TERMINAL DU

Impact on financial transfers among designated postal operators of the Universal PostaUnion 2018-2021 cycle agreem

22 September 2017

U.S. Postal Regulatory Commission
© Copenhagen Economics A/S

22 September 2017Henrik Ballebye OkholmAnna Möller BoivieJimmy GårdebrinkMartina FacinoImpact on financial transfers among designated postal operators of thUnion 2018-2021 cycle agreements

TERMINAL DUES

AUTHORS
In a report to the Postal Regulatory Commission 

(PRC) in September 2014, 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 crossborder letter post items

2. Distortion of demand for (i) delivery services

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 transfers1 between designated postal 

operators 

In December 2015, the PRC asked Copenhagen Economics to conduct a quantitative analysis, estimating the magnitude of the third type of distortion: the financial transfers between designated postal operators caused by the terminal dues system in 2014. 

In this previous study, we estimated the financial transfers caused by the UPU terminal dues system to 950 million Special Drawings Right (SDR), equivalent to approximately 1,4 billion USD. We also highlighted that financial transfers primarily are created by low terminal dues for small packets, one of the letter formats covered by the terminal dues system. In September 2016, the UPU Congress agreed on a number of changes to the terminal dues system, entering into effect as of January 1, 2018. Perhaps most notably, the changes include separate (and higher) terminal dues for E-format items (bulky letters and small packets). 

Against this background, the PRC has asked 

Copenhagen Economics to estimate the impact of these changes on financial transfers going forward.The report provides new quantifications of financialtransfers with the current system and with the updated system respectively. The methodology 

applied is report, but tariff data updated remagnitude directly co

PrefaceThe 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 fall-back provision when negotiating bilateral agreements). In this report we show that the UPU rates are distortive and lead to USD 3.1 billion in financial transfers between postal operators in 2018. 

A

1 Financial transfers are the net gain or loss for the postal operator, deriving from the difference between the actual term

terminal dues that would be paid/received in the absence of the UPU system of terminal due
EXECUTIVE 

SUMMARY 1. INTRODUCTION

2. SYTE

3. FUTURE DEVELOPMENTS IN CROSS-BORDER LETTER POST FLOWS

4. IMPACT OF CHANGES TO TERMINAL DUES ON FINANCIAL TRANSFERS AP
EXECUTIVE SUMMARY
Executive summary

Terminal dues are payments between designated postal operators for the transport, sorting and delivery of cross-border letter post items in the destination country. These international tariffs are governed by the Universal Postal Union (UPU). The compensation that designated postal operators receive from delivering inbound cross-border letter mail (i.e., the actual terminal dues) differs from the compensation that they would require in a situation 

without the UPU terminal dues system in place (i.e., 

the counterfactual terminal dues). This gives rise to financial transfers between designated postal operators around the world. Financial transfers canpotentially create distortionary spill-over effects on national markets (e.g., compensation for postal operators’ losses funded by taxes). The financial transfer for each bilateral flow of cross-border letters is determined by the difference between the actual and the counterfactual terminal dues rate for that 

bilateral flow. 

The UPU terminal dues rates are effective in cycles offour years. The current rates (in place from 1 January2014 to 31 December 2017) were established by the UPU Convention adopted in Doha in 2012. In September 2016, the UPU Congress in Istanbul set the path for the 2018 through 2021 cycle of UPU terminal dues. The agreements made in Istanbul 

build on the current system, but with adjustments to

some key parameters. Perhaps most notably, the updated system separates terminal dues for small and large letters (P- and G-format items) from thoseof bulky letters and small packets (E-format items). 

In this report, we quantify the financial transfers caused by the UPU terminal dues system with and 

without the changes agreed in Istanbul. We do this by comparing the actual terminal dues rates set out by the UPU Convention to a set of counterfactual 

terminal dues rates which reflect the prices that 

would have been paid without the UPU Convention 

in place. 

Our results Istanbul onof financiadues system

value of ne

2.2bn (coramended slower than current sysnet financi

Total value of financial transfers applying c

for UPU terminal dues in 2018

2.401 

 -

 500

 1.000 1.500 2.000 2.500 3.000

Current System, in 2018 

SDR, Million

-8%
A determining factor for the development of financial 

transfers over time is the development in crossborder mail volumes (in particular small packets containing products bought online). In order to quantify the total value of financial transfers overtime, we therefore include in our analysis a forecast of the development of international letter volumes.The results of our analysis show that, although the adjustments agreed in Istanbul may reduce the size of transfers slightly compared to the current system, they will not prevent transfers from growing with time. In fact, our base case scenario suggests a growth of financial transfers by 50 per cent 2018-2021. This corresponds to an average annual compound growth rate of 14 per cent. 

Although previous reports and literature 

unequivocally point to the fact that small packets will grow as a result of growing e-commerce, there is uncertainty about the precise pace. In order to account for this uncertainty, we have created three scenarios for the future development in internationalletter mail volumes. The scenarios provide us with a range for the predicted total financial transfers created by the UPU system for terminal dues. The resulting transfers range between SDR 2.1 bnand SDR 2.4 bn in 2018, growing to between SDR 2.8 bn and SDR 4 bn in 2021. 

Financial transfers 2016-2021Total financial transfers, by scenario of volum

 -

 500

 1.000 1.500 2.000 2.500 3.000 3.500 4.000 4.500

2018 2019 

SDR, Million

Base case Extensive case 

 -

 500

 1.000 1.500 2.000 2.500 3.000 3.500

2016 2017 2018 20

SDR, Million

Current System Up
1

INTRODUCTION1.1 BACKGROUND 1.2 THE ASSIGNMENT AND OUR APPROACH
1.1 Background

THE UPU SYSTEM FOR TERMINAL DUESThe Universal Postal Union (UPU) is an intergovernmental organisation and a global forum for cooperation between governments on topics related to the postal sector and international postalservices. The UPU was founded in 1874. At that time, the organisation 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. Terminal dues are the payments between designated postal operators for the transport, sorting, and delivery of cross-border letter post items in the destination country. They apply to all products classified as letter items, which is split into three groups: small letters (P), large letters (G)

(sometimes referred to as “flats”), and bulky 

letters and small packets (E). The groups are defined by a set of minimum and maximum dimensions and weights.Terminal dues affect all cross-border deliveries of letter mail either directly or indirectly by serving as a fall-back provision in the negotiation of bilateral agreements. As some cross-border letter post traffic grows, spurred by positive developments in ecommerce, these payments become increasingly important for postal operators. In 2015, a total of 3.4 

billion cross-border letter post items were sent 

globally 2 and cross-border e-commerce trade is 

expected to have a global compound annual growth rate (CAGR) of 29 per cent between 2014 and 2020 3.

UPU members revise the terminal dues rates every four years in a general congress and changes to the system must be agreed by a majority of UPU members. The last congress took place in Istanbul in September 2016, where the members agreed on a number of changes to the current system to be implemented in 2018.Data on global letter post flows within and betweenregions demonstrates that the main flows of crossborder letter post have historically been between industrialised countries. Large volumes of crossborder letters multiply the impact of the regulated terminal dues rates, since they apply to more letters that need to be delivered. This suggests that designated postal 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 are also significantly affected by any changes to the current terminal dues system.Countries may agree on other terms than the UPU terminal dues rates. These bilateral agreements willin that case determine the actual compensation 

between those postal operators. In this report, we 

assume that all countries in our analysis apply UPU 

terminal dapplication agreementthe design to it for pufinancial trmodified. Hoverstates regions anmultilateratransaction

3 
THE CONCEPT OF FINANCIAL TRANSFERS

Financial transfers emerge because the actual 

compensation that designated postal operators receive from delivering inbound cross-border letter mail (i.e., the actual terminal dues) differs from the 

compensation that they would require in a situation 

without the UPU terminal dues system in place (i.e., 

the counterfactual terminal dues). The distortion per letter sent (outbound) or received (inbound) is thus the difference between the actual and the counterfactual terminal dues rate.Our analysis is based on a counterfactual terminal dues rate corresponding to 70 per cent of the price charged by the postal operator for end-to-end 

delivery of domestic letter post items. Since most of the costs for mail delivery are incurred in the lastmile delivery phase, the 70 per cent is an approximation of the domestic price for last-mile delivery of a priority, single-piece letter.The inbound effect is the difference between the actual terminal dues rate received by a designated postal operator and the counterfactual rate, aggregated for all inbound (import) letter mail 

volumes. The outbound effect is the difference 

between the actual terminal dues rate paid and the 

counterfactual rate, aggregated for all outbound (export) letter mail volumes. The sum of the inbound effect and the outbound effect corresponds to the net 

effect, reprfinancial operator in QUANTIFTRANSFIn 2015, thasked Copfinancial trsystem. Ou

value of ne

designated dues systerights

4 (SD

The concept of financial transfers explained

4 The amounts are expressed in SDR, which is also the currency that we will use in our analy

The figure and table to the right illustrate the concept of financial transfers. It provides an example calculation of the net effect for three countries (A, B, and C):• A has a high cost for last-mile delivery and is a net 

exporter of cross-border letters,

• B has a high cost for last-mile delivery and is a net 

importer of cross-border letters,

• C has a low cost for last-mile delivery and is a net 

exporter of cross-border letters.

