Quantification of 

financial transfers 

caused by Universal 

Postal Union

terminal dues

Final report

Postal Regulatory Commission

22 December 2015
Authors:

Henrik Ballebye Okholm

Anna Möller Boivie

Simon Edkins

Jimmy Gårdebrink
Preface

The Universal Postal Union (UPU) system of terminal dues governs payments between designated postal

operators for the transport, sorting, and delivery of cross-border letter post items in the destination country. UPU rates are used by many postal operators across the world, both directly and indirectly (as a fallback provision). In a report from September 20141

, Copenhagen Economics identified three types of potential market distortions created by the current UPU terminal dues system:

1. Distortion of competition for (i) last-mile handling and (ii) first-mile handling of cross-border letter post items

2. Distortion of demand for (i) delivery within and outside the terminal dues system, (ii) domestic 

versus cross-border delivery, and (iii) cross-border delivery originating in transition versus target 

countries

3. Financial transfers between delivery operators 

As a follow-up on the previous study, the Postal Regulatory Commission has asked Copenhagen Economics to conduct a quantitative analysis, estimating the magnitude of the third type of distortion: the financial transfers between designated postal operators currently using the terminal dues system. 

This report presents the findings of our research conducted from September to December 2015. This report provides updated results compared to an earlier version released in October 2015, where there were 

errors in some of the input data. This means that the financial net transfers in our previous report were 

too high. 

Compared to the previous version of the report, this report also provides more analysis of the patterns of 

the net transfers, i.e. a breakdown on types of letters and a breakdown of transfers between geographical 

regions. 

The structure of the report is the following: Chapter 1 provides an introduction to terminal dues and their 

impact on designated postal operators’ financial positions. Chapter 2 describes the model that we use to 

estimate financial transfers. Chapter 3 discusses the results of the modelling and the caveats that must be 

considered when interpreting the results.

 

1 Copenhagen Economics (2014), The Economics of Terminal Dues, report prepared for the Postal Regulatory Commission. Available at 

http://www.prc.gov/sites/default/files/reports/The%20Economics%20of%20Terminal%20Dues_final%20report%20300914.pdf
Table of contents

Preface 1

Executive summary 6

1 Terminal dues and their impact on postal 

operators’ financial positions 12

1.1 The UPU system for terminal dues 12

1.2 Design of the terminal dues system 13

1.3 Financial net transfers created by terminal dues 15

2 Developing a model for estimating net 

transfers 19

2.1 A model for estimating financial transfers 19

2.2 Elements and assumptions in the model 22

2.3 Interpretation of the results – caveats and cautions 33

3 Applying the model – estimating net 

transfers 36

3.1 Net financial transfers 36

3.2 Inbound effect 39

3.3 Outbound effect 44

3.4 Net effect by letter format 45

3.5 Financial transfers between geographical regions 46

3.6 Sensitivity analysis 47

References 50
List of tables

Table 1 Universal Postal Union groups ............................................. 14

Table 2 Terminal dues rates paid...................................................... 14

Table 3 Target countries subject to UPU floors or caps .................... 15

Table 4 Schedule of terminal dues rates ...........................................29

Table 5 Illustration: Drivers of positive inbound effects...................41

Table 6 Illustration: Drivers of negative inbound effects..................43

Table 7 Illustration: Drivers of outbound effects ..............................45

Table 8 Sensitivity analysis: Equivalent domestic postage rates ..... 48

Table 9 Sensitivity analysis: Share of small packets in mail mix ..... 48
List of figures

Figure 1 Terminal dues versus domestic postage rates in the 

US ..................................................................................................... 17

Figure 2 Domestic postage, letter 20g ..............................................24

Figure 3 Process map........................................................................25

Figure 4 Bilateral mail flows (largest outbound/inbound flows)..... 28

Figure 5 Illustration: Calculation of uncapped terminal dues ......... 30

Figure 6 Calculation of equivalent domestic postage rates ...............32

Figure 7 Postal operators with largest estimated negative net 

transfers 2014 (million SDR)............................................................37

Figure 8 Postal operators with largest estimated positive net 

transfers 2014 (million SDR)........................................................... 38

Figure 9 Postal operators with largest estimated positive 

transfers for inbound mail flows 2014 ..............................................39

Figure 10 Estimated gain per item (inbound mail flows - top 

15) .................................................................................................... 40

Figure 11 Postal operators with largest estimated negative 

transfers for inbound mail flows 2014 ..............................................42

Figure 12 Estimated loss per item (inbound mail flows - top 

15) .....................................................................................................43

Figure 13 Postal operators with largest estimated positive 

transfers for outbound mail flows.....................................................44

Figure 14 Distribution of net effect by letter format .........................46

Figure 15 Financial transfers between geographical regions ............46
List of boxes

Box 1 Financial transfers created by terminal dues ..........................18

Box 2 Calculation of financial transfers, numerical example........... 20

Box 3 Assumption of proportional regional participation ................26
6

Executive summary

The Universal Postal Union (UPU) is an intergovernmental organization and a global 

forum for cooperation between postal sector players, originally founded in 1874. Amongst 

other things, the UPU sets the rules for terminal dues - payments between designated 

postal operators for the transport, sorting, and delivery of cross-border letter post2items 

in the destination country. 

Terminal dues make sure that designated postal operators get compensation when they

handle letters originating from designated postal operators in other countries. However, 

the design of the UPU system for terminal dues may lead to market distortions. In fact, in 

a report from September 20143, Copenhagen Economics identified three types of potential 

market distortions present in the current UPU terminal dues system:

1. Distortion of competition for (i) last-mile handling and (ii) first-mile handling of 

cross-border letter post items

2. Distortion of demand for (i) delivery within and outside the terminal dues system, (ii) domestic versus cross-border delivery, and (iii) cross-border delivery 

originating in transition versus target countries

3. Financial transfers between delivery operators 

Since the completion of the report, there has been interest from the U.S. Department of 

State’s Federal Advisory Committee on International Postal and Delivery Services, operators, regulators, and others in quantifying the potential market distortions. Quantifying 

the distortions will lend visibility into the extent of the potential problem. Of primary 

interest is quantifying the financial transfers between delivery operators. Against this 

background, the Postal Regulatory Commission has asked Copenhagen Economics to 

estimate the financial transfers between designated postal operators currently using the 

terminal dues system.

As outlined in the previous report, the potential distortions emerging from the current 

terminal dues system can be quantified by comparing the actual situation with the current 

set of terminal dues to a counterfactual situation, in which terminal dues are nondistortionary. The difference between the two situations can be considered a distortion of 

the ideal state.

 

2 Terminal dues apply to “small letters”, “large letters” (sometimes referred to as “flats”), and “bulky letter” (sometimes 

referred to as “small packets”), defined by a set of minimum and maximum dimensions and weights. Small letters (P) are 

defined by the characteristics; Minimum dimensions: 90 x 140 mm, Maximum dimensions: 165 x 245 mm, Maximum 

weight: 100 g, Maximum thickness: 5 mm. Large letters (G) are characterized as items that cannot be classified as small 

letters; Minimum dimensions: 90 x 140 mm, Maximum dimensions: 165 x 245 mm, Maximum weight: 100 g, Maximum 

thickness: 5 mm. Bulky letters or small packets (E) (a non-standard envelope or parcel up to 2 kg) are characterized as 

items classified neither as small letters nor as large letters; Minimum dimensions: 90 x 140 mm, Maximum dimensions: 

900 mm length, width and depth combined, with the greatest dimension not exceeding 900 mm, Maximum weight: 2 kg (5 

kg for items containing books or pamphlets), cf. UPU 2015 Statistics and Accounting Guide. 

3 Copenhagen Economics (2014), The Economics of Terminal Dues, report prepared for the Postal Regulatory Commission. 

Available at 

http://www.prc.gov/sites/default/files/reports/The%20Economics%20of%20Terminal%20Dues_final%20report%203009

14.pdf
7

Financial transfers between designated postal operators occur in cases where (compared 

to a counterfactual situation with non-distortionary terminal dues) the sending postal 

operator today overpays or underpays for last-mile delivery in the destination country. An 

underpayment for delivery implies a financial transfer from the receiving postal operator 

to the sending one. Similarly, an overpayment for delivery implies a financial transfer 

from the sending postal operator to the receiving one.

A set of counterfactual and non-distortionary terminal dues are defined by the rates that 

would be charged to a private company for the same service (i.e., last-mile handling of 

letter mail). Since these tariffs are not always available in the public domain, previous 

studies have often applied a set of counterfactual terminal dues rates, referred to as the 

equivalent domestic postage rates, set at 70-80 percent of the domestic postage rates for 

end-to-end delivery of single-piece letters of three formats (small letters, large letters, and 

small packets). This is where our analysis begins.4 We also conduct a number of robustness checks where we vary this assumption.

Developing a model for estimating financial net transfers

The current terminal dues system may influence the financial position of postal operators, 

given their bilateral mail flows, via two channels: inbound cross-border mail flows (import volumes) and outbound cross-border mail flows (export volumes).

On the inbound side, the effect (for a specific receiving postal operator and a specific bilateral mail flow) would equal the difference between the terminal dues charged and the 

equivalent domestic postage rate, times the amount of inbound letter post items. If the 

current terminal dues rate is below the domestic price for last-mile delivery, this implies a 

negative financial transfer for the receiving operator.

On the outbound side, the effect (for a specific sending postal operator and a specific bilateral mail flow) would equal the difference between the terminal dues paid and the 

equivalent domestic postage in the receiving country, times the amount of outbound letter 

post items. If the current terminal dues rate charged by the postal operator in the destination country is below the domestic price for last-mile delivery in the destination country, 

this implies a positive financial transfer for the sending operator. 

In order to quantify the financial net transfers, we design a model assuming that all bilateral mail flows between designated postal operators are subject to UPU terminal dues. 

This is, however, not the case in reality.5 For designated postal operators using alternative 

agreements for remuneration in relation to cross-border letter post flows, the financial 

transfers estimated in our model may thus be somewhat overstated. Nevertheless, as the 

UPU terminal dues will always serve as a benchmark in negotiations about alternative 

agreements, we do not expect these rates to differ substantially from the UPU rates. 

 

4 An alternative approach could be to depart from the uncapped UPU terminal dues rates. These rates, however, only reflect 

the domestic postage for small letters (P) and large letters (G). Due to the increased importance of e-commerce and small 

packets in the cross-border mail mix, including also the domestic postage for small packets (E) will provide a more representative picture of the real cross-border mail mix. 

5 Two alternatives to the UPU terminal dues are (i) compensation rates negotiated under the REIMS agreement (administered by the International Post Corporation (IPC)) and (ii) bilateral agreements between postal administrations.
8

As a first step, our model estimates the net financial transfer for one operator in relation 

to one specific bilateral flow of cross-border letter mail:

πij

I = Xji(TDij − EDPij)

πij

O = Xij(TDji − EDPji)

NTi = πij

I − πijO

In this model, πij

I

is country i’s loss (gain) on inbound letter mail from country j expressed 

as the difference between what country i gets in terms of terminal dues from country j 

today and what it would get in the counterfactual scenario. Xji is the letter mail flow subject to terminal dues going from country j to country i, TDij is the actual terminal dues 

rate that country i receives as revenue from country j and EDPij is the equivalent domestic 

postage, i.e. the counterfactual terminal dues rate, in country i.

Equivalently, πij

O

is country i’s gain (loss) on outbound letter mail to country j expressed 

as the difference between what country i pays in terms of terminal dues to country j today 

and what it would pay in the counterfactual scenario. 

NTiis thus the net transfer for country i related to its bilateral cross border exchange of 

mail with country j. In order to get the total net transfer for country i, one has to conduct 

the same analysis for all bilateral mail flows to and from country i.

