What it means
Regulation covers the rules that governments and their agencies set for particular industries, for example telecoms, airlines, energy and banking. Deregulation means relaxing or removing some of those rules so that companies have more freedom to set prices, enter new markets or change their products.
It can happen all at once through a new law, or gradually as agencies drop individual requirements. Supporters argue that fewer rules lower costs, encourage new entrants and give customers more choice.
Critics argue that some rules exist to protect safety, stability or vulnerable customers, and that removing them can create new problems. Both views have been tested in many countries and industries over the past few decades, and the evidence is genuinely mixed.
For finance teams, deregulation changes the competitive and financial picture. Prices may fall or become more volatile, new competitors may appear, and incumbents may need to cut costs or find new revenue.
Forecasts that assumed stable, regulated returns can quickly become out of date. It also changes the risk profile of lending and investing.
A utility that once earned a regulated return may face market prices instead, which makes its profits harder to predict. Lenders and investors therefore reassess credit ratings, dividend capacity and the discount rate used to value the business.
Deregulation is not a one-way street. After a crisis or a public backlash, governments sometimes reintroduce rules, which is called re-regulation.
Businesses that plan carefully keep scenarios for both outcomes in their long-term plans, so they are not caught out by a change of direction. Timing and sequence matter a great deal when rules are removed.
If a government deregulates prices but keeps barriers to new competitors in place, incumbents may simply raise prices without any benefit to customers. Well-designed reform therefore tends to open entry and remove price controls together, supported by a competition authority that can step in.
In practice
Real-world examples.
Example
A country removes price controls on domestic flights and lets any licensed airline fly any route. A regional carrier cuts its fares by 15% on its busiest route, while its finance team reviews the cost base to protect margins. It renegotiates fuel contracts and trims unprofitable routes to pay for the lower prices.
Example
A government allows households to choose their electricity supplier rather than buying from a single regulated provider. A small energy retailer enters the market, offering fixed prices for two years, and wins customers from the incumbent.
Example
A banking regulator relaxes a rule limiting the types of products a bank can offer. A mid-sized bank launches an investment advice service and budgets $2 million in start-up costs to build it. The finance team tracks the new service separately for its first two years to judge whether it earns a sensible return.
Case study
Seen in the real world.
Greenfield Telecom is a fictional phone company used here as an illustrative example. For decades it was the only licensed provider in its country, charging prices set by a regulator and earning a steady but modest return.
When the government deregulates the market, three competitors launch within a year and Greenfield loses 20% of its customers. The finance director responds by cutting the cost base by $30 million, launching a lower-priced plan and adding mobile data bundles. Revenue falls in the first year, but customer losses slow and a leaner Greenfield returns to profit in year three.
Five years later the finance director reflects on the change in a presentation to investors. Customer numbers are back to their original level, average revenue per customer is 8% lower, and operating costs have fallen by a quarter. She argues that the deregulation was painful but ultimately made the company stronger, although she acknowledges that other firms in the industry did not survive.
Watch out
Common mistakes.
- Assuming deregulation always lowers prices. Prices often fall at first, but they can rise later if competition weakens or if costs increase.
- Treating deregulation as the absence of all rules. Most industries still face general laws on safety, fraud, competition and consumer protection.
- Keeping old forecasts after the rules change. Revenue, costs and risk can shift quickly, so plans need rebuilding on new assumptions.
Questions
People also ask.
Is deregulation the same as privatisation?
No, privatisation transfers ownership from the state to private owners, while deregulation removes rules. A state-owned company can be deregulated, and a private company can remain heavily regulated.
Who benefits from deregulation?
Consumers may benefit from lower prices and more choice, and efficient companies may gain market share. Weaker incumbents and some workers may lose out, so outcomes vary by industry.
What is re-regulation?
It is when a government brings rules back after a period of deregulation. This often follows a crisis, a safety failure or public pressure over prices.
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