Therefore, the special treatment will be granted to all land-locked developing countries not larger than the largest SIDS.

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1 Resolution C 77/2012- Annex 1 Country classification methodology for the future terminal dues system I. Introduction 1 The present document describes the methodology approved by the 24th Congress for the classification of countries for terminal dues and Quality of Service Fund purposes, with some adjustments decided by the CA. The business rules approved by the 24th Congress have been integrated into this document. The methodology and business rules are also applicable to the classification proposal submitted to the 25th Congress. II. Methodology for the classification of UPU member countries 2 The methodology is essentially based on the postal development indicator (PDI). The PDI is then applied following a hierarchical approach for the listing of countries in groups using as reference the current target system countries and the United Nations Economic and Social Council (ECOSOC) classification of least developed countries (LDCs). Small-island developing states (SIDS) and landlocked developing countries (LLDC) status is also taken into account. A. Postal development indicator (PDI) 3 The PDI includes a macroeconomic part, the gross national income (GNI) per capita, and a postal-specific part, the normal letter unit cost. 4 The GNI per capita is an indicator of the average annual income available to an inhabitant of the country in question. For given normal letter unit costs, it is true that the higher the GNI per capita, the more developed the country, and the higher its rank in the country classification. 5 The normal unit letter cost indicates, in terms of resource requirements (man-years per letter), the difficulties in serving the postal territory, given the level of postal services offered. This cost encompasses all financially relevant aspects of processing and delivering a letter and automatically weights them appropriately. For given GNI per capita, it is true that the higher the normal unit costs, the less developed the country and the lower its rank in the country classification. 6 A common reason for high unit costs in many developing countries is low volumes that imply high fixed costs per letter. In contrast, many developed countries benefit from low fixed costs per letter due to high volumes (economies of scale). 7 The mechanism related to normal unit costs works as follows: other things being equal, greater difficulties in serving the postal territory means: higher normal unit costs; a decreased reciprocal of normal letter unit costs; a decreased PDI value; a decreased rank in the PDI country classification. 8 The total normal costs in terms of full-time staff are determined by econometric regression, using as variables: for fixed costs: the population with home delivery, the surface area and the country characteristics (i.e. island); for variable costs: the number of letter-post items. Total normal costs = a1 x weighted number of letters + a2 x surface area + a3 x (population x percentage of home delivery) + a4 x (population x percentage of home delivery x island-dummy)

2 9 The coefficients a1, a2, a3 and a4 reflect the importance of the respective variable for total costs. They are estimated using the least squares method. 10 The normal costs of the letter-post activity are derived by applying the following adjustments to the regression coefficients above: The variable cost coefficient a1 is adjusted by multiplying it by the world-average income percentage of the letter-post. This adjustment reduces world-average total variable costs per letter to the world-average letter-specific variable costs per letter. The fixed costs coefficients a2, a3 and a4 are adjusted by multiplying it by the country-specific income percentage of the letter post divided by the sum of the country-specific income percentages of the letter post and of parcels and logistics. This adjustment reduces total country-specific network fixed costs to country-specific and letter-specific network fixed costs. 11 The letter-post normal unit cost for each country is calculated as the ratio between the letterpost normal costs and the weighted number of letter-post items. 12 Furthermore, for SIDS (small island developing states) and small LLCs (land-locked countries) in similar circumstances, the normal unit cost obtained is adjusted upward (in every single case by 15% at least). The agreed definition of small land-locked countries in similar circumstances is as follows: "small" = not larger than the largest SIDS; "similar circumstances" (compared to SIDS) = DC status (developing country). Therefore, the special treatment will be granted to all land-locked developing countries not larger than the largest SIDS. 13 The PDI is obtained by applying the following formula: PDI = (1 - ) x postal-specific part + x macroeconomic part = (1 - ) x (normalized (1 / normal unit costs)) + x (normalized GNI per capita) where each part is normalized to a value between 0 and 1 according to the following formula: normalized value = (value - minimum)/(maximum - minimum). 14 The relative weight of the macroeconomic part, that is, is 75%. Correspondingly, the relative weight of the postal-specific part is 25%. The greater weighting importance of the macroeconomic part is due to the fact that it constitutes a decisive classifying factor for both sides of the international postal process (inbound and outbound), whereas the postal-specific part concerns the inbound side only. B. Hierarchical approach comparative classification 15 The PDI values calculated as above are compared with the PDIs of countries in the current target system and with those of LDCs, following the ECOSOC classification. 16 Countries are classified in five groups, with the most developed countries in Group 1 and the least developed countries in Group 5: a b c d Group 5 all LDCs. Group 1 all remaining countries with a PDI value higher than the minimum PDI of current target system countries (where the minimum PDI is determined without regarding territories that are in the current target system). This rule was only valid for application for the 2008 classification. Group 2 all countries not in Group 1, 4 or 5 and with tariffs above the average tariffs of Group 1 countries. This rule was only valid for application for the 2008 classification. Group 4 all countries not in Group 1, 2 or 5 and with a PDI below the maximum PDI of Group 5. However, the maximum value of the postal development indicator (PDI) in Group 5, used for purposes of classification in Group 4, should not include the highest PDI value of countries