The terminal due per kg is assumed to be 0.1

4 for the 

three countries and the counterfactual terminal dues are assumed to be 0.1 for country C and 0.5 for country A and B. Based on the mail volumes exchanged between the countries, the net effects are the following: Country A: net loss of 80 Country B: net loss of 160 Country C: net gain of 240Note that the total loss equals the total gain, provingthat the terminal dues system creates a pure transfer of money between designated postal operators.

Inbo

A

B-A: 0.5)C-A: 0.5)

B

A-B: 0.5)C-B: 0.5)

C

A-C: 0.1)B-C: 0.1)
1.2 The assignment and our approach

THE ASSIGNMENTIn the most recent UPU Congress in Istanbul in September 2016, a number of changes were made to the UPU terminal dues system. These changes will come into effect in 2018 and may impact the financial transfers caused by the system. In fact, some changes agreed in Istanbul were de facto aimed at reducing these transfers.In the study conducted on behalf of PRC in 2015, Copenhagen Economics quantified the value of the financial transfers and analysed the patterns of the distribution of positive and negative net transfers for different countries. Against the background of the recent changes to the terminal dues system, the PRC has asked Copenhagen Economics to update the model for calculating financial transfers from the UPU terminal dues.The updated model takes into account the outcome of the UPU Congress in Istanbul. Furthermore, the PRC has asked for a scenario analysis based on a stylised forecast of letter volume development. 

OUR APPROACHOur analysis is based on a seven-step approach 

where we:

1. Collect and update the existing model with new 

data, including updates on domestic postage rates and volumes.

2. Analyse necessary changes in the terminal dues 

model based on the outcome of the Istanbul congress.

3. Change model specifications according to 

changes agreed in Istanbul.

4. Run the model with the UPU system before and 

after Istanbul to estimate the effect of the changes of the Istanbul agreement on total transfers and individual countries.

5. Design scenarios for future outlook.6. Run the model with future scenarios to estimate 

the effect on financial transfers.

7. Discuss and interpret the results of our analysis.Our approach is also depicted on the next page.
Illustration of our approach

5 An overview of the data used 

Existing model:

Current system, 2014 

data

Update of data in 

existing model:

Current system, new 

data5

Transfers in 2018 

with current system 

and current volume

New model:

New regulatory 

system, new data

Transfers in 2018 

with new system and 

current volume

Effect of new system

New model

New system

Applied on fut

scenarios

Transfers 2018-

with new syst

including volu

forecast

Effect of market developments

Model

Input

Output

Result

New data on postal 

rates and volumes

Change of model 

specifications

Scenario analysis of 

postal volume 

development

1

2

3

4

5

6
2

THE UNIVERSAL POSTAL UNION (USYSTEM FOR TERMINAL DUES2.1 THE DESIGN OF THE UPU TERMINAL DUES SYSTEM2.2 CHANGES AGREED AT THE ISTANBUL CONGRESS2.3 IMPLICATIONS FOR THE ESTIMATION OF FINANCIAL TRANSFERS
2.1 The design of the UPU terminal dues system

THE TERMINAL DUES SYSTEM IS A TWOTIER SYSTEMThe current UPU system for terminal dues is a twotiered system dating back to 1989

6. It consists of six 

groups of countries belonging to two different systems: the target system and the transitional system.The transitional system mainly applies to exchanges of international letter mail to, from, or between designated operators in countries traditionally considered “developing”. The target system mainlygoverns the exchange of letter post items between designated operators in countries and territories previously thought of as “industrialised”. In 2010, countries and territories classified as “developing” started to join the target system.Countries in the transitional system can opt in to thetarget system, but not the other way around. Depending on when they joined the target system or 

when it is foreseen that they will join the target system, 

UPU members are currently divided into 6 groups: 1.1,1.2, 2, 3, 4, and 5, see Table 2.1.TERMINAL DUES RATES DEPEND ON THE GROUP TO WHICH THE SENDER AND RECEIVER BELONG The terminal dues received by a designated postal operator for the last-mile handling of cross-borderletter post depend on the terminal dues group to which it belongs as well as on the terminal dues group to 

which the sending postal operator belongs. As of 2016,

countries or territories that are part of the target system (groups 1.1, 1.2, 2, and 3) pay each other target rates, while terminal dues to, from, and between countries or territories in the transitional system (groups 4 and 5) are paid at transitional rates, see Table 2.2. 

Table 2.1: Universal Postal Union groupsTable 2.2: Terminal dues rates type by orig

Note: UPU countries and territories are divided into six groups based on a po

macroeconomic component (gross national income, GNI, per capita) and a p

http://www.upu.int/uploads/tx_sbdownlo

http://www.upu.int/uploads/tx_sbdownlo

6 WIK (2010) Study on the External 

Group

Number of countries and 

territories in the group 

1.1 41 1.2 13 2 24 3 39 4 53 5 50 Paying country or territory (origin) Receiving country (destiTarget

Tr

Transition

Tr
Table 2.3: Schedule of terminal dues rates

http://www.upu.int/uploads/tx_sbdownlo

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.THE TRANSITIONAL SYSTEMFor the transitional system, the UPU prescribes rates (for delivering inbound letter mail) that have 

both per item and per kilogram components. These 

per item and per kilogram rates for the transitional system are equal to the minimum level (i.e. the floorrate) of the target system for any given year.In particular, terminal dues rates are calculated as a fixed rate per kilogram if the total inbound flow froma certain country is less than 75 tons per annum. This is done by assuming an average number of items per kilogram of mail and setting one per kilogram rate for transition countries.If the total inbound flow from a certain country is above 75 tons per annum, a fixed per-item rate is applied in combination with a fixed per-kilogram rate.THE TARGET SYSTEMFor the target system, the rates (for delivering inbound letter post) are based on 70 per cent of the domestic tariff for a 20-gram priority small letter and a 175-gram priority large letter in the destination country, though subject to caps and floors (per itemand per kilogram). The level of the floors and caps depends on group classification (1.1, 1.2, 2, or 3).There is also a limit depending on the size of mail flows where a fixed per kilogram rate will apply if thetotal inbound mail flow is less than 75 tons.

In practice, however, caps and floors are so close toeach other that the terminal dues received by target countries are often a fixed rate that is not aligned 

with their domestic tariffs.

The schedule of terminal dues rates applicable to the different groups is laid out in Table 2.3. In addition, terminal dues in the target system are adjusted basedon the quality of service of mail delivery.

Mail flow 

Intra group 1.1

Cap: 

Floor: 

Intra group 1.2 + between group 1.1. and 1.2

Cap: 

Floor: 

To, from, and between groups 3, 4, and 5
CALCULATION OF THE ACTUAL 

TARGET RATESIn order to calculate the current terminal dues ratesfor countries in the target system, the UPU makesuse of domestic prices which are later related to predefined caps and floors. We need information abouttwo reference tariffs:• The tariff for a 20 g small (P) priority letter post

item in the domestic service, converted into SDR(DP1)

• The tariff for a 175 g large (G) priority letter-post

item in the domestic service, converted into SDR(DP2)

According to the UPU Convention, the terminal dues 

rate per item before caps and floors is 70 per cent times the tariff of the 0-20g small letter (DP1) times 

0.01 (10 grams assumed to be the average weight for a small letter7). In order to calculate per-kilogram 

rates, as a first step, a linear relationship between 

weights and tariffs is assumed and calculated. These 

two rates (per item and per kilogram) are then applied to an item of average weight (the reference 

weight is assumed by the UPU to be 81 grams in the 

current system), in order to get the uncapped terminal dues rate for an average item, see Figure 2.1.If the uncapped terminal dues rates for the reference 

weight are higher than the cap, the capped rates will

be used. If the uncapped terminal dues rates for the 

reference weight are lower than the floor, the floorrates will be used. Finally, if the uncapped terminal dues rates for the reference weight are between thecap and the floor, then a target rate is calculated 

based on the uncapped terminal dues. 

