MODULES2­7 Labor Issues in Infrastructure Reform A Toolkit Labor Issues in MODULES Infrastructure Reform 2­7 A Toolkit © 2004 The International Bank for Reconstruction and Development / The World Bank All rights reserved. 1 2 3 4 07 06 05 04 The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not neces- sarily reflect the views of the Public-Private Infrastructure Advisory Facility (PPIAF), or the Board of Executive Directors of the World Bank, or the governments they represent. Neither PPIAF nor the World Bank guarantees the accuracy of the data included in this work. The bound- aries, colors, denominations, and other information shown on any map in this work do not imply any judg- ment on the part of PPIAF or the World Bank concerning the legal status of any territory or the endorse- ment or acceptance of such boundaries. Rights and Permissions The material in this work is copyrighted. 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ISBN 0-8213-5470-1 Library of Congress Cataloging-in-Publication Data Labor issues in infrastructure reform : a toolkit / Public-Private Infrastructure Advisory Facility (PPIAF). p. cm. Includes bibliographical references. ISBN 0-8213-5470-1 1. Public works--Management--Handbooks, manuals, etc. 2. Public contracts--Handbooks, manuals, etc. 3. Labor contract--Handbooks, manuals, etc. 4. Public works--Personnel management. 5. Public works--Employees. 6. Public works--Cost effectiveness. 7. Contracting out. 8. Infrastructure (Economics) I. Public-Private Infrastructure Advisory Facility. II. World Bank. HD3850.L23 2003 352.7'7268--dc22 2003061161 Contents MODULE 2 LABOR IMPACTS OF PRIVATE PARTICIPATION IN INFRASTRUCTURE 1 Overall Trends 1 Employment Impact 2 Factors in Employment Reduction 2 Rail 3 Ports 4 Water 5 Electricity 6 Telecommunications 7 Postal Services 8 Labor Productivity 8 Pay 11 Benefits 13 Pensions 13 Other Benefits 14 Work Practices 14 Working Conditions 14 Subcontracting and Outsourcing 16 Gender Impacts 16 Summary 18 Additional Material (on the CD-ROM) 20 Web Sites 20 Other Materials and Sources 20 MODULE 3 ASSESSING THE SIZE AND SCOPE OF LABOR RESTRUCTURING 25 Overview 25 Staff Audits 27 Objectives 27 Scope 27 Collecting Personnel Data 28 Collecting Information on Skills 29 iii Contents Benchmarking 33 What Are Benchmarks? 33 Sources of Benchmark Data 34 Using Benchmark Measures 38 Benchmarking Labor Costs 41 Work Force Analysis 43 Objectives of Work Force Analysis 43 Work Force Analysis Tools 43 Who Should Do the Assessments? 48 Tools (on the CD-ROM) 50 Additional Material (on the CD-ROM) 50 Web Sites 50 Other Material and Sources 50 MODULE 4 STRATEGIES AND OPTIONS 45 Restructuring--Who Should Do It? 45 Labor Restructuring by the Private Sector 45 Labor Restructuring by Government 46 A Mixed Approach 48 Menu of Options 48 Sequencing of Options 51 Soft Options 53 Payroll Management 53 Enforcement of Retirement Age 54 Enforcement of Disciplinary Proceedings 54 Staff Transfers to Other Public Organizations 54 Recruitment and Promotion Freezes 55 Advantages of Soft Options 55 Workplace Restructuring 56 Reducing Working Hours 56 Placing Workers on Administrative Leave 56 Reorganizing the Work Force 57 Restructuring the Enterprise 58 Retirement and Redundancy 58 Key Considerations in Developing Strategies and Options 60 Labor-Related Legislation 60 Employee Status Prior to PPI 65 Employment Protection in the Bidding Process 65 Strategies--A Decision Tree 68 Tools (on the CD-ROM) 68 Additional Material (on the CD-ROM) 68 Web Sites 71 Other Material and Sources 71 iv Contents MODULE 5 KEY ELEMENTS OF A LABOR PROGRAM 73 Severance 73 Statutory Payments 74 Contractual Benefits 79 Ex Gratia Severance Payments 80 Adverse Selection and Targeting 88 Implementation Issues 94 Tools (on the CD-ROM) 98 Additional MateriaL (on the CD-ROM) 99 Web Sites 99 Other Material and Sources 99 Pensions and PPI 99 The Pension Challenge 99 Types of Pension Plans 101 Addressing Prior Pension Obligations 104 Pensions and Labor Restructuring 111 Future Pension Design 114 Pensions: Implementation Steps 118 Tools (on the CD-ROM) 119 Additional Material (on the CD-ROM) 119 Web Sites 121 Other Material and Sources 121 Redeployment Support 121 Design and Implementation of Redeployment Programs 124 Counseling 136 Job-Search Assistance 138 Retraining 139 Employee Enterprise 141 Job-Creation Initiatives 143 Tools (on the CD-ROM) 146 Additional Material (on the CD-ROM) 146 Web Sites 146 Other Material and Sources 147 Employee Share Ownership 147 Compensation Packages for Redundant Workers 148 Shares as an Incentive or Reward 148 Employee Share Ownership Plans 148 Additional Material (on the CD-ROM) 150 Web Sites 150 Other Material and Sources 152 MODULE 6 ENGAGING WITH STAKEHOLDERS 153 Fundamentals of Engagement 153 Forms of Engagement 153 v Contents Designing an Engagement Strategy 154 Acquiring Engagement Skills 156 Communication 156 Objectives 156 Preparing a Communication Plan 157 Consultation 161 Role of Consultation 161 Methods of Consultation 162 Negotiation 163 Steps in Negotiations 165 Cooperation 169 Cooperation in Practice 169 Circumstances that Suit Cooperation 170 Tools (on the CD-ROM) 171 Additional Material (on the CD-ROM) 171 Web Sites 171 Other Material and Sources 171 MODULE 7 MONITORING AND EVALUATION OF LABOR PROGRAMS 173 Overview 173 Assessing Financial Returns 174 Financial Costs--A Checklist 175 Financial Benefits--A Checklist 176 Financial Payback Analysis 178 Discounted Cash Flow Analysis 179 Assessing Economic Returns 180 Rationale 180 Economic vs. Financial Costs 180 Evaluating Labor Market Programs 183 Constructing the Counterfactual Analysis 183 Assessing the Impact of Redeployment 184 Assessing the Effects on Workers' Welfare 187 Assessing Overall PPI Benefits 188 Monitoring Labor Programs 189 Tools (on the CD-ROM) 193 Additional Material (on the CD-ROM) 193 Web Sites 194 Other Material and Sources 194 REFERENCES 195 FIGURES 2.1 Employment in Côte d'Ivoire and Burkina Faso Rail, 1980­2000 4 2.2 Labor Productivity in South American Rail Companies 11 3.1 Structure of Performance Measures for Utilities 37 3.2 Sample Age Profiles 40 vi Contents 4.1 Restructuring Options--A Typology 52 4.2 An Illustration of Sequencing 53 4.3 Strategic Choices in Labor Adjustment--A Decision Tree 70 5.1 End-of-Service Benefits in Orissa, India 78 5.2 Core and Supplementary Elements 127 5.3 Moving from Supply-Driven to Demand-Driven Training 133 BOXES 2.1 Popular Perceptions of PPI 2 2.2 Argentina--Job Losses in the Infrastructure Sector 3 2.3 Employment Reductions in Brazil's Railways 4 2.4 Union Perceptions of Privatization's Impact in Ports 5 2.5 Employment Growth in Mexican Ports 5 2.6 ILO Analysis of the Labor Impact of PPI in the Telecommunications Sector 9 2.7 Productivity Growth in Latin American Telecoms Following PPI 10 2.8 Service and Productivity Improvements at Trinidad and Tobago Post 12 2.9 Municipalization of In-Kind Social Benefits in Russia 15 2.10 Changing Work Practices in Mexico Telecoms 16 2.12 Outsourcing in Argentine Telecoms 17 2.11 New Working Practices in Côte d'Ivoire Electricity 17 2.13 Contracting Out and Equal Opportunities in the United Kingdom 18 2.14 Key Factors Affecting the Labor Impact of PPI 19 3.1 What's the Minimum Data Set for a Staff Audit? 24 3.2 Nigeria--Conducting Staff Audits in the Civil Service 26 3.3 Middle East Airlines--Skills Mismatch 27 3.4 India--Unions and Reskilling in the Telecommunications Sector 28 3.5 British Rail--Loss of Institutional Memory 29 3.6 Benchmarking Definitions 29 3.7 Kenya--Internal Benchmarking in Power Distribution 29 3.8 Generic Labor Benchmarks 30 3.9 Sample Labor Benchmarks by Sector 30 3.10 Hints and Tips for Using Benchmark Data 36 3.11 Brazil--Work Force Analysis in Rail Privatization 38 4.1 Restructuring by PPI Investors--Argentina and Guyana 46 4.2 Tanzania--Telecommunications Work Force Restructuring 47 4.3 Zambia--Redundancy for All Rail Workers 49 4.4 Philippines--Use of a Mixed Approach through Probationary Employment 49 4.5 South Africa--Phased Reform in Electricity 55 4.6 Jordan--Tactical Staff Transfers at Aqaba Rail 56 4.7 China--Administrative Leave for Workers in State-Owned Enterprises 57 4.8 Argentina--The Success of a Voluntary Approach 59 4.9 Aeromexico--Liquidation and Labor Adjustment 60 4.10 Mexico Rail--How the Legal Framework Changed 64 4.11 Argentina--International Standards, National Laws, and Labor Contracts 64 4.12 Turkmenistan--Privatization and Employment Rights 65 4.13 New Zealand Rail--Changes in Worker Status 67 4.14 Telecommunications--Institutional Structures and Labor Adjustment 68 4.15 Experiences of Using Labor Factors in PPI Bidding 69 vii Contents 5.1 Mexican Railways--The Daily Integrated Salary 79 5.2 Brazil--Reducing Payments for Older Workers 85 5.3 Earnings Losses after Retrenchment 86 5.4 Tanzania--Severance Policies in Port Concessioning 89 5.5 Problems with Case-by-Case Setting of Severance--Sri Lanka and Zambia 90 5.6 Challenges of Selection--Guinea and Sri Lanka 93 5.7 Sri Lanka--Experiences of Selection through Eligibility Criteria 93 5.8 Chile Rail--Severance Benefits and Rehiring Rules 95 5.9 Content of a Severance Manual 96 5.10 Regularizing Casual and Stipendiary Workers in the Orissa Power Sector 97 5.11 Morocco Rail--An Unsustainable Pension Scheme 101 5.12 Privileged Pension Rights in Central and Eastern Europe 107 5.13 Accounting Standards for Defined-Benefit Plans 108 5.14 Tanzania Telecom--Pension Plan Restructuring 111 5.15 Japan Railway's Recurring Pensions Challenge 112 5.16 British Coal--Negotiated Pension Agreements 114 5.17 South America--Working with Trustees and Pension Advisers 120 5.18 Brazil Rail--Worker Surveys in a Labor Study 125 5.19 Ukraine--Profiles of Displaced Coal Mine Workers 126 5.20 Tanzania--"Invisible" Service Providers 127 5.21 Bolivia--The Emergency Social Fund 135 5.22 Job-Search Assistance--Using New Technology 139 5.23 What Happens in a Job Club? 140 5.24 Retraining--Chile's Program for Mine Workers 140 5.25 Malawi--Road Maintenance by Displaced Workers 142 5.26 Three-Point Checklist for Successful Public Works Programs 144 5.27 British Coal--Responding to Mine Closure 145 5.28 Shares as Incentives in Infrastructure Privatization 149 5.29 Checklist for Successful ESOPs 151 6.1 OECD--Defining Government­Citizen Relationships in Policymaking 154 6.2 Italy--Ministerial Change Facilitates Negotiations 156 6.3 Manila Water--How a Trip to Buenos Aires Improved Understanding 161 6.4 Trade Unions and Consultation 162 6.5 Ghana Port Reform--Working Effectively with Unions 163 6.6 Engagement Strategies in the Privatization of Sri Lanka Telecom 164 6.7 South Africa Rail Restructuring--Widening the Negotiation 165 6.8 South Africa Transport Sector Negotiations--A "Long and Arduous" Process 166 6.9 From Confrontation to Cooperation in Indianapolis 169 7.1 Indicators for Cost-Benefit Analysis 179 7.2 The Importance of Control Groups--A Hypothetical Example 183 7.3 Example of a Redeployment Evaluation--PROBECAT, Mexico 186 7.4 Possible Cost and Benefit Indicators for Redeployment Programs 187 7.5 Impact of Downsizing on PPI Prices 191 7.6 Monitoring and Evaluation Defined 192 7.7 Severance and Redeployment: Some Monitoring Indicators 193 viii Contents TABLES 2.1 Possible Effects of Privatization on Employment in Ports 6 2.2 Employment Numbers and Labor Productivity in Three Latin American Cities before and after Private Participation in the Water Sector 7 2.3 Argentina Restructuring of Electricity Work Force after Privatization 7 2.4 Employment Reductions in Brazilian Electricity Utilities 8 3.1 Three Dimensions of Work Force Restructuring 22 3.2 Some Sources of International Benchmarking Information 32 3.3 Regional Comparative Performance Measures 34 3.4 India--Changing Labor Productivity at BSNL, Selected Years 35 3.5 Pros and Cons of In-house and External Consultants 42 4.1 Labor Restructuring--By Whom and When? 50 4.2 Administrative Leave and Reduced Work Schedules in Countries of the Former Soviet Union 58 4.3 Advantages and Disadvantages of Early Retirement, Voluntary Departure, and Compulsory Redundancy 61 4.4 Labor Issues Legal Framework 63 4.5 Institutional Reorganization and Changes in Employee Status 66 5.1 Some Examples of Statutory Termination Benefits 75 5.2 Advantages and Disadvantages of Standard Severance Formulas 81 5.3 Examples of Severance Formulas and Payments 81 5.4 Advantages and Disadvantages of Loss-Based Formulas 87 5.5 Advantages and Disadvantages of Uniform and Case-by-Case Approaches to Severance 88 5.6 Advantages and Disadvantages of Alternative Selection Approaches 91 5.7 Summary of Active Labor Market Program Evaluation Results 123 5.8 What Works Best When? 129 5.9 Mechanisms and Incentives for Redeployment 131 6.1 Outline of an Engagement Strategy 155 6.2 Communications Plan Template 158 6.3 Example of a Media Audit--Picking the Right Tools for the Task 160 6.4 A Checklist for Negotiations with Labor 167 7.1 Financial Analysis--Key Questions and Tools 175 7.2 Checklist--Financial Costs of a Labor Program 176 7.3 Checklist--Financial Benefits of a Labor Program 177 7.4 Economic vs. Financial Costs and Benefits 181 7.5 Turkey--How Workers Used Severance Compensation 189 7.6 Preferred Employment Status of Redeployed Civil Servants--Ghana 189 7.7 Assessing Labor Programs--A Checklist of Potential Effects on Different Stakeholders 190 ix 2 MODULE Labor Impacts M O D of Private ULE Participation in 2 Infrastructure A good understanding of the effects of private participation in infrastruc- Workers and unions are anxious about ture (PPI) on the work force is essential for managers in the implement- the effects of PPI. Popular opinion ing agency. The purpose of this module is to provide the implementing shares many of those same agency with an overview of the empirical evidence about what actually happens concerns. to workers in the process of PPI. This is valuable because the implementing agency has to deal with a variety of interest groups holding a range of beliefs and perceptions about what PPI will mean for them. Belief and perception are important because they drive the actions and reactions of all stakeholders and affect the political and labor relations environments. They are often informed, however, by partial, distorted, or even false evidence. OVERALL TRENDS Labor reductions in the enterprise are a reality, and PPI takes place in a changing global context that some workers retained in some post-PPI enterprises affects all businesses and national economies. have also experienced reductions in income and There is, however, widespread concern regarding benefits, especially those with skills for which sup- its impact on workers. ply exceeds demand. Workers and unions have therefore generally opposed privatization, conces- Public service workers and their unions often dis- sioning, contracting, and other forms of PPI. And it trust PPI, fearing that it will have negative effects is not only union leaders who believe that privati- on employment numbers, pay, terms and condi- zation has had a negative impact on labor and-- tions, and relationships with management. Set more broadly--on income and wealth distribution. against