A pedestrian walks past wall mounted red letter boxes outside a Royal Mail Plc post office in London, U.K. (Photographer: Simon Dawson/Bloomberg)

Think Your Postal Service Has Problems? Try Delivering to 18,000 Far-Flung Islands

(Bloomberg) -- You may have heard the U.S. Postal Service has problems. Well, try delivering the mail in Indonesia, a far-flung archipelago with so many islands the government literally doesn’t know how many there are.

Post offices everywhere have to contend with the fact that people send so few letters these days. In Indonesia, though, an online shopping boom that should be helping the postal service is actually hurting because regulators have set parcel delivery prices so low, according to Gilarsi Wahyu Setijono, a former Merrill Lynch investment banker who became post office president in 2015.

“The tariffs are below our commercial costs,” Setijono said in a recent interview in Jakarta. “I’ve asked for adjustment many times.”

Think Your Postal Service Has Problems? Try Delivering to 18,000 Far-Flung Islands

Indonesia’s far-flung geography makes online shopping a godsend for consumers, but it’s hard on the people who have to deliver the packages, often over water and mountains. By 2022 the country’s e-commerce market will grow to $65 billion from last year’s $8 billion, according to McKinsey. And the post office will do much of the heavy lifting, shipping 4.4 million online-shopping parcels each day, six times what it does today.

In the U.S., President Donald Trump attacks Amazon.com for treating the Postal Service as a “delivery boy” and paying less than it should for shipping, but the parcel business is actually a bright spot for the post office. Its  losses — $656 million in the second quarter alone — stem from falling letter volumes and higher costs for health and retirement benefits.

For Indonesia’s post office – the state-owned PT Pos Indonesia – the finances aren’t so bad now, but Setijono said the burden of shipping packages will make things worse with every passing quarter. Profit fell 18 percent last year.

To put the 272-year-old postal service on more solid footing, Setijono is restructuring. He’s spinning off a logistics unit, building a new business to handle digital payments, and planning the company’s first-ever bond sale, a 1 trillion rupiah issuance ($60 million).

Think Your Postal Service Has Problems? Try Delivering to 18,000 Far-Flung Islands

One thing nobody can change is Indonesia’s geography. The country has so many islands that the government last year embarked on a census to come up with an official count. At last tally, there were more than 18,000 spread over a chain that would stretch from New York to Alaska.

That — along with poor roads and bridges — is why shipping and other kinds of logistics consumes 23 percent of the country’s gross domestic product, according to government figures. It’s also why more than half of the post office’s 4,800 branches are in commercially nonviable locations, Setijono says.

Think Your Postal Service Has Problems? Try Delivering to 18,000 Far-Flung Islands

Consider a two-kilogram package sent from bustling Jakarta to Waropen, a sparsely populated territory 3,300 kilometers away on the isolated coast of Papua, where roads wind through forested mountains and are often impassable in monsoon season. Government mandates set the post office rate at about 268,000 rupiah ($16). For the same delivery, private shipper JNE Express charges 430,000 rupiah, according to its online rate calculator.

That kind of discrepancy rankled Setijono from the moment he took the top job at the post office three years ago. He wants rates set by the market, and not by the communications ministry, which hasn’t raised tariffs since 2009 — even as the economy clocked an average annual growth rate of about 5.5 percent.

“Far from sufficient,” Setijono said. “We have an obligation to operate in nonviable areas. Whether it’s mountaintops, or remote islands, we have to operate where our citizens are.”

Think Your Postal Service Has Problems? Try Delivering to 18,000 Far-Flung Islands

Rudiantara, the minister of communications (like many Indonesians, he goes by one name), says he’s sympathetic, but rates can’t be changed without a thorough assessment of the post office’s costs, which will take time.

“We cannot just amend the tariffs,” he said in an interview. “It has to be part of our logistics strategy.”

Strictly speaking, rates are only fixed for personal deliveries. The idea is to make sure that regular people can afford to send packages to family and friends. In practice, however, online merchants often take advantage of the government’s largess.

Think Your Postal Service Has Problems? Try Delivering to 18,000 Far-Flung Islands

Berliana, a 37-year-old West Java woman who sells clothes on Facebook and Instagram, admits as much. She says she’s been in business for four or five years, sending her merchandise via the post office’s personal rates whenever possible.

“Small post offices don’t ask many questions,” she said.

For Setijono, the dilemma remains.

“The more we improve our performance, the more volumes rise,” he said. “The higher the volume, the more I bleed.”

©2018 Bloomberg L.P.