7 UPU (20

Figure 2.1: Calculation of uncapped terminal 

Source: Copenhagen Eco

0

0,20,40,60,8

1

1,21,4

0 20 40 60 80 100 12

SDR

The target rate is calculated by multiplying the peritem and per kilogram floor rates by a ratio of uncapped revenue and floor revenue. This means that if domestic tariffs in one country are higher thanthe floor rates, that postal operator will get a higher add-on to the floor rate (but not higher than the cap).The target terminal dues rates per kilogram are thus calculated as:

= 70% ×

 × 	
 − 0.01 + 

 × 	
 + 

× 

Similarly, the target terminal dues rates per item in are calculated as:

 = 70% ×

 × 	
 − 0.01 + 

 × 	
 + 

× 

where,M = consta

0.01) (this 

DP1 and D

for 0-20g P 

Wavg = the at 81gRwfl = floor Rifl = floor 

For each bdepend on 

belongs, (i

flow is comdues for thcap or floo
2.2 Changes agreed at the Istanbul Congress

The terminal dues rates are decided upon at the UPU Congress for inclusion in the Universal Postal Convention. The Convention was last revised in September 2016 in Istanbul. The 2016 Congress in Istanbul set the path for the 2018 through 2021 cycle of UPU terminal dues. The agreements made build on the current system, but with adjustments to some key parameters. A comparison of key parameters 

between the current system and the updated system 

is provided in Table 2.4.One important change agreed in Istanbul was the introduction of a new classification of E-format shipments. Currently, the E-format is defined as “bulky letters” and is characterized only by its physical specifications (not by the content of the shipment). After 2018, there will be a formal recognition of the fact that some E-format shipmentscontain documents (defined as bulky letters) 

whereas others contain goods (defined as small 

packets). An important reason for this change is the growth in e-commerce which is calling for more shipments containing goods to be sent cross-border.Since these shipments are usually more expensive to handle in the last mile compared to shipments containing documents, the terminal dues rates that postal operators receive as compensation for lastmile delivery will be especially important for these shipments. However, concerning the terminal dues charged/received for E-format shipments in the 2018-21 cycle, no distinction will be made between 

bulky letters and small packets.

Perhaps the most important feature of the updated system is the practical separation of small and large

letters (P and G) from bulky letters and small packets (E). 

We have identified three key aspects of the updated 

system with implications for the financial impact of the system from 2018:1. New target system formula including a 

separate ‘rate line’ for bulky letters and small packets

2. New structure and level of caps and floors for 

bulky letters and small packets

3. Higher annual increase in the caps for bulky 

letters and small packets

The classification of countries has been consolidated 

into four groups instead of the current six. This change reflects the fact that the rates paid by countries in groups 1.2 and 2, and separately in 4 and5, gradually transition towards the rates applied among industrialised countries in group 1.1 at the same level. Furthermore, the UPU Congress approved an Integrated Product Plan (IPP) that may have future implications for terminal dues, see Box 2.1. SEPARATE RATE LINE FOR BULKY LETTERS AND SMALL PACKETSThe updated system still builds on a target formula that departs from domestic postage rates. Instead of having the same formula in the target system for all letter post formats, the updated system now separates small letters (P-format) and large letters (G-format) on the one hand, and bulky letters and small packets (E-format) on the other. The new rate structure for bulky letters and small packets is 

“flatter”. Tkilogram onumber of This changsmall packexpensive The key pa“item-to-kcommonly more intui

weight tha

adds the saitem rate. Mrate divideestablishes small packitem-to-kilcurrent sys

small packsame for smNEW LEVSMALL PGoing from 

version in 

and floors For bulky lkilogram w2018, wherhigher. Thrate struct
Table 2.4: Key parameters, current 

and new cycle

2014-2017 

cycle

2018-2021 

cycle

Reference weight, P/G/E 81,1g 91,9gReference weight, P/G n/a 37,6gReference weight, E n/a 375gItem-to-kilogram ratio, P/G/E 0,128 0,128Item-to-kilogram ratio, P/G n/a 0,128Item-to-kilogram ratio, E n/a 0,445Caps and floors, per item, P/G same levelCaps and floors, per kilo , P/G same levelCaps and floors, per item , E increase 120% - 140% Caps and floors, per kilo , E decrease 30% - 37%Increase in caps, E, group 1 3% 3%Increase in caps, E, group 2 6% 9.6%Increase in caps, E, group 3 2.8% 13%

HIGHER ANNUAL INCREASE IN CAPS FOR BULKY LETTERS AND SMALL PACKETS

After 2018, the caps for small packets will increase at a 

faster pace for two of the three groups in the targetsystem. For group 2, which is currently in the target system, the annual increase in caps for bulky lettersand small packets will increase from 6 per cent to 9.6 per cent per year. For countries in group 3, which 

joined the target system in 2016, the annual increasewill be 13 per cent per year. For small and large letters, 

as well as for bulky letters and small packets in group 1, the annual increase remains the same as in the current system. 

Source: UPU (2016) 2016 Istanbul Acts, Universal Postal 

Convention

Note: The increase in caps and floors are expressed in annual 

changes
BOX 2.1: INTEGRATED PRODUCT PLAN

Besides the changes regarding terminal dues discussed above, another reform, the Integrated Product Plan (IPP), was decided upon by the Istanbul congress. Currently, the first step of the plan is approved and the second step still remains to 

be agreed on. 

The aim of the IPP is to develop a fully integrated portfolio of products (letter post items, parcel post items and EMS) and a suitable remuneration system that cover the costs of delivering the products in thelast mile. 

As part of the implementation of step 1, the first 

stage on the route to integration will be to introducea documents and goods classification. Letter-post formats P and G and bulky letters (E-format) will be 

restricted to documents while small packets (Eformat) can contain only goods. Parcel-post items and Express Mail Service (EMS) will remain unchanged.The potential impact of the IPP on the financial transfers caused by the terminal dues system lies precisely in the separation of documents and goods. 

With the current definition of the E-format, small 

packets containing goods are treated identically to 

bulky letters containing documents, see illustration below. As of 2018, based on the IPP, this will no 

longer be the case. The first step is aimed to have mainly conceptual implications and bring only minimal operational changes for designated postal operators.8

In 2018, thterm Cong

version of 

the remunas a basis fthe IPP in The precissystem and depend on executed. Tthe internafactor also 

Source: UPU (2017) 26th Congress. Integrated Pr

8 UPU (2017) 26th. Integrated Product Plan (IPP) 2017–20

Non-priority

&

Priority

Express

Letter-post items

Express Mail Service

Parce

Small Packets

Bulky Letters

E

LargeLetters

Small Letters

P G

Documents Goods
2.3 Implications for the estimation of financial transfer

NEW TERMINAL DUES RATES FOR BULKY LETTERS AND SMALL PACKETS COULD REDUCE FINANCIAL TRANSFERSFinancial transfers emerge because the actual terminal dues rates differ from (generally being lower than) the counterfactual rate (i.e., the rate that the postal operator charges for last-mile handling ofa comparable domestic priority letter post item). Today, this difference between actual terminal dues rates and counterfactual rates is especially large for small packets and bulky letters, since they are more costly to deliver and, hence, often are priced higher than smaller letters.If the new structure of terminal dues (flatter and higher rates for bulky letters and small packets) implies that the actual terminal dues rates move closer to the counterfactual rates, this means that the new structure will reduce the financial transfers.THE NEW SYSTEM WILL NOT ELIMINATE THE FINANCIAL TRANSFERSToday many countries with high domestic prices are receiving the capped terminal dues rates. Higher caps in the new system are therefore an important parameter for reducing financial transfers. For some particular flows, the counterfactual rates 

based on domestic tariffs are far greater than the 

regulated terminal dues rates. For this reason, despite being higher and flatter, caps in the updatedsystem will still in many cases apply, making the actual terminal dues rate received/paid far below thecounterfactual terminal dues rate. 