a background in which many state-owned According to a recent study, such beliefs are grow- enterprises have provided their staff with employ- ing and becoming more widespread (see IDB 2002 ment security, and terms and conditions much bet- and box 2.1). ter than those enjoyed by equivalent workers in the private sector, such anxieties are understand- Does the evidence support such perceptions? In able. Moreover, there is no shortage of document- general, yes--but much depends on the initial con- ed examples to show that these fears are well ditions. In some cases workers have gained from grounded. privatization because new investments and dynam- 1 Labor Issues in Infrastructure Reform: A Toolkit Impact assessment services. Overall, the experience of the impact of also should take Box 2.1: Popular Perceptions of PPI PPI on labor is more varied and nuanced than is account of the A t the heart of much of the criticism is a counterfactual: what suggested by the stereotypes. would have perception that privatization has been unfair--hurting the poor, the disenfran- There are significant differences between sectors, 2 happened anyway in the absence of PPI? chised, and in some cases beleaguered work- and underfunded public service organizations have ers, and benefiting the already rich, powerful, often been unable to provide their employees with and privileged. Privatization is seen as throwing the capital investment and new technology to large numbers of people out of work or forcing them to accept jobs with lower pay, less securi- enhance their work and productivity. Many public ty, and fewer benefits; as raising the prices of employers have held back improvements in salaries goods and services sold; as providing opportu- and wages rather than reduce staffing and pay MODULE nities for the enrichment of the agile and cor- more to those who remain, and that practice has rupt, and generally making the rich richer and often had an adverse effect on their ability to the poor poorer. recruit and retain key staff. Some employers have The complaint is that, even if privatization con- difficulties paying salaries at all, and a few have tributes to improved efficiency and financial per- formance (and some contest this as well), it has even looted employees' pension contributions. a negative effect on the distribution of wealth, income, and political power. By introducing new capital and by restructuring The negative perception is widespread and human resources PPI can improve the earnings and growing: 63 percent of people surveyed in the working environment of many workers, albeit spring of 2001 in 17 countries of Latin America often by reducing the number of people directly disagreed or strongly disagreed with the state- employed, at least in the short term. In addition, ment, "The privatization of state companies has efficiency improvements often lead to longer-term been beneficial...." The extent of disagreement security of employment, and--in some sectors-- was much greater than in 2000 (57 percent) or 1998 (43 percent). Over 60 percent of Sri employment expansion. Lankans interviewed in 2000 opposed the priva- tization of the remaining state-owned firms. It Although it is important to be aware of the poten- would not be hard to find other expressions of tial and negative impact of PPI on labor, it is no popular dissatisfaction with privatization, of a less important to be aware of the wider picture so similar magnitude, from the transition countries that costs and effects can be accurately assessed in general and Russia in particular. and fairly attributed. Moreover, without funda- Source: Birdsall and Nellis 2002, p. 2. mental enterprise reform, infrastructure services will continue to deteriorate in many cases, at high cost to consumers and users. ic expansion have resulted in new job creation at the enterprise or sectoral level, and because pro- ductivity improvements have led to better terms EMPLOYMENT IMPACT and conditions of service. Moreover, workers are Job losses are the most obvious adverse impact on also consumers and their households will benefit labor. This section focuses on the impact of PPI on from improvements in access and services. the number of workers employed, beginning with a The review of sector impacts in subsequent sections brief introduction and then examining the evidence of this module also indicates that PPI itself is not sector by sector. necessarily the only cause of adverse impacts on labor. Any counterfactual assessment of the impact of PPI on labor must take account of levels of Factors in Employment Reduction labor adjustment that would have taken place any- Private participation in state-owned enterprises has way, perhaps as a result of new technology or a variable impact on job numbers. There are sever- structural change in the economy through a shift to 2 Labor Impacts of Private Participation in Infrastructure al reports of positive net impacts of privatization have become stronger competitors for rail There are very few programs in general. In the infrastructure sector, operations. There are now few passenger or railways that are not exposed to however, PPI is seldom associated with short-term general freight railways that are not subject competition from increases in employment in the enterprises directly to competition from road transportation. road transport. This MODULE affected and is more usually associated with short- is one factor that 2. Technological change has brought a shift spurs restructuring run job losses. These losses can be substantial away from labor-intensive operations; for of the rail sector. because of the large size of the enterprises con- example, more efficient diesel and electric cerned and the unusually high level of labor redun- trains, improved ticketing systems, increased dancy in many infrastructure enterprises (box 2.2). use of freight containers, or the mechaniza- Many factors play an important role in determin- tion of operations such as track tamping. 2 ing the extent, pace, and timing of employment 3. Some rail companies maintained their pro- reductions. Although there are numerous country- tected monopoly status for many years and and enterprise-specific circumstances, some pat- when that was removed, profound changes terns exist. For example, sectors such as rail and in operations, costs, and staff numbers fol- ports have generally experienced higher levels of lowed. downsizing than have the telecommunications and Some of the largest water sectors. 4. Rail workers (along with mine workers) are reductions in some of the oldest and most significant employee numbers groups of organized labor. In some countries have occurred in (Argentina, for example) the unions were suc- South American Rail railways. cessful in preserving high levels of employ- Overall, the most severe impact of PPI on employ- ment until economic crisis enabled reform. ment numbers has been felt in railway enterprises. 5. Rail has been often a vehicle for job creation There are five potential explanations for this: and patronage. 1. There is increasing competition from road The result has been high levels of downsizing. In operators. As road networks have developed Argentina, where the railway was restructured into and improved, trucking and bus operations several separate freight and passenger networks and concessioned in 1994 and 1995, employment fell from around 95,000 in 1989 to approximately 17,000 in 1997. (In 1960 it had been as high as Box 2.2: Argentina--Job Losses in the 200,000.) The scale of job loss associated with rail Infrastructure Sector PPI in Argentina is typical for Latin America. In Chile, where there had already been a cut of 75 I n Argentina, a recent review of five major pri- vatization transactions (telecoms, electricity, percent in the railway labor force between 1973 gas, water and sanitation, and energy) found and 1990, the number was halved again in the that close to 30 percent of employees in the five course of privatization from 1990 to 1995. Brazil's enterprises lost their jobs by the time privatiza- experience was similar (see box 2.3). tion took place. The reductions ranged from 3 percent in telecoms to 72 percent in energy.... In Africa, rail PPIs have also been associated with Drastic employment cuts were also made in significant reductions in employment numbers, other sectors, including railways and steel. Low although not on the scale of Latin America where productivity and interference by labor unions in management decisions had made the cost of overstaffing appears to have been particularly high. keeping loss-making enterprises in the state Figure 2.1 shows how the work force adjustment sector so high that the government was willing in the joint railway of Côte d'Ivoire and Burkina to undertake the necessary employment Faso took place at the time of a major restructur- reforms to facilitate privatization. ing exercise in 1988, and then again at the time of Source: Kikeri 1998, p. 6. PPI in 1995. 3 Labor Issues in Infrastructure Reform: A Toolkit Approximate number of employees Box 2.3: Employment Reductions in Brazil's 7,000 Railways t the beginning of the PPI process, in 6,000 A 1995, the main state-owned railway com- 2 5,000 Pre-PPI labor restructuring pany in Brazil, RFFSA, employed 42,000 4,000 people, down from 110,000 workers 20 years Labor restructuring at the time of PPI earlier. In preparation for the concessions that 3,000 began in 1996 and 1997, following RFFSA's restructuring into six regional businesses, more 2,000 than half of those workers left, 4,000 of them 1,000 through voluntary redundancies and 18,000 MODULE through other means. 0 1980 1984 1988 1992 1996 2000 The privatization team recognized that these tar- Figure 2.1: Employment in Côte d'Ivoire and Burkina geted reductions in labor force were by no Faso Rail, 1980­2000 means final. When all the regional areas had Source: Martin and Micoud 1997; SITARAIL data. been privatized, the organization of each system would probably change and would likely lead to additional reductions in staff, changes in skills tainerization. Port workers' trade unions have mixes, and improved productivity. opposed port reform because both job losses, casu- That proved to be true. The work force was halved again, to a total of around 11,000, within alization of labor (the shift to individual temporary a year of the start of concessions, meaning that contracts with less legal protection for workers), since the beginning of the privatization process and changes in working conditions are of great about 75 percent of the jobs had been cut. concern (box 2.4). Whether or not the comments Source: Estache, Schmitt de Azevedo, and Sydenstricker made in box 2.4 are a fair reflection of what has 2000. happened in all ports, they are typical of the per- ceptions of union leaders in ports--and indeed Job losses have also Job losses apparently associated with PPI do, howev- other infrastructure sectors. occurred in railways er, need to be seen in the context of the sector as a that have stayed in An International Labour Organisation (ILO) sur- the public sector. whole. There have been substantial reductions even vey of ports suggested that overstaffing was most where rail has remained in the public sector. In serious where there are port labor pools--a meas- Denmark's national rail company, for instance, ure that protects against casualization of labor-- employment fell by nearly 29 percent in one year, and that overstaffing was greater in operations from 1996 to 1997. Moreover, focusing on the enter- than in administration. There has been a dramatic prise rather than the sector can be misleading. New decline in employment in such ports. For example, jobs can be created with contractors and subcontrac- in the port of Buenos Aires, Argentina, the suspen- tors without showing up in the personnel numbers of sion of the existing labor agreements led to a 50 the post-PPI companies themselves. For example, six percent reduction of the number of workers. Port years after the concessioning of Bolivia's Eastern and reforms in Australia, France, and the United Andean railroads, more than 50 percent of the Kingdom cut employment levels by 40 to 60 per- employment in the sector is provided through out- cent (ILO 1996). sourced contractors (see Valdez 2002). The Public-Private Infrastructure Advisory Facility Valdez 2002 (a case study by the Public-Private (PPIAF) Port Reform Toolkit is a comprehensive Infrastructure Advisory Facility). source of information on all aspects of port reform, including labor issues. Ports The PIAFF Port Reform Toolkit can be downloaded The port industry has been heavily influenced by through the Internet from www.ppiaf.org. global competition, technological change, and con- 4 Labor Impacts of Private Participation in Infrastructure impact. They can influence port competi- Although job losses Box 2.4: Union Perceptions of Privatization's tiveness, cargo types, and volumes--and are common, some Impact in Ports ports have seen net thus employment levels. increases in " D eregulation, privatization, flexibility and employment · The nature of industrial relations is also per- casualization have become the magic following reform MODULE words and the solutions to all shortcom- tinent in assessing the impact. Effective and PPI. ings. They are supposed to create wealth for all, unions enable employees to better defend but the real and practical consequences are changes to jobs and work practices. mass dismissal of workers, worsening of work- ing conditions and deterioration of health and Many government-owned ports face these issues-- safety.... often in combination--and that can affect employ- "In nearly all cases, investments in new port ment conditions and labor­management relation- 2 infra- and superstructures coincided with down- ships in various ways (see table 2.1 and the PPIAF ward pressure on working conditions and Port Reform Toolkit). Where the right factors employment in order to cut labor costs as much come together, however, there can be net job cre- as possible. Deregulation, privatization and growing competition are leading to this down- ation in the ports sector (box 2.5). ward pressure and subsequently to the increas- ing use of nonunion labor, casualization of labor and flexibilisation of labor relations and working conditions, all of which are not in the interests of Water workers" (International Transport Workers' Private participation in water infrastructure often Federation 1997, p. 9­10). involves investment plans that propose rapid expansion of the service area. This expansion helps · Increasing competition compels port stake- protect employment numbers because any surplus holders to assess their cost structures and can be absorbed. Nonetheless, many state-owned labor force. Competition is one of the prin- cipal motivating forces behind labor reform in ports. Impacts on individual ports depend Box 2.5: Employment Growth in Mexican Ports on a number of factors, not simply PPI I n 1993 the Mexican government passed a alone. law that enabled reform of Mexico's ports. It · The nature of port operations--the extent dismantled the public agency Puertos Mexicanos, which was responsible