The language used here is woolly and needs to be tightened up - a consumer welfare oriented approach, as opposed to the quasi-trade test that appears to be applied here, needs elaboration. Where the bill refers to the fact that the new postal companies will not do anything to damage the interests of companies that provide like services, the competition agency needs to weigh in with its views regarding precisely what this means in a competition context.

There are other areas such as insurance and financial services where the provisions are to ensure that the competitive relationships with other providers are not adversely affected. This is slightly clearer language, but it is important to ensure that the JFTC's views are actively sought in the crafting of the implementing regulations.

The key areas where some competition safeguards are mandated are as follows:

1. Use of the USO as a shield for anti-competitive practices. Frequently, as noted above, the USO is so used.

2. A rigorous accounting separation mechanism among the various businesses is required to ensure that any anti-competitive cross-subsidization is limited. In considering the costs for provision of a service, we recommend using a hypothetical private firm, and adding to that cost base the benefits accrued from being government owned, including all exemptions from taxes, licenses or any other regulatory process that private firms would have to engage in. All these costs should be added to the hypothetical benchmark. If the Post is charging below these costs, then a case can be made for anti-competitive cross-subsidization.

### 12. Potential Issues in Japanese Postal Privatization

a. Evaluation of JPCo's Cost Base

It is clear that Japan Postal Company (“JPCo”) (one of the companies that will exist after the privatization separates the postal company from the financial services and insurance arms of Japan Post) has benefited from having already built out its infrastructure. JPCo therefore clearly will benefit from this legacy governmental ownership. Meanwhile, there are a number of domestic express companies, such as Yamato and others that might be interested in providing postal services. The problem for them would be that they would have to compete against the much lower cost, already built-out infrastructure of JPCo. JFTC would have to develop a methodology to deal with this cost differential, by assigning a hypothetical benchmark cost for provision of postal service, and by developing accurate ways of evaluating the cost of the individual network elements. A careful and accurate evaluation of cost is particularly important as the SOE can engage in below-cost pricing which would be below the real cost of provision of the service (if those costs are properly allocated) but may be below the hypothetical and artificially created cost, which arises from the perks and privileges of government ownership.

In studies of the cost of the universal service obligation, a common theme emerges. The USO has both cost and benefit characteristics. Many studies conclude that any cost characteristics are outweighed by the benefit characteristics, and any cost savings by limiting the USO are dwarfed by savings from, for example, reducing the premium wage of government postal employees, who tend to be paid significantly more than private sector counterparts in comparable jobs. This is borne