3. Universal Service Fund obligations should not be imposed generally on competitors or potential entrants to market. This is because this damages competitive markets. These public sector restraints are effectively state aids to the Post Office which may be used to help it compete against other new entrants in sectors that are broadly competitive.

### 11. Ensuring Privatization Leads to Competition

We have established that one of the major purposes behind privatization is to unleash the forces of competition and generate the efficiency and management gains for the benefit of consumers of the service. One of the challenges that are typically faced by the Post is that it has very high labor costs, brought about by a high level of powerful public sector unions. Employee ownership therefore may be a way of minimizing labor concerns, while at the same time ensuring that the conditions for privatization result in a more productive workforce.

It will be important in any contemplated privatization to ensure that the newly privatized Post cannot continue to engage in anti-competitive practices. These include the following:

### 1. Deterring entry of new competitors

2. Use of legacy privileges to secure a better competitive position. Competition agencies should look for special tax breaks, customs privileges, even things like parking privileges that have an impact on the overall cost base.

3. Predatory or exclusionary practices. Agencies will have to be sensitive to the possibility that post services may elect to charge for certain services below cost to knock out competitors in certain areas, using the legally mandated monopoly in other areas to do so.

Many of these problems could be solved by a series of regional postal companies. Such a divestiture also helps the issue related to labor changes, because it will de-concentrate the power of labor unions, and thereby allow the downward pressure on labor costs that competition brings to be effective.

The Japan Privatization Bill (the “Bill”) does contemplate a separation between the various lines of business of Japan Post. This is very important, and it is good that separation of these revenue streams is in the Bill. It also will be important to include similar safeguards against cross subsidization in the regulations implementing the Bill. De jure and de facto separation, including having separate price caps, if price caps are contemplated, and rigid accounting separation between these entities would also be required.

The Postal Privatization commission does not currently have within its number representatives of the competition agency. This would be very important to ensure pro-competitive concerns are addressed in the privatization process itself. There are also special exemptions that are contemplated in the privatization during the preparatory period for Japan Post. These include the ability of Japan Post to provide financing for international cargo transport. There are provisions that provide that this must be approved by the Privatization Commission, and that this activity must not unfairly harm those who provide like activities. This needs to be more clearly spelled out in the implementing regulations and the competition agency needs to be involved more closely in this area.