for all ports, of containerization, the nature of the and provided for the decentralization of port man- cargo--and the emergence of regional hub agement, the privatization of port operations, and ports will be one factor. In particular where the encouragement of competition among ports. containerization and privatization occur One element of the reform was the transforma- about the same time, it is difficult to distin- tion of national collective bargaining into firm- guish clearly which factor is responsible for level bargaining by the new private operators, job losses. so allowing these firms to negotiate with their workers according to local and business condi- · The national economy has an impact. The tions. As a result the number of port workers effect of privatization in ports, rail, and employed by the public sector was reduced, but total port employment by private firms is rising other transport services depends on overall because of an increase in the activity of ports. economic and trade performance because For example, the port of Manzanillo had 2,100 much traffic will be demand driven. If the workers before the reform, and at the end of economy stalls, so will demand for port and 1997 the number had doubled. In Veracruz, with other transport services. an initial number of 6,647 employees, the increase was not so spectacular in relative · The performance of other related logistical terms, but employment had risen to 8,260. (rail, road terminals) and trade facilitation Source: Estache, González, and Trujillo 2001 (customs) operations can have a profound 5 Labor Issues in Infrastructure Reform: A Toolkit Expansion of the water companies have low labor productivity, and Electricity supply network has the need to improve performance may necessitate helped maintain In the electricity sector the need for rapid invest- employment work force reductions. ment and expansion of infrastructure also reduces numbers in the In the Czech Republic, for example, privatization of the extent of job losses. Nonetheless, the ILO 2 water sector. Even so, 25 to 40 percent water supply and sewerage utilities began in 1992 reported employment cuts of more than 20 percent reductions in and within five years the number of workers in the of the work force in a number of countries. employee numbers have been reported. water supply companies had fallen by 26 percent. For example, in Côte d'Ivoire employment fell by Similarly, in Hungary there was a 46 percent reduc- 22 percent over a 5-year period following the start tion in staff in one water company (ILO 1999b). of a 15-year concession. The impact appears to MODULE Employment reductions of a similar scale and have fallen particularly heavily on middle manage- range are associated with water PPIs in Africa, ment. The new management decided to "flatten" Asia, and Latin America (table 2.2). In Buenos the organization by reducing the number of hierar- Aires the numbers of permanent employees fell by chical layers from 18 to 5. about half to around 4,000. The consortium that As in other sectors, job losses also take place under won the concession for the service also reported, public ownership, without PPI. In South Africa, for however, that it increased its indirect employment example, there was a 40 percent reduction in the through contracts associated with its infrastructure number of workers employed by the publicly Taking account of expansion by as many as 5,000, producing a net contract workers, owned electricity utility Eskom over the six-year employment rose by increase of about 10 percent (Aguas Argentinas, period from 1993 to 1999. 10 percent in the personal communication). case of Buenos Aires water. Table 2.1: Possible Effects of Privatization on Employment in Ports Labor­management Employment effect Employment condition relationship · Reclassification of posts · Greater job mobility · Greater emphasis on profes- · New job patterns · Diminished guarantee of sionalism · More discretionary power · Labor retrenchment and tenure and job security in making management direct job losses · Need for retraining and skill decisions and formulating · Gender-biased employment upgrading enterprise policies policies · Longer working hours · More emphasis on strict · Discrimination against shop and/or increased workload implementation of those stewards and other labor · Payment by results decisions and policies representatives schemes and pay freezes · Marginalization of unions' · Medium- and long-term · Loss of seniority and service influence and bargaining employment gains resulting grades power from increased investment, · Wider wage differentials · More tedious wage bargain- growth of privatized firms, with greater incentive com- ing with preferences for indi- and diversification of servic- ponents vidual rather than collective es. agreements · Loss of pension rights · Tougher stance of manage- · Loss of social benefits ment on workers' perform- (for example, housing, trans- ance and work discipline portation, child care, health · Efficiency arguments insurance plans) and profit making gain · Abolition of the prohibition importance over social to undertake strikes and objectives. industrial actions. Source: Adapted from UNCTAD 1995. 6 Labor Impacts of Private Participation in Infrastructure Table 2.2: Employment Numbers and Labor Productivity in Three Latin American Cities before The electricity sector and after Private Participation in the Water Sector has seen substantial reductions in the Buenos Aires Cartagena de Indias Santiago work force. Before PPI 1995 Before PPI 1995a Before PPI 1995 However, these have MODULE Operating revenues occurred both in (US$ millions) 230 385 10 12 60 130 privatized firms and those staying in Number of employees 7,450 4,250 1,200 385 1,717 1,945 public ownership. Employees per thousand connections 6.4 3.3 14.0 4.5 2.1 1.9 a. Data for six months of operation. Source: de Luca 1998b, p. 187. 2 In Latin America's power sector the level of markets in 26 Asian and Latin American coun- employment reductions appears to have been tries, whereas countries that retained a monopoly Countries that have liberalized and larger than elsewhere, which (as in other sectors) showed only a 3 percent increase (Petrazzini allowed new private reflects the extent of previous overstaffing in 1996a). sector entrants have those countries. In Argentina the ILO has report- seen significant ed that 22 percent of the work force was cut in Petrazzini 1996. levels of net job creation in the the run-up to privatization and another 28 per- The nature of the new jobs in telecommunica- telecommunications cent was cut over a similar period following pri- tions--in terms of the skills, experience, and cultur- sector--on average, vatization (table 2.3). 21 percent in newly al approaches they require--has changed greatly. competitive markets. A similar pattern has been seen in Brazil (table 2.4 This means that retrenched workers from priva- indicates the extent of reductions there). This also tized telecommunications companies are not neces- shows that work force adjustments can be substan- sarily well equipped for the new jobs that have tial even where there is no PPI. been created (box 2.6). A great deal of retraining can be required, and in some cases that challenge Telecommunications has been tackled in the context of PPI. In the case of Sri Lanka Telecom, for example, none of the In the telecommunications sector the natural 800 workers was retrenched but many were monopoly characteristics that underpinned state ownership have largely disappeared. Technology has brought dynamic changes, including increased convergence with computing and media, while the Table 2.3: Argentina: Restructuring of Electricity market has become more segmented among long- Work Force after Privatization distance, data, mobile, and local telephone services, Number of employees for example. At time of After privatization privatization Percentage Company (1990) (1993) change New service providers have entered the market since the mid-1980s, including specialist cellular Central operators and Internet service providers. Therefore, Costanera 795 661 ­16.8 although typically there has been a reduction in the Central number of workers employed by privatized Dock Sud 75 60 ­20.0 telecommunications companies, growth in the sec- Central Pedro de Mendoza 59 31 ­47.5 tor among new entrants has generated more jobs than the numbers lost in the former public monop- Central Puerto 1,115 798 ­28.4 oly enterprise. Edelap 741 542 ­26.8 Edenor 6,443 4,164 ­35.3 A recent study showed that from 1990 to 1994, Edesur 6,529 5,051 ­22.6 employment increased by an average of 21 per- Total 15,747 11,307 ­28.4 cent in newly competitive telecommunications Source: de Luca 1998b, p. 194. 7 Labor Issues in Infrastructure Reform: A Toolkit Table 2.4: Employment Reductions in Brazilian Electricity Utilities Employees Employees Percentage Company before restructuring (year) after restructuring (year) change CEMIGa 19,981 (1991) 14,800 (1997) ­26 2 CERJ 5,700 (1996) 2,160 (1997) ­62 COELBAa 7,231 (1992) 4,763 (1997) ­34 ESCELSA 2,500 (1994) 1,717 (1997) ­30 Light 10,658 (1995) 6,541 (1996) ­38 Note: Data provided to ILO by the companies named. a. In these two cases the "after" figure was before PPI; in the other cases, PPI occurred between the years indicated. Source: de Luca 1998b. MODULE retrained in new skills suited to the new technolo- On the other hand, Tanzania experienced a 45 per- gies. In India, too, a freeze on recruitment was cent decline in employment from 1994 to 1999 linked to a program of retraining in the main through attrition, voluntary separations, early telecommunications utility, Bharat Sanchar Nigam retirements, and transfers, coinciding with an Limited. expansion in franchised operations. Improved pro- ductivity, performance, and business allowed a sig- nificant expansion (20 percent) of employment numbers in 2000. Postal Services A recent ILO review of employment trends in In Latin America and the Caribbean employment postal services suggests that experience in postal remained stable or increased in several countries services varies--perhaps more than in other sec- (Barbados, Brazil, Chile, Colombia, Jamaica, tors. Among the main factors identified in job loss- Mexico, Peru, and República Bolivariana de es by the ILO are mergers and acquisitions, global- Venezuela) between 1995 and 1999, but declined ization, changing markets, new technologies, in Argentina, Costa Rica, El Salvador, Panama, changing fashions, and structural and regulatory and Trinidad and Tobago. In Costa Rica, nearly changes. a quarter of total staff took voluntary retirement in 1998 following the creation of an autonomous It is therefore difficult to separate the impact of the state postal firm, but in the following years technologies from that of privatization and reor- recruitment to cover new demand and services ganization, but technological and related synergy largely restored employment numbers to their effects and increased efficiency have influenced the previous levels. In Argentina a program of volun- quantity and quality of jobs in the postal service tary departures led the permanent work force to and the structure of the work force (ILO 2002). fall by 25 percent from 1996 to 1999. In post, as In Malaysia in 1992 the Postal Services in ports and telecommunications, Department was transformed into Pos Malaysia, the impacts of PPI and nearly all employees chose to transfer to the LABOR PRODUCTIVITY are difficult to new corporation rather than remain civil servants. separate from those PPI has enabled many governments to overcome of technology and Corporatization was accompanied by network long-standing problems of low labor productivity competition. expansion, new business, and services (advertising in public services. This has been done not only mail, courier services, printing, and express post, (and not even always) through reducing the work for example), so employment increased by 20 per- force but also through capital investment and serv- cent from 1992 to 2000. ice expansion. 8 Labor Impacts of Private Participation in Infrastructure Box 2.6: ILO Analysis of the Labor Impact of PPI in the Telecommunications Sector T he ILO has concluded that privatization 1980s did not result in staff reductions. For some and liberalization "have generally resulted years the opposite happened while the market in job losses among traditional telecommu- underwent considerable expansion--in the years MODULE nications services operators in OECD following privatization, the number of employees [Organisation for Economic Co-operation and in Korea Telecom increased by 32 percent, but Development] countries, in which markets are fell back by 12 percent following the period considered mature, with generally satisfied 1997­99, with the Asian financial crisis. demand for basic services, and competitive "In Mexico, the privatization of Telmex did not in offers of new services. Job creation in industrial- itself result in job cuts--following an agreement 2 ized countries is mainly due to the emergence of with the trade unions there were no layoffs, and new enterprises or services." the work force increased (on paper at least) by However, "in low-to-middle-income countries 30 percent in the period 1997­99." and those in transition, the supply of basic serv- As well as capital scarcity, many countries have ices has not yet reached saturation point and is also suffered from telecommunications skills sometimes far below it; employment creation is shortages, which, says the ILO, "is often a con- hindered by lack of solvent demand (demand in sequence of lack of investment in training, or lack general is not lacking); and growth in the supply of basic information and communication technol- of telecommunications services is often impeded ogy (ICT) skills among potential recruits." by local shortages of capital, although mobile As a result, foreign recruitment is a frequent communications are experiencing huge growth in option. "In Africa, where average teledensity is many developing countries. less than two telephone lines per 100 inhabitants, "While employment has fallen and continues to with most lines concentrated in urban areas, the fall among the main traditional operators in lack of technical staff and expertise means that mature markets, this situation is clearly not true ICT-trained employees may well move to richer for operators (whether privatized or not) in coun- countries. Thus the principal employment preoc- tries continuing to construct and/or modernize cupation may be how to retain skilled staff and their network. how to attract new ones, rather than a need to "Thus, in the Republic of Korea, the partial priva- cut employment numbers, despite budgetary tization of telecommunications and the termina- constraints." tion of public employee status at the end of the Source: ILO 2002, pp. 73, 84, 89. All infrastructure operations can identify methods Almost invariably, labor productivity measured in for measuring labor productivity and international terms of output per employee rises following PPI. benchmarks in the infrastructure sectors that are In many cases, employment reductions are one based on those methods. The practical use of those means of driving up productivity, and in some labor productivity measurements and benchmarks cases they are indispensable. Increasing labor pro- is less simple, however, because many circumstan- ductivity does not, however, necessarily involve job tial factors have to be taken into account. cuts, and even when it does, there are other pro- Improving labor productivity is a matter of com- ductivity-enhancing measures to be taken as well bining quantitative information with qualitative (see box 2.7). In fact, other ways of increasing judgment in the most effective ways. Module 3 labor productivity can be more important than addresses those issues more fully. For the purposes employment reduction. Badly designed retrench- of this module, the issue to be stressed is that PPI ment programs that lead to the wrong workers typically is associated with increasing labor pro- leaving (the adverse selection problem) or to mass ductivity measured in terms of output per employ- demoralization can even have the effect of reducing ee. This is, in part, because labor productivity tends labor productivity. to be too low under state management. 