European Commission Will Probe Subsidizing of Deliveries by German Post

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BRUSSELS - The United Parcel Service won another round last month in its 5-year battle against Deutsche Post over cross-subsidizing parcel delivery service with mail monopoly profits as the EC decided to start a formal investigation.


The charge is a violation of the EU's competition law, specifically using a surplus from a "reserved" activity - such as the German Post's letter mail monopoly - to finance losses in another sector, such as parcel delivery.


Rivals claim Deutsche Post offers discounts of up to 60 percent in the parcel business, even though the division lost $206 million last year, and financed the discounts with illegal subsidies.


"To establish the facts of the case, the Commission compares the conduct of the State with that of a commercial investor: Would a commercial investor have left the surplus funds in the company in the hope of making this sort of profit?" an EC statement said.


Based on existing evidence, the statement continued, the EC "doubts whether a commercial investor would have financed losses and investment in this manner."


The German Post issued a position paper arguing that the EC had been considering the case for five years and had dropped investigations based on violation of subsidy and competition laws.


"Why the EC should have reopened the subsidy charge literally in the last minute is hard for the German Post to understand," Deutsche Post said.


The investigation was launched July 20 by Karel Van Miert, EC Competition Commissioner who leaves office next month, as part of a flurry of activity that included probes of Coke, Lufthansa and state broadcasting practices in France and Italy.


While Van Miert cannot complete the ongoing investigation, he has turned the dossiers over to his successor, Mario Monti, the current commissioner for the Internal Market. Monti is expected to push the probe.


UPS, fed up with EC delays in the matter, had already taken the Commission to the European Court of Justice on charges of inactivity in the matter, a case it is likely to drop now.


"We are very pleased by the decision to move forward," UPS spokesman Tad Siegal said. "That was the appropriate action that needs to be taken. We think the EC will do an excellent job and come to the same conclusion we have:


"To wit, there is a fair amount of cross subsidy from the German Post to its competitive enterprise (the parcel delivery service competes head to head with private delivery companies).


"Insofar as that is a violation of the EC agreement against government support or state aid then there will have to be some sort of recompense, if it gets to that point, and that's anybody's guess."


Should the EC rule against the Germans the recompense could be stiff - as much as 17 billion Deutschmarks (about $9 billion) - since UPS is not the only private carrier claiming damages. It was simply the first to bring charges.


"We take this as an encouraging sign and look forward to a swift resolution," Siegal said, though conceding UPS wasn't likely to get it. Stefan Rating, a spokesman for Directorate General IV, which handles the probe, said the middle of next year was the earliest possible date.


Siegal noted it had taken UPS five years to get this far, at a time German Post is close to going public. In preparation for the stock market launch, the Germans "have gone on a buying spree that would make Donald Trump blush," Siegal said.


Deutsche Post has spent billions over the past year buying and building a network of parcel delivery companies across Europe and expanding into the US, where it bought Global Mail and Yellowstone.


The acquisitions are also a matter of EC investigation. "Many competitors have complained about these acquisitions, claiming that Deutsche Post used profits made through its monopoly to finance its expansion. The Commission must examine these claims," the EC said.


Outside observers doubted the EC would complete the probe by mid-2000. The Germans have proved adept in delaying release of data and other pertinent information.


Thus the German Post argued that the EC case is directed at the "Federal Republic of Germany and not against the Deutsche Post itself." And it claims to have financed recent acquisitions through sale of real estate and other assets, not through monopoly transfers.


The tenacity of DG IV should not be under-estimated, however. "DG IV has the largest staff of any department. They are the shock troops and the commandos and they never rest. They raid companies on Christmas Eve," noted Alastair Tempest, the DM industry's chief lobbyist here.
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