When terminal dues change from the current level to the counterfactual rate, this may 

imply that postal administrations change the prices they charge for outbound crossborder delivery of letters. This may affect the demand for cross-border mail. As a result, 

the global mail volumes in the counterfactual situation may not be the same as the global 

mail volumes in the actual situation. This dynamic effect is not taken into account in our 

model. In order to consider this effect, one would need to include assumptions about (i) 

the impact of terminal dues levels on postal tariffs and (ii) mailers’ elasticities of demand. 

The lack of dynamic effects in our model in combination with a lack of precise data on 

actual bilateral mail flows, terminal dues in the counterfactual situation, and the existence 

of alternative agreements not subject to UPU terminal dues implies that we cannot claim 

to estimate precise net financial transfers for individual postal operators. Nevertheless, 

our estimations provide valuable information regarding the magnitude and direction of 

financial transfers across designated postal operators worldwide. They also provide valuable insights regarding the characteristics of designated postal operators determining 

whether and to what extent a postal operator is likely to experience positive or negative 

financial transfers in the current system.

Applying the model – estimating financial net transfers 

Our modelling reveals a total value of net financial transfers between 154 designated 

postal operators in the current terminal dues system in 2014 of approximately 950 million Special Drawing Rights (SDR), corresponding to 1,400 million USD.

The levels of net financial transfers differ substantially across countries. Whereas many 

countries (primarily in Africa, South America, and the Middle East) experience net finan-
9

cial transfers of 0.5 million SDR (corresponding to approximately 0.7 million USD) or 

less, there is also a large number of countries experiencing substantially larger transfers 

(up to 270 million SDR corresponding to almost 400 million USD). The financial net 

transfers are significant for some operators and correspond to up to 13 percent of the mail 

revenue for countries experiencing a negative financial net transfer, and up to 30 percent 

of mail revenue for countries experiencing positive financial net transfer. 

Our estimates show that the financial transfers primarily stem from low terminal dues for 

small packets. Small packets account for 70% of the total financial transfers. Large letters 

account for 14% and small letters account for 16% of the financial transfers. 

Our estimations show that whereas the negative net transfers generated by the terminal 

dues system are concentrated to a relatively small number of designated postal operators 

(31), the positive net transfers are distributed among a larger number of designated postal operators (123). In fact, we find that 98 percent of the negative net transfers generated 

by the terminal dues system are incurred by only 15 designated postal operators which 

(according to our estimations) all incurred a net financial loss of more than 6 million SDR 

(approximately 8.5 million USD) or more in 2014. As regards the positive transfers, we 

observe a slightly different picture with a larger number of designated postal operators 

sharing the transfers generated by the terminal dues system. Nevertheless, there are still a 

small number of postal operators that experience significantly higher gains than others 

do. Altogether, the 15 designated postal operators experiencing the largest positive net 

transfers represent 69 percent of the total transfers generated by the system. 

On a regional level, there are three significant financial net transfers: From Western Europe to Eastern Europe & Central-Asia, from Western Europe to Asia-Pacific and from 

North America to Asia-Pacific. 

The net financial transfer for each postal operator emerges from a combination of two 

effects: an inbound effect (on cross-border letter mail coming from other countries) and 

an outbound effect (on cross-border letter mail sent to other countries).

With respect to the inbound effect, our estimations reveal that 97 designated postal operators experience a positive financial transfer whereas 57 postal operators experience a 

negative financial transfer. The financial loss per operator experiencing a negative transfer on inbound volumes is, however, much larger than the financial gain per operator 

experiencing a positive transfer on inbound volumes. Whereas no postal operators experience a positive inbound transfer larger than 12 million SDR, negative transfers on inbound volumes can amount to over 275 million SDR. 

With respect to the outbound effect, all postal operators in our analysis experience a financial gain on outbound mail flows. Depending on the characteristics of the designated 

postal operator, the positive transfer on outbound mail volumes ranges from less than 

1.000 SDR to more than 200 million SDR per operator. 

The size of the net financial transfer (i.e. the sum of the inbound and the outbound effect 

t) experienced by a specific postal operator depends on (i) the difference between actual 
10

and counterfactual terminal dues rates charged from/paid to foreign postal operators as 

well as on (ii) the size of and composition of inbound/outbound cross-border mail flows. 

Our analysis reveals that the financial transfers in the UPU terminal dues system are 

driven by a combination of these two factors. 

Our estimations suggest that some designated postal operators with relatively low crossborder volumes in a global perspective experience large negative financial transfers, due 

to significant differences between actual terminal dues charged for inbound cross-border 

letters and the equivalent domestic postage rate. Similarly, some designated postal operators experience large positive financial transfers due to significant differences between 

terminal dues paid for outbound cross-border letters and the equivalent domestic postage 

rates in the receiving countries.

For any difference between actual and counterfactual terminal dues on inbound as well as 

on outbound mail flows, however, larger cross-border mail flows will always increase the 

financial impact of the terminal dues system. As a consequence, the largest transfers created by the current system of terminal dues will follow the largest global mail flows. 

Our estimations show that a designated postal operator that is losing money on inbound 

mail flows and gaining money on outbound mail flows will experience larger losses if it is 

a net importer of mail than if it is a net exporter of mail. Net-importing postal operators 

with a high price for last-mile handling of domestic letter post items will experience the 

largest negative transfers in the current system. Net-exporting postal operators with a 

price for last-mile handling of domestic letter post items below the actual terminal dues 

rates will experience the largest positive transfers in the current system.

Sensitivity analysis

The model used to estimate financial transfers is based on a number of assumptions regarding bilateral mail flows and non-distortionary terminal dues in the counterfactual. In 

order to take into account that the reality may differ from our assumptions in the model, 

we conduct two sensitivity checks where we vary the most important assumptions in the 

model. The two assumptions that we vary in our sensitivity analysis are:

 The share of single-piece rates used as a basis for equivalent domestic postage 

 The share of small packets in the cross-border mail mix 

In a study about postal operators’ pricing behaviour, conducted on behalf of the European 

Commission in 2011, we found that single piece items (on average) were priced over 45 

percent higher than transactional bulk mail and bulk mail was priced almost 50 percent 

higher than direct mail. This suggests that a 30 percent discount on single piece tariffs 

may not be enough to reflect the equivalent domestic postage for last-mile delivery of 

cross-border letters. Moreover, in some countries, the domestic postage rates for singlepiece items are subject to regulation to ensure that postal services are available to everyone at affordable rates. In these countries, the single-piece postage rates may thus be 

subsidised to a low level.
11

In order to take this into consideration, we run our model with the assumption that the 

equivalent domestic postage rates can be approximated by 80 percent, 60 percent and 50 

percent of the domestic postage rates for single-piece items respectively. Applying an 

average share of domestic postage rates to all bilateral mail flows most likely implies that 

the share of domestic postage applied will be too low for some postal operators and too 

high for others. Nevertheless, this test allows us to estimate the likely boundaries of financial transfers created by the current set of terminal dues. The sensitivity test reveals 

total financial transfers generated by the current terminal dues system ranging from 602

million SDR (corresponding to 854 million USD) with 50 percent to 1,160 million SDR 

(corresponding to 1,647 USD) with 80 percent of the domestic postage rates used as a 

basis for calculating the equivalent domestic postage. 

Moreover, as recognised in several publications already6, an increasing level of crossborder e-commerce implies a change in the cross-border mail mix in terms of a larger 

share of small packets. In order to take this into account, we run our model with the assumption that the share of E format items in the cross-border mail mix increases by 15 

percent and 30 percent respectively for all designated postal operators. While doing this, 

we assume that the shares of P and G format items decline proportionately, such that the 

total number of letter post items remains the same. The test reveals that a higher share of 

small packets in the cross-border mail mix creates larger total transfers in the system 

(ranging from 950 million SDR in the base case to 1,100 million SDR in the case where 

the share of small packets is increase by 30 percent in all flows). 

 

6

See for example UPU (2014a), “Fulfilling the global e-commerce promise,” and UPU (2013), Union Postale no.4 December 

2013, p.17
12

Chapter 1

Terminal dues and their impact on 

postal operators’ financial positions 

This report provides a quantitative estimate of the net financial transfers created by the 

current system of terminal dues administered by the Universal Postal Union (hereafter 

referred to as the UPU). In order to better understand the model used to quantify net 

transfers as well as the results from our modelling (described in chapters 2 and 3), we 

start by providing an overview of the UPU system for terminal dues and explaining how 

this system affects the financial positions of postal operators across the world. 

1.1 The UPU system for terminal dues

The UPU is an intergovernmental organization and a global forum for cooperation between postal sector players, originally founded in 1874. At that time, the organization 

included 21 member countries. Today, 220 countries and territories are part of the UPU. 

Amongst other things, the UPU sets the rules for international mail exchanges between 

designated postal operators in its member countries. An essential part of this work concerns intergovernmental agreements governing terminal dues - payments between designated postal operators for the transport, sorting, and delivery of cross-border letter post7

items in the destination country. UPU members revise the terminal dues rates every four 

years in a general congress. The next congress takes place in Istanbul in September 2016. 

In 2013, 3.5 billion cross-border letter post items were sent globally.

8 Terminal dues affect 

all cross-border deliveries of letter mail (either directly or indirectly)9, the level of these 

payments are very important for designated postal operators. As cross-border letter post 

traffic grows, spurred by the positive development in e-commerce, the importance of terminal dues will increase.

10

 

7 Terminal dues apply to “small letters”, “large letters” (sometimes referred to as “flats”), and “bulky letter” (sometimes 

referred to as “small packets”), defined by a set of minimum and maximum dimensions and weights. Small letters (P) are 

defined by the characteristics; Minimum dimensions: 90 x 140 mm, Maximum dimensions: 165 x 245 mm, Maximum 

weight: 100 g, Maximum thickness: 5 mm. Large letters (G) are characterized as items that cannot be classified as small 

letters; Minimum dimensions: 90 x 140 mm, Maximum dimensions: 165 x 245 mm, Maximum weight: 100 g, Maximum 

thickness: 5 mm. Bulky letters or small packets (E) (a non-standard envelope or parcel up to 2 kg) are characterized as 

items classified neither as small letters nor as large letters; Minimum dimensions: 90 x 140 mm, Maximum dimensions: 

900 mm length, width and depth combined, with the greatest dimension not exceeding 900 mm, Maximum weight: 2 kg (5 

kg for items containing books or pamphlets), cf. UPU 2015 Statistics and Accounting Guide. 

8 UPU (2014b), Development of postal services in 2013, p. 4. This corresponds to 1 percent of total letter post traffic world 

wide.

9 For letter post flows where postal operators have negotiated bilateral agreements, terminal dues are still relevant as they 

work as a fall-back option in the negotiations. I.e. the bilaterally negotiated rates are usually not very different from the 

terminal dues. Terminal dues under the REIMS V agreement are not publicly available, but under REIMS II, terminal dues 

were set at 80 percent of the domestic price for a single-piece priority letter, i.e. not very different from the uncapped UPU 

rates.

10 E-commerce deliveries are to a large extent sent by letter post (as “bulky letters” or “small packets”, see for example UPU 

(2014) “Fulfilling the global e-commerce promise” and UPU (2013), Union Postale no.4 December 2013, p.17
13

Terminal dues thus affect designated postal operators across the whole world. The 

amount of cross-border letter post sent to and from its country influences the amount to 

which terminal dues affect an individual postal operator. Data on global letter post flows 

within and between regions demonstrates that the main flows of cross-border letter post 

are between industrialised countries.

11 This suggests that designated operators in these 

countries would be most affected by any changes to the current level of terminal dues.

However, with an increasing share of citizens in Western Europe and North America 

shopping at online marketplaces in Asia, the flow of cross-border letter mail from Asia to 

Western Europe and North America is increasing. As a result, designated operators in 

these countries will also be significantly affected by any changes to the current terminal 

dues system.

