The United States Postal Service (USPS) knows how to “lose” money: “On a U.S. generally accepted accounting principles basis, the Postal Service had a net loss of $4.9 billion for 2021, compared to a net loss of $9.2 billion for 2020. The Postal Service’s operating revenue was $77.0 billion for 2021, an increase of $3.9 billion, or 5.3 percent, compared to the prior year.” But do not be deceived: that is an amazing strategic operating loss (you can also call this loss-leading operations where you expect to capture value in other ways even as you record direct losses in one way).
This is what happens: you can visit a post office in New York, buy a stamp for 50 cents, and send mail to the remote part of Alaska. That delivery may possibly cost the USPS more than $5 but it is happy to charge you 50 cents. But by charging the 50 cents, it ensures that rural America and urban America remain connected for commerce. It is evident: if you remove the postal service in a state, a big divide will happen. Simply, you have broken the supply chain, and the rural and urban parts will become further apart. Economically, the rural area will struggle.
By running those losses, USPS keeps the rural economy going. But as it does that, the United States government makes up via taxes, made possible by those better logistics and supply chain USPS powers. That is the reason why they continue to focus on improving operations, and not overly increment of prices to become profitable.
Registration for Tekedia Mini-MBA edition 9 (Sep 12- Dec 3 2022) has started. Register here. Cost is N60,000 or $140 for the 12-week program.
America does it but China is the best in the world when it comes to this. If you live in New York, you can buy an iPhone case from a Chinese vendor on ebay for $1.50 including shipping. Yes, less than $2, and someone will ship a case from China to New York. If you try to buy the same thing within the US, you must go down by at least $7 including shipping.
How is that possible? China subsidizes shipping and supply chain, making China’s products competitive for global commerce. The marginal losses are taken care of by higher taxes, overall economic growth and new employment.
Come to Nigeria: we miss the memo as everyone wants to run a postal service that is NEVER loss-making. That is possible since the leaders do not understand that without logistics and supply chain, there is no commerce. A loss-making postal service may be necessary since emails and new digital communication systems have taken out the most profitable segments of the old postal service systems. But since the physical world remains, postal services remain vital for healthy economies.
You need to understand my pains when you realize that Ovim postal service (just like the train station) is no more. And when it collapsed as most postal services in Nigeria, the village became far distant to the major cities because the supply chain had been broken.
I am hoping that by 2023, Nigeria will have a GREAT Team and fix this nation once again.
Aba is fading and that affected my village Ovim. Ovim train station was the largest train station in our area serving many communities. Typically, from Aba, every train is expected to stop at Umuahia, Uzuakoli and then Ovim, bypassing some small stations.
Ovim served Ohafia, Arochukwu, Ahaba, and many other communities. As that was happening, businessmen went and built houses around the station. But with the train station gone, everything has collapsed. The hub is gone and Ovim lost a strategic positioning which was used to supply garri to Enugu via rail!
Every kid rode a Raleigh bicycle which was used to move foodstuffs from Oriendu Market to the train station! It was great.
Comment: The Nigerian government might have tried to do this by subsidising petrol.
If petrol was sold at the openn market rate in Nigeria, we would not be able to afford garri and rice any more.
What is left of our national logistic systems would grind to a complete stop.
We would even have civil disorders.
I think every government has it’s own version of subsidy in place, however Nigeria’s version is obviously not working.
My Response: What the US does is not subsidy, it is a pure strategic operating loss-making. This operating loss comes out of utilizing factors of production (there is an economic activity which helps to create finished goods, expanding the GDP). Subsidy does not require any deployment of factors of production. How? If we have 10 trucks of petrol and I pay $200k as a subsidy at inception, I am distorting market equilibrium since someone can re-export those 10 trucks.
An equivalent strategic operating loss in Nigeria would have been reducing the cost to ride Edo Line, Abia transport, BRT Lagos, Kaduna transport line, etc so that those using transportations (within a production line) pay say 10% less with government covering. That government expenditure is within a clear economic activity pipeline and cannot be disintermediated.
Comment 2: Strongly disagree…A loss leading strategy is terrible for an institution such as NIPOST. They are already losing so much money and capacity. There are almost nothing like USPS. I’m not even sure how they exist currently.
My Response 2: “I’m not even sure how they exist currently.” – Not sure where to begin since you noted that you are not even sure. NIPOST was “diminished” when emails came at scale as it was no longer making money via stamps. Before emails, NIPOST was super-profitable and postmaster general was a big appointment. Today, no one cares! Nigeria instead of absorbing the “losses” stopped investing in it and sold some assets. Today, NIPOST does not operationally exist, it exists because of NIPOST electronic stamp duties we pay for wiring money in Nigeria. If you remove it, they will close shops tomorrow.
Sure – they have the peripheral export service, microfinance, wallet, big city delivery etc. But let us not be confused – without the stamp duty, they have no mission now. They do not cover more than 99% of Nigeria.
Comment 3: Amazing and simple analysis tinged with wisdom. So we need our national corporations like the NNPC and the other essential ones to run being subsidized so they could provide essential services which in turn trigger economic growth. Unfortunately, the political boys don’t see it this far and clear.
My Response: Making NNPC a strategic loss-maker or loss-leading will not be correct. You benefit from strategic loss-making if that activity that generates that loss can enable you to tax the outputs to recover the losses. The loss USPS makes generates $billions in US tax that compensate for that loss.
An equivalent strategic operating loss in Nigeria (in the oil sector) would have been reducing the cost to ride Edo Line, Abia transport, BRT Lagos, Kaduna transport line, etc so that those using transportations (within a production line) pay say 10% less with government covering. That government expenditure is within a clear economic activity pipeline. When we tax that, we recover that “loss”.---
1. Advance your career, run your business better with Tekedia Mini-MBA (Sep 12 – Dec 3, 2022): cost is N60,000 naira ($140). Click and register here.
2. Click and register for Tekedia Startup Masterclass and master business secrets from start-up to unicorn. Cost is N180,000 naira ($400).
3. Click to join Tekedia Capital Syndicate and own a piece of Africa’s finest startups with a minimum of $10,000 investment.