The United Kingdom has been a pacesetter in institutional change in the telecommunications sector. Over the 1980s the government privatized British Telecom, introduced a novel regulatory scheme and a new regulatory institution (Oftel, the office of Telecommunications), and opened the sector to competition in the network, customer premises equipment, and value-added network services. Private investors have shown remarkable confidence in the future of the sector despite the uncertainty generated by the lack of modern experience with regulation of private utilities, the intrinsic discretionary powers of the government in administrative decisions, and continuing institutional change.

The British political system provides no constitutional protection against discretionary regulatory behavior. The party in power controls both Parliament and the government, and there is no tradition of active judicial oversight of regulatory bodies. Thus governments and regulators cannot easily and credibly commit not to use administrative discretion to tighten the regulatory screws to expropriate a regulated firm's specific assets. Even if the courts rejected a particular regulatory interference, the government could get its way just by introducing new legislation or procedures. The puzzle, then, is how the Conservative governments of the 1980s were able to privatize the telecommunications, electricity, water, gas, and airport sectors. Why were private investors willing to invest large amounts in sectors that, in principle, were vulnerable to confiscatory regulation in the future?

At least part of the explanation lies in the way the privatization was handled and in the evolution and adaptation of British political institutions.