1.2 Design of the terminal dues system

The current UPU system for terminal dues is a two-tiered system dating back to 1989. It 

consists of a target system and a transitional system. 

 The transitional system mainly applies to exchanges to, from, or between designated 

operators in countries considered “developing”. 

 The target system mainly governs the exchange of letter post items between designated operators in countries and territories previously thought of as “industrialised”.

12 In 

2010, countries and territories classified as “developing” began to join the target system.

Countries in the transitional system can opt in to the target system, but not the other way 

around.13 Depending on when they joined the target system or when it is foreseen that 

they will join the target system, UPU members are divided into 6 groups: 1.1, 1.2, 2, 3, 4, 

and 5, cf. Table 1. 

 

11 According to Universal Postal Union (2014),” Development strategies for the postal sector: An economic perspective”, 

Chapter 8: Global postal connectedness, p. 196, 43 percent of total international letter post flows (measured in kg) were intra Western Europe and 15 percent were between Western Europe and North America.

12 Classification is from the United Nations Social and Economic Council.

13 Campbell (2014) Estimating the effects of UPU terminal dues 2014-2017 and UPU (2015) Statistics and Accounting Guide
14

Table 1 Universal Postal Union groups

Group Number of countries and territories in the group Description

1.1 41 Countries in target system prior to 2010

1.2 13 Joined target system in 2010

2 24 Joined target system in 2012

3 39 Will join target system in 2016

4 53 Will apply transitional system rates for 2014-2017

5 50 Will apply transitional system rates for 2014-2017

Note: UPU countries and territories are divided into six groups based on the postal development index (PDI), 

which comprises a macroeconomic component (gross national income, GNI, per capita) and a postalspecific component (normal unit cost per letter based on full-time staff). 

Source: UPU (2015) Statistics and Accounting Guide, 

http://www.upu.int/uploads/tx_sbdownloader/guideTerminalDuesStatisticsAccountingEn.pdf

The terminal dues received by a designated postal operator for the last-mile handling of 

cross-border letter post depend on the terminal dues group to which group it belongs as 

well as on the terminal dues group to which the sending postal operator belongs. Countries or territories part of the target system (groups 1.1, 1.2, and 3) pay each other target 

rates, while terminal dues to, from, and between countries or territories in the transitional system (groups 3, 4, and 5) are paid at transitional rates, cf. Table 2. 

Table 2 Terminal dues rates paid

Paying country or territory (origin) Country Receiving (destination) Rate Paid

Target

Target Target

Transition Transition

Transition

Target Transition

Transition Transition

Source: UPU (2015), Statistics and Accounting Guide, 

http://www.upu.int/uploads/tx_sbdownloader/guideTerminalDuesStatisticsAccountingEn.pdf

The terminal dues rates for the two rate systems are based on different parameters. In 

general, the rates in the transitional system are lower than the rates in the target system. 

For the transitional system, the UPU prescribes rates (for delivering inbound letter mail)

that have both per item and per kilogram components, which are then converted into a 

per kilogram rate.

14 These per item and per kilogram rates for the transitional system are 

equal to the floor of the target system for any given year. 

For the target system, the rates (for delivering inbound mail) are based on 70 percent of 

the domestic tariff for a 20-gram priority small letter and a 175-gram priority large letter, 

though subject to caps and floors (per item and per kilogram). The level of the floors and 

caps depend on group classification (1.1, 1.2 or 2). In practice, however, caps and floors 

 

14 For mail flows below 75 tons, an average number of items per kilogram of mail is applied to these per item and per kilogram 

rates to develop one per kilogram rate for transition countries.
15

are so close to each other that the terminal dues applied by target countries for inbound 

letter mail often is a fixed rate, which is not aligned to the domestic tariffs. In addition to 

this, terminal dues are adjusted based on the quality of service of mail delivery.15

UPU data suggests that more than 80 percent of designated operators in group 1.1 will be 

subject to either caps or floors for intra-1.1 group letter flows between 2014 and 201716. 

For letter flows within groups 1.2 and 2, or between groups 1.1, 1.2, and 2, the share of 

operators subject to caps or floors are between 96 and 100 percent, cf. Table 3.

Table 3 Target countries subject to UPU floors or caps

Flows Cap/floor 2013 (%) 2015 (%) 2017 (%)

Intra-1.1

(41 countries)

Cap (per kg or per item) 71 71 71

Floor (per-kg or per-item) 17 17 17

Cap or floor 88 88 88

Intra-1.2, Intra-2, inter-1.1, 1.2, and 2

(76 countries)

Cap (per-kg and per-item) 100 59 57

Floor (per-kg and per-item) 100 39 39

Cap or floor 100 98 96

Note: The table shows the share of countries in the relevant group(s) constrained by UPU caps or floors in 

2013, 2015 and 2017. Total number of countries in groups 1.1, 1.2 and 2 are 76. Group 1.1 consists 

of 41 countries.

Source: Copenhagen Economics, based on UPU tool: Terminal Dues Impact, 2012

1.3 Financial net transfers created by terminal dues

As demonstrated above, the UPU terminal dues system is effectively a regulation of prices 

for last-mile handling of inbound cross-border letter post. Although bilateral agreements 

can be concluded between postal operators on a voluntary basis, the UPU terminal dues 

system constitutes a default option. As a result, the UPU terminal dues have become the 

binding rate for last-mile delivery of cross-border letter mail in the vast majority of cases. 

Due to the fact that (i) terminal dues received often are lower than the prices for last-mile 

handling of domestic (and comparable) letter post items in the receiving country17, and 

(ii) some countries are net importers of international letter post whereas some are net 

exporters, the terminal dues system creates financial transfers between postal operators 

in the system.

18

 

15 For operators in target countries with annual inward mail flows above 100 tons and for operators in the transition system 

that choose to participate, terminal dues are adjusted according to quality of service. This can result in a bonus or penalty of 

5 percent of the base rate. In addition to this, postal operators in groups 1.1, 1.2, and 2 pay into a Quality of Service Fund for 

transition system operators. The fund is governed by the UPU, and distributed to postal operators in transition countries to 

improve postal services.

16 Source: Copenhagen Economics, based on UPU Tool: Terminal Dues Impact, 2012

17 This is primarily a problem for operators in the target system who often are subject to restrictive caps on the terminal dues

they receive for the handling of inbound letter mail. In contrast to terminal dues, the prices for last-mile handling of domestic letter post are often not subject to strict regulation. Sometimes, however, these prices are subject to cost-orientation requirements.

18 In addition to financial transfers between postal operators, Copenhagen Economics (2014) identifies five types of market 

distortions caused by the UPU Terminal Dues system: 1) Distortion of competition for last-mile handling of cross-border 

letter post items, 2) Distortion of competition for first-mile handling of cross-border letter post items, 3) Distortion of demand for delivery within and outside the terminal dues system, 4) Distortion of demand for domestic versus cross-border 

delivery, and 5) Distortion of demand for cross-border delivery originating in transition versus target countries.
16

When assessing the effect of the terminal dues system on designated postal operators’ 

financial positions, one needs to compare the current situation against a counterfactual 

situation with an alternative set of terminal dues that provides a demonstrable improvement over the current system. As demonstrated in Copenhagen Economics (2014)19, such 

a set of alternative terminal dues could equal the domestic prices for last-mile handling of 

comparable letter post items (hereafter referred to as the equivalent domestic postage). 

This would imply that the designated operators charge the same price for the same service 

(i.e. non-discrimination between domestic and cross-border letter post). 

When comparing the actual situation to the counterfactual situation described above, we 

find that some postal operators (because of the current system) lose money whereas other 

operators gain money on the handling of inbound letter mail. Similarly, because of the 

current system, some operators gain money on outbound delivery since they pay a too low 

price for the last-mile handling of outbound cross-border letters.

As information about domestic prices for last-mile handling of letter mail sometimes is 

difficult to obtain in the public domain, the non-distortionary level of terminal dues is 

often approximated as a share (normally 70-80 percent) of the list price for domestic 

(end-to-end) delivery of single piece letters. The difference between the terminal dues per 

letter received for inbound delivery and the domestic postage rate thus provides an indication of the loss per inbound letter incurred by the postal operator in the destination 

country.

Figure 1 shows the price for domestic first class delivery of a normal shaped letter in the 

US compared with the terminal dues received by the U.S. Postal Service (USPS) for a 

cross-border letter sent from Denmark. It reveals a marked difference between the domestic postage rate and the terminal dues, primarily for items weighing more than 25 

grams. The difference is still considerable if the domestic postage is reduced by 20-30 

percent. This indicates a financial transfer from the USPS to Post Danmark created by the 

current level of terminal dues.

 

19 Copenhagen Economics (2014), “The Economics of Terminal Dues”, report prepared for the Postal Regulatory Commission, 

http://www.prc.gov/sites/default/files/reports/The%20Economics%20of%20Terminal%20Dues_final%20report%203009

14.pdf
17

Figure 1 Terminal dues versus domestic postage rates in the US

Note: SDR=Special Drawing Rights. The diagram shows rates for a normal shaped letter. First class shipping 

when 300 grams or under + priority shipping when over 300 grams. First Class Mail rates used in certain instances, not Priority, because although the UPU states that UPU terminal dues are calculated 

with priority rates, the amounts it cites as examples are for First Class.

Source: Universal Postal Union (2015), “Statistics and Accounting Guide,” Campbell (1998), “Comment on 

REIMS II Terminal Dues Agreement”, Campbell (1997), “Evolution of the Postal Function in Long Distance Markets”

In order to estimate the full financial transfer between the USPS and Post Danmark (or 

between any two other operators in the UPU system) one needs to take into account the 

bilateral nature of mail flows between the two operators and investigate the existence of 

transfers on both outbound and inbound delivery. This exercise is illustrated in Box 1. 

0

2

4

6

8

10 20 25 50 75 100 125 150 175 200 300 400 500 600 700 800 900 1000

SDR

Weight of letter item (grams)

US domestic rate (in SDR, exclusive of VAT) (2014) UPU terminal dues (2014)
18

Box 1 Financial transfers created by terminal dues

In this example, we consider two operators, A and B. Operator A’s price for last-mile 

handling of domestic letter post is 1.0. Operator B’s price for last-mile handling of domestic letter post is 0.6. 

The terminal dues on all transactions between A and B are set at 0.5 (i.e., below the 

price of domestic last-mile activities for both operators). This implies that operator A 

loses 0.5 (0.5-1.0) on every inbound item and gains 0.1 (0.6-0.5) on every outbound 

item, compared to a situation where the terminal dues would be equal to the domestic 

rates. Similarly, operator B loses 0.1 (0.5-0.6) on every inbound item and gains 0.5 

(1.0-0.5) on every outbound item, compared to a situation where the terminal dues 

would equal the domestic rates. 

Losses and gains per item in relation to inbound and outbound activities

A B

Loss per item on inbound activities -0.5 -0.1

Gain per item on outbound activities 0.1 0.5

If the two bilateral flows between A and B are symmetrical, this implies that operator A 

achieves a net loss of 400 whereas operator B achieves a net gain of 400.

Transfer from country A of country B

Balanced flow: 1,000 items from A to B, and 1,000 items from B to A

A B

Total loss on inbound activities -500 -100

Total gain on outbound activities 100 500

Net gain/loss -400 400

This mechanism is often referred to as a financial transfer where the operator with the 

higher domestic price transfers money to the operator with the lower domestic price.

Source: Copenhagen Economics

In certain cases, the loss on inbound delivery may equal the gain on outbound delivery for 

both countries in a bilateral relationship. In this case, the net effect for both operators is 

zero, although transfers occur on both inbound and outbound delivery. 