9 Labor Issues in Infrastructure Reform: A Toolkit PPI affects labor cent productivity increase was attributable productivity in a Box 2.7: Productivity Growth in Latin to service expansion, with only about a variety of ways. American Telecoms Following PPI quarter the result of layoffs. avi Ramamurti has reported "explosive Capital investment, especially in new tech- 2 R · growth" in labor productivity in utilities and telecommunications following privati- nology, enables the same number of workers zation in Latin America. It was achieved not to produce more. This has been especially necessarily through cutting jobs, but often significant in the telecommunications sector, through expansion of coverage, deployment of but has been instrumental in increasing pro- new technology, and other means. Even when ductivity across other sectors as well. employment numbers are sharply reduced, that is not the only factor in productivity increases. · Greater commercial orientation of enterprise MODULE Mexican telecoms increased the number of lines managers: This, is however, easier in a pri- per employee by 13 percent a year in the first vatized environment. Public managers some- three years of privatization (which occurred in times operate under conflicting sets of objec- 1990), compared to a decline of two percent a year throughout the 1980s until the last two tives--to provide an efficient service while years before privatization when 10 percent employing surplus labor for political or increases were recorded each year. social reasons--and often have been unable Telecoms in República Bolivariana de Venezuela to tackle productivity problems in a sus- also recorded double-digit labor productivity tained way. increases in the first two years of privatization (beginning in 1991), and Argentina's lines per · Better management and faster decisionmak- employee rose by 19 percent in the first three ing: Again, private sector managers are years after privatization (1990) compared with often able to make normal management 6.5 percent in the two years before. decisions more quickly than are public sec- Ramamurti explained how it was done: "The tor managers. Delayed decisions on spend- dramatic increases in labor productivity resulted ing for critical repairs, small investments, or from a deliberate effort to freeze the size of the work force even as the network expanded by new recruitments hinder productivity. Public double digits. In Argentina, where workers were sector managers often have limited delegat- not promised job security after privatization, the ed financial authority, suffer from public new owners shed almost 50 percent of the orig- sector liquidity shortages, and need to gain inal work force, even as they hired younger per- the approval of administrators in distant sons with skills in areas such as information capital cities to make minor expenditures. systems or marketing; companies recovered the US$15,000­$20,000 spent on severance com- Of all the infrastructure sectors, railways have pensation per employee in two years or less." exhibited some of the highest levels of productivity Source: Ramamurti 1996, pp. 26­28. improvements after PPI. This reflects the high level of surplus labor the railways have had to carry over the years and the subsequent high levels of Other ways in which enterprise restructuring-- work force downsizing. A review of six rail opera- through PPI or public sector modernization-- tions concluded that: brings labor productivity improvements include the following: The most dramatic results of the involvement of the private sector in the concessions (or pri- · Service expansion prompts the output side vatizations) are undoubtedly the significant of the output-per-employee ratio to improvements in labor productivity. In all but increase--for example, more homes are con- one case (Côte d'Ivoire/Burkina Faso--a 33 nected to the water supply. In Brazil's elec- percent improvement in five years), labor out- tricity sector, for example, it has been esti- put per employee (expressed as the sum of mated that about three-quarters of a 10 per- ton-km plus passenger-km per employee) at 10 Labor Impacts of Private Participation in Infrastructure least doubled and more often tripled or Traffic units (TUs) Labor productivity per employee quadrupled. To some extent this was a result improvements have (thousands) been substantial of traffic growth, but the greater share of the 6,000 Before concessioning following PPI in improvement must be attached to the pro- After concessioning M 5,000 railways. grams which reduced the redundancy in the O 4,000 labor forces of the railways (Thompson, Budin, and Estache 2001, p. 10). D 3,000 U Thompson, Budin, and Estache 2001. LE 2,000 1,000 2 RFFSA: RFFSA: RFFSA: RFFSA: RFFSA: RFFSA: Bolivia: Bolivia: Figure 2.2 shows traffic units per employee--the FCA MRS FSA Tereza Oeste Nordeste Andina Oriental Cristina standard measure of labor productivity in rail--in System:line six Brazilian and two Bolivian freight concessions Figure 2.2: Labor Productivity in South American Rail before and after PPI. Companies Note: The table compares the Andean and Oriental lines of Service expansion and capital investment form a the Bolivian railway network, and six divisions of the Brazilian substantial part of the productivity increase in federal railways (RFFSA) system: the midwest (Ferrovia Centro Atlântica, FCA), the southeast (MRS Logistica­MRS), the some cases, such as Trinidad and Tobago Post (box south (Ferrovia Sul Atlântica, FSA), the Ferrovia Tereza 2.8). Another example is Côte d'Ivoire electricity, Cristinia in Tubarão, the west (Oeste), and the northeast (Cia Ferroviária Nordeste). which was privatized in 1990. By 1995 labor pro- Source: World Bank, Private Railways Operations Database. ductivity (kilowatt hours per employee) rose by nearly 25 percent. The number of consumers per employee showed a slightly slower rate of increase, from 128 in 1990 to 156.7 in 1995, a rise of about costs and bring compensation more into line with 22 percent. Over the same period the number of market conditions. Equally, where public employ- workers employed fell by less than 5 percent (ILO ees have been paid too little to enable recruitment 1999b, Plane 1998). and retention of some grades of skilled workers, market forces will push pay upwards. Labor unions are able to take advantage of tight PAY market conditions to negotiate pay and benefit As with employment numbers, the impact of PPI increases for the workers whose skills are in short on pay can be seen as an outcome of underlying supply. They also may seek to extend the same and historical factors rather than of PPI as such. improvements to unskilled workers or others in Privatization and other forms of PPI have tended less demand. to expose pay determination more to market In addition to the general tendency for PPI employ- forces, but this has been offset to varying degrees ers to relate pay more to market conditions, there by legal provisions, collective agreements, and are four other trends that can result from PPI labor union strength. Therefore, the impact of PPI across a range of sectors and countries: on earnings has varied in accordance with the net influence of these various factors. 1. The first trend is monetization of compensa- tion (pay and benefits) packages as the non- In some sectors and grades publicly employed wage benefits are converted to monetary workers have received higher compensation than amounts, bought out, reduced, or eliminat- equivalent workers in the private sector. In these ed. Private investors are reluctant to take on cases competitive pressures will encourage the the wide range of fringe benefits often found agencies implementing labor programs to reduce in state-owned enterprises (especially in tran- 11 Labor Issues in Infrastructure Reform: A Toolkit Changes in pay and determination, a trend intensified by the compensation Box 2.8: Service and Productivity increased use of subcontractors and casual- depend not only on Improvements at Trinidad and Tobago Post private sector ization of labor initiatives but also nder the 1999 Postal Act, following poor 4. The fourth trend is the change that pay sys- 2 U on labor laws and performance by the public operator, contracts. tems undergo after PPI as new managers Trinidad and Tobago Postal Corporation (TTPost) was created, in consultation with the seek to relate earnings more directly to pro- trade unions. A management contract was ductivity performance. awarded to New Zealand Post, intended to In practice, the impact of these market trends can enhance the reach of the universal service in TTPost as well as to improve revenues, profits, be constrained by rigidities in the pay revision and customer satisfaction and reduce transit process. These rigidities may be set out in labor MODULE time. laws, collective bargaining agreements, or labor According to World Bank reports TTPost has: contracts, some of which may predate the PPI · Opened new, better-equipped outlets offering transaction by many years. improved customer service · Expanded home delivery to previously poorly In the utility and infrastructure companies of the served areas former East African Community (EAC), for exam- · Established a wider range of products and ple, pay and benefits were very different between services (including inland courier services) workers originally employed by the EAC and later and expanded their availability recruits. These differentials have persisted in the · Enhanced customer satisfaction years following the dissolution of the EAC, but · Improved the reliability, speed, and security of more recent PPI reforms are now allowing the mail delivery opportunity to revisit and harmonize pay systems · Increased revenue, productivity, and financial so that they are more equitable. In some Mexican performance ports, longshoremen who had previously been paid · Improved working conditions and staff moti- by the ton of cargo handled were paid by the day vation. after privatization. In the electricity privatization Source: ILO 2002. process in Pakistan, an agreement with the All Pakistan State Enterprises Workers' Action sition countries, where state-owned enter- Committee in 1991 provided for a 35 percent prises had supplied a wide range of social increase in basic pay and for allowances to be paid services). In some cases pay and benefit at the new rate. structures are so complex that managers can In some cases PPI has produced "two-tier" work hardly assess and compare the total compen- forces in which the pay (and other conditions) of sation that workers receive. Monetization retained workers is protected to some degree and and restructuring of remuneration packages new employees are recruited on different terms. An are then essential, simply to make compensa- example is Cote d'Ivoire rail, where new recruits tion and pay more transparent. have lower basic wages than those retained from 2. The second trend is an increase in pay dif- before PPI, but they also have bonuses mostly ferentials, partly in response to labor market related to performance. Average pay in Cote conditions and especially to attract and pro- d'Ivoire rail has increased following PPI, but so vide incentives in the recruitment and reten- have differentials; therefore, the effect on different tion of experienced and skilled technicians grades varies greatly. and managers. In some cases, as employment has expanded in the 3. The third trend is the erosion of national- longer term, the success of PPI has made pay level collective bargaining, with a shift to increases above the rate of inflation affordable. For enterprise-level bargaining or individual pay example: 12 Labor Impacts of Private Participation in Infrastructure · Following privatization, staff numbers in the fixed percentage of final salary at retirement, as Workers' pay has Guyana telecommunications enterprise were well as a lump-sum payment. Such arrangements improved following private participation cut in half, but the salaries of retained also exist in the private sector in some countries, in a number of employees increased by 90 percent (Hinds but are on the decrease; the trend is toward pen- cases. MODULE 1995). sion plans in which more risk is borne by the bene- ficiary and less by the employer (see module 5). · In Argentina the real wages and salaries of employees of Entel and the Buenos Aires Privatization and major downsizing can have pro- water concession increased by 45 percent in found effects on the pension plans. Those workers the three years following privatization who are close to retirement and who are made (Kikeri 1998). redundant would be entitled to immediate benefits, 2 · In Chile the new owners of the electricity while the amount of contributions that flow into Pensions can be companies (Chilgener and Enersis) increased the plan in the future are significantly reduced. a major issue, wages and introduced profit-sharing plans. This could seriously affect the financial viability of especially where the fund. Where the private investor is required to enterprises have · In Orissa, India, retained employees in the set up a pension plan for the work force taken offered generous privatized power sector received pay increas- over, as well as for new employees, the likelihood is defined-benefit es as well as improved promotion opportu- (final salary) plans. that an accumulation-type plan will be established nities (Ray 2001). that is subject to investment risks and that has less Ray 2001. guaranteed benefits than are provided under defined-benefit arrangements. · Workers at Malaysia's Port Kelang who remained with the partly privatized compa- Pension arrangements are often a key issue in labor ny received compensation increases averag- negotiations in the context of PPI. A report of an ing 12 percent. ILO bipartite meeting on privatization of munici- pal services (including electricity, water, public · In Mexico wages in a sample of privatized transportation, and other