3 found to be eligible for graduation from the list of least developed countries (LDCs) prepared by ECOSOC. e All remaining countries will be placed in Group The reclassification of countries will take place according to the following rules: i ii iii iv A 10% margin above the group threshold will be allowed before countries are classified in the upper group. An LDC losing that status will be classified in Group 3 or 4, depending on its PDI. There is no automatic downward reclassification, except temporary downward reclassification due to war or extremely severe economic crisis, following a CA decision. A review of the classification will take place every four years where the structural PDI parameters stemming from the cost regression are taken from the initial classification without change. III. Appeals against classification Appeal to account for anomalies or inconsistencies in individual country classification cases 18 The first type of appeal can be triggered by possible anomalies or inconsistencies in the application of the classification methodology. This type of appeal should be accompanied by sufficient evidence from official national or international sources supporting the reason for the request. It should propose specific alternative information or data that would replace those that caused the anomaly or inconsistency. Deviations from the data originally used in the classification must be clearly documented by the appealing country and submitted to the International Bureau for verification and validation. Any reclassification based on alternative information should not impact upon the classification of countries that did not submit a request for appeal. Appeal to reclassify countries which can prove with well-argued evidence that there are valid reasons why their right to be kept in the transition system should be preserved 19 A second type of appeal corresponds to a member country's appeal to be kept in the transition system. This appeal must be accompanied by sufficient evidence and analysis to show that there are valid reasons (referring for example to the situations described in resolution C 17/2008) why their right to be kept in the transition system should be preserved. The appeal should take into consideration the areas where differentiated treatments are applied between target, new target and transition system countries in the UPU terminal dues system. These are the terminal dues rates applied, the obligation to link terminal dues to quality of service, and the payable and receivable QSF amounts. Assessment of the appeal 20 The International Bureau, based on the information supplied by the interested country and depending on the type of appeal, will check the information, make a technical assessment, recalculate the postal development indicator (PDI) if necessary, and check or make a financial impact analysis if required. Deadlines 21 An appeal for reclassification can be examined no later than the first CA session after Congress. Therefore, any such appeal, accompanied by complete relevant supporting data and information, must reach the International Bureau two months before the opening date of the session. The International Bureau's technical analysis of appeals received will be made available to CA members no later than two weeks in advance of the beginning of the CA session. Duration of reclassifications 22 Any reclassification decided by the CA as the result of an appeal of the first type will be valid for the entire cycle.