In the remainder of this report, we focus on the net effect, i.e., the net financial transfers

created by the UPU system for terminal dues. 
19

Chapter 2

Developing a model for estimating 

net transfers

In order to estimate the financial transfers created by the terminal dues system, we have 

created a model that compares the terminal dues received/paid by designated postal operators worldwide in two situations: (i) the actual situation with the current set of terminal dues and (ii) a counterfactual situation with an alternative set of non-distortionary 

terminal dues. In this chapter, we describe and explain the model, including its elements 

and the assumptions made. 

2.1 A model for estimating financial transfers

When assessing the effect of the terminal dues system on designated postal operators’ 

financial positions, one needs to compare the current situation against a counterfactual 

situation with an alternative set of terminal dues that provides a demonstrable improvement over the current system. The difference between the two situations constitutes an 

effect of the current terminal dues system.

A set of counterfactual terminal dues could for example be defined by terminal dues equal 

to the prices of similar domestic delivery services. This would reduce the financial transfers created by the current system. However, since these tariffs are not always available in 

the public domain, previous studies have often used a set of counterfactual terminal dues 

rates set at a percentage (typically 70-80 percent20) of the domestic postage rates for endto-end delivery of single-piece letters of three formats (small letters, large letters, and 

small packets). This is where our analysis begins.21 We also conduct a number of robustness checks where we vary this assumption.

The current terminal dues rates influence the financial position of postal operators, given 

their bilateral mail flows, via two channels: inbound cross-border flows (import volumes) 

and outbound cross-border flows (export volumes).

On the inbound side, the effect (for a specific postal operator and a specific bilateral mail 

flow) equals the difference between the terminal dues charged and the equivalent domestic postage times the amount of inbound letter post items. If the current terminal dues

rate is below the equivalent domestic postage22, this implies a negative financial transfer 

for the receiving operator.

 

20 70 percent of the domestic postage rates is also used by the UPU as the benchmark when calculating terminal dues before 

adjusting for caps and floors. 

21 An alternative approach could be to depart from the uncapped UPU terminal dues rates. These rates, however, only reflect 

the domestic postage for small letters (P) and large letters (G). Due to the increased importance of e-commerce and small 

packets in the cross-border mail mix, including also the domestic postage for small packets (E) will provide a more representative picture of the real cross-border mail mix. 

22 The equivalent domestic postage represents the counterfactual and non-distortionary terminal dues rate and is estimated 

for each country based on information about domestic postage rates for three types of letter formats: small letters (P), large 
20

On the outbound side, the effect (for a specific postal operator and a specific bilateral mail 

flow) equals the difference between the terminal dues paid and the equivalent domestic 

postage in the destination country times the amount of outbound letter post items. If the 

current terminal dues rate charged by the destination country is below the equivalent 

domestic postage in the destination country, this implies a positive financial transfer for 

the sending operator. 

For each bilateral country pair we thus want to estimate:

πij

I = Xji(TDij − EDPij)

πij

O = Xij(TDji − EDPji)

NTi = πij

I − πijO

where πij

I

is country i’s loss (gain) on inbound letter mail from country j expressed as the 

difference between what country i gets in terms of terminal dues from country j today and 

what it would get in the counterfactual scenario. Xji is the letter mail flow subject to terminal dues going from country j to country i, TDij is the actual terminal dues rate that 

country i receives as revenue from country j and EDPij is the equivalent domestic postage 

(i.e. the counterfactual terminal dues rate).

Equivalently, πij

O

is country i’s gain (loss) on outbound letter mail to country j expressed 

as the difference between what country i pays in terms of terminal dues to country j today 

and what it would pay in the counterfactual scenario. 

NTiis thus the net transfer for country i related to its bilateral cross border exchange of 

mail with country j. In order to get the total net transfer for country i, one has to conduct 

the same analysis for all bilateral mail flows to and from country i. This exercise is also 

illustrated in Box 2 by means of a numerical example.

Box 2 Calculation of financial transfers, numerical example

Assume there are three designated postal operators (A, B, and C), located in countries 

A, B, and C. Operator A sends 600,000 pieces to other countries and receives 700,000 

pieces, making it a net importer. For every letter it sends to Country B, Operator A 

pays a terminal dues rate lower than the comparable domestic postage in Country B. 

For every letter it sends to Country C, Operator A pays a terminal dues rate equivalent 

to the comparable domestic postage in Country C. For every letter received from 

Countries B and C, Operator A receives a terminal dues rate lower than its comparable 

domestic postage. All country characteristics are outlined in the table below:

Country characteristics

A B C

Actual terminal dues rate 

(applied to all inbound flows) 0.1 0.1 0.1

Counterfactual terminal dues rate (applied to all inbound flows) 0.5 0.5 0.1

Volume from country A - 400,000 200,000

 

letters (G), and small packets (E) as well as assumptions about the weight distribution for the three formats within the 

cross-border mail mix.
21

Volume from country B 400,000 - 100,000

Volume from country C 300,000 400,000 -

The net financial transfers (as well as the losses and gains for each bilateral mail flow) 

are calculated in the in the following way:

Calculation of financial transfers

Effect Calculation

Inbound B-A 400,000 * (0.1-0.5) = -160,000

Inbound C-A 300,000 * (0.1-0.5) = -120,000

Outbound A-B 400,000 * (0.1-0.5) = -160,000

Outbound A-C 200,000 * (0,1-0,1) = 0

Net effect Country A (inbound effect-outbound effect) -120,000 (net loss)

Inbound A-B 400,000 * (0.1-0.5) = -160,000

Inbound C-B 400,000 * (0.1-0.5) = -160,000

Outbound B-A 400,000 * (0.1-0.5) = -160,000

Outbound B-C 100,000 * (0,1-0,1) = 0

Net effect Country B (inbound effect-outbound effect) -160,000 (net loss)

Inbound A-C 200,000 * (0.1-0.1) = 0

Inbound B-C 100,000 * (0.1-0.1) = 0

Outbound C-A 300,000 * (0.1-0.5) = -120,000

Outbound C-B 400,000 * (0,1-0,5) =- 160,000

Net effect Country C (inbound effect-outbound effect) 280,000 (net gain)

On the inbound side, Operator A experiences a negative financial transfer of funds to 

the sending countries B and C amounting to 280,000 SDRs. This negative transfer is 

caused by terminal dues received which are less than the comparable domestic postage. On the outbound side, Operator A experiences a positive financial transfer from 

the receiving country B, amounting to 160,000 SDRs. In total, Operator A suffers a 

net loss of 120,000 SDRs as it transfers more funds to other operators (280,000 

SDRs) than it receives (160,000 SDRs). Similarly, Operator B receives more mail than 

it sends, making it a net importer. Due to the large negative financial transfers on the 

inbound side, it suffers a net financial loss of 160,000 SDRs. In contrast, Operator C 

sends more mail than it receives making it a net exporter. Since Operator C does not 

suffer any negative financial transfer on its inbound flows, whereas it experiences a financial gain on its outbound flows, it receives a net gain of 280,000 SDRs.

Source: Copenhagen Economics

As evident from the example above, the net financial transfer for a postal operator will 

depend on: 

 Whether the operator is a net importer or a net exporter of mail

 The difference between the actual terminal dues rates received and the applicable 

comparable domestic postage in the domestic market 

 The difference in between actual terminal due rates paid and the applicable comparable domestic postage in the destination market 

In the following, we describe the model for estimating financial transfers in detail. 
22

2.2 Elements and assumptions in the model

The model designed to estimate financial transfers from the current system of UPU terminal dues consists of four main elements:

 Designated postal operators

 Bilateral flows of letter mail up to 2kg between all designated postal operators (in 

number of items and weight), split by letter format (P, G, E)23

 Actual terminal dues rates for each bilateral mail flow

 Counterfactual terminal dues rates for each bilateral mail flow

Due to shortage of primary data available in the public domain, the input used to construct reliable estimates for each element is collected from various sources24. In the following, we describe, for each element in turn, how the data set is constructed as well as 

the assumptions made in the process. 

Designated postal operators

The model includes designated postal operators in 162 countries and territories across the 

world. This is a subset of the 220 countries and territories that are part of the UPU. The 

selection of countries and territories is made based on data availability, primarily regarding cross-border flows of letter mail.

Due to the lack of precise data on actual bilateral mail flows, terminal dues in the counterfactual situation, and the existence of bilateral agreements (not subject to UPU terminal 

dues), we cannot claim to estimate precise net financial transfers for individual postal 

operators. Nevertheless, our estimations provide valuable information regarding the 

magnitude and direction of financial transfers across designated postal operators worldwide. It also provides valuable insights regarding the characteristics of designated postal 

operators determining whether and to what extent a postal operator is experiencing positive or negative financial transfers in the current system.

Three particularly important characteristics are:

 

23 Small letters (P) are defined by the characteristics; Minimum dimensions: 90 x 140 mm, Maximum dimensions: 165 x 

245 mm, Maximum weight: 100 g, Maximum thickness: 5 mm. Large letters (G) are characterized as items that cannot be 

classified as small letters; Minimum dimensions: 90 x 140 mm, Maximum dimensions: 165 x 245 mm, Maximum weight: 

100 g, Maximum thickness: 5 mm. Bulky letters or small packets (E) (a non-standard envelope or parcel up to 2 kg) 

are characterized as items classified neither as small letters nor as large letters; Minimum dimensions: 90 x 140 mm, Maximum dimensions: 900 mm length, width and depth combined, with the greatest dimension not exceeding 900 mm, Maximum weight: 2 kg (5 kg for items containing books or pamphlets), cf. UPU 2015 Statistics and Accounting Guide

24 Much of our data is collected from documents, publications, and databases from the Universal Postal Union, for example 

UPU (2015b), “UPU Postal Statistics database”, 

http://pls.upu.int/pls/ap/ssp_report.main?p_language=AN&p_choice=BROWSE; .UPU (2014b), “Development strategies 

for the postal sector: An economic perspective”, 

http://www.upu.int/uploads/tx_sbdownloader/publicationTrendsDevelopmentStrategiesForThePostalSectorEn.pdf; UPU 

(2014c), “Development of postal services in 2013”, 

http://www.upu.int/fileadmin/documentsFiles/resources/postalStatistics/developmentOfPostalServicesIn2013En.pdf and 

UPU (2014d), POC C3 LPRG 2014.2 Doc 4a, “Results of the items per kilogramme (IPK) study”. We complement this with 

recent research of domestic postage rates from WIK Consult (2013). 
23

 The difference between the terminal dues rates received on inbound flows and the

equivalent domestic postage (used as basis for the counterfactual terminal dues 

rate received on inbound flows)

 The size of cross-border mail flows and whether the postal operator is a net importer or a net exporter of cross-border letter mail

 The composition of cross-border mail flows and whether the terminal dues received on inbound flows are subject to caps

Designated postal operators with a high price for last-mile handling of domestic letter 

post items are more likely to experience negative financial transfers under the current 

system. This is because the difference between the actual terminal dues rates charged for 

inbound cross-border letters and the rates that would be charged in the counterfactual 

situation is larger for these postal operators than for postal operators with low domestic 

prices (especially if the operator is subject to the caps in the terminal dues system). Postal 

operators with very low domestic prices may even experience a positive financial transfer 

on inbound mail volumes as terminal dues in the counterfactual situation would be lower 

than what they are today. The illustration shown in Box 2 demonstrates this. Operators A 

and B have comparable domestic postage rates that are higher than the terminal dues 

received on inbound flows and both operators suffer a net financial transfer loss on their 

inbound flows. In contrast, the domestic postage rates and the terminal dues are equal for 

Operator C, which produce a net financial transfer gain that operator (zero transfer on 

inbound flows and a positive transfer on outbound flows).