infrastructure sectors) firms increased far in excess of rates else- noted that privatization often "entailed a lot of dis- where in the economy, with larger gains for tress" for the workers affected: blue-collar workers than for white-collar workers (Kikeri 1998). The disappearance or reduction of pension schemes for which new employers had little regard represented one of the most dramatic BENEFITS consequences. Even where pension schemes Public employees often enjoy a range of nonwage were maintained, new upper limits had been benefits that tend to be both greater in quantity set to qualify for benefits in countries such as and different from those that are more typical of Kenya, resulting in workers with fewer years the private sector. As mentioned in the pay section, of service leaving employment with no benefits PPI tends to lead to monetization of nonwage ben- (ILO 2001, p. 27). efits as they are bought out. In addition, pension However, the same meeting also heard that "social arrangements and other social provisions tend to dialogue would provide agreed solutions to this change with PPI, and new benefits, such as dilemma in the form of provisions on early retire- employee shares, are sometimes introduced. ment, limited redundancy, aid to unemployed workers, and retraining." An example was given: Prior to privatization of the electricity sector in Pensions Hungary, the trade unions had negotiated an Most public sector pension plans are of a defined- agreement with the Government. It would benefit type, usually guaranteeing the worker a transfer five percent of privatization revenue to 13 Labor Issues in Infrastructure Reform: A Toolkit Housing, education, a trade union managed fund in support of 1991.... There is [also] a savings and loan and other in-kind workers who left public companies in order to fund, which offers interest-free loans over peri- facilities were transferred to pay the differences between pensions and ods of 12 to 15 months to workers who have municipalities in salaries in case of early retirement, and for a saved for at least four months. Finally there is a 2 some transition time to supplement unemployment funds collective investment fund by means of which countries. beyond state provisions. Steps had also been compulsory wage deductions finance the acqui- taken to develop tailor-made training schemes, sition of CIE shares. The shares are kept in an and the results had been so positive that account which remains blocked until the Hungary had become a model for other coun- employee leaves. The funds were widely tries of Central Europe (ILO 2001, p. 27). shunned at the outset because the unions saw MODULE them as a kind of paternalistic balsam. Other examples of changes in pension arrange- However, the annual report for 1995 talks of ments both before and during PPI are described in growing use. The savings and loan fund alone module 5. has made 9,000 loans (Plane 1998). The extent of the challenge has been much greater Other Benefits in the "transition" (formerly centrally planned) Workers in infrastructure enterprises may derive economies and especially in one-company towns not only wage income from employment but also a and rural areas. In Russia, for example, enterprises "social wage" composed of many elements. were responsible not only for a range of mandato- Housing; health care; childcare and preschool edu- ry benefits, such as sick pay, maternity allowances, cation; and sports, recreational, and cultural facili- and paid vacations, but also for a number of in- ties have been provided. The introduction of PPI kind benefits (for example, kindergartens and may lead to changes in these arrangements. recreational facilities). In the case of in-kind bene- fits, or "social assets" as they are known, the gen- For example, as part of their remuneration, railway eral policy has been to "municipalize" them. The workers in Côte d'Ivoire were covered by a health results, and the impact on workers, however, have insurance program. The concessionaire who won varied greatly (box 2.9). the contract under the railway privatization pro- gram did not wish to inherit the plan, but was agreeable to establishing a new one. Under the lat- WORK PRACTICES ter plan, the cost of contributions is shared The various forms of PPI tend to result in changes between the workers and the company, and the to working conditions and practices. The way this workers pay a larger share than they did before. is done and the extent to which workers are Although on paper it is a worse arrangement for involved in shaping new arrangements vary among the workers, in practice the state employees' funds employers, just as they do in the private sector had been heavily in debt because the government more generally. failed to pay its contributions. Most employees no longer even applied to the fund for reimbursement Working Conditions of medical expenses. Now their entitlements are As with other aspects of PPI's effect on labor, there smaller on paper but they can rely on their being are some general trends, namely: honored. · PPI tends to produce flatter organizations by Also in Côte d'Ivoire the electricity concession removing layers of middle management. company CIE set up three funds for its employees: · Labor contracts tend to be simplified, often Firstly, there is a social fund designed to pro- allowing the work force to be deployed in vide allowances for family events. Hundreds of more flexible ways (as in the case of Telmex, workers have benefited from it each year since presented in box 2.10). 14 Labor Impacts of Private Participation in Infrastructure PPI tends to bring Box 2.9: Municipalization of In-Kind Social Benefits in Russia more focused T he Russian privatization legislation required resources. A survey of 92 enterprises in five organizations, flatter that in-kind benefits, such as housing, Russian cities, conducted by the European structures, and simpler labor health care, kindergarten, and a range of Union's Technical Assistance to the contracts. MODULE sports, recreational, and cultural facilities, transfer Commonwealth of Independent States project, to the municipality (which had the discretionary revealed that workers in most of the surveyed power to privatize them instead). The policy was enterprises experienced their access to housing intended to maintain services seen as important as having declined--"markedly" in 44 percent of to social justice while it relieved entrepreneurs of cases. About half of the workers said cultural responsibilities to which they were not suited and services had declined, and about a third felt their that would have undermined their financial com- health, kindergarten, and sports services had 2 petitiveness. Enterprises were expected to deteriorated. In most cases, however, enterprises increase wages as a result of the savings said they had not realized savings that enabled achieved. them to increase wages. In general, however, municipalities lacked the The principal source of these problems was that funds to maintain the same levels of services, or municipalities did not have the resources to keep in some cases to maintain them at all. This lack the services going properly or even at all. At the was dealt with in a variety of ways. In some same time a large minority of the enterprises that cases the enterprises continued to fund the had yet to transfer the assets said they would services, at least in part. In many of those cases prefer to keep them, and most wanted to keep they did so willingly, perceiving some of the recreational, sports, and cultural facilities, in both services concerned to be a better financial cases because they represented important bene- option than shedding them, in which case pres- fits in lieu of wages. However, fewer enterprises sure for higher wages would have been corre- wanted to retain responsibility for health services spondingly greater. To do this while complying and childcare services. with the legislation requiring transfer to munici- According to one account, "The survey shows palities, some enterprises rented services back that, contrary to earlier expectations, municipal- from the municipalities. ization of the social assets of the majority of From 1992 to 1996, this scheme proceeded quite enterprises has not translated, in the current eco- rapidly but with a variety of effects, and in the lat- nomic environment, into a significantly improved ter part of the 1990s the difficulties that had aris- financial state and higher competitiveness. Only en led to increasing numbers of conflicts 15 percent of enterprises which divested their between enterprises and municipalities and a social assets estimated the subsequent positive slowing down of the process of transition. One changes as significant." frequent difficulty was the decline in the scale Source: Vinogradova 2002, p. 197. and quality of services because of the lack of · Pre-PPI restructuring often means disposal The impact of PPI on working hours varies. of noncore assets or withdrawal from non- Influencing factors include labor market condi- core operations and thus the elimination or tions, the legal framework, union strength, and outsourcing of some jobs. attitudes. Attempts to increase labor productivity do not necessarily entail longer hours of work-- In several sectors infrastructure companies have indeed, they can involve reducing hours and inten- sought to establish greater flexibility (increased sifying work--but hours certainly have increased use of part-time work and fixed-term contracts, in some cases. For example, prior to the privatiza- redeployment, and decentralization of labor tion of Entel, the Argentine telecommunications relations) and other changes in working meth- company, the government changed the work week ods, employment, and industrial relations. For from 35 to 40 hours. At times, however, govern- permanent staff, however, PPI often brings ment and the PPI partner work well together to greater investment in training, as in Côte maintain standards of worker competence and pro- d'Ivoire's electricity concession (box 2.11) and tect safety through regulation. Mexico's railways. 15 Labor Issues in Infrastructure Reform: A Toolkit The replacement of providing a transition for workers into new private permanent jobs with Box 2.10: Changing Work Practices in sector employment and retaining some access to casual or contract Mexico Telecoms work is a major their specialist skills and knowledge (box 2.12). I concern for trade n general, of all the beneficiaries of a state unions. enterprise, workers and unions offer the In Côte d'Ivoire, the rail concessionaire, SITARAIL 2 fiercest resistance to privatization because (Société Internationale de Transports Africains par EL they fear losing jobs, pay, and influence. Telmex Rail), agreed in principle to favor companies creat- was no exception, inasmuch as its employees ed by retrenched former state railway workers U were among the best paid in Mexico and when looking for subcontractors. In practice, track D employment in the company had consistently grown faster than the size of Telmex's network maintenance, company car fleet management, and O since the government had taken control of the printing of timetables and tickets have been con- M firm. The telephone workers' union (STRM) tracted out to firms set up by employees of the for- exerted a great deal of influence on the internal mer state rail company. workings of the company, as did unions in other state enterprises. The STRM recognized that Other PPI companies in Africa have also subcon- privatization could change that influence. tracted to companies set up by their own former President Salinas seems to have become per- employees. In Guinea's water PPI, for example, sonally involved in securing the union's support for privatization, presenting workers with a car- some 250 retrenched workers were given subcon- rot-and-stick offer. The carrot included a prom- tracts through 20 small cooperatives. The subcon- ise that no existing worker would lose his or her tracted workers organized into 20 small enterprises job as a result of privatization and that workers that took over responsibility for installing new con- would receive a stake in the privatized nections, maintaining canals, and landscaping. The firm....The stick consisted of a veiled threat that if the STRM did not go along with the govern- concession company gave them training, logistical ment's policy, Telmex would be privatized any- support, and initial working capital. how, without any guarantees about the welfare of its workers.... Sometimes, PPI leads to less rather than more sub- The carrot-and-stick combination yielded three contracting because nontransparent agreements are concessions from the union: first, the union cancelled: agreed to support the privatization of Telmex with the safeguards promised by the govern- In Côte d'Ivoire...the new Compagnie ivoiri- ment; second, it agreed to replace the STRM's enne d'électricité (CIE) contracts out much 57 labor contracts with Telmex with a single less than its predecessor, the EECI....Electrical contract for all unionized workers, along with a firms, which were often set up by members of reduction in the number of job classifications from more than 500 to just 50; and third, it gave the public enterprise's staff (moonlighting), management the freedom to introduce new have collapsed after enjoying prosperous years technology, including the freedom to redeploy when the process of privatization had not yet workers. started (Plane 1998; see also Plane 1999). Source: Ramamurti 1996, pp. 79­80. Gender Impacts Subcontracting and Outsourcing In recent years among other political and social In recent years public and private sector organiza- trends there has been increasing commitment by tions have increasingly outsourced noncore opera- governments, employers, and unions to promote tions that can be provided more cheaply or at a workplace equality between women and men. This higher quality by external specialists. Subcon- has taken a variety of forms in practice, such as tracting can also be a redeployment mechanism. government commitments to ending discrimination Subcontracts are one way for newly privatized of various types and combating sexual harassment, infrastructure firms to reduce labor costs and business commitment to retaining skilled and change working practices and conditions while knowledgeable workers after maternity leave, and 16 Labor Impacts of Private Participation in Infrastructure Subcontracting is Box 2.11: New Working Practices in Côte d'Ivoire Electricity not only a fter Côte d'Ivoire concessioned its electric- A detect immediately where gains in economic mechanism for work ity services to a company called CIE, the efficiency can be made. Through privatization, force restructuring but also a tool for major shareholders of which were the the whole internal organization of the firm has redeployment of MODULE French companies SAUR and EdF, the organiza- been metamorphosed. displaced workers. tion was flattened hierarchically by reducing the The arrival of the concessionaire was accom- number of grades by half, from 18 to 9, and later panied by a transfer of technical