This indicates that the financial transfers still persist since the gap between actual and counterfactual rates 

is not likely to be closed in the new system. Thus, the financial transfers are not likely to be fully corrected for with the updated system. Figure 2.2 to the right illustrates with an example how the gap between regulated terminal dues rates and the counterfactualrates may still persist. FOR SOME BILATERAL FLOWS, TRANSFERS CAN EVEN INCREASE IN THE UPDATED SYSTEM

With the updated system, terminal dues rates for bulky letters and small packets will increase for bilateral flows when the average weight is low 

(generally below 380 gram). However, for flows withaverage weights above a certain point, terminal duesrates will be lower than today. This is because the new rate structure for bulky letters and small packets 

is flatter, and, therefore, there will be a point where 

this rate line crosses the rate line for the current system. This will be the case for both capped and uncapped flows. Figure 2.3 to the right illustrates with an example how above a threshold of 380 grams the financial transfers are larger in the new system compared to under the current system. 

Figure and new 

Figure current 

Sou

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

0 

SDR

0,000,501,001,502,002,50

SDR

Transfer (new)
3

FUTURE DEVELOPMENTS IN INTERNLETTER POST FLOWS3.1 HISTORICAL DEVELOPMENT IN CROSS-BORDER MAIL VOLUMES

3.2 METHODOLOGY FOR VOLUME PROJECTIONS3.3 SCENARIOS FOR FUTURE DEVELOPMENT IN INTERNATIONAL LETT
Introduction and main findings

In this chapter, we show how future mail volume estimates are incorporated into our model of financial transfers. In order to assess the impact ofthe regulatory changes in the coming terminal dues cycle (2018-2021) we have to develop different scenarios for the future development of cross-border letter volumes. Since the updated regulatory framework for the terminal dues separates small and large letters from bulky letters and small packets, we need to assess the volume development for the different letter formats over time. We consider the development from 2016 (our base year for volume data) to 2021 (the last year of the coming terminal dues cycle). Our forecast of letter volumes 2016-2021 consists of two steps. First, we analyse available data on historical mail volume development until 2016. We find that international mail volumes have had a negative trend overall, mainly as a result of electronic substitution. However, we also find that part of the international letter mail volume, namely bulky letters and small packets, have been increasing rapidly in recent years due to increased e-commerce. Second, we incorporate projections of e-substitutionand cross-border e-commerce to estimate future 

volumes for use in three scenarios. Figure 3.1 shows 

our estimated base case development of cross-border mail volumes for the three different letter mail formats between 2016 and 2021. 

Figure 3.1: Development of international lett

Sour

The growth in the volumes of bulky letters and small packets is likely to differ across geographical regions. Capturing these dynamics is important since it will impact the financial transfers between countries located in different regions. Our results demonstrate a shift in cross-border letter delivery patterns with a larger share of international 

letters being delivered from the Asia-Pacific regionand a smaller relative share being delivered from industrialised countries in Western Europe and North America. This trend is largely driven by the growth in e-commerce and is expected to continue in the future. 

0

500

100015002000250030003500

2016 2017 2018 20

Volume, Million

P G E
3.1 Historical development in cross-border mail volume

LETTER VOLUMES ARE DECLINING, LARGELY DUE TO ELECTRONIC SUBSTITUTIONBetween 1990 and 2015, international letter mail 

volumes declined by more than 10 per cent, see 

Figure 3.2. Although this development is driven by increased substitution to electronic means of communication, there is no evidence that industrialised countries with more mature online infrastructure have experienced higher rates of decline in letters than developing countries. In fact,evidence indicates that developing countries have experienced a proportionally higher decline in mail 

volumes, partly due to a steep increase in technology 

adoption. 

Whereas the development differs across regions with 

the largest relative declines in the Arab countries and in the Asia-Pacific region, see Figure 3.3, the average development in letter mail volumes 2010-2015 was -2 per cent per year. We take this as a base line for our scenarios for future volume developments for small and large letters, assuming a similar pattern in the future.

Figure 3.2: Global cross-border letter volume Figure 3.3: Change in outbound cross-border 

Note: The index sho

80828486889092949698

100102

1990 1995 2000 20

Volume, index

-7,9%

-1,9%

-10,6%

-5,8%

Africa Latin America Asia-Pacific

Eastern Eu

and CIS 
PARCELS ARE INCREASING RAPIDLY DUE 

TO E-COMMERCE

At the same time as international letter mail volumes 

have been falling, international parcel mail volumes have increased substantially – a trend largely driven 

by the increase in cross-border e-commerce, see 

Figure 3.4This growth is not homogenously distributed across regions. Whereas there has been a rapid increase inthe international flow of parcels from countries in the Asia-Pacific region to countries in Western Europe and North America, countries in the Middle East region and in Africa have so far not seen the same growth of e-commerce as the rest of the world.9CROSS-BORDER E-COMMERCE GOODS ARE OFTEN DELIVERED IN THE MAIL STREAMSince many of the items bought online are small in size and of low weight, these are often not delivered as parcel post, but instead as letter post (small packets). In fact, the UPU estimates that 80 per centof “mail items” generated by e-commerce weight less than 2 kg and are processed in letter post streams.10The fact that e-commerce items are shipped in the letter mail stream is reflected in a significant increase in the international volumes of small packets 

between 2005 and 2015. Thus, whereas the volumes 

of small letters (P-format) and large letters (Gformat) in the international mail flows have declined over the past ten years, the volumes of small packets(E-format) have increased, see Figure 3.5.

Figure 3.4: International parcels, globallyFigure 3.5: International letter volume by lett

9 UPU (2016) Research on Postal Martkets, page 21; 

http://www.upu.int/en/activities/letter-post-devel

9095

100105110115

1990 1995 2000 20

Volume, index

0

0,20,40,60,8

1

1,21,41,61,8

Transactions Correspondence Direct Mail 

P 

Volume, Billion

2005 
A SHIFT FROM DEVELOPED COUNTRIES 

TO ASIAThe worldwide development of the flows of bulky letters and small packets can be somewhat misleading as e-commerce market size and growth differ considerably between regions. Nevertheless, international flows of small packets are following a global trend with a higher share of small packets originating from Asia. Table 3.1 and Table 3.2 show inter- and intraregional flows of goods in the postal delivery stream (smallpackets, parcels and packages) in tonnage as a percentage of global cross-border postal flows in 2011 and in 2016 respectively. Although this data also includes other items than letter mail, it still provides an indication of the development in letter mail flows (especially since parcel post and small packets are expected to follow similar patterns). Based on this information, we observe that the developed countries in 2011 represented over 70 per cent of global inbound and global outbound flows. In 2016 however, developed countries accounted for little over 60 per cent of the global inbound flows and 50 per cent of global outbound flows. At the same time, intraregional flows between developed countries have decreased by 20 percentage points. 

Another key feature is the fact that Asia now 

accounts for over 25 per cent of global inbound flows and over 40 per cent of global outbound flows. This information will be used as input when we make our projections for the future development of interand intra-regional letter mail volumes.

Table 3.1: International deliveries (tonnage) 

Table 3.2: International deliveries (tonnage) 

So

Note: Goods are 

S

Note: Goods are 

Developed 

countries Africa Asia and Oceania Lat

and 

Developed countries 26.3% 0.9% 20.8% Africa 0.7% 0.2% 0.2% Asia and Oceania 33.2% 0.4% 4.2% Latin America and Caribbean 1.0% 0.0% 0.1% Transition economies 0.7% 0.0% 0.1% World 61.9% 1.5% 25.4% 

Developed 

countries Africa Asia and Oceania Lat

and 

Developed countries 46.3% 2.4% 12.1% Africa 0.7% 0.2% 0.1% Asia and Oceania 21.6% 0.3% 2.7% Latin America and Caribbean 1.7% 0.0% 0.1% Transition economies 0.5% 0.0% 0.0% World 70.8% 2.9% 15.0% 

-20 %pts

From

To

From

To
3.2 Methodology for volume projections

Table 3.3: Growth of B2C Cross-border e-com

of studies

Note: * The CAGR are those reported and by comparative study made by UN

Source: UNCTAD (2016)

In this section, we present a scenario-based approach to forecast future developments of international letter mail flows. We base our scenarios on the historical development presented in section 3.1 as well as the existing research regarding the future outlook for global e-commerce. 

