gave and their actual costs based on commercial rates.

• Government Mail and Materials for the blind: (Pg. 28) 17 million in ‘foregone’ revenue.

• Library Book Rate: (Pg. 28) 6 million in ‘foregone’ revenue.

The total lost ‘foregone’ revenue to Canada Post for these three programs is an annual 34 million dollars.

This total does not include free mail to the military in Afghanistan.

Nor does it include a breakdown of how much the Universal Service Obligation costs. What is meant here by USO? All points serviced that Canada Post loses money on, which is typically rural and non-urban communities. Losses that are required to be recouped through the profitable urban operations.

These two entities, Urban and Non-Urban, should be distinct in all Canada Post financial reports.

The Math behind a Letter Carrier Route

If the Letter Carriers routes are changing, then it is time for the math to get corrected and made fair.

Letter Carriers of the Canada Post Corporation do not work by the hour but by a complex calculation of distance, volume, coverage, average walking speed and obstructions that total 7 hours. The total is brought to 8 when one includes the coffee breaks and a lunch break.

The detailed formula is outlined in a manual called the Letter Carrier Route Measurement System. It is long and hard to quickly decipher key-terms. It has been in existence for decades, if not more, for measuring a route.

The formula has had its strength and weaknesses. It generally equals to 8 hours, while other times it is below or above. Senior letter carriers usually take advantage of the weakness of the system and choose the routes that have been under-assessed while newcomers normally get the over-assessed routes.

This isn’t necessarily a bad thing because by the time senior letter carriers have the 20 years or so of service to do this, their knees, ankles, back or hips are close to being worn out. It enables them to extend their physical ability to complete their duties by a number of years. Although this is far from a right solution to the problem of aging and physical fatigue from the daily mechanical stress the job description entails, it has saved Canada Post millions every year in medical and disability issues.

Now that Canada Post is transforming and modernizing the Letter Carrier delivery system, important changes have happened to route measurement. First of all, it has introduced the two bundle delivery system, secondly less sorting due to the introduction of new machinery has subsequently added more delivery time to each delivery persons day.

It has also brought out the inherent flaws in this mathematical system. First of all it is a calculation based on the laws of averages. It is based on the premise that every day and every month carries the same volume. This is not the case. Volumes from October to the end of December are approximately double of what they are from June to August. This means that what is calculated to be an average 8 hour day should theoretically take 10 hours or so in high season, and approximately 6 hours in low season.

This flaw of averages is especially noticeable when a letter carrier’s actual amount of physical delivery time has increased by approximately 1.5 hours under the new plan. This 1.5 hours was taken from the manual sorting time letter carriers used to have, but now taken over by automation, the introduction of a company vehicle rather than taxis, public transit, or by foot. Time savings are also found in disputed revisions to the Letter Carrier Route Measurement System. This was previously 1.5 hours of work that was not physically stressful. This 1.5 hours more of added physical delivery time per day will, over time, increase the likelihood of injuries.

The system also needs to be more flexible to accommodate these shift in seasons. Not only are the weights heavier and the volumes higher in the peak season, but with the introduction of shifts starting at 10:00 am, those letter carriers will then be forced to deliver in the dark during the winter season. This is a serious flaw that needs to be corrected.

With the new technology available, it should be able to calculate weight and volume on a daily basis. Where the calculation exceeds the 8 hours, extra-staff should be called in to complete the work which would force the regular carrier in an overtime situation. In the summer where there is not enough mail for the average distance, the letter carrier should be required to do extra distance to make up the 8 hours.

Another problem that the route measurement system does not take into account is environment. Storms, rain, snow, dark and any other inclement condition can easily add one hour to the average daily walk. It is well known at least in Winnipeg that heavy packed snow increases the time of all walks by one hour each day. The use of gloves and the combination of a high amount of flyers also effects this variable.

If Canada Post wants to make the route measurement system fair, this environment variable needs to be added.

The two-bundle system adds more time to a route. It adds an average 2 extra seconds to each point of call — though some letter carriers in the earlier editions of this article have disputed this figure is too low. One has to look longer, stop, juggle mail and flyers around to confirm that the oversize and the sequenced mail belongs to the next house. This may seem trivial and petty to the casual observer, but the math concludes otherwise. This adds 2000 seconds to a typical modern 1000 point call which is approximately 33 minutes to a route everyday. This calculation was based on working in natural sunlight. If it is dark, the variable should be doubled.

The LCRMS calculated values are still based on delivering in a one bundle system. This has never changed. It should be updated to the two bundle system values.

Another problem of the route measurement system is new values added by management. The introduction of company vehicles has added a new dimension. However the variables and the math regarding this have not been clearly disclosed to the workers or the union. No one knows what they are. No one knows for example, how finding a parking spot on a busy street has been included in the mathematical formulation.

Canada Post needs to make the route measurement system more transparent to all its employees. It has to be certified or evaluated by those are recipients of the calculations.

Today there is an added problem — the Letter Carrier Route Measurement System has been changed into a database system. What was once a legal published document now resides as a software program in Canada Post’s database. This is not a bad thing, but access is a serious problem. At least one representative of the Canadian Union of Postal Workers in Winnipeg claims they they have been denied access, though he did admit management would allow them to look at the database views at a corporate office.

Another mathematical calculation is flyers. This was excluded in the collective agreement for the calculation of route delivery time – though the number of flyers can often double the average weight of delivery on given days. The collation of flyers is not calculated fairly either. To be fair, this also has to be calculated into the route measurement system.

This is controversial, as Canada Post letter carriers are not paid by the hour to deliver flyers, but by piece and many like it this way. This contradicts and breaks the spirit of the letter carrier route measurement system. The LCRMS is the only way to be accurately fair. The payment by the piece has to end.

The way the flyer system is enforced, it actually abrogates the math for typical coverage of a route. Not every home gets mail everyday, so the math has been calculated into this to build a typical 8 hour day. However, when one is forced to deliver flyers to 33% of all homes almost every day, with penalties of demonstrated firings if not doing so, whether the home has mail or not, it increases the daily coverage by up to 10%. This can add up to 30 minutes or more every day to a route.

This flaw has to be added to the Letter Carrier Route Measurement system as well.

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A newer article on the problems of the LCRMS system is available: Canada Post’s Delivery Software Needs a Serious Update.