Figure 2 displays the domestic postage rates for a 20g priority small letter in 163 countries, ranging from less than 0.05 SDR per item to almost 1.1 SDR per item. Many countries with a high domestic postage in Figure 2 belong to the target system for terminal 

dues. This means that they are capped with respect to the terminal dues they can charge 

for inbound cross-border mail. In combination with a high domestic postage, this makes 

it more likely that these countries are experiencing net financial losses due to the current 

design of terminal dues. 
24

Figure 2 Domestic postage, letter 20g

Note: As a proxy for the price of last-mile handling of domestic letter post items, we depart from the domestic postage for end-to-end delivery of a 20g letter. 

Source: WIK (2013) ” Main Developments in the Postal Sector (2010-2013)”, UPU(2008)

For any difference between actual and counterfactual terminal dues on inbound as well as 

on outbound mail flows, larger cross-border mail flows will increase the financial impact 

of the terminal dues system. For example, a designated postal operator that is losing 

money on inbound mail flows and gaining money on outbound mail flows will experience 

larger losses if it is a net importer of mail than if it is a net exporter of mail. Net-importing 

postal operators with a high price for last-mile handling of domestic letter post items will 

experience the largest negative transfers in the current system. Net-exporting postal operators with a price for last-mile handling of domestic letter post items similar or even 

below the actual terminal dues rates will experience the largest positive transfers in the 

current system.

Bilateral mail flows

Bilateral mail flows between designated postal operators are an essential input in the 

model. In combination with the difference between the actual terminal dues rates and the 

counterfactual ones (i.e. the equivalent domestic postage), the magnitude of bilateral mail 

flows will determine the size of the financial transfers.

In order to estimate financial net transfers in our model, we need information about bilateral flows of letter mail up to 2kg between all designated postal operators (both in 

number of items and in weight), split by letter format (P, G, E). As this information is not 

readily available in the public domain, we have to construct our own data set, based on 

publicly available data and reasonable assumptions about the performance of global mail 

markets. 

Whereas we have information about flows of cross-border letter post between regions, we 

do not know how the cross-border volume to/from each region is disaggregated among

the countries in the region. Moreover, we do not have information about the product mix 

0

0.2

0.4

0.6

0.8

1

1.2

1 163
25

(i.e., letter formats) in the volumes. For this reason, we use a number of proxies to approximate mail flows subject to UPU terminal dues. The process of estimating bilateral 

mail flows is depicted in Figure 3 and described in detail below.

Figure 3 Process map

Source: Copenhagen Economics

As a first step, we create estimates of the total inbound and outbound mail flow (in terms 

of number of items) for individual countries. The starting point for this is readily available 

data for total inbound and outbound mail flows from the UPU25, measured in number of 

items. Since 2011 is the year in the UPU statistics for with we have the broadest coverage 

of data (139 countries and territories covered), we use this as a reference. If we cannot 

find information for a specific country or territory in the UPU dataset from 2011, we turn 

to UPU statistics from other years. This adds data points for another 31 countries. When 

neither of these sources can provide us with an estimate, we turn to domestic sources 

such as the national regulatory authorities. This adds data points for another five countries. For seven additional countries with data for domestic (but not cross-border) letter 

volumes, we are able to construct our own estimate of cross-border volumes by using a 

reasonable ratio of cross-border to domestic letter mail volumes.

26

This results in a data set of inbound and outbound volumes (in number of items) for 182 

countries and territories.

 

25 UPU Postal Statistics Database, http://pls.upu.int/pls/ap/ssp_report.main?p_language=AN&p_choice=BROWSE

26 The ratios used are based on information from previous years regarding the relationship between domestic and crossborder mail volumes. Where this information is not available, a ratio is constructed based on assumptions regarding the 

similarity of countries (i.e. countries of similar size can be expected to have the same ratio between domestic and crossborder flows).

Total inbound/ 

outbound letter mail flow per 

country

Bilateral mail 

flows as % of 

inter-regional 

flows

Bilateral mail 

flows as % of 

global crossborder flow

Bilateral mail 

flows in volumes 

(number of 

items)

Bilateral mail 

flows (no. of 

items) per 

format

Bilateral mail 

flows (in weight 

+ no. of items) 

per format

1

2

3

4

5

6
26

As a second step, we set the estimates of inbound and outbound flows in 2011 for each 

designated postal operator relative to the 2011 inter-regional mail flows to and from for 

the region where the postal operator is located.27 This provides us with a ratio (for each 

designated operator) of (i) the inbound flow relative to the total inbound flow to the region and (ii) the outbound flow relative to the total outbound flow from the region.

As a third step, we make an important assumption about proportional regional participation, cf. Box 3, where we depart from the ratios from step two and apply them to interregional mail flows from 2014. By applying this assumption, we are able to estimate data 

points for each bilateral mail flow as a percentage of the global cross-border mail flow in 

2014. While this methodology fails to take into account factors such as distance and international relations28, it is the best available approximation of bilateral flows and does

not suffer from further data gaps.

Box 3 Assumption of proportional regional participation

The assumption about proportional regional participation allows us to estimate the percentage of the world’s mail flow that goes from a country i in region A to a country j in region B

based on the following information:

(i) The percentage of region A’s outbound flow originates in country i, 

(ii) The percentage of region B’s inbound letter mail flow that is delivered to country j 

(iii) The share of the global total cross border mail flow that goes from region A to region B

For each mail stream that goes between countries from different regions, we apply the following calculation:

Xij =

Oi

OA

×

Ij

IB

× XAB (1)

For each mail stream that goes between countries within the same region, we apply the following calculation: 

Xij =

Oi

OA

×

Ij

IA×(1−(

I

i

IA

))

× XAA (2)

Xij= percentage of world’s mail flow that goes from country i to country j

XAB= percentage of world’s mail flow that goes from region A to region B

XAA=percentage of world’s mail flow that goes within region A

Oi= total outbound mail flow from country i

OA= total outbound mail flow from region A

Ij= total inbound mail flow to country j 

IB= total inbound mail flow to region B

The assumption in (1) and (2) is essentially the same but the calculations differ in the rela-

 

27 Data for inter-regional mail flows are available in Ansón, José, and Matthias Helble, (2014), "Global postal connectedness." 

In Universal Postal Union, Development Strategies for the Postal Sector: An Economic Perspective. Bern: UPU.

28 Factors such as distance, international relations, and a common language can be important for the mail exchange between 

certain countries. With respect to the growing share of cross-border e-commerce, for example, we often observe larger 

online trade between countries that share a common language or culture (e.g., Germany and Austria, the United States and 

Canada). For the case of the United States, we have tried to compensate for this by adjusting bilateral flows between the US 

and Canada based on publicly available information about cross-border mail flows between these countries. 
27

tive inbound. The difference is due to the fact that the total inbound flow to region A also 

includes mail destined for country i. This is a pragmatic solution to solve a mechanical problem in the model because we do not want to include domestic mail.

Source: Copenhagen Economics

As a fourth step, we convert each bilateral flow (until now measured as a percentage of 

the global flow of international mail) into an estimate in terms of volumes (number of 

items). We do this by multiplying it with the global volume of international mail.

29

As a fifth step, we split each bilateral mail flow according to the different letter formats 

(P, G, and E). In order to do this, we use a UPU survey among 49 designated postal operators that contain regional estimates for the distribution of formats (in percentage of number of items and weight).30 This study also provides estimates of the average weights per 

format. By assuming that the distribution of P, G and E items in a specific bilateral mail 

flow between two regions is the same as the distribution of P, G, and E items in the total 

inter-regional mail flow between the same two regions, this provides us with a per-format

estimate of letter mail volumes for each bilateral mail stream.

As a sixth, and last, step, we apply the average weight for each product type (from the 

UPU survey referred to above) in order to get the bilateral flows measured in kilograms

instead of number of items. 

Based on this, we are able to estimate bilateral cross-border flows of letter post items 

between 183 countries and territories worldwide. Depending on the size and structure of 

bilateral mail flows, the current design of the terminal dues system will affect designated 

operators differently. For example, large outbound flows of cross-border mail may imply 

that designated postal operators experience large positive transfers on the outbound side. 

Similarly, in combination with a negative difference between actual terminal dues received and the equivalent domestic postage rate, large inbound may imply that designated 

postal operators experience large negative transfers on the inbound side. Understanding 

the structure of bilateral mail flows will thus be very helpful when trying to understand 

the structure of net financial transfers created by the current terminal due system. 

Figure 4 displays the largest bilateral mail flows estimated in our model. It reveals the 

United States, Great Britain, and Germany as the countries with the largest flows of outbound cross-border letter mail. It also reveals France, the United States, Canada, and 

Germany as the countries with the largest inbound flows of cross-border letter mail. In 

addition to this, the figure also reveals designated postal operators in the United States, 

Great Britain, France, and Germany as net exporters of mail whereas the designated postal operator in Canada is a net importer of mail. As explained above, in combination with 

information about the difference between actual terminal dues and equivalent domestic 

postage rates, this information will be very valuable when analysing the reason for why 

certain postal operators are experiencing positive financial transfers from the system 

whereas others experience negative financial transfers. 

 

29 Information about global cross-border letter post volumes is available in UPU (2014c), "Development of Postal Services in 

2013" (Powerpoint presentation).

30 UPU, (2014d), POC C3 LPRG 2014.2 Doc 4a, “Results of the items per kilogramme (IPK) study” (committee document).
28

Figure 4 Bilateral mail flows (largest outbound/inbound flows)

Note: The figure displays mail flows above 5 million items

Source: Copenhagen Economics based on modelling
29

Actual terminal dues rates

Our model estimates financial transfers by comparing the actual situation (with actual 

terminal dues31) with a counterfactual situation (with counterfactual terminal dues).

Actual terminal dues rates are calculated based on the UPU methodology set out in the 

25th UPU congress for the period of 2014 through 2017.32 According to this methodology, 

postal operators that are part of the UPU system fall into one of six different groups (1.1, 

1.2, 2, 3, 4, 5, see chapter 1). For postal operators in groups 1.1, 1.2, and 2 (i.e. countries in 

the target system), the terminal dues for inbound letter mail consists of a per-item rate 

and a per-kilogram rate based on 70 percent of the domestic postage for a 20g small priority letter and a 175g large priority letter. These rates are, however, subject to caps and 

floors depending on to which of the three groups the postal operator belongs. There is 

also a limit depending on the size of mail flows where a fixed per kilogram rate will apply 

if the total inbound mail flow is less than 75 tons. For postal operators in groups 3, 4, and 

5 (i.e. countries in the transitional system), terminal dues charges are calculated as a fixed 

rate per kilogram if the total inbound flow from a certain country is less than 75 tons and 

a fixed per-kilogram rate and per-item rate if the total inbound flow from a certain country is above 75 tons. The schedule of terminal dues rates applicable to the different groups 

is laid out in Table 4.

Table 4 Schedule of terminal dues rates

Mail flow Terminal dues

Intra group 1.1

Cap: 2.294/kg + 0.924/item (<75 tons: 5.890/kg)

Secondary cap: Max. annual increase: 13%

Floor: 1.591/kg + 0.203/item (<75 tons: 4.074/kg)

Intra group 1.2 + between group 1.1. and 1.2 Cap: 1.641/kg + 0.209/item (<75 tons: 5.890/kg)

Floor: 1.591/kg + 0.203/item (<75 tons: 4.074/kg)

To, from, and between groups 3, 4, and 5 <75 tons: 4.192/kg 

>75 tons: 1.591/kg + 0.203/item

Source: UPU (2012b), 2012 Convention, Arts. 29-31; 2013 Letter Post Regulations, Art. RL 220 (target rate 

formula).