When estimating future developments for letter mail volumes, it is important to distinguish between the 

three letter mail formats (P, G and E), which exhibit different growth patterns. Whereas we assume that the observed historical decline in mail volumes willcontinue for small and large letters across all geographical regions, we assume that small packets 

will continue a positive development trend which, 

however, will differ across geographical regions. By combining information from several sources we first design a base case with regional growth rates for the three different letter post formats. We then depart from the base case to form a conservative scenario and an extensive scenario. The conservative scenario assumes a slower decline for P- and Gformat items and a slower growth for E-format items. Conversely, the extensive case assumes a steeper decline for P- and G-format items and more rapid growth of E-format items. E-COMMERCE AS AN IMPORTANT PROXY FOR SMALL PACKETS

As e-commerce is a key driver for the growth of Eformat items globally, the available knowledge and 

research on e-commerce growth forms an important input to our scenario analysis. 

Author/ Company

Year Forec

Accenture/AliResearch 2014 2

OC&C(6 countries) 2013 2

PayPal(6 countries) 2013 2

UPS/Comscore 2014 2

Although the development in cross-border ecommerce is expected to be a good approximation, it 

is important to keep in mind that that there are some important differences. The most important of these differences is that e-commerce growth often is expressed in monetary terms. This means that estimated growth rates of e-commerce are likely to 

be higher than the growth in small packets. There are 

two reasons for this: Firstly, as consumers become more used to buying online, they tend buy more expensive goods. This leads to a higher growth in monetary value than in the number of items bought and delivered. 

Secondly, to buy heagoods above-commerrate for itePREVIOUGROWTH

A number 

growth of esummarisee-commersales of megrowth rat
Figure 3.6 shows forecasted growth of e-commerce 

for different regions. It illustrates how more mature e-commerce markets, such as Western Europe, see slower growth rates going forward, while markets starting from a low value begin to see rapid growth.

Figure 3.6: B2C Cross-border e-commerce (U
5. THE G

GROUPS IMPORTS INDIVIDUBy combinestimates ogroup. By wmodel, eactotal exporIn other wequation aflows, we cindividual 

Note: *Details of the specific countries belonging 

In the following, we outline how we have determinedthe annual growth rates for E-format items in our scenarios. We do this in five steps.1. Organize countries into four groups2. Estimate total average growth rates for inbound 

small packets

3. Estimate total average growth rates for outbound 

small packets

4. Estimate volumes of individual flows5. Derive growth rates of individual flows1. THE COUNTRIES ARE ORGANIZED INTO FOUR GROUPS*E-commerce exporters: developed economies, primarily in Asia. These e-commerce markets are characterized by large outbound flows. Industrialised countries: developed economies 

with mature e-commerce markets.

Transition economies: emerging economies, largely consisting of countries within the OECD. Developing countries: developing countries with less developed e-commerce sectors.For an exact presentation of which countries are included in each group, see appendix C.2. THE TOTAL INBOUND GROWTH RATESE-commerce development is used as a proxy for the flow of small packets. Mature e-commerce markets such as North America and Western Europe buy more expensive items online. Therefore any growth rate measured in monetary values will be higher than if measured in number of items shipped.

3. THE TOTAL OUTBOUND GROWTH RATES

Whereas emerging economies in Asia, such as China 

and India, are expected to grow at a fast pace, Industrialised countries in North America and 

Western Europe already have high outbound flows 

and will not growth very fast in relative terms. Symmetrically, transitional economies and developing countries do not have large outbound flows and are therefore expected to see significant growth rates in relative terms.4. VOLUMES ARE USED TO DETERMINE THE INDIVIDUAL FLOWS’ GROWTH RATESTo determine the growth of individual flows between country groups we rely on information about each country group’s share of global mail flows, as used in our model.The individual inter-regional growth rates (inboundand outbound) are multiplied by their share of global (inbound and outbound) mail flows. This calculation is repeated across all regions and provides us with the total growth rate of inbound and outbound mail flows for a region.For example, to arrive at the total growth rate of Industrialised countries’ outbound volumes, the growth rates of flows going from these countries to the other regions are multiplied by the respective shares of outbound flows that goes to each group and then summed across all regions. More detailed tables 

with the results for each group-to-group flow are 

reported in appendix C.

Export 

growth ra

Industrialis

countrie

a 
3.3 Scenarios for future development in international le

2016-2021 ANNUAL GROWTH RATES FOR SMALL AND LARGE LETTERSFor small and large letters (P- and G-format items), 

we assume the same decline for all inter- and 

intraregional flows for three scenarios:• Base case: -2 per cent per year• Conservative case: -1 per cent per year• Extensive case: -3 per cent per year

2016-2021 ANNUAL GROWTH RATES FOR SMALL PACKETS - BASE CASEFor small packets (E-format items), we start by outlining the base case. The annual growth rates of inter- and intraregional flows in the base case are shown in Table 3.4. The total of each column and row are an approximated average of the total export or import associated with each region.

Table 3.4: Annual growth rates for small packets, base case, 2016-2021

Source: Copenhagen 

E-commerce exporters Industrialised countries Transition economies Developing 

E-commerce exporters 35% 20% 35% 3Industrialised countries 15% 10% 10% 1Transition economies 15% 10% 15% 1Developing countries 15% 5% 15% 1Total 23% 16% 23% 2

To From
2016-2021 ANNUAL GROWTH RATES FOR 

SMALL PACKETS – CONSERVATIVE CASETable 3.5 shows the annual growth rates of inter- andintraregional flows in the conservative case. These growth rates represent a decrease of 5 percentage points compared to the base case.2016-2021 ANNUAL GROWTH RATES FOR SMALL PACKETS – EXTENSIVE CASETable 3.6 shows the annual growth rates of inter- andintraregional flows in the extensive case. These growth rates represent an increase of 5 percentage points compared to the base case.

Table 3.5: Conservative caseTable 3.6: Extensive case

Source: Copenhagen 

Source: Copenhagen 

E-commerce

exporters

Industrialised countries

Transition economies

E-commerceexporters 30% 15% 30% Industrialised countries 10% 5% 5% Transition economies 10% 5% 10% Developing countries 10% 1% 10% Total 15% 5% 10% 

From

To

E-commerce

exporters

Industrialised countries

Transition economies

E-commerceexporters 40% 25% 40% Industrialised countries 20% 15% 15% Transition economies 20% 15% 20% Developing countries 20% 10% 20% Total 18% 11% 18% 

From

To
P 

DISTRIBUTION OF ITEMS OF DIFFERENT FORMATSBy applying the base case scenario we obtain a different mix of the three letter formats in 2021, compared to 2016. The largest differences, by design,happen for the bulky letters and small packets, whichgoes from 35 per cent of the total international letter 

volume in 2016 to 59 per cent in 2021, see Figure 

3.7. In total, the volume of international mail is predicted to increase. This is because the small annual decline in small and large letters is outweighed in absolute terms by the increase for the 

bulky letters and small packets. 

THE SHARE OF E-FORMAT ITEMS IS PREDICTED TO GROWThe difference in the share of bulky letters and small packets out of the total mail mix for our base case scenario is illustrated in Figure 3.8. We can see thatthe E-format is expected to become the format with the greatest volume after 2018. 

Figure 3.7: Distribution of mail type, base ca2021Figure 3.8: Development of international lett

2016 

50%

15%

35%

P G E

0

500

100015002000250030003500

2016 2017 2018 20

Volume, Million

P G E
4

IMPACT OF CHANGES TO THE TERDUES SYSTEM ON FINANCIAL TRA4.1 TOTAL VALUE OF TRANSFERS WITH AND WITHOUT THE CHANGES 

4.2 IMPACT ON INDIVIDUAL COUNTRIES4.3 FINANCIAL TRANSFERS TOWARDS 2030
2.401 

 -

 500

 1.000 1.500 2.000 2.500 3.000

Current System, in 2018 

SDR, Million

4.1 Total value of transfers before and after the changeIn order to disentangle the impact of the regulatory changes implemented in 2018 from the impact of the development in cross-border mail flows, we start our analysis by keeping mail volumes constant at a given level. 