and organiza- to 5. A "management by objectives" approach tional know-how. New work procedures codi- was also instituted, with workers reorganized into fying the duties of employees at their post "cost centers," each with a defined list of tasks were introduced and helped raise the efficien- but with considerable autonomy about how to cy of the firm's operations. In support of this 2 achieve them. Performance was closely moni- strategy, a great deal of effort was put into tored in terms of achieving targets, and bonuses training further the already proficient workers. of between 0.75 and 1.25 times one month's CIE also brought back in-house the training oper- salary could be earned. In the main, bonuses ation that had previously been contracted out were awarded (or not) to the groups as a whole, because it wanted to develop a new enterprise with a small additional incentive payment also culture among its staff. So it set up a training available to individuals. division that offers two-year courses to all African The geographic decentralization of distribution electricity companies and that issues a vocation- is an illustration of this effort to make individu- al certificate in public utility management als responsible within their group. CIE is divid- approved by the Ministry of Higher Education, ed into a number of full autonomous regional plus short courses. Four years after the begin- boards. They in turn are subdivided into geo- ning of the concession, more than 2,000 CIE staff graphical sectors, each managing about had been through courses there, and the compa- 15,000 consumers. These sectors have great ny's training budget had risen to a level equiva- freedom of initiative, so they can be regarded lent to four percent of its wage bill. as profit centers. By means of computerized Source: Plane 1998, p. 29. comparative analyses, management can union campaigns for equal pay for work of equal changes in work organization and job specifica- value. tion are more likely to be detrimental to women given that they are disproportionately represent- There is little hard evidence of the extent to which ed in part-time work and are therefore less visi- PPI has affected women workers differently from men, but what little there is, taken together with evidence from other sectors (see box 2.13), sug- Box 2.12: Outsourcing in Argentine gests that the impact often falls harder on women Telecoms than on men, particularly in transition economies "T elecom and Telefónica (the two compa- where female participation in the labor force is nies which replaced Entel) also imple- high. Sector impacts will vary, however. In mented voluntary retirement plans, which Vietnam overstaffing of state enterprises was con- saw the departure of approximately 5,000 work- centrated in male-dominated sectors, such as con- ers, or 10 percent of Entel's work force.... Interestingly, Telecom and Telefónica rehired a struction, mining, and transportation (Rama considerable number of those workers as con- 2001a). tract employees. In this way, the companies obtained skilled labor while reducing their costs, Rama 2001. such as pension contributions, vacation time, health insurance, and other fringe benefits. This In the case of telecommunications the ILO notes maneuver also reduced the number of unionized that: employees." Source: Ramammiti, 1996, p. 135. 17 Labor Issues in Infrastructure Reform: A Toolkit to compete for the remaining positions. Box 2.13: Contracting Out and Equal Restructuring involving flatter management Opportunities in the United Kingdom structures often affects women workers more T he Equal Opportunities Commission--an than their male counterparts, with low-level and official body of the government of the 2 middle-management positions being most likely United Kingdom--reported in March 1995 that compulsory competitive tendering (CCT) to disappear (ILO 2002, pp. 124­5). had discriminated against women because such The ILO cites restructuring at the Tanzania effects as loss of jobs, increased reliance on Telecommunications Company in support of its temporary and casual employment, and deterio- ration in terms and conditions of employment argument, but also notes evidence of increases in affected them disproportionately. the percentage of women employed in some public MODULE Results of a study of the impact of CCT in 39 and private post and telecommunications enterpris- local authorities showed that women's employ- es, and the redeployment of women into manage- ment fell by 22 percent while men's employment ment and customer service functions (ILO 2002). fell by 12 percent. In building cleaning and edu- Overall there have been few empirical studies of cation catering--both female-dominated work the variable impact of PPI on women and men in forces--male employment actually increased while female employment fell by 31 percent and these sectors. 11 percent, respectively, in the cases examined. In energy and water utilities, most of the work In building cleaning hours fell by 25 percent and "pay rates have not generally increased and in force tends to be male, but unions claim that job some cases have declined, particularly for part- losses still affect women disproportionately because There is little time workers" (p. 71), while employment they tend to be concentrated in administrative and empirical evidence declined by 29 percent. The most severely clerical functions. New owners are more likely to on the differential affected workers across the board were part- effects of PPI on integrate such functions into their existing opera- time women employees. Many of them had their men and women in tions after privatization to achieve economies of weekly hours of employment reduced to below the work force. a key threshold level (16 hours) for protection of scale (Belser and Rama 2001). Unions also point employment rights. out that many social protections geared toward Source: Escott and Whitfield 1995. women only exist because unions fought for them, so if unions are weakened then it is likely that these protections also will be weakened. ble to showcase their skills and exercise their rights. Moreover, the main jobs that have declined in number in that sector--such as SUMMARY those of telephone operators--were mainly Evidence shows a diversity of labor effects resulting done by women. Commonly, overstaffing from PPI. Nonetheless some key trends and factors occurs in administrative and clerical positions, affecting outcomes in particular situations can be rather than in the more technically skilled abstracted from the available information. The jobs.... The same obstacles that hinder the main comments that can be made are these: access of women to management positions can also disadvantage them in downsizing.... At the · Analysis of impacts is confounded by the individual level, women might lack the appro- wide range of factors that affect the labor priate education, training or experience to be adjustment at the country, sector, and enter- retained during restructuring, particularly when prise levels. Box 2.14 provides a generalized managers are competing for fewer positions, summary of some of those factors. and criteria such as seniority and "last in, first out" considerations are used. Structural and · The fact that job losses occur at the time of cultural factors can also be an obstacle. Women PPI does not necessarily mean that PPI is the managers might not have the same professional direct, or only, factor causing those job loss- networks and personal contacts to enable them es. Significant job losses have also been 18 Labor Impacts of Private Participation in Infrastructure competition from other modes (for example, Some global agreements between Box 2.14: Key Factors Affecting the Labor rail worldwide and fixed line telephone serv- trade unions and Impact of PPI ices in industrialized nations); sectors where investors have been · The sector concerned, and especially the traditions of overstaffing have suffered fol- established. MODULE nature of the market in that sector, a category lowing introduction of new technologies that in turn has two key variables: whether (such as port labor pools following con- and to what extent the market is expanding or tainerization); and enterprises that have contracting, and whether and to what extent been shielded from the need to adjust for the market is competitive many years. · The extent to which PPI is associated with changes in technology that significantly affect · Fewer job losses occur in sectors where 2 the sector's labor intensity demand is rising rapidly (such as fixed and · The existing level of labor redundancy and mobile phone services in developing coun- productivity in terms of relevant international tries) or where there is demand for expan- and national benchmarks sion of the network (for example, water and · National and local labor market conditions sanitation). and social protection provisions · The relative costs of labor and capital in the · Many of the analyses of job loss have been economy concerned limited by their focus on the impact at the · The nature of the legal framework governing enterprise level rather than at the sector labor issues, and whether (and how) that is level. There is little information on the net changing effects on employment when taking account · The content of existing formal agreements (for of growth in other modes (for example, example, labor contracts and collective bar- trucking, bus, and rail operations; mobile gaining agreements) and data telephony as well as fixed line serv- · Government policy regarding employment ices); the overall trend toward outsourcing protection and creation of services in the sector because outsourced · The balance of influence between interest groups in the labor relations environment employment is not recorded by enterprises; and expansion of ancillary services (for · The nature of the political relationship between the government and the relevant example, distribution and supply chain labor unions logistics businesses at terminals of port and · The attitudes and strategies of government, rail operations). investors, and labor leaders · Employment reductions drive productivity · The capacity and preparedness of govern- improvements in many sectors. Expansion ment, investors, and labor in support of their strategies. of services, however, can also improve labor productivity when employee numbers remain stable. recorded in infrastructure enterprises even · Changes in work practices and worker rep- where there is restructuring without PPI (for resentation are often of as great a concern to example, Eskom South Africa's 40 percent trade unions as is job loss, particularly reduction over six years). where this is associated with greater use of so-called atypical work practices (for exam- · Higher levels of job loss can occur in the ple, casual employment and outsourcing). infrastructure enterprises than in privatiza- tions in general. Reductions in the work force · Although there is a general belief that of 50 percent or more have been reported. women are more adversely affected by PPI- related changes than are men, there is little · The greatest impact on jobs occurs in sec- empirical evidence of a differential impact. tors where demand is declining because of 19 Labor Issues in Infrastructure Reform: A Toolkit Additional Material (on the Corradetti, Susana. 1999. The Impact of Privatization CD-ROM) of Public Sector Enterprises on Labour Relations and Conditions of Work in the Air and Land (Rail) Belser, Patrick, and Martin Rama. 2001. "State Transport Sector. Geneva: International Labour Ownership and Labor Redundancy: Estimates Office. Available at www.ilo.org. 2 Based on Enterprise-Level Data from Vietnam." Policy Research Paper 2599. World Bank, de Luca, Loretta, ed. 1998a. Labour and Social Washington, D.C. Dimensions of Privatization and Restructuring-- Public Utilities: Water, Gas, Electricity. Part I: Birdsall, Nancy, and John Nellis. 2002. "Winners and Africa/Asia-Pacific Region. Geneva: International Losers: Assessing the Distributional Impact of Labour Office, Available at www.ilo.org. Privatization." Working Paper 6. Center for Global Development, World Bank, Washington, D.C. ------ ed. 1998b. Labour and Social Dimensions of MODULE Privatization and Restructuring--Public Utilities: Chen, Yi, and Ishac Diwan. 2000. "When the Water, Gas, Electricity. Part II: Europe and Latin Bureaucrats Move Out of Business: A Cost-Benefit America. Geneva: International Labour Office. Assessment of Labor Retrenchment in China." Available at www.ilo.org. Policy Research Working Paper 235. World Bank, Washington, D.C. Evans-Klock, Christine, and Alexander Samorodov. 1998. "Worker Displacement: Public Policy and PPIAF. 2001. Port Reform Tool Kit. Module 7 (Labor Labour Management Initiatives in Selected OECD Issues).Washington, D.C.: World Bank. Countries." Employment and Training Paper 24. International Labour Office, Geneva. Available at Rama, Martin. 2001. "The Gender Implications of www.ilo.org. Public Sector Downsizing: The Reform Program of Vietnam." Policy Research Working Paper 2573. Fallick, Bruce C. 1996. "A Review of the Recent World Bank, Washington, D.C. Empirical Literature on Displaced Workers." Industrial and Labor Relations Review 50(1):5­16. Galal, Ahmed, Leroy Jones, Pankaj Tandon, and Ingo Web Sites Vogelsand. 1994. Welfare Consequences of Selling ILO: www.ilo.org. (Site offers a collection of papers Public Enterprises. Washington, D.C.: Oxford on privatization and restructuring that can be University Press. (Main volume is out of print; sum- downloaded at www.ilo.org/public/english/employ mary volume is still available from World Bank ment/ent/papers/privat/pub.htm.) Publications, www.worldbank.org.) PPIAF: www.ppiaf.org. (Site provides information on ILO (International Labour Organisation). 2002. other PPIAF resources and toolkits.) "Report for Discussion at the Tripartite Meeting on Employment, Employability and Equal PSIRU (Public Services International Research Unit): Opportunities in the Postal and www.psiru.org. (The site publishes research on the Telecommunications Services." International impact of privatization on workers and trade Labour Office, Geneva. Available at www.ilo.org. unions.) Marges, Kees. 1999. "Privatisation of Seaports as a Rapid Response Unit: http://rru.worldbank.org. (This Challenge for Trade Unions." International site is a gateway to a range of information on infra- Transport Workers' Federation, London. Available structure, privatization, and private sector develop- at www.itf.org.uk. ment policies.) Van der Hoeven, Rolph, and Gyorgy Sziraczki. 