In order to calculate the 2014 terminal dues rates for countries in the target system before 

any caps and floors are applied, we need information about two reference tariffs:33 

 The tariff for a 20 g small (P) priority letter post item in the domestic service (in force 

at 1 June 2014), converted into SDR (DP1)

 The tariff for a 175 g large (G) priority letter-post item in the domestic service (in force 

at 1 June 2014), converted into SDR (DP2)34

According to the UPU guidelines, the terminal dues rate per item before caps and floors is 

70 percent times the tariff of the 0-20g small letter (DP1) times 0.01 (10 grams assumed 

 

31 The model assumes that all designated postal operators (also those part of other multilateral or bilateral agreements) apply 

the UPU terminal dues rates for cross-border mail flows in the current situation. For letter post flows where postal operators have negotiated alternative agreements, terminal dues are nevertheless still relevant as they work as a fall-back option 

in the negotiations. I.e. the alternative rates are usually not very different from the terminal dues.

32 UPU (2012a), UPU terminal dues system for the period 2014-2017.Joint Council of Administration and Postal Operations 

Council report.

33 The data is provided by UPU (2014e), “International Bureau Circular 112”

34 Since the estimates of bilateral mail flows relate to the year 2014, we also depart from domestic postage rates for the same 

year.
30

to be the average weight for a small letter). In order to calculate per-kilogram rates, a 

linear relationship between weights and tariffs is assumed. These two rates (per item and 

per kilogram) are then applied to an item of average weight (assumed by the UPU to be 81

grams) in order to get the uncapped terminal dues rate for an average item, cf. Figure 5. 

Figure 5 Illustration: Calculation of uncapped terminal dues

Note: Prices in SDR

Source: Copenhagen Economics based on UPU (2012)

The target rate is calculated by multiplying the floor rate, both per item and per kilogram 

separately, with a ratio of uncapped revenue and floor revenue. This means is that if domestic tariffs in one country are high relative to the floor rates, that postal operator will 

get a higher add-on to the floor rate (but not higher than the cap). 

Terminal dues rates per kilogram in the target system are thus calculated as:

Rw = 70% ×

M×(Wavg−0.01)+DP1

Rwfl×Wavg+Rpfl

× Rwfl (3)

And terminal dues rates per item in the target system are calculated as:

Rw = 70% ×

M×(Wavg−0.01)+DP1

Rwfl×Wavg+Rpfl

× RIfl (4)

where, 

M=constant rate of change= (DP2-DP1) / (0.175-0.01)

DP1 and DP2=Domestic postage rates without VAT for 0-20g P and 100-250g G

Wavg=The average weight of an letter post item, set to 81g

Rwfl= Floor rate per kilogram 

Rpfl= Floor rate per piece

0

0.2

0.4

0.6

0.8

1

1.2

1.4

0 20 40 60 80 100 120 140 160 180 200

Price

weight (gr)
31

For each bilateral mail flow the effective rate will depend on (i) the group to which a postal operator belongs, (ii) from which country the inbound mail flow is coming, and (iii) 

whether or not the terminal dues for the bilateral flow in question is subject to a cap or 

floor. 

Counterfactual terminal dues rates

The counterfactual terminal dues rates should ideally reflect (for each country) the price 

for last-mile handling of cross-border letter post items that a private company (not part of 

the UPU) would pay. Since the terminal dues are payments for activities in the receiving 

postal operator’s domestic market, this price could be approximated by the price for lastmile handling of domestic letter post items (corrected for any cost difference between 

domestic and cross-border letter mail).

Neither of these two prices are readily available in the public domain. Moreover, collecting these prices for all postal operators that are part of the UPU system is very difficult,

requiring detailed information (for each operator) about (i) the mix of inbound letter post 

items (formats, weights, address quality etc.) and (ii) prices for last-mile handling of domestic letter post for each format, weight, level of address quality, etc. Collecting these 

data was not possible within the period and budget of this report.

As a proxy for the counterfactual terminal dues rates, we therefore depart from the domestic (end-to-end) postage rates for single-piece items of three different formats (P, G, 

E) and weights. This means that we use more granular data than what the UPU uses to 

calculate terminal dues. In particular, the UPU does not use prices for items of E format 

(small packages). In order to reflect the price charged for last-mile handling of domestic 

letter mail, we apply an adjustment factor of 70 percent35. The difference between applying the domestic postage rates used by the UPU as a starting point and applying more 

granular data on weight and format-specific prices is illustrated in Figure 6. The pink line 

in the diagram represents the methodology36 for calculating the target revenue for the 

UPU terminal dues. This rate is calculated based on two reference tariffs: The domestic 

postage for a 20 g small priority letter and the domestic postage for a 175 g large priority 

letter (connected by the pink line in the diagram). 

Instead of making a simple linear relationship between two tariffs, we use information 

about different weight-steps for three products. The two grey lines and the black line in 

the diagram below show the domestic postage rates for small letters (P format), large 

letters (G format) and small packets (E format) for different weight classes. Our method-

 

35 This adjustment factor is the same as used by the UPU for the calculation of uncapped terminal dues for operators in the 

target system. According to the 25th congress document describing the base for the current terminal dues system: “Domestic 

tariffs, exclusive of VAT and other taxes, will be used as a reference for calculating TD rates. The percentage of domestic 

tariffs retained for use is 70%. This figure results from the inbound mail handling cost, calculated based on information 

from the cost study.”, source: UPU (2012), UPU terminal dues system for the period 2014-2017, Joint Council of Administration and Postal Operations Council report. 

http://documents.upu.int/Bodies/2012/CNG/CNG%20DOC/MEETING/CNG%20DOC%202012/Doc%2020b/EN/cng_do

c_d020b.pdf?Mobile=1&Source=%2F_layouts%2Fmobile%2Fview.aspx%3FList%3D9cab4832-53b8-40f5-9ca4-

8566e0ab0364%26View%3D895ea13c-b413-4ce7-b5cb912051fecf08%26RootFolder%3D%252FBodies%252F2012%252FCNG%252FCNG%2520DOC%252FMEETING%252FCN

G%2520DOC%25202012%252FDoc%252020b%252FEN%26CurrentPage%3D1

36 See UPU (2014e), International Bureau Circular 112
32

ology uses three weight steps for small letters, five weight steps for large letters and seven 

weight steps for small packets. This allows us to calculate equivalent domestic postage 

rates that mirror the actual situation better than what would have been the case if only 

two prices would have been used. 

Figure 6 Calculation of equivalent domestic postage rates

Source: Copenhagen Economics based on WIK (2013) and UPU (2008)

For industrialized countries and all European countries, information about domestic 

postage rates mainly comes from a survey conducted by WIK consulting, containing a 

comprehensive overview of domestic postage rates in 201337. For other countries domestic 

postage rates are collected from a UPU database with 2008 priority domestic rates by 

product type and weight step.38 These rates are adjusted based on inflation to create an 

estimate of tariff levels in 2014. 

However, the UPU data on domestic postage rates is too granular for our purpose. For 

example, for small letters (P) the dataset contains prices for three weight steps, 20g, 50g 

and 100g for each country. In order to calculate an average postage rate per small letter, 

we thus need to make assumptions about the distribution of weights. These assumptions 

are primarily based on a UPU study from 201439 containing estimated distributions on 

different weight steps for each product type P, G and E. 

Once the weight distribution for each format is established, it is straightforward to calculate a domestic rate per item for each product type. 

In order to correct for the first part of end-to-end delivery activities (collection, transport) 

which is not part of the last-mile handling, we apply an adjustment factor (70 percent of 

 

37 WIK (2013), ” Main Developments in the Postal Sector (2010-2013)”

38 The database from 2008 is the most recent source available containing such a comprehensive and granular overview of 

domestic tariffs. 

39 UPU, (2014b), POC C3 LPRG 2014.2 Doc 4a, “Results of the items per kilogramme (IPK) study” (committee document).

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

0 200 400 600 800 1000 1200 1400 1600 1800 2000

Price (SDR)

Weight (gr)
33

the domestic postage). It may well be that applying a share of the domestic postage rates 

for single-piece letters does not reflect the price for last-mile handling of the cross-border

letter mail mix. Reasons for this might be that domestic postage rates for single piece 

letters are regulated, or that low price elasticity of demand for single-piece letters result in 

higher prices. Nevertheless, since information about special tariffs40 (which may constitute a better starting point) often are not available in the public domain, we consider the 

single piece rates to be a valid starting point similar to what has been done in previous 

studies.41In order to check the sensitivity of our results to this assumption, we conduct a 

number of robustness checks where we vary this assumption, cf. chapter 3. 

Our data set contains domestic postage rates for 163 countries and territories. Combined

with the data set of bilateral mail flows (consisting of 182 countries and territories), this 

leaves us with a set of 154 designated operators (for which we have estimates of all necessary parameters) to include in the analysis.

2.3 Interpretation of the results – caveats and cautions 

Due to the lack of precise data on actual bilateral mail flows, terminal dues in the counterfactual situation, and the existence of bilateral agreements (not subject to UPU terminal 

dues), we cannot claim that our model estimates precise net financial transfers for individual postal administrations. Nevertheless, we believe that our estimations provide valuable information regarding the magnitude and direction of financial transfers across 

postal administrations worldwide.

Although our model tries to mimic the reality as well as possible, some effects are not 

captured and the results have to be interpreted with some care. In the following, we briefly discuss three aspects that one should be aware of when interpreting the results.

The existence of alternative agreements

Our estimates assume that all bilateral mail flows captured in the model are subject to 

UPU terminal dues. This is, however, not the case in reality. Two alternatives to the UPU 

terminal dues are (i) compensation rates negotiated under the REIMS42 agreement (administered by the International Post Corporation (IPC)) and (ii) bilateral agreements 

between postal administrations. 

The REIMS agreement currently has 26 signatories, including all major European designated operators. According to the IPC, about one-third of EU international mail volumes 

were settled under REIMS in 2009.43 Compensation rates under the current REIMS 

agreement are not publicly available. However, under REIMS II, compensation rates were 

set at 80 percent of the domestic price for a single-piece priority letter (without any caps 

 

40 Special tariffs are work-sharing discounts applicable to the distribution of bulk mail

41 See for example Campbell, James (2014), “Estimating the effects of UPU terminal dues 2014-2017”

42 REIMS stands for Remuneration of International Mails

43 Approximately one third were settled under alternative agreements such as UPU or bilateral agreements and approximately 

one third were injected directly in domestic networks. Source: IPC (2009), ”Trends and challenges in cross-border mail 

markets”
34

or floors). As many of the European postal administrations would be subject to restrictive 

caps in the current UPU system, the REIMS system brings the charges for last-mile handling of cross-border mail closer to the non-distortionary rate level. For the countries part

of the REIMS agreement, the financial transfers estimated in our model may be overstated. 

The same applies to postal administrations that have negotiated bilateral agreements with 

rates closer to the non-distortionary ones. However, as the UPU terminal dues will always 

serve as a benchmark in negotiations, we do not expect bilaterally negotiated rates to 

differ substantially from the UPU rates. 

Impact on mail flows of changes in terminal dues 

When terminal dues change from the current level to the counterfactual rate, this may 

imply that postal administrations change the prices they charge for outbound crossborder delivery of letters. This may affect the demand for cross-border mail. As a result, 

the global mail volumes in the counterfactual situation may not be the same as the global 

mail volumes in the actual situation. 

This dynamic effect is not taken into account in our model. In order to consider this effect, one would need to include assumptions about (i) the impact of terminal dues levels 

on postal tariffs and (ii) mailers’ elasticities of demand. For designated postal operators 

for which higher terminal dues in the counterfactual situation would reduce the demand 

for cross-border mail, holding volumes constant in the model is likely to overstate net 

financial transfers. 

Related to this issue is the topic of remailing. As acknowledged in Copenhagen Economics 

(2014), the current UPU system for terminal dues may create incentives for mailers to 

post letters in a country other than the country where the mailer “resides”44. The mailer 

might physically send the mail to a second country for posting using a private operator or 

ETOE45 or “cause it to be posted” by transferring the electronic data from which the mail 

is prepared. In the counterfactual situation with non-distortionary terminal dues rates, 

the incentive to remail would disappear, meaning that global mail flows may change. This 

dynamic effect is not taken into account in our model. 