We quantify the global financial transfers with the 

new terminal dues system in 2018 and compare them to a situation where the current system would be applied also in 2018. In this analysis, we rely on three specific assumptions: • We assume that letter volumes develop according 

to our base case scenario from 2016 to 2018 

• We assume that domestic prices increase by an 

inflation rate of 2 per cent per year, and 

• We assume that the annual increase in terminal 

dues rates in the current system is applied also from 2017 to 2018 and onwards until 2021.

REGULATORY CHANGES ARE NOT EXPECTED TO HAVE A LARGE IMPACT ON TRANSFERSOur analysis suggests that the changes agreed upon in Istanbul do not bring about large changes to the total value of the financial transfers. Our simulations show that, compared to continuing 

with the current system, the updated terminal dues 

system is expected result in a 8 per cent decrease in financial transfers for 2018, see Figure 4.1.

Figure 4.1: Total value of financial transfers updated system in 2018

Source: Copenhagen E

-8%
 -

 500

 1.000 1.500 2.000 2.500 3.000

2018 2019 

SDR, Million

Current System 

THE IMPACT OF THE REGULATORY CHANGES IS DRIVEN BY BULKY LETTERS AND SMALL PACKETSThe change in the total value of financial transfers is expected to come from the E-format items (bulky letters and small packets)11. Compared to keeping the 

current system, financial transfers resulting from E- format items are expected to decrease by 9 per cent, see Figure 4.2.The financial transfers resulting from P- and Gformat items (small and large letters) are not expected to change significantly. This is simply 

because most of the changes in the updated system 

are related to E-format items only.THE IMPACT WILL INCREASE OVER TIMESince the updated system includes a larger annual increase in caps compared to the current one, the impact of the new system will increase over time. In fact, our analysis shows that the difference between the current and the updated system will grow from 8 per cent in 2018 to 14 per cent in 2021, see Figure 4.3. 

Although the new system will reduce the amount of 

financial transfers compared to the existing one, financial transfers for some flows will still grow over time. This is because absolute differences between actual terminal dues and counterfactual rates are 

very large. For example, in cases where the domestic 

tariffs are significantly higher than the actual terminal dues, even a small increase in domestic tariffs by 2 per cent per year may outweigh a 13 per cent increase of actual terminal dues.

Figure 4.2: Total value of financial transfers Figure 4.3: Total value of financial transfers 

Source: Copenhagen E

Note: The volumes are kept constant over time in 

Source: Copenhagen E

11 Since there is no practical distinction between bulky letters and small packets and we only observe 

do not separate any effects based on whethe

8% 

 -

 500

 1.000 1.500 2.000 2.500

P G 

SDR, Million

Current System, in 2018 
Figure 4.4: E-commerce exporter example

http://www.upu.int/uploads/tx_sbdownlo

THE FINANCIAL TRANSFERS ARE NOT EQUALLY DISTRIBUTEDThe financial transfers can also be examined on a country by country basis. Since every transfer created by the terminal dues system will benefit onedesignated postal operator while making another designated postal operator worse off, some countries

will experience a net gain from the system and others will experience a net loss. In total, the total value of 

financial transfers is zero, i.e. one country’s gain is another country’s loss. The size of gains and losses can vary largely acrossdifferent countries, mainly due to two reasons: 1. The difference between the actual terminal dues 

paid and the counterfactual terminal dues are different for different flows. Since postal markets exhibit country-specific characteristics, counterfactual terminal dues rates will vary across countries as well. 

2. Some countries are net importers and others are 

net exporters of international letter mail. This means that some operators receive large positive transfers on large outbound flows while others lose significantly on large inbound flows. 

E-COMMERCE EXPORTERS AND TRANSITIONAL ECONOMIES EXPERIENCE THE LARGEST POSITIVE NET EFFECT The 15 countries found to have the highest estimatedpositive net effect are all classified as e-commerce exporters or transitional economies.

For these countries, the positive net effect is based on a large share of outbound E-format items where the actual terminal dues paid are lower than the counterfactual rate. Out of the total net effect for these countries, approximately 80 per cent comes from the E-format (example provided in Figure 4.4). These emerging economies all experience a reduced net effect from the updated system, i.e. they get asmaller positive effect. There are two explanations for this. First, the positive effect comes primarily from the bulky letters and small packets where the changes are made. Second, the average weight of Eformat items being exported from these countries is 

low in genethat have tcompared these counreduced (sper cent.

0

100200300400500600700800

P G 

SDR, Million

Current System, in 2018 
LARGE INDUSTRIALISED COUNTRIES 

EXPERIENCE THE LARGEST NEGATIVE NET EFFECTThe group of countries that currently experience the largest negative net effect consists to a large extent of large industrialised countries with high domestic postal tariffs. Which letter format that creates thelargest transfer differs significantly among them. 

Whereas some countries suffer the greatest loss on 

small letters, others lose mostly on bulky letters and small packets. A few countries even experience a positive impact from small letters that is outweighed 

by a large negative impact from bulky letters and 

small packets. One common feature is that they all experience a negative net impact from bulky letters and small packets. Two examples are provided in Figure 4.5 and Figure 4.6. In the first example, the postal operator suffers significant losses from bulky letters and small packets, which outweigh a small positive effect fromsmall letters. In the second example, the postal operator suffers significant losses on all three letter post formats. The changes in regulation will overall lead to a smaller negative net effect compared to the current system. However, on a country-by-country basis, the decrease in the negative net effect stemming from small packets and bulky letters varies between 3 and12 per cent. 

Figure 4.5: Country with large effect from E-f

Figure 4.6: Country with negative effect from 

Sour

Sour

-800-700-600-500-400-300-200-100

0

100

P G 

SDR, Million

Current System, in 2018 

-90-80-70-60-50-40-30-20-10

0

P G 

SDR, Million

Current System, in 2018 
SOME REGIONS RECEIVE MORE POSITIVE 

TRANSFERS THAN OTHERSOur model based on bilateral mail flows enables us toaggregate and analyse the geographical patterns of financial transfers between regions. We do this by aggregating our result for the base case in 2018 with the updated system across countries. This analysis excludes financial transfers between countries in the same region. Our analysis reveals that two geographical regions receive a significant positive net financial transfer from the UPU terminal dues system. These two regions are Asia-Pacific and Eastern Europe & Central Asia.The Asia-Pacific region receives a significant positive net transfer both from North America and Western Europe and experiences very small transfers to or from the rest of the world, see Figure 4.8. The positive transfers experienced by operators in the 

Asia-Pacific region are expected to grow due to the

global trend of cross-border delivery of small packets from the this region. The pattern for Eastern Europe & Central Asia looks slightly different. The largest positive transfer is emerging from the exchange in cross-border letter mail with Western Europe, see Figure 4.9. There is also a significant positive transfer from the exchange

with North America.When a higher share of the international small 

packets is delivered from the Asia-Pacific and Eastern Europe & Central Asia, the financial transfers from Western Europe and North America to these regions will grow. 

Figure 4.8 Asia-Pacific net financial transferFigure 4.9 Eastern Europe & Central Asia net 

Sour

Sour

850 

997 

-3 -19

 -

 500

 1.000 1.500 2.000

Western Europe North America North Africa &

Middle East

South Central

America

E

SDR, Million

141 

-3

44 0 

 -

 50

 100 150 200

Western Europe Asia-Pacific North America North Africa &

Middle East

SDR, Million
Due to the construction of the transfer system, the 

positive net transfers to the Asia-Pacific region and to Eastern Europe & Central Asia must be balanced 

by negative net transfers for other geographical 

regions. Our analysis shows that the two geographical regions receiving the largest negativenet financial transfers are Western Europe and North America.

Western Europe experiences the largest negative net

transfer overall with negative net transfers from allother regions, see Figure 4.10. The most significantnegative transfers are, as mentioned above, coming from exchanges with the Asia-Pacific region and Eastern Europe & Central Asia. North America experiences a negative financial net transfer, with the largest negative impact coming from exchanges with the Asia-Pacific region, see Figure 4.11. 