1997. Lessons from Privatization. Labour Issues in Developing and Transitional Countries. Geneva: Other Materials and Sources International Labour Office. Baker, J. L. 1999. Evaluating the Poverty Impact of Projects: A Handbook for Practitioners. Washington, D.C.: World Bank. 20 3 MODULE Assessing the MODULE Size and Scope of Labor 3 Restructuring A first step for the implementing agency is to assess the size and scope of labor restructuring. This module begins with an overview of the rationale for carrying out systematic staffing assessments and then summarizes three tools that the implementing agency can use in this regard: staff audits, benchmarking, and work force analysis. OVERVIEW · Ensure fairness and transparency of the process. This section outlines the rationale for a systematic The principal objective of a staffing assessment is assessment of the work force and introduces the to determine existing levels and types of staff and key questions that the implementing agency must compare those with what are needed. To that end address. the assessment will address the following questions: A systematic assessment of the work force enables · How many staff are there in the enterprise, the implementing agency to: and how does that compare with required · Determine the scope and nature of labor amounts based on efficiency criteria? needs · How can surplus staff be identified, and · Enter into more informed negotiations and where is it located in the enterprise? discussions with trade unions and labor rep- · Are there any particular skills or categories resentatives of worker that are scarce? · Reduce the risk of service disruption or · Will future market or operational changes operational difficulties through the loss of place some job skills in more demand than skilled workers others? · Improve targeting in any labor restructuring · Are there particular key individuals or staff program categories who must be retained--perhaps 21 Labor Issues in Infrastructure Reform: A Toolkit Work force because their experience is critical to the redesign), and the closure of redundant workshops restructuring has continued operation of the enterprise? (organization redesign). both immediate and longer-term Staffing assessments are relevant in a range of There are three tools that the implementing agency dimensions. restructuring circumstances. Work force restructur- can use to address the above questions: 3 ing has short-term (often urgent) as well as longer- term dimensions. This is illustrated in table 3.1, · Staff audits or personnel inventories which characterizes three dimensions: work force · Benchmarking reduction, work redesign, and organization redesign. · Work force analysis. Three assessment tools--all closely Terms of reference for consultants to undertake a staff MODULE In many PPI programs all three dimensions are related: scoping study involved and the different tools described in this · Staff audits chapter can be applied to each of the dimensions. Although these are described as three different tools · Benchmarking During the course of a railway PPI transaction, for · Work force and are presented in separate sections, in practice analysis. example, there may be removal of ghost workers, they are closely related and often overlap. For this early retirement and voluntary departure (work reason the model terms of reference for consultants force reduction), more use of containers and (see the CD-ROM) include all of these tools streamlining of terminal turnaround times (work because they may well be procured as a single con- Table 3.1: Three Dimensions of Work Force Restructuring Work force reduction Work redesign Organization redesign Focus · Headcount · Unnecessary work and · Organizational jobs structure · Customer orientation Timeframe · Short (one to two years) · Short to medium · Medium to long (five years and longer) Key tools · Staff audits · Benchmarking · Work force analysis · Benchmarking · Work force analysis · Organizational reviews Factor(s) to · People · Work · Units, levels eliminate PPI issues · Downsizing · Management contracts · Privatization · Contracting out · Concessions · Competitive processes · Leases Implementation · Short-term · Moderate · Extended and payback period Examples · Severance · New working practices · Transfer of social work · Early retirement · Redesign and simplifi- force (housing, · Layoffs cation of processes kindergarten) · Job sharing · Productivity improvement · Exit from noncore · Renegotiated labor activities agreements with unions · Incentive-based pay- ment systems · Outsourcing and con- tracting out (employ- ee enterprise) Source: Adapted from Cameron 1994. 22 Assessing the Size and Scope of Labor Restructuring tract. In combination they can guide decisions · Provide a basis for developing severance and Up-to-date records about levels of redundancy, avoidance of adverse early retirement options and for estimating of personnel and removal of ghost selection, and other aspects of restructuring strategy. costs if downsizing is needed. workers are immediate benefits The tools described in this section can also be use- · Fill in critical data gaps (for example, of a staff audit. MODULE ful when the PPI transaction is not likely to happen employee age, grade, or start of service) that for some time. Sometimes the preparation for PPI may be needed subsequently to calculate reform may take years, and during this time there severance payments. will be proposals for organizational change. Such · Improve the accuracy of subsequent work efforts can themselves benefit from systematic force analysis. staffing assessments and the use of proper tools. 3 · Establish effective record-keeping proce- Staffing assessments and the tools employed in this dures in order to allow management to con- process are a means to determine the potential size trol or regain control of the payroll, provide and scope of labor restructuring. The main objec- management with adequate human resource tive is to estimate the broad extent of restructuring information, and comply with labor laws for planning purposes. The process should not and regulations. become an end in itself or be viewed as a way to · Provide a basis for review of job positions, determine precise needs or identify individual sur- pay grades, and scales. In some enterprises, plus employees. Such an approach can be highly harmonization of staff terms is an essential time consuming and may lead to delays not just in task prior to the PPI transaction. This is par- the restructuring process but in PPI itself. ticularly the case where a new operating company is to be formed, perhaps drawing staff from civil service and public enterprise STAFF AUDITS cadres. Staff audits give an up-to-date analysis of the work force and provide the basis for subsequent bench- marking and work force analyses. They also pro- Scope vide the necessary database for accurate estimation A staff audit is a fresh review of staffing. It pro- All categories of of the costs of alternative severance and pensions vides up-to-date information on personnel, and staff need to be strategies, and for the eventual disbursement of identified. typically includes data on: payments to workers. · Employee numbers, categorized by type of employment (precise definitions will depend on national regulations). For example, per- Objectives manent full-time and part-time employees; A staff audit is an essential first step in assessing short-term casual, seasonal, or temporary labor issues in the enterprise. Staff audits help to: workers; temporary workers engaged for many years (who may have acquired addi- · Bring personnel records up to date. tional rights); professional staff recruited on · Identify and eliminate ghost workers who ad hoc emergency terms; semipermanent are still on the payroll. In Argentina's workers; contract workers; workers on dis- SOMISA steel company, for example, the ciplinary suspension; workers on deputation introduction of a plant census with a photo from elsewhere in government; and workers ID quickly revealed that 17 percent of the on administrative leave. work force were shadow employees (Hess · Employee numbers, categorized by opera- 1997). tional or social criteria, such as location, job 23 Labor Issues in Infrastructure Reform: A Toolkit There may be a big title, function, salary grade, level of educa- force, minimize adverse selection, and calculate an gap between today's tion, age, gender, ethnic group, years of serv- individual employee's entitlements in the event of skills and competencies and ice, and other categories relevant to the severance. In the first stages of planning, however, those needed country or the enterprise. data may not be available and the implementing tomorrow. 3 agency may need to obtain some basic minimum · Employee skills: Skills assessments are an figures. Box 3.1 suggests a minimum data set. integral part of the staff audit. They are par- ticularly important in terms of maintaining Some well-managed enterprises will have up-to- service levels and quality, and they generally date personnel records and the staff audit will be include assessment of individual employee relatively easy to undertake. In many developing functional or technical skills; identification countries, however, adequate information is lacking MODULE of key individuals or groups of workers and substantial effort is needed to build a credible whose knowledge, experience, and institu- and current personnel database. It will be more dif- tional memory are critical to the effective ficult when: In some enterprises operation of the enterprise; and the identifi- accurate data will be difficult to obtain. cation, through some form of gap analysis, · The personnel administration and human of the difference between today's skills and resource management functions have been competencies and those required for the neglected. future success of the enterprise. · Salary and benefits are complex with many · Employee compensation for each employee, different components. or category of employee, including basic · Personnel records are entirely paper based, monthly salary, cash and other allowances and there is no computerized information (for example, civil servants in Yemen receive available to allow data manipulation, sort- a basic salary and up to 16 allowances), in- ing, and analysis. kind benefits (for example, housing, travel, and subsidized loans), and pension contribu- · Personnel record-keeping has been decen- tions by the employer. tralized, which may mean greater amounts · Liabilities of the enterprise to the employee, which may be important information to col- lect during the staff audit, particularly in Box 3.1: What's the Minimum Data Set for a enterprises in acute financial crisis where Staff Audit? there may be arrears of salaries or benefits n assessing the work force, the minimum payable to employees, arrears of pension or I information that the implementing agency will social insurance payments attributable to need for each employee: employees (both employers' contribution · Age and employee contribution), and arrears of · Gender payroll taxes due to the tax authority and · Years of service and service start date other payroll deductions. · Grade and/or category · Salary In some cases data on these financial liabilities will be available for individual employees; in other · Allowances cases, only at an aggregate level. · Estimated arrears of salary · Estimated arrears of pension, tax, and other benefits. In the very first stages of staffing assessments, Collecting Personnel Data or where data are poor, averages or estimates The data set described above represents an ideal for categories of employees will be needed (e.g. average salaries, estimated pension arrears, level of information needed to fully assess the work years of service for different cadres of staff). 24 Assessing the Size and Scope of Labor Restructuring of missing data and incorrectly maintained · Early, factual, and open communication Standard records. with workers about the purpose of the staff approaches help improve audit, what will happen, where, when, and · Records have been lost through damage transparency. how. (deterioration, fire, conflict). MODULE · Early consultation with trade union repre- Reviewing a sample of the existing records can sentatives. Unions may be willing to partici- help the implementing agency determine whether pate in the staff audit and help ensure that it the data are: is open, fair, and transparent, and thereby · Comprehensive--Are all workers included? assuage the concerns of their members. Are records for certain workers missing? Records of employee performance are an impor- 3 Are there lost or damaged service records? tant data source for the staff audit process. Are performance records complete? Are all Where appraisal or disciplinary records are the records complete? incomplete, managers are often reluctant to dis- · Accessible--Is information easy to extract? miss staff on the basis of nonperformance Is it computerized? In some cases collecting because of the risk of noncompliance with labor A staff audit in a specific information may require a time-con- laws or regulations. large enterprise can suming, manual review of paper records. be resource Updating personnel records is, in principle, a rela- intensive. Where there is reluctance on the part of tively straightforward task, but it may be quite enterprise managers, access to records may onerous, time consuming, and demanding of be deliberately delayed or made more diffi- resources if the PPI enterprise has a work force of cult. tens of thousands of people spread across an entire · Accurate and up to date--Are validation country, often in remote locations. In some coun- systems in place? tries, implementing agencies might learn from the If records are poor, the updating of the personnel experiences (both good and bad) of conducting inventory is a critical and urgent first step. In such civil service audits. An illustration of one approach cases the staff audit will effectively provide baseline to updating personnel records and identifying data against which all proposals for work force ghost workers is given in box 3.2. restructuring will be assessed. The way that data are collected and staff audits are Collecting Information on Skills conducted is important, too. Effective staff audits will be transparent, and considered by workers to Even where there is overstaffing, employees are not have been undertaken fairly. One way to do this is just a cost but an asset too. Collecting information to use uniform and clear procedures. For example, on their skills and capabilities will help to ensure when Middle East Airlines was conducting its staff that the right overall skills mix is available to the audit in preparation for privatization, standard post-PPI enterprise and that critical skills are not evaluation forms and curriculum vitae formats were lost. prepared for each employee (see the CD-ROM for Skills Assessments an actual example of an employee evaluation form). Another example of transparent procedures is the Skills assessments extend the scope of the basic one adopted in Nigeria's civil service census (box staff audit and are particularly valuable in sectors 3.2). where there is rapid technological change, such as telecommunications. The purpose of a skills assess- Staff are likely to be worried and made anxious by ment is to provide information that will assist the some aspects of the staff audit. Measures to help implementing agency in identifying areas of skill workers reduce anxiety include: shortages and avoiding problems of adverse selec- 25 Labor Issues in Infrastructure Reform: A Toolkit Skills assessments Box 3.2: Nigeria--Conducting Staff Audits