Proportional regional participation model 

In lack of detailed data on bilateral mail volumes, our model assumes that the bilateral 

mail flows between two countries in different geographical regions mirror the aggregated 

mail flows between those regions. I.e. if 30 percent of region A’s mail volume from region 

B comes from country y in region B, then 30 percent of the mail volume from region B 

going to country x in region A is also assumed to come from country y. This is a rather 

strict assumption that does not take into account that some countries may have strong

links, increasing the relative mail flow between those two countries. This may for example 

 

44 Where a company is considered to reside is matter of judgement for postal officials. A large multinational company like 

Citibank (in one famous case in Europe) could be deemed to reside in almost every country in the world.

45 An extraterritorial office of exchange (ETOE) is defined as a facility operated by a designated postal operator in the territory 

of another country.
35

be the case with respect to some countries in Europe with strong links to previous colonies in Africa or in the Caribbean. It may also be the case with respect to some countries, 

e.g. in Europe, where the level of e-commerce from Asia is particularly high. 

In order to correct for this, one would have to collect more detailed information about 

specific bilateral mail volumes. Since this information often is not publicly available, we 

have refrained from this in our model. 
36

Chapter 3

Applying the model – estimating net 

transfers

Based on the model described in chapter 2, we are able to estimate financial transfers 

between 183 designated postal operators worldwide. For each postal operator exhibiting 

certain characteristics with respect to the size and composition of bilateral mail flows, the

actual terminal dues received/paid, and the level of the equivalent domestic postage in 

the home market, we are able to estimate financial transfers related to inbound as well as 

outbound cross-border mail. In this chapter, we outline our findings.

Since our model includes a number of assumptions regarding bilateral mail flows, terminal dues in the counterfactual situation, and the existence of bilateral agreements (not 

subject to UPU terminal dues), we cannot claim to estimate precise net financial transfers 

for individual postal operators. For this reason, when reporting the results from our modelling, we refrain from identifying individual postal operators.

Irrespective of this, our results still provide valuable information regarding the magnitude 

and direction of financial transfers across designated postal operators worldwide. They 

also provide valuable insights regarding the characteristics of designated postal operators 

determining whether and to what extent a postal operator is likely to experience positive 

or negative financial transfers in the current system.

3.1 Net financial transfers

Our modelling exercise estimates a total value of net financial transfers between 154 designated postal operators of 966 million SDR in 2014, corresponding to 1,371 million USD. 

Taking into account that some postal operators in our analysis use other types of agreements (e.g. REIMS or bilateral agreements), these figures most likely represent an upper 

bound of financial transfers created by the UPU terminal dues system.

The estimated levels of financial transfers in our model differ substantially across countries. Whereas many designated postal operators (primarily in Africa, South America, and 

the Middle East) experience estimated net financial transfers of 5 million SDR (approximately 7 million USD) or less, there is also a large number of postal operators that experience substantially larger estimated net transfers (up to approximately 268 million SDR, 

corresponding to over 381 million USD).

Our estimations show that whereas the negative net transfers generated by the terminal 

dues system are concentrated to a relatively small number of designated postal operators 

(31), the positive net transfers are distributed among a much larger number of operators 

(123). In fact, according to our model, 98 percent of the estimated negative net transfers 

generated by the terminal dues system are concentrated to only 15 designated postal operators. Among these, the postal operators with the largest estimated negative net trans-
37

fers incurred losses of more than 6 million SDR each (approximately 8.5 million USD) in 

2014, cf. Figure 7.

Figure 7 Postal operators with largest estimated negative net 

transfers 2014 (million SDR) 

Note: Each number represents a designated postal operator

Source: Copenhagen Economics based on modelling results

As regards the positive net transfers, we observe a slightly different picture with a larger 

number of designated postal operators sharing the estimated positive transfers generated 

by the terminal dues system. Nevertheless, there are a small number of postal operators 

that experience significantly higher positive estimated transfers than the others. These 

operators all incurred an estimated net gain of more than 50 million SDR (approximately 

70 million USD) each in 2014, cf. Figure 8. Altogether, the net financial gains experienced 

by the 15 postal operators with the largest positive transfers in 2014 represent 69 percent 

of the total positive net transfers generated by the current system. 

 (300.00)

 (250.00)

 (200.00)

 (150.00)

 (100.00)

 (50.00)

 -

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Million SDR
38

Figure 8 Postal operators with largest estimated positive net 

transfers 2014 (million SDR)

Note: Each number represents a designated postal operator

Source: Copenhagen Economics based on modelling results

The net financial transfer experienced by a designated postal operator is composed of two 

effects: an inbound effect (for cross-border letter mail coming from other countries) and 

an outbound effect (for cross-border letter mail sent to other countries). Thus, an operator experiencing positive financial transfers on the outbound side can still experience 

negative net transfers if the negative transfers on the inbound side are large enough. 

As a general rule, a designated postal operator that is losing money on inbound mail flows 

and gaining money on outbound mail flows will experience larger losses if it is a net importer of mail than if it is a net exporter of mail. Net-importing postal operators with a 

high price for last-mile handling of domestic letter post items (i.e. a high counterfactual 

terminal dues rate) will experience the largest negative transfers in the current system. 

Net-exporting postal operators with a price for last-mile handling of domestic letter post 

items similar or even below the actual terminal dues rates will experience the largest positive transfers in the current system.

Nevertheless, a large cross-border flow of letter mail is capable of offsetting a small difference between actual and counterfactual terminal dues applicable to that mail flow. Similarly, a large difference between actual and counterfactual terminal dues can lead to a 

large financial gain/loss, also for an operator with relatively small cross-border mail volumes. For any difference between actual and counterfactual terminal dues on inbound as 

well as on outbound mail flows, however, larger cross-border mail flows will always increase the financial impact of the terminal dues system. As a consequence, the largest 

transfers created by the current system of terminal dues will follow the largest global mail 

flows. 

In order to understand better what factors determine whether and to what extent a specific postal operator is likely to experience positive or negative financial transfers, we will in 

 -

 20.00

 40.00

 60.00

 80.00

 100.00

 120.00

 140.00

 160.00

16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Million SDR
39

the following disaggregate the net financial transfers into the inbound effect and the outbound effect and analyse both of them more in depth.

3.2 Inbound effect

The inbound effect (for a receiving postal operator and a specific bilateral mail flow) 

equals the difference between the actual terminal dues rate received for inbound letter 

mail and the equivalent domestic postage (representing the counterfactual terminal 

dues), times the amount of inbound cross-border letter post affected by terminal dues. 

If the current terminal dues rate is below the equivalent domestic postage rate, this means 

that the payment per inbound letter post item would increase in the counterfactual, 

thereby making the receiving postal operator better off. In terms of financial transfers, 

this means that the receiving postal operator today is experiencing a negative financial 

transfer on the inbound letter flow.

According to our estimations, 69 designated postal operators experience a negative financial transfer on inbound volumes whereas 85 postal operators experience a positive financial transfer on inbound volumes. However, in terms of value, the positive financial transfers on the inbound side correspond to only three percent of the negative inbound transfers. This implies that the positive inbound transfer per operator is very low, something 

that is also supported by our modelling results. Taking a closer look at the designated 

operators receiving positive net transfers on the inbound side, we observe that none of the 

operators in our model has an estimated positive transfer on inbound volumes larger than 

8 million SDR and all but three operators have an estimated positive transfer lower than 5

million SDR, cf. Figure 9. 

Figure 9 Postal operators with largest estimated positive transfers for inbound mail flows 2014

Note: Each number represents a designated postal operator.

Source: Copenhagen Economics based on modelling results

0

2

4

6

8

10

12

14

31 17 25 16 18 20 32 29 33 34 35 36 37 38 39

Million SDR
40

As the diagram above reveals, some of the designated operators with large positive transfers on inbound flows (operators 16, 17, 18, and 20) are also among the designated operators with the largest positive net transfers, cf. Figure 8.

The size of the financial transfer on inbound mail volumes depend on two parameters: (i) 

the difference between the actual and the counterfactual terminal dues rates and (ii) the 

amount of inbound mail volumes. 

As a proxy for the difference between actual and counterfactual terminal dues rates, we 

use the ratio between the financial transfers experienced on inbound mail volumes and 

the total inbound mail flow. This provides us with an estimate of the gain (or loss) per 

inbound item experienced by the designated postal operator. The analysis reveals three

designated postal operators that gain more than 0.5 SDR (0.7 USD) per inbound letter. 

The relatively large gains in these countries may reflect the fact that domestic postage 

rates for single-piece letters often are subsidised in order to ensure affordability and accessibility of a basic letter service.

Figure 10 Estimated gain per item (inbound mail flows - top 15)

Note: Each number represents a designated postal operator 

Source: Copenhagen Economics based on modelling results

Worth noting is that only two of the 15 designated postal operators in the diagram above

(operators 37 and 38) also belong to the group of 15 postal operators experiencing the 

largest positive transfers on inbound mail flows, cf. Figure 9. The reason for this is that 

most operators in the diagram above have very small inbound mail flows (resulting in a 

small total transfers on inbound volumes). Thus, the main driver for large positive transfers does not seem to be the difference between actual and counterfactual terminal dues, 

but a large inbound mail flow. 

In order to understand better how different drivers affect the levels of financial transfers,

Table 5 shows how the size of the inbound mail flow and the difference between terminal 

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

41 42 43 44 45 46 47 48 49 50 51 52 37 38 53

SDR
41

dues and equivalent domestic postage rates translate into different levels of financial 

transfers on inbound volumes.

Table 5 Illustration: Drivers of positive inbound effects

Operator Inbound mail flow

(million items)

Gain per inbound item

(SDR)

Estimated financial transfer on inbound flows 

(million SDR)

20 28.0 0.20 5.5

25 27.6 0.32 8.7

30 3.3 0.20 0.6

32 26.1 0.20 5.3

41 0.04 0.79 0.03

Source: Copenhagen Economics based on modelling data

The table reveals three important findings. First, comparing the results for operator 20

and operator 24 in the table above reveals that, in cases where inbound volumes are fairly 

similar, differences in the gain per inbound item can lead to significant differences in 

financial transfers. A large gain per item may, for example, be caused by an artificially low 

(regulated) domestic postage. Second, comparing the results for operator 30 and operator 

32 reveals that, when the gain per item is the same or very similar, the size of inbound 

mail flows are the determining factor for the size of inbound transfers. Third, a closer look 

at operator 44 reveals that, irrespective of how high the gains per item are, low volumes 

will still lead to a small total transfer.

If we instead turn to the postal operators experiencing a negative inbound effect, our estimations show that some postal operators experience estimated negative financial transfers of more than 100 million SDR, cf. Figure 11. The negative financial transfers per postal operator is thus significantly larger than the positive financial transfers per operator 

identified above. In other words, the financial loss per operator experiencing a negative 

transfer is much larger than the financial gain per operator experiencing a positive transfer. 
42

Figure 11 Postal operators with largest estimated negative transfers for inbound mail flows 2014

Note: Each number represents a designated postal operator.

Source: Copenhagen Economics based on modelling results

We also observe that 11 of the designated operators with the largest estimated negative 

financial transfer on the inbound side also are among the designated operators who experience the largest negative net transfers, cf. Figure 7. For these operators, the large negative transfers on inbound volumes outweigh any positive transfers that they may experience on outbound volumes. Worth noting is also that two of the operators in Figure 11

above, despite their large negative transfers on inbound volumes, still belong to the group 

of postal operators experiencing the largest positive net transfers, cf. Figure 8. For these 

operators, positive financial transfers on outbound volumes will outweigh the negative 

effect on inbound volumes.

