Light Regulation Has Failed

Listener: 31 March, 2012.

Keywords: Regulation & Taxation;

It would be wrong to prejudge the findings of the royal commissions on the Pike River coal mine deaths and the Canterbury earthquakes. But it’s still a good idea to respond promptly to the available evidence and take necessary measures, as the Department of Labour did by setting up a High Hazards Unit (especially as the commissions’ reporting times have been delayed by six months).

In that spirit I draw attention to a wider problem of which these events are examples. Governments have repeatedly failed to regulate markets adequately, a conclusion backed up by numerous other examples. To list but three: the finance company collapses have been attributed to a failure of adequate regulation – Parliament has passed legislation to supervise the sector better (shifting responsibility from the Securities Commission to the Reserve Bank); as many as 110,000 homes and many public and commercial buildings have been caught up in leaky building syndrome, which is a failure of just about the whole building industry; and our high rate of industrial accidents is commonly attributed to inadequate safety inspection.

It is hard enough to quantify the financial losses of these failures. More difficult (and usually more pertinent) are the wider human costs, which may include death and injury and almost always include misery and suffering. The generic cause of these failures, and of many others, has been the “lighthanded regulation” regime that began in about 1990 and which is based on two assumptions.

The first is the belief that the private sector, left to itself, will adequately police safety and quality standards. Businesses will be careful, so it is assumed, to avoid reputation damage and embarrassing court cases. The Pike River Mine exploded that logic: the company that owns it is bankrupt, and the court proceedings and lost reputation count for nought. But this is also true for leaky buildings, where many builders and other culpable parties have long disappeared before their loss of reputation or court proceedings begin to bite.

The second assumption is that because the private sector can be relied on, any public sector supervision can be wound down at a saving to the public purse. Except that when things go wrong, taxpayers find themselves forking out vastly more than the cost of that supervision (and the public also bears considerable non-taxpayer costs).

If this seems extravagant, surveys show New Zealanders are willing to pay almost $4 million to avoid an accidental death. (That may seem a large sum but it’s only about 85c a New Zealander.) On this basis, we would have been willing to pay about $110 million to avoid the 29 deaths at Pike River, say $11 million a year. We didn’t. Each failure inevitably leads to an inquiry that usually concludes light-handed regulation has failed and we need more public regulation.

Eleven people died in a balloon crash, so we decide to inspect all hot-air balloons. We are world experts at shutting the door after the horse has bolted. Stable doors remain swinging loose. What is there to prevent something similar to leaky building syndrome happening in the construction industry in future? In other markets public regulation is feeble and catastrophe is yet to come. We need to break away from the lighthanded regulation mentality and instead have a coherent policy of adequate public regulation of markets.

It won’t stop every death and all the destruction, but it can minimise them in a cost-efficient way. The Regulatory Standards Bill before Parliament aims to improve laws and regulations by specifying principles of responsible regulatory management. Many see it as ideological because it may block state supervision, leaving regulation even more in private hands. No doubt Parliament will address that question.

Let me offer a modest proposal. MPs should judge the bill on the basis of whether, had it been in force from 1990, it would have stopped (or limited) the human suffering and capital destruction from the finance company collapses, from the leaky building fiasco, from industrial accidents, from the Pike River disaster, from the Canterbury earthquakes and from a lot of other smaller failures as well.