The Postal Accountability and Enhancement Act of 2006 (PAEA) allowed the U.S. Postal Service to enter into bilateral agreements with foreign posts to promote the efficient operation of international postal services. The Postal Service subsequently established bilateral agreements that developed new rates for existing letter class mailpieces and established a new letter class mailpiece designation for small lightweight packets weighing up to 2 kilograms (4.4 pounds). These small packets, or ePackets, offer delivery confirmation and tracking services, and are classified as market dominant products.
Our objective was to assess whether all costs associated with ePackets were accurately captured and aggregated.
What the OIG Found
While the Postal Service captured and aggregated most ePacket life cycle costs in its cost calculations, the Postal Service could still improve the accuracy and transparency of ePackets costing. Specifically:
- The Postal Service did not accurately capture or attribute the costs associated with returning undeliverable inbound ePackets to the product. During our site visits, we observed personnel preparing to transport undeliverable ePackets from the international service center back to the foreign post. However, our analysis of the ePacket financial model and fiscal year (FY) 2016 Annual Compliance Report found return costs were not captured or attributed to undeliverable inbound ePackets.
As a result, this inaccurate cost attribution understates the product costs of inbound ePackets and overstates the product costs of outbound international packets between about $1.02 and $1.13 per returned mailpiece, depending on the destinating country. This could lead management and the Postal Regulatory Commission to rely on incorrect information when determining cost coverage and negotiating prices.
- We found the Postal Service incurred a financial loss for each returned inbound ePacket. When we calculated the estimated costs incurred before mailpieces were deemed undeliverable, as well as the international transportation costs and the postage paid to send them back, we found the Postal Service may be losing money on returned ePackets.
We estimated the Postal Service lost between $0.20 and $0.57 on each ePacket return in FY 2016. The precise total loss incurred for these items cannot be determined because the Postal Service does not track returned ePackets.
- The Postal Service does not separately report the cost of inbound ePackets as its own line item in its regulatory reports. In February 2014, the Postal Service agreed to evaluate a prior U.S. Postal Service Office of Inspector General recommendation to track and report costs and revenue for ePackets.
While the Postal Service has collected ePacket data in its In-Office Cost System (IOCS) since FY 2014, management stated they do not believe the data is sufficiently reliable to estimate and report accurate ePacket-specific costs. The Postal Service currently uses a proxy financial model to estimate the unit cost of ePackets, project future revenue, conduct bilateral agreement negotiations, and estimate cost coverage for ePackets. However, the Postal Service does not use the proxy to separately report ePacket costs. Although the proxy is reasonable, it is based on inbound international packet-shaped data rather than ePacket-specific data. A model that includes ePacket-specific statistical data from Postal Service data collection systems would produce more precise ePacket cost estimates.
From FY 2014 to FY 2016, ePackets volume grew by about 111 percent and revenue grew by about 163 percent. This resulted in over $493 million in additional revenue during those fiscal years. Aggregating the costs and revenue of ePackets with other inbound international products limits the transparency of these costs and insight into the profitability of a product with increasing demand and prominence.
What the OIG Recommended
We recommended management:
- Establish procedures to track returns of undeliverable inbound ePackets.
- Include return costs in inbound ePacket proxy calculations and attribute those costs to ePackets.
- Evaluate the costs of returning inbound ePackets and include a provision in future ePacket bilateral agreements that requires foreign posts to pay a service fee for ePacket returns.
- Use the proxy ePacket cost estimate to report total costs and cost coverage for inbound ePackets as a separate line item in future fiscal years’ Annual Compliance Report.
- Develop a method to collect more accurate and reliable ePacket-specific data in Postal Service cost systems.