Similar to the case of positive transfers on the inbound side, the negative transfers observed above can be the result of a large difference between actual and counterfactual 

terminal dues rates and/or a large inbound mail flow. Using the loss per inbound item as 

a proxy for the difference between actual and counterfactual terminal dues rates, we observe losses per inbound item over 1.8 SDR per item, cf. Figure 12.

 (300.00)

 (250.00)

 (200.00)

 (150.00)

 (100.00)

 (50.00)

 -

1 2 19 3 4 23 22 5 6 8 7 9 11 10 40

Million SDR
43

Figure 12 Estimated loss per item (inbound mail flows - top 15)

Note: Each number represents a designated postal operator.

Source: Copenhagen Economics based on modelling results

Several of the postal operators in the diagram above are also, due to their large inbound 

mail flows, among the 15 postal operators experiencing the largest negative transfers on 

inbound mail flows. 

Table 6 demonstrates how different characteristics with respect to the size of the inbound 

mail flow and the difference between terminal dues and equivalent domestic postage rates 

translate into different levels of financial transfers on inbound volumes. 

Table 6 Illustration: Drivers of negative inbound effects

Operator Inbound mail flow

(million items)

Loss per inbound item

(SDR)

Estimated financial transfer on inbound flows 

(million SDR)

61 25.0 -0.29 -7.1

12 25.4 -1.07 -27.2

7 63.4 -0.99 -63.4

55 0.5 -0.99 -0.5

54 0.6 -1.82 -1.1

Source: Copenhagen Economics based on modelling data

The table reveals three important findings, very similar to those for the positive inbound 

effects. First, comparing the results for operator 64 and operator 12 in the table above 

reveals that, in cases where inbound volumes are fairly similar, differences in the loss per 

inbound item can lead to significant differences in financial transfers. A large loss per 

item may, for example, be caused by a high domestic postage rate in combination with a 

large share of inbound volumes being subject to capped terminal dues. Second, comparing the results for operator 7 and operator 58 reveals that, when the loss per item is the 

same or very similar, the size of inbound mail flows are the determining factor for the size 

of inbound transfers. Third, a closer look at operator 57 reveals that, irrespective of how 

high the losses per item are, low volumes will still lead to a small total transfer.

-2

-1.8

-1.6

-1.4

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

54 2 1 12 7 55 10 4 56 13 57 11 58 23 59

SDR
44

3.3 Outbound effect

The outbound effect (for a specific postal operator and a specific bilateral mail flow) 

equals the difference between the terminal dues paid to the receiving postal operator and 

the equivalent domestic postage in the receiving country, times the amount of outbound 

letter post items. 

If the current terminal dues rate charged by the designated postal operator in the destination country is below the counterfactual terminal dues rate (in our model represented by 

the equivalent domestic postage), this means that the payment per outbound letter post 

item would increase in the counterfactual, thereby making the sending postal operator 

worse off. In terms of financial transfers, this means that the sending postal operator today is experiencing a positive financial transfer on the outbound letter flow (since it is 

paying less than what it would pay in the counterfactual situation). 

Our modelling shows that, in contrast to the inbound mail flows, all designated postal 

operators experience an estimated financial gain on outbound mail flows. The positive 

transfers on outbound mail volumes range from less than 1,000 SDR for some operators 

to more than 200 million SDR for others. The 15 designated postal operators with the 

largest estimated positive transfers on outbound mail flows are displayed in Figure 13.

Figure 13 Postal operators with largest estimated positive transfers for outbound mail flows

Note: Each number represents a designated postal operator.

Source: Copenhagen Economics based on modelling results

As the diagram reveals, there are a few postal operators that, due to the size of their outbound mail flows and their composition of bilateral mail flows, generate significantly 

higher positive transfers than the others. In addition to this, we also observe that ten out 

of the 15 operators in the diagram above belong to the group of operators in Figure 8 with 

the largest positive net transfers generated from the current system of terminal dues. 

Three of these operators are number 19, 22 and 23, which also were among the operators 

with the largest negative transfers on inbound mail flows. The positive net financial trans-

 -

 50

 100

 150

 200

 250

19 16 23 22 17 18 3 20 40 21 9 8 24 60 26

Million SDR
45

fers for these operators are thus a result of large positive effects on the outbound side 

outweighing large negative effects on the inbound side. As for the other operators in the 

diagram above belonging to the group with the largest positive net transfers, the large 

positive net transfer is due to a combination of a large positive transfer on both inbound 

and outbound mail volumes. 

Table 7 demonstrates how different characteristics with respect to the size of the outbound mail flow and the composition of bilateral mail flows translate into different levels 

of financial transfers on outbound volumes. 

Table 7 Illustration: Drivers of outbound effects

Operator Outbound mail flow

(million items)

Share of outbound flows 

subject to capped TDs

Estimated financial transfer on outbound flows 

(million SDR)

20 44.7 High 38.7

1 44.5 Low 7.2

24 28.6 High 22.7

60 78.5 Low 21.1

Source: Copenhagen Economics based on modelling data

The information in the table above reveals that differences in the share of outbound flows 

subject to capped terminal dues can be a determining factor for the size of outbound financial transfers. However, large differences in the share of outbound flows subject to 

capped terminal dues can be compensated for by large differences in outbound mail 

flows, thereby leading to similar levels of financial transfers. This clearly shows that the 

composition of financial transfers is complex and that two postal operators experiencing 

very similar levels of transfers can do so for different reasons. 

3.4 Net effect by letter format

We have examined how the financial transfers are allocated among different letter formats (P, G and E). The conclusion from this analysis is quite clear: The financial net 

transfers are primarily caused by small packets. Out of the total financial net effect of 966 

million SDR 158 million (16%) comes from small letters, 136 million (14%) from large 

envelopes and 672 million (70%) from small packets, see Figure 14. Small packets are the 

largest contributor because the equivalent domestic prices for these are the highest, while 

the current terminal due rates do not incorporate this into the calculations. 
46

-500

-250

0

250

500 Asia-Pacific

Figure 14 Distribution of net effect by letter format

Source: Copenhagen Economics based on modelling data

3.5 Financial transfers between geographical regions

Our model based on bilateral mail flows, also enable us to analyse the geographical pattern of financial transfers. We have done this by focussing on the financial net transfers 

between the seven regions in our model. 

In essence, we find three significant financial net transfers, when we consider transfers 

between regions:

1. A financial net transfer from Western Europe to Eastern Europe & Central Asia

2. A financial transfer from North America to Asia-Pacific

3. A Financial transfer from Western Europe to Asia-Pacific. 

The two regions with largest negative effect are Western Europe and North America, and 

the two regions with largest positive net effect are Asia-Pacific and Eastern Europe & Central Asia, see Figure 15.

Figure 15 Financial transfers between geographical regions

[CATEGORY NAME]

[CATEGORY NAME]

[CATEGORY NAME]
47

Note: The figures show the total financial net transfer between the regions. A green box indicates that there 

is a positive net transfer to the region, while a red box indicates that there is a negative net transfer 

from the region. 

Source: Copenhagen Economics based on modelling data

3.6 Sensitivity analysis

The model used to estimate financial transfers is based on a number of assumptions regarding bilateral mail flows and non-distortionary terminal dues in the counterfactual. In 

order to take into account that the reality may differ from our assumptions in the model, 

we conduct two sensitivity checks where we vary the most important assumptions in the 

model. The outcome of the sensitivity analysis will show (i) how important these assumptions are for the outcome of our analysis and (ii) within which span the actual levels of net 

financial transfers are likely to be. 

The two assumptions that we vary in our sensitivity analysis are:

 The share of single-piece rates used as a basis for equivalent domestic postage 

 The share of small packets in the cross-border mail mix 

Share of single-piece rates used as basis for equivalent domestic postage

The assumption that the equivalent domestic postage rates for last-mile delivery of crossborder mail can be approximated by 70 percent of the price for domestic end-to-end delivery of single piece letters is not necessarily correct. In a study about postal operators’ 

pricing behaviour, conducted on behalf of the European Commission in 2011, we found 

that single piece items (on average) were priced over 45 percent higher than transactional 

bulk mail and bulk mail was priced almost 50 percent higher than direct mail. This suggests that a 30 percent discount on single piece tariffs may not be enough to reflect the 

equivalent domestic postage for last-mile delivery of cross-border letters. Moreover, in 

some countries, the domestic postage rates for single-piece items are subject to regulation

to ensure that postal services are available to everyone at affordable rates. In these countries, the single-piece postage rates may thus be subsidised to a low level.

In order to take this into consideration, we conduct a sensitivity analysis where we run 

our model with the assumption that the equivalent domestic postage rates can be approximated by 80 percent, 60 percent and 50 percent of the domestic postage rates for singlepiece items respectively. Table 8 shows the outcome of the sensitivity analysis. It reveals 

total financial transfers generated by the current terminal dues system ranging from 602

million SDR (corresponding to 855 million USD) to 1,160 million SDR (corresponding to 

1,647 USD). For every 10 percent increase/reduction in the share of the single-piece postage used as basis for calculating equivalent domestic postage rates, we observe that the 

total financial transfers generated increase/decline by approximately 20 percent.
48

Table 8 Sensitivity analysis: Equivalent domestic postage rates

Share of single-piece 

domestic rates used as 

basis for equivalent domestic postage

Total financial transfers 

created by the current 

terminal dues system

(million SDR)

Number of operators 

experiencing positive 

financial net transfers

Number of operators 

experiencing negative 

financial net transfers

50% 602 124 30

60% 774 124 30

70% (base case) 966 123 31

80% 1,160 121 33

Source: Copenhagen Economics based on modelling

Share of small packets in the cross-border mail mix

In our base case, the share of small packets (E format items) in the cross-border mail mix 

is estimated based on a UPU survey from among 49 designated postal operators. The 

survey contains regional estimates for the distribution of formats (P, G, E) in the crossborder mail mix (in percentage of number of items and weight).46 By assuming that the 

distribution of P, G and E items in a specific bilateral mail flow between two regions is the 

same as the distribution of P, G, and E items in the total inter-regional mail flow between 

the same two regions, we arrive at a per-format estimate of letter mail volumes for each 

bilateral mail stream.

However, as recognised in several publications already47, an increasing level of crossborder e-commerce also implies a change in the cross-border mail mix in terms of a larger 

share of small packets. In order to take this into account, we conduct a sensitivity analysis 

where we run our model with the assumption that the share of E format items in the 

cross-border mail mix increases by 15 percent and 30 percent respectively for all designated postal operators. While doing this, we assume that the shares of P and G format 

items decline proportionately, such that the total number of letter post items remains the 

same. Table 9 shows the outcome of the sensitivity analysis. It reveals that a higher share 

of small packets in the cross-border mail mix creates larger total transfers in the system 

(ranging from 966 million SDR in the base case to 1,131 million SDR in the case where the 

share of small packets is increase by 30 percent in all flows). 

Table 9 Sensitivity analysis: Share of small packets in mail mix

Relative increase in the 

share of small packets in 

the cross-border mail mix

Total financial transfers 

created by the current 

terminal dues system

(million SDR)

Number of operators 

experiencing positive 

financial net transfers

Number of operators 

experiencing negative 

financial net transfers

0 (base case) 966 123 31

15 percent 1,048 123 31

30 percent 1,131 123 31

Source: Copenhagen Economics based on modelling

Worth noting is also that the number of designated postal operators experiencing negative net transfers declines as the share of small packets in the mail mix increases. This is 

 

46 UPU, (2014b), POC C3 LPRG 2014.2 Doc 4a, “Results of the items per kilogramme (IPK) study” (committee document).

47 See for example UPU (2014), “Fulfilling the global e-commerce promise,” and UPU (2013), Union Postale no.4 December 

2013, p.17
49

due to the fact that two designated postal operators with very small negative net transfers 

in the base case (less than 1,000 SDR each) will experience small positive net transfers as 

the share of small packets in the mail mix increases. 
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