4.10 Western Europe net financial transfer4.11 North America net financial transfer

Sour

Sour

-850 

-50 -7 -21 

 -1.500 -1.000

 -500

 -

Asia-Pacific North America North Africa &

Middle East

South Central

America

SDR, Million

-997 

-1 -12 -44 

 -1.500 -1.000

 -500

 -

Asia-Pacific North Africa &

Middle East

South Central

Am. &Carb.

Eastern Europe

& Central Asia

SDR, Million
4.3 Financial transfers towards 2021

BASE CASE: THE FINANCIAL TRANSFERS GROW WHEN MORE SMALL PACKETS ARE BEING SENTDue to the growth in volume of small packets, the financial transfers will grow over time irrespective of the UPU system in place (current or updated 

version). 

The reason for this is the large transfers created by E-format items for which volumes will grow with increasing e-commerce. For our base case scenario (moderate letter volume development), we estimate that total financial transfers will grow with 50 per cent during the course of the next cycle (2018-2021),see Figure 4.12. This corresponds to an average annual compound growth rate of 14 per cent. 

Figure 4.12: Financial transfers 2016-2021

Sour

 -

 500

 1.000 1.500 2.000 2.500 3.000 3.500

2016 2017 2018 20

SDR, Million

Current System Up
COMPARING THE BASE CASE TO THE 

CONSERVATIVE AND THE EXTENSIVE CASEThe projected growth of financial transfers is directly linked to the development of letter volumes. In particular, the growth of small packets in the mail stream has a fundamental impact on the development of financial transfers. Although previous reports and literature unequivocally pointsto the fact that small packets will grow as a result of growing e-commerce, there is uncertainty about the precise pace. Our three different scenarios for cross-border letter

volume development gives us a range for the 

predicted total financial transfers during the cycle. 

The estimate financial transfers range from SDR 2.1 

bn to SDR 2.4 bn in 2018. As e-commerce grows over 

time, this range increases to between SDR 2.8 bn andSDR 4 bn in 2021, see Figure 4.13 

Figure 4.13: Total financial transfers, by scen

 -

 500

 1.000 1.500 2.000 2.500 3.000 3.500 4.000 4.500

2018 2019 

SDR, Million

Base case Extensive case 

Sour
 -

 500

 1.000 1.500 2.000 2.500 3.000 3.500 4.000 4.500

2018 2019 

SDR, Million

Current System 

BASE CASE: THE RELATIVE IMPACT WILL GROW COMPARED TO THE CURRENT SYSTEM

With the growth of small packets, the absolute 

difference in financial transfers with the current system and with the updated one is expected to grow over time, see Figure 4.14. Because E-format items 

will make up a larger share of the total international 

mail flow in the future, the impact from a change in regulation that targets these flows will inevitably

become larger over time. 

Similarly, the relative difference in financial transfers 

between the two systems is also expected to increase 

over time, from approximately 8 percent in 2018 to 15 percent in 2021. 

Figure 4.14: Comparison of the two terminal 

8%

Sour
6

APPENDIXA. POSTAGE PRICES COLLECTION AND CALCULATION OF COUNTERFA

B. ESTIMATION OF CROSS-BORDER LETTER VOLUMESC. SCENARIO ANALYSIS METHODOLOGY
ANNEX A: Collection of postage rates and calculation o

terminal duesUPDATED POSTAGE RATESData on postage rates have been updated with most recent data, where possible. When possible we collected postage prices for different weights of P, Gand E formats. In particular:• 20g, 50g, 100g for small letters (P).• 20g, 50g, 100g, 250g, 500g for large letters (G).• 20g, 50g, 100g, 250g, 500g, 1kg, 2kg for bulky 

letters and small packets (E).

For 32 key countries, the postage rates have been researched online directly on the postal operator’s 

website and updated as of January 2017. These 32 

countries account for approximately 83 per cent of the total inbound volume12. The remaining 185 rates 

are 2013 estimates from the UPU13, see Table A.1. 

SELECTION OF POSTAL PRODUCTS

When selecting the letter mail products for which to 

collect price information from national postal operators’ websites, the aim is always to select a product with dimensions as close as possible to the maximum dimensions allowed by the UPU for the three letter mail formats (E, P, G). However, the maximum allowed letter dimensions on the operators’ websites are sometimes smaller than the maximum allowed dimensions in the UPU system. This means that, for example, a letter post item close to the G-format maximum dimensions allowed by the UPU would exceed the maximum letter mail dimensions for some operators and thereby classify as a parcel. This was the case for 5 countries (DE, EE, IT, NL, NZ). Using the parcel prices would in these cases result in significantly higher postage rates compared to the cheaper letter mail prices. 

In these instances, we have chosen to use the cheaper letter product, i.e. the item with slightlysmaller maximum dimensions. There are two main reasons for this:1. Consistency and easier comparison with previous 

results, where letter rates were used for all countries.

2. We apply a conservative approach. As not all 

cross-border packets will have the maximum UPU dimensions, applying the parcel rates 

would thus overestimate the difference between 

the actual and the counterfactual terminal dues rates.

CALCULATION OF COUNTERFACTUAL TERMINAL DUES RATESDomestic prices for last-mile handling of crossborder letter post items are not readily available in the public domain. As a proxy for the counterfactualterminal dues rates, we therefore depart from the domestic (end-to-end) single-piece postage rates foritems of different letter post formats (P, G, E) and 

weights (as specified in the previous section). In 

order to reflect the price charged for last-mile handling of domestic letter mail, rather than the endto-end price, we apply an adjustment factor of 70 per cent14

.

Table A

Source: CopeAccounting G

12 C

13 http://www.upu.int/en/activities/terminal-du

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

dues system for the period 2014-2017, Joint Council of Adminis

15 Special tariffs are work-sharing discou

16 See for example Campbell, James (2014), “Estimating 

Source Online pooperatorsUPU estim

It may welpostage ratcorrectly rehandling ofor this cousingle piecelasticity ohigher pricNevertheletariffs15 (wpoint) ofte

we conside

starting poprevious stour results of robustn
Instead of estimating a simple linear relationship 

between two prices – that of a 20g domestic small 

priority letter and that of a 175g domestic large priority letter, as UPU does17 – we use several prices 

per letter mail format to calculate the counterfactual terminal dues rates. By using three tariffs (i.e. three weight steps) for small letters, five tariffs for large letters and seven tariffs for small packets, we are able to calculate counterfactual terminal dues rates that mirror the actual situation better than what would have been the case if only two tariffs would have been used.In order to calculate an average rate (i.e. the counterfactual terminal dues rate) per format, we make assumptions about the distribution of weights 

within each format. These assumptions are primarily based on a UPU study from 201418 containing 

estimated distributions of items across different 

weight steps for each letter format P, G and E. 

Once the weight distribution for each format is established, it is straightforward to calculate a counterfactual terminal dues rate per item for each format. 

17 See 

18 UPU, (2014), POC C3 LPRG 2014.2 Doc 4a, “Results of the items per kilog
ANNEX B: Estimation of cross-border letter mail volum

ESTIMATION OF BILATERAL MAIL FLOWSBilateral mail flows between designated postal operators are an essential input in the model, as their magnitude will determine the size of the financial transfers.In order to estimate financial net transfers in our model, we need information about bilateral flows ofletter mail up to 2kg between all designated postaloperators (both in terms of the number of items andin terms of their total 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 aggregate flows 

of cross-border letter post items between regions, we do not know how the cross-border volume to and from each region is disaggregated among the countries in the region. Moreover, we do not have information about the product mix (i.e., the distribution of letter formats). For this reason, we 

use a numbsubject to Uestimating B.1 and de

FIGURE B.1: PROCESS OF CALCULATING VOLUME ESTIMATES

Input data

Estimate of total 

inbound and 

outbound letter 

mail flow per 

country

(number of items)

1

Total inbound 

and outbound 

mail flow per 

postal operator 

(number of items)

Bilateral mail flows 

from country to 

country as % of 

global crossborder flow

Bilateral mail flows 

in volumes 

(number of items)

3

4

Estimates of intraand inter-region 

mail flows as % of 

total inbound and 

outbound per 

region

Assumption:

proportional 

regional 

participation

Estimate of total 

global mail 

volume

(number of items)

Bilatera

per 

(numbe

5

Estima

distrib

fo

Inter- and intraregional mail flow 

as % of global 

cross-border flow

2
As a first step, we obtain estimates of the total 

inbound and outbound mail flows (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 UPU statistical database19, measured in number of 

items. 2013 is the latest year in the UPU statisticsdatabase for which we have a broad coverage of data, see table B.1 and table B.2. Hence, we use this as a reference. If we cannot find information for a specific country or territory in the UPU dataset from 2013, we turn to UPU statistics from other years. When neither of these sources can provide us with an estimate, we turn to domestic sources such as the national regulatory authorities and designated operators. This adds data points for another five countries. For sevenadditional 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 volumes20. This results in a data 

set of inbound and outbound volumes (in number of items) for 180 countries and territories.