4 Requests for reclassification due to war or extremely severe economic conditions 23 A country may request a temporary downward reclassification due to war or extremely severe economic conditions. The request should specify the group to which the country proposes to be reclassified and substantiate the reason given for the reclassification request. It should be documented with verifiable supporting data and information. 24 Such request could be received and examined by any CA session. The two-month deadline before the beginning of the relevant CA session for receipt of such requests also applies. 25 The International Bureau's technical analysis of requests received will be made available to CA members no later than two weeks in advance of the beginning of the relevant CA session. 26 Any temporary downward reclassification decided by the CA will be valid for two years at the most, with a possible extension after that period upon a new decision by the CA, but not beyond the end of the cycle. IV. Business rules for the application of the classification methodology General rules 27 Classification for the years n+2, n+3, n+4 and n+5 (i.e. a four-year classification cycle) is established during the year n and based on the most recent data available, i.e. using macroeconomic data for n-2, postal and geographic data for n-1 and tariff data for n. If a variable value is missing, the most recent value available for the country in question will be used instead. 28 The four-year classification cycle means that a finalized classification for the years 2014, 2015, 2016 and 2017 is decided by the 2012 Congress, using macroeconomic data for the year 2010, and postal and geographic data for the year In case of missing data, the above rule will be applied. V. Detailed list of classification variables and parameters with data requirements, sources and business rules Population 29 Data for the year n-1 and n-2 is required. The source is UN statistics. GNI per capita 30 Data for the year n-2 is required. The source is the World Bank, and the total GNI used is computed according to the Atlas method (GNI in USD) In the case of missing GNI for the year n-2, any earlier value used will be "updated" to the n-2 period by multiplying the value in question by the world GNI growth factor for the relevant period. 32 The population used to compute the GNI per capita must correspond to the number of inhabitants during the year n-2, in order to ensure consistency with the GNI figure. 33 In cases where the GNI is not available, not even from other recognized sources (e.g. UN statistics), the GNI per capita is estimated on the basis of the GDP per capita for non-least developed countries (LDCs) (e.g. GNI = GDP); for LDCs, the GNI per capita is estimated by the GDP per capita of that LDC multiplied by the LDC average of the ratio between the GNI per capita and the GDP per capita. 1 The World Bank's Atlas method smoothes out exchange rate effects by relying on a three-year exchange rate average.

5 Surface area 34 Data for the year n-1 is required. The surface area is to include land and sea in order to reflect the particular difficulties of multiple-island states. 35 The source is UN statistics, provided that they include the sea area. Otherwise, other recognized sources (e.g. the country's government data) will be used. Items (mail volume) 36 Data for the year n-1 is required, as well as data for 2003 and 2004 (alternatively, data for the years preceding 2003). 37 The source is UPU Postal Statistics. 38 Missing data on the number of items will be replaced by an approximation based on GNI: 1) domestic items = GNI x regional average of (domestic items/gni), 2) international dispatch items = GNI x regional average of (international dispatch items/gni), and 3) international receipt items = GNI x regional average of (international receipt items/gni). If GNI is not available either, an estimated GNI will be used (see above). 39 The volumes that are taken into account for the classification cannot fall short of the minimum of: 1) the approximation based on GNI according to the rule under 38; and 2) the average number of items for the years 2003 and 2004 (if either the 2003 or the 2004 value is unavailable, the most recent earlier value, if available, is used instead). The rule is applied separately to domestic mail, international outbound mail and international inbound mail. Weighting of the number of letter-post items 40 The weighting of volumes used for the calculation of total costs is made by weighting the domestic, international inbound and international outbound number of letter-post items by 100%, 68% and 32% respectively. Home delivery percentage 41 Data for the year n-1 is required. The source is UPU Postal Statistics. 42 If no home delivery (HD) percentage is available for any year, it will be estimated according to the following business rule: % of HD = GNI per capita x world average of (% of HD/GNI per capita). Postal income percentages 43 Data for the year n-1 is required. The source is UPU Postal Statistics. 44 Where the income percentage of the letter post or, respectively, parcels and logistics is not available, a world average is taken instead. Number of posts (labour force) 45 Data for the year n-1 is required. The source is UPU Postal Statistics. 46 If the number of posts is not available for any year, it is calculated as the sum of full-time staff and 50% of part-time staff for the most recent year. If only a full-time staff number is available, the part-time staff number is estimated by: part-time staff = full-time staff x world average of (part-time staff/full-time staff). 47 If both the number of posts and the full-time staff number are not available for any year, the country cannot be included in the regression (for the classification there is no consequence, as the PDI does not depend on staff numbers).

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