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Monday, June 13, 2011

A Brief History of Canada’s Postal Transformation

An ambitious plan that started with the ideal of being self-funded with no debt has escalated into over 2.7 billion in borrowed funds and projected to go over 4 billion. What happened?

With this growing debt, can Canada Post survive another economic recession?

The 2007 Canada Post Annual Report gave a positive spin to the idea of postal transformation, “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 was to be self-funded and if the funding was not available, the transformation would be delayed.

Canada Post had just finished in 2006 paying off the last 240 million of pension liability and the various portions of the pension plan for 2007 had a savings of 414 million dollars over the previous year.(2)
This 414 million dollars in savings for 2007 alone were to be the self-funding catalyst for postal transformation. This surplus was expected to repeat itself over the five year plan.

It was a risky and aggressive approach that would soon unravel.

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.

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.

The blueprint was an in-house solution. The Federal Government kept Canada Post at arms length and as long as it was self-sufficient and not needing neither financial or political intervention, it was allowed to chart its own course.

First, Canada Post tried to change the Pension regulations so that they wouldn’t be immediately forced to repay. 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.(3) 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 for ask permission for Canada Post to partially privatize in order that she could arrange funding. She was denied.(4) The Government was now forced to get involved into problem-solving the financial crisis. In December 2009, Canada Post’s borrowing limit was extended to 2.5 billion dollars.(5) The solution was for Canada Post to issue public bonds that were guaranteed by the Government of Canada and a 400 million dollar credit facility. This way, the Government did not have to directly intervene with a taxpayer monies.

There has never been an announcement by Canada Post on why they switched from a self-funding formula to external borrowing or simply delay until the funds were internally available – as promised on a number of occasions in the 2007 Annual Report.
Nor has there been any explanation why they did not ‘sharpen’ the traditional model first, which could have absorbed the loss of 10% of the workforce with little impact, flex mail routes, rotating shifts instead of fixed-night shifts, which would see a tremendous health savings, more truck instead of air transportation and less managers per employee would save Canada Post over 400 million annually. Plus, labour-relations would not be so intense, nor would the corporation become a concern for the the Federal Government as it is now.

Neither does the Postal Transformation blueprint address the two major concerns that directly effect Canada Post’s long-term health: the pension problem and the legislated postal services to money-losing non-urban centres.

The 2.7 billion dollar forecast debt which may rise to 4 billion,(6) was not planned or intended. If the Corporation goes through another economic recession along with the extra added overhead expense of Postal Transformation, it may need another extensive cash infusion from the Federal Government or be forced to privatize.

During the midst of this crisis, Moya Greene resigned on May 27, 2010(7) 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 issue but the timing suggests that she had struck out and had no other options.

In the meantime, Canada Post continues to proceed on transformation, with no intention of trimming back.
(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. 59


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