As a secon

regional flogiven regio

(e.g. Asia-Pprovided bdata is in tletters in teadditional kilogram o

exercise prin volume specific bi-

As a third 

about propdepart from apply them this assumfor each bias a percenin 2013. Waccount facrelations22

bilateral flo

gaps.

19 UPU Postal Statistics Database, http://pls.upu.int/pls/ap/ssp_repor

20 The ratios used are based on information from previous years regarding the relationship between domestic and cross-bord

available, a ratio is constructed based on assumptions regarding the similarity of countries (i.e. countries of similar size can b

21 UPU, (2014), POC C3 LPRG 2014.2 Doc 4a, “Results of the items per kilo

22 Factors such as distance, international relations, and a common language can be important for th

TABLE B.1: SOURCES OF OUTBOUND VOLUMESTABLE B.2: SOURCES OF INBOUND VOLUMES

Note: The percentages are subject to roundingSource: Copenhagen Economics

Note: The percentages are subject to roundingSource: Copenhagen Economics

Source Number of countries % of countries2013 UPU estimate 115 64%UPU estimate from other year

51 28%

based on domestic UPU data and ratio of domestic to international 

8 4%

designated operator 3 2%government /regulator 3 2%other 1 1%Source Number of countries % of countries2013 UPU estimate 108 60%UPU estimate from other year

58 32%

based on domestic UPU data and ratio of domestic to international 

10 6%

designated operator 2 1%government /regulator 1 1%other 1 1%
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 the bilateral percentage with the global 

volume of international mail.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 contains regional 

estimates for the distribution of formats (in percentage of number of items and weight)23. 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 crossborder flows of letter post items between 145 

countries and territories worldwide. Depending on the size and structure of bilateral mail flows, the current design of the terminal dues system will affectdesignated operators differently. For example, largeoutbound 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.

23 UPU, (2014), POC C3 LPRG 2014.2 Doc 4a, “Results of the items per kilog

Mail stream between different regions:

 =





	×





× 

Where= percentage of world’s mail flow that goes from country i to country j = percentage of world’s mail flow that goes from region A to region B=percentage of world’s mail flow that goes 

within region A

= total outbound mail flow from country i= total outbound mail flow from region A= total inbound mail flow to country j= total inbound mail flow to region B

Mail stream between the same region:

 =





×



 × (1 −  ) × 
Groups Countries that belong to each region

Sub-Saharan Africa

BW,GA,MU,SC,ZA,CG,CI,CM,CV,GH,KE,NA,NG,SZ,ZW,AO,BF,BI,BJ,CD,CF,ER,ENE,RW,SL,SN,SS,ST,TD,TG,TZ,UG,ZM

South Central America

AI,AW,BM,BS,KY,TC,VG,AG,BB,CW,DM,GD,KN,MS,SX,TT,AR,BR,CL,CR,CU,JM,

EC,GT,GY,HN,NI,PE,PY,SH,SV,HT

Asia-Pacific

AU,JP,NC,NF,NZ,PF,PN,WF,HK,SG,BN,CK,KR,MO,CN,FJ,MV,MY,NR,NU,TH,ID,INBT,KH,KI,LA,MM,NP,SB,TL,TV,VN,VU,WS

Eastern Europe & Central Asia

SI,CY,CZ,EE,HR,HU,MT,PL,SK,BA,BG,BY,KZ,LT,LV,ME,MK,RO,RS,RU,TR,UA,ALUZ

North Africa & Middle East AE,KW,QA,BH,SA,LB,LY,OM,TN,DZ,EG,IQ,JO,MA,SY,DJ,KM,MR,PS,SD,SO,YE

Western Europe AT,BE,CH,DE,DK,ES,FI,FK,FO,FR,GB,GG,GI,GL,GR,IE,IL,IM,IS,IT,JE,LI,LU,MC,

North America CA,US

TABLE B.3: REGIONAL COUNTRY GROUPINGS
ANNEX C: Scenario analysis methodology

For our projections of bulky letters and small packet 

we start out by forming relevant country groups. The 

groups are based on characteristics of the market taking into consideration the maturity of ecommerce, which is the key driver of our projections.

All countries in our analysis is divided into four 

groups, see Table C.1.The first group, e-commerce exporters, consists of countries that are net exporters of letters with a rapidly growing e-commerce market. The second group, Industrialised countries, is based 

on geographic and economic characteristics. The ecommerce market is already a significant share of the total retail market in many of these countries. Geographically, we find these countries in North 

America and Western Europe, along with Australia, 

New Zealand and Japan. The third group, Transition Economies, consists of countries with less mature e-commerce markets but 

with economies that already see considerable growth 

rates.Finally, the last group, Developing countries, 

consists of all other outstanding countries. This group of countries starts from very low volumes of 

bulky mail and small packets. 

TABLE C.1: COUNTRY GROUPS FOR SCENARIO ANALYSIS

Groups Countries includedE-commerce exporters HK, CN, SG, IN, THIndustrialised countries

AT, BE, CA, CH, DE, DK, ES, FI, FR, GB, GR, IE, IL, IS, IT, LU, NL, NO, PT, SE

Transition economies

BG, BR, CY, EE, HR, HU, LT, LV, MX, NE, PL, RU, SI, CZ, MT, RO, CL, KR, TR

Developing countries AE, AW, BM, BS, KW, QA, BB, BH, BN, GD, MO, SA, SK, TT, AR, BA, BW, BY, 

MV, MY, OM, PA, SR, TN, UA, UY, VE, ZA, AL, AM, BO, CI, CM, CO, CV, DO, DJO, KE, KG, LK, MA, MD, MN, NG, NI, PE, PG, PH, PK, PY, SV, SY, SZ, AO, BDGM, GN, HT, KH, KI, LA, MG, MM, MR, MW, MZ, NP, RW, SB, SN, TG, TZ, UG, 
E-commerce 

exporters

Industrialised countries

Traec

E-commerce exporters

Growth rate 35% 20% 

Weight 3% 73% 

Industrialised countries

Growth rate 15% 10% 

Weight 7% 50% 

Transition economies

Growth rate 15% 10% Weight 2% 60% 

Developing countries

Growth rate 15% 5% 

Weight 3% 67% 

From historical evidence and previous research on ecommerce, we form a hypothesis on the compound annual growth rates for the inbound and outbound letter mail flows for each country group. This is represented by the sum of the rows in Table C.2 (regional outbound) and the sum of the columns in Table C.3 (regional inbound). To form a hypothesis about the growth rates for individual letter mail flows between country groups 

we rely on information about each country group’s 

share of global mail flows, as used in our model. These are outlined as weights in Table C.2 and Table C.3. For example, out of all the outbound letter mail originating in industrialised countries (second row inTable C.2), 7 per cent goes to countries classified ase-commerce exporters (second row, first column in Table C.2). Symmetrically, Table C.3 shows the share of the inbound letter mail flow for each country 

group that originates from any of the other country groups. Based on the average regional inbound and outbound growth rates and the weights for inter- and intra-regional flows, we form hypotheses about reasonable growth rates for all inter- and intraregional mail flows.

Table C.2: 2016-2021 Annual growth rates caTable C.3: 2016-2021 Annual growth rates ca

From To

E-commerce 

exporters

Industrialised countries Tran

Growth rate Weight Growth rate Weight Grow

rate 

E-commerce exporters 35% 42% 20% 64% 3

Industrialised countries 15% 45% 10% 17% 1

Transition economies 15% 4% 10% 7% 1Developing countries 15% 9% 5% 11% 1

Avg. 23% 16% 

From To
Hard facts. Clear S

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