The Israel Postal Company needs a Service Pricing Policy - Opinion

29 Apr 2014
The severe financial crisis suffered by the Israel Postal Company is not a private matter reserved only to its shareholders, i.e. the government. It is one of the largest governmental companies; the main supplier of postal services in Israel and of financial services through the Postal Bank, employing ~7,000 workers and holding real estate assets valued at approximately 1B NIS. The organization, on the one hand, generates revenues of 1.8B NIS but, on the other hand, is suffering from a severe budgetary deficit that is expected to reach ~180M NIS by the end of the year. The crisis is so severe that there is a real concern that it will become insolvent and unable to serve a debt of ~400M NIS to its debenture holders. There are many reasons for the crisis, one of which is its method for setting rates and pricing its products. Product and service pricing is among the most important planning tools for any company, among others, in order to monitor and control the costs. It is a system that should enable company managers, regulatory functions in the Ministry of Communications and Ministry of Finance to evaluate the correlation between inputs and outputs, to obtain a proper picture about the costs of products and services provided by the Israel Postal Company, to identify inefficiencies and help reach budgetary and operational decisions. In the annual report published several months ago, the State Comptroller stated that 29 Postal Company services and 19 Postal Bank services are not included in the company’s pricing system and ~143M NIS of total expenses of 1.92B NIS in 2010 were not allocated as organizational costs. In other words, a substantial part of the company’s expenses was not reflected in its pricing system, somewhat skewing the costs of certain services provided by the company. In this regard, the Ministry of Communications itself submitted a document to the State Comptroller and Reich Commission, a public committee esablished to evaluate the postal market, stating that “it is impossible to determine that, for the purpose of pricing, controlling and monitoring costs relating to the various services, the pricing system fulfills its designation as a managerial tool for the decision makers.” The State Comptroller also evaluated the manner in which the Ministry of Communications sets the rates for Postal Company services. His findings showed that, in determining Postal Company rates, the Ministry of Communications did not specify principles for a pricing method within the company and the Postal Bank. The Comptroller further noted that the applied pricing principles were based on a database relating to Postal Authority operations in 2004 where, in the years since then, the company’s income mix has undergone many changes; existing services have changed and many new services were introduced. A pricing system will not heal all of the Postal Company’s ills, but as the State Comptroller stated – it is a prerequisite for preparing an economic and factual infrastructure for setting updated rates for Postal Company service. In the absence of such a system, the Ministry of Communications Rate Committee will find it difficult to price the postal services in a realistic and fair manner, and Postal Company management will be unable to reach the budgetary and operational decisions required to save the organization. Therefore, in the current situation, just before the company collapses, the Ministry of Communications – as the regulatory body in charge – along with the Postal Company board of directors, should take decisive action toward setting a consistent pricing policy and comprehensive pricing system that will enable them to see the company’s business situation and help them select the measures required for its recovery. Full article published in TheMarker