Adam Smith Institute

On Tuesday evening we held the latest in our Shaping the Future series of events. The theme this time was The Future of Regulation. Tim Ambler, of the London Business School, was in the chair, and John Redwood MP and Professor Stephen Littlechild were the speakers. Tim opened the seminar with a question: "Who thinks we have too much regulation?" Every hand in the house went up.

Stephen Littlechild, who was head of the Office of Electricity Regulation from 1989-98, spoke first. His argument was that a direct relationship between consumers and producers could be far more effective and more sensitive than regulation alone, and he offered numerous international examples of this in practice. Someone in the audience made the point that this is how non-broadcast advertising is regulated in the UK. The industry self-regulates based on complaints and feedback from the consumer – and it seems to work rather well.

John Redwood MP – who headed the Conservatives' recent economic competitiveness taskforce – spoke next. He opened up his talk with an analogy I rather liked.

Think of a pair of trousers. Everyone is concerned that their trousers stay up – that's why we have belts, braces, zips and buttons. In the regulation context, the free market provides all of these things to protect the consumer: the belt represents the decency of producers, who generally want to do a good job; the braces represent the producer's brand, the maintenance of which is vital to their success; the civil law provides the zips; the criminal law provides the buttons. Adding regulation to this mix is like trussing your trousers up with string – it ruins the trousers and adds very little to their safety.

Redwood also outlined the approach the Tories would take to deregulation if elected. There would be a requirement for the government to decrease its regulatory budget by 3.7 percent every year, and an annual Deregulation Bill (much like the annual Finance Bill) to help them accomplish it. Sounds like a good idea to me.

I have had enough.

I recently sent a package to a friend of mine. I paid for first-class postage, even though I could have walked it to its destination in thirty minutes. It finally turned up two weeks later. Then, for the fourth or fifth week in a row, my Economist failed to arrive on time. It used to arrive on Friday mornings, but now I'm lucky if it turns up before the next issue comes out. These are not isolated incidents. They will be familiar to anyone who uses the UK’s postal system at the moment.

In any other industry, one would switch providers after receiving such shoddy service. An organisation that could not provide a basic quality of service to its paying customers would have to change or face going bust. That is the way a free economy is meant to work.

The trouble is, the Post Office does not really operate in a free economy. Its protected position means it does not face real competition, and unhappy customers do not have a realistic exit option. It is high time this changed. The Post Office is not a natural monopoly whose market is difficult to contest. It should be privatized and its market should be fully liberalized as soon as reasonably possible. Perhaps then there would be some chance our mail arriving on time.

The only thing standing in the way of doing this is the universal service obligation, which compels the Post Office to undertake unprofitable activities (delivering in sparsely populated areas for instance, at the standard price to the customer). People often raise this issue, saying that liberalization could not work since new competitors would take all the profitable areas, leaving the Post Office an irredeemably loss-making enterprise. But there are plenty of sensible ways around this problem, as Ian Senior showed in his ASI report Consigned to Oblivion (2002), and it must not be allowed prevent what is plainly a valid reform.

Is water different? That was the theme of OfWat chairman Philip Fletcher CBE at our Power Lunch in Westminster this week. He suggested that while the regulators wanted to see more competition, there was not a lot of scope for it in the water and sewage sector.

I'm not so sure. OK, the pipes are sort-of-natural monopolies: planning, cost, and common sense are all reasons why we don't have three or four set of pipes and drains coming into and out of our homes. But the whole operation of that infrastructure could, I would guess, be contracted out, with considerable savings. Of course, there is little reason for water-monopoly executives to give up parts of their empire (and their pay) to contractors. But they could be pushed into doing it. Or someone could just buy water companies and do it, cutting costs and pocketing a profit - or they could if the sector wasn't so heavily regulated.

There would be even more pressure for competition if Britain's water legislation wasn't so absurdly restrictive. At present, only the very largest customers, like universities, health trusts and big factories can switch to alternative water suppliers. Why not ordinary householders – who can switch their gas, electricity or phone provider but not their water utility. That must change.