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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.”

Important Questions on Postal Transformation

These are some important questions that come to mind in the process of modernizing Canada Post. There was no public or employee input involved in the decision-making. These are vital questions that should have been publicly addressed before implementation but still remain unanswered.

Why is Canada Post spending so much money on new buildings and infrastructure when mail volumes are declining? If Canada Post was publicly traded, would investors infuse 2 billion dollars for a sales base forecasted on declining volumes or would they just want management to “sharpen the saw” with the least capital possible?
Can the Post Office continue to rely on rate increases to cover costs?
Why should Canada Post bear the cost of Company provided vehicles when historically employees provided their own? In Winnipeg, 70% of the traditional letter carriers use private vehicles, 5% public transit, 23% taxi and 2% walking directly from station to destination. Of the private vehicles 90% do not benefit from Canada Post subsidies of any kind. The costs are all borne by the carrier. In the new modern Post scenario, media outlets confer the purchase of 5000 additional vehicles on top of replacing a fleet of 6000. If the 5000 figure is correct, and this is to replace the private vehicles. The new cost adds 40 million of annual expenditures to Canada Post’s bottom line that never existed before. (27 million a year in lease payments, plus 13 million in additional annual fuel costs, approximately 7.5 million in annual insurance costs, and 2.5 million in annual maintenance)
Is this a good business decision?
Why use expensive air transport when trucking will suffice? USPS is trying to move as much delivery goods to surface transport as opposed to air to cut down on costs. Will Canada Post follow suit, or is moving nearer to the Airport an indication of the opposite strategy? One personal study concludes that air transport is 3x higher than surface transportation. How much would Canada Post save if the majority of goods were shipped by surface rather than by air? (It has been proven that the majority of urban centres can meet time objectives by surface).
Wouldn’t it have been much cheaper to build a facility away from the airport with more emphasis on trucking logistics?
Why such a big cost of transformation with so little return? The 2007 annual report demonstrates the costs are being shifted from labour to infrastructure with little financial change. Suggestions have been made that staffing is to be reduced by 10%. This brings in an annual savings of $350 million dollars. The 2007 Canada Post annual report has stated that total debt obligations will amount to $315 million a year in yearly lease obligations in five years plus other obligations that could push it over 350 million a year. If this is correct, whatever costs associated with the upgrades and reductions in staffing leaves the financial picture unchanged.
Why couldn’t the corporation just slow down the roll-out and use its available yearly profits to fund it?
Why didn’t the corporation first test this plan in a controlled area of study and then implement a national strategy when all the serious problems had been ironed out?
Should Canada Post be involved in ancillary companies such as InnovaPost, or should they shed non-core items and focus more clearly on the direct company mission?
When will Canada Post issue annual reports that comply with the Ontario Securities Commission standards?
Proposed savings from better health initiatives #1. How can letter carriers spending an extra 1.5 hours walking/delivering per day than the traditional model be construed as a health and safety solution? Wouldn’t extra time walking increase the exposure to injury? Shouldn’t the new model be decreasing the amount a letter carrier should be walking?
Proposed savings from better health initiatives #2. Night shift work. It has been noted that mental health issues, productivity and absenteeism have to be addressed in order to control and improve costs. Much of this can be directly correlated to long-term evening and especially night shift work with its physical and social consequences. Productivity could likely be increased by 30%, absenteeism reduced by at least 50%, and would effect long term mental illness leave by a large percentage. There would be a decrease in workplace violence as well if night shift work could be reduced to a minimum. It is one of the most long-term expensive health problems faced by Canada Post. Why isn’t there even a remote discussion on a solution to the problems associated with evening and night shifts? The productivity improvements alone from improving work hours may even be more profitable than installing new equipment.
How much does the universal Government mandate of sending mail from everywhere to anywhere cost Canada Post:

How much does Canada Post lose in sending mail to non-urban centres?
Does Canada Post have a hope of ever breaking even with these points?
Can increasing profits through innovation and better work practices from urban centres ever cover the losses of sending mail to non-urban centres? Is there a point with fuel costs that it will be impossible for urban centres to subsidize costs of delivery to non-urban centres?
How much profit did the urban centres actually make in 2011 to compensate for the losses accrued from the non-urban centres?
Do the Government subsidies for Northern and remote towns/villages cover the costs of delivery? If not, how much does Canada Post lose on this every year?
How much money does Canada Post lose from Fed Ex, UPS, etc. piggybacking Canada Post in delivery to non-urban centres every year?
How much does it cost Canada Post to deliver Parliament mail, admail and to Canadian military establishments such as Afghanistan every year?
Do the Government subsidies adequately cover the cost of delivery for magazines and publications? If not, how much does Canada Post lose on this every year?
Canadian Library parcel delivery service. Do the Government subsidies adequately cover the delivery cost for these? If not, how much does Canada Post lose on this every year?
Since these items are all acts of legislation and Canada Post has no control over these variables, shouldn’t non-urban centre costs be listed separately in the annual report as fixed expenses/liabilities?
Shouldn’t the profitable and the forced non-profitable entities of Canada Post be separated for financial reporting purposes?

Still looking for answers…