in the Civil Service help avoid adverse selection. W hen the Nigerian government decided that other staff members could corroborate the to eliminate ghost workers from civil information supplied by the interviewee. service employment, it set about the Staff were also all required to fill out standard 3 task systematically with World Bank assistance. forms giving: The methodology involved questionnaires, physi- · Personnel file number, name, gender, and des- cal headcounts, preparation of comprehensive ignation nominal rolls (staff rosters), scanned photo- ULE graphs, and the use of file numbers to locate the · Qualifications D relevant people, compiling actual personnel costs · Grade level/step, department, location O and calculating personnel costs based on head- · Date of birth, state of origin M counts reflected in the nominal roll. A special · Date of first appointment and date of confir- instructional guide was prepared to elicit relevant mation of appointment data from the field. The guide contained a step- by-step approach required by auditors in eliciting · Date of present appointment the necessary information. The guide also includ- · Remarks ed the formats of the nominal roll and the records · Image file number for photo ID. of personnel emoluments. On the day of the physical headcount, which The staff were required to appear in groups coincided with payday, each staff member was before a panel of auditors. Each person asked to line up and present his or her forms, appeared with his or her employment file, which together with a photograph and employment file. contained or should have contained relevant The forms were then checked against the infor- documents showing that he or she was a bona mation on file and signed off by the worker's fide employee. The files were intended to serve supervisor. Disparities and suspect submissions as a control, and an effort was made to match were noted and the data was transferred to a the facts in the file with those on the completed spreadsheet. In addition, information on pay was questionnaires. entered on to a second spreadsheet, cross- During the interviews staff were questioned checking the forms with the departmental per- about the facts in the file and the questionnaire in sonnel emolument cards for each staff member. order to authenticate the information provided. Source: International Records Management Trust 2001a. The interviews were conducted in the open so tion where the best people might leave during the surplus and skill shortage. This is an impor- course of work force restructuring. tant step because a skills shortage in the cur- rent enterprise could easily become a total Skills assessments have three elements: surplus if the skills are not required in the post-PPI environment. · Assessments of current skill levels and short- ages, based on current techniques and tech- Identification of Critical Skills nology employed by the enterprise. Operations managers, responsible for maintenance · Forecasts of future skill requirements (num- or service delivery, usually know very well what ber and level), using modern technology and skills are in short supply today--often much better management practices. This has a degree of than top management knows them. Senior man- subjectivity and requires some insight into agement, however, will have a better picture of the the types of technology that would be used overall direction of the enterprise--and hence under modernized public sector or private future skill needs--so the skills audit will need the sector ownership and management. perspectives of both groups. · Analysis of the gap between current and Sometimes critical skill surpluses and deficits are likely required skills to identify areas of skill not hard to analyze (as in box 3.3). Although some 26 Assessing the Size and Scope of Labor Restructuring skill issues can be predicted easily, the implement- Skills and knowledge can be thought of as the Front-line operations ing agency should be cautious in such decisions. In understanding gained from experience. If it is managers will have a wealth of the airline example in box 3.3, for example, it is important in a particular PPI scheme, the imple- knowledge on conceivable that a PPI investor might be interested menting agency can encourage actions to reduce current skills MODULE in those skills to provide a new regional mainte- the loss of skills. The following are some of those shortages. nance business for Boeing aircraft. Where new actions: technology is to be encouraged, the existing man- agers may not have enough information about that · Ensuring that skills are covered in the staff technology to make the best decisions on future audit. staff restructuring. · Effective targeting and selection of workers who are to be retained. 3 Union involvement can be useful in the case of skills audits. Often unions are aware of the need · Capturing of tacit knowledge, which is held for reskilling of the work force and may take a in people's heads and often revealed in lead on pushing for the reskilling of their members unstructured forms (memos, notes, e-mails). as part of work force restructuring. (See, for exam- · Ensuring that skilled workers are compen- ple, box 3.4.) sated properly so that there is an incentive Skills considerations are highly relevant to work to stay. force restructuring in PPI because poorly planned labor adjustment that is not skill based can lead BENCHMARKING to loss of capability within the enterprise, which can affect service delivery and lead to perceptions Benchmarking is an important mechanism for that PPI has failed. Even when faced with an identifying the potential for labor productivity urgent and undisputed need for downsizing, the improvements (box 3.6). Making good compar- implementing agency will need to recognize that isons can be difficult, but there are several sources workers are also assets--and that their knowl- of information. In addition the process of bench- edge and experience may have value. Two exam- marking will help identify problem areas in terms ples from the railway sector illustrate the prob- of overstaffing and opportunities for improving lems that occur when this knowledge is lost: labor productivity. Chile's Fepasa railway (see box 5.10 in module 5) and the United Kingdom's privatized track infra- structure (box 3.5). What Are Benchmarks? Benchmarks are fixed pieces of information that can be used to make comparisons with other simi- lar fixed pieces of information. Labor benchmarks Box 3.3: Middle East Airlines--Skills are not only used as a one-off activity for work Mismatch force restructuring but also as a tool for continu- ously monitoring and improving performance and A work force restructuring exercise formed part of the preparation for the privatiza- competitiveness. In practice it is the process of tion of Middle East Airlines in 2000­01. undertaking benchmarking that generates most Of a total work force of 3,700, about 1,120 were benefits because it challenges current norms. estimated to be surplus to requirements. The Benchmarks provide managers with comparative largest group of redundant workers was 700 data on performance and labor productivity. ground employees trained in servicing Boeing aircraft and not qualified to service Airbus air- Although like-for-like comparisons are not always craft, which made up all of MEA's new fleet. easy, benchmark measures can give the implement- Source: Middle East Airlines. ing agency crude indicators of the scale of any overstaffing. 27 Labor Issues in Infrastructure Reform: A Toolkit If knowledge might Box 3.4: India--Unions and Reskilling in the Telecommunications Sector be lost as a result of the PPI process, the T rade unions strongly opposed the corpora- ing the regularization of 100,000 casual and other implementing tization of India's main telecommunications workers. agency can enterprise, BSNL. The unions, however, The Sareen Committee had also noted a mis- 3 encourage today's also worked hard to negotiate on issues of long- managers to match between the skills required for new tech- standing concern relating to staffing, skills, tech- document and nology operations and those that actually exist- record critical nology, and the viability of the organization. ed. Skill upgrading also constituted a core information. It was clear that there was overstaffing. As early demand from the federations. After the as 1982 the Sareen Committee Report on the announcement of the National Telecom Policy, Telecom Sector had pointed out that in India the trade unions gave strike notices in August there were 104 officials per 1,000 telephones as 1994 and June 1995. In both those cases there MODULE against fewer than 10 per 1,000 in developed was an expression of concern about the too- countries. At that time the International Labour early entry of the private sector and the need to Organisation played a significant advisory role upgrade skills within the public sector enterprises with respect to preparing for work force restruc- to match this competition: turing, and the telecommunications trade union The trade unions in Telecom have neither federations accepted a ban on recruitment in opposed its expansion nor modernization, but 1984. This ban preceded the creation of have repeatedly been urging for upgrading of Mahanagar Telephone Nigam Limited and Videsh skills and education of the work force which Sanchar Nigam Limited (two new state-owned was recruited in a period for the type of work firms specializing in supply of telecommunica- which does not exist today. We have persist- tions to Delhi/Mumbai and data services, respec- ently stressed for bringing about a change in tively) a few years later. Together with the vast the work culture which cannot be automatical- expansion of the sector, this ban led to an ly achieved by economic improvement. improved staffing ratio of 35 per 1,000 lines by (Gupta 1998, pp. 33, 34). 1997. Although there was a ban on new recruit- Sources: Interviews, relevant reports, and documents; Gupta ment, the unions had been successful in obtain- 1998. There are three main types of benchmarks: in the ways they manage the turnaround and dispatch of aircraft or trains; administrative · Internal benchmarks: By making compar- processes, customer service response times, isons within an organization, perhaps and staff appraisal performance will have between different offices or time periods, it similarities in all organizations. may be possible to identify some areas for improvement quickly and easily. An exam- All three types of benchmarks have their places, ple is the approach adopted by Kenya's elec- but a combination of measurement and process tricity distribution company (see box 3.7). analysis is important for effective benchmarking. Measurement identifies the performance gap, but · Sector benchmarks: Comparisons in the the discussion, debate, and working through of same sector provide another comparison. process and operating changes provide the mecha- International or regional comparisons can nism for operational managers to identify be used where the PPI enterprise is a change--including identification of the extent, monopoly provider in the country. location, and causes of overstaffing. · Functional (process) benchmarks: There may To understand the origins of labor productivity, be other organizations from different sectors implementing agencies will want to review a range but with similar operational functions that of generic benchmarks (box 3.8), as well as those can be compared. For example, gas, water, specific to the sector (box 3.9), such as: and power utilities might cooperate in bench- marking their metering or billing collection · Number of employees per thousand connec- procedures; airlines and railways are similar tions (telephones or water) 28 Assessing the Size and Scope of Labor Restructuring A benchmark is a Box 3.5: British Rail--Loss of Institutional Memory comparative T he experience following British Rail (BR) the old comradeship, which used to mean that measure. privatization illustrates how flaws in labor problems were easily spotted, repairs made, and Benchmarking is the process of restructuring can bring the broader PPI people could talk to each other," the business comparison. MODULE agenda into disrepute. The BR privatization is newspaper's analysis concluded, adding: much cited in Europe as evidence that private Track workers operated in gangs and knew profit is incompatible with public safety and serv- their stretch of rails like their own back gar- ice reliability. But testimony given at a public dens. Instead, workers became nomadic, inquiry following three fatal train crashes in the moving to the next job with little or no local four years after privatization suggested that a knowledge and instructions not to talk to rival principal lesson the experience provides for workers except via a supervisor miles away. 3 implementing agencies internationally is to pay The second big problem was a growing lack adequate attention to issues of work force skills of control over the staff and their work. There and institutional knowledge. have been complaints of sub-contractors One former senior BR manager, Chris Green, recruiting workers out of pubs to fill gaps on who has since been recruited by one of the train the night shift (Financial Times, "Railtrack operating companies to help them deal with their Descent into Chaos," February 22, 2001). problems, told the Financial Times that the "col- The overall effect was to break "traditional bonds lapse" of professionalism has been the "most and practices of passing on skills and experi- fundamental" consequence of privatization. He ence," the Financial Times commented, and this cited contracting out and the departure of many was exacerbated by the introduction of "hard- junior and middle managers "with vital experi- nosed commercial tensions into relationships that ence" as the cause of the problems. "The net often needed to be co-operative." "Safe working result has been a collective loss of memory on of the network is hardly possible in such a cli- the basics of running a railway," he said. mate," John Hurst, BR's former organizational (Financial Times, "Inside Track: A Pragmatist's development manager, told the public inquiry into Track Record," February 14, 2001.) the crashes. "Merely taking steps of a technical The Financial Times has vividly drawn attention and operational nature, in light of any particular to the consequences of replacing an integrated disaster, will not address this underlying malaise work force and an established hierarchy with which will inevitably chronically manifest itself in layer upon layer of contractors and subcontrac- new disasters" (Financial Times, "Railtrack's tors to carry out track maintenance more cheap- Rocky Train Journey to Its Fifth Birthday," May ly. "The first consequence was the breakdown of 21, 2001). Box 3.6: Benchmarking Definitions Box 3.7: Kenya--Internal Benchmarking in Benchmark: A standard or point of reference Power Distribution used in measuring and judging quality or value. F or each geographic district in which it Benchmarking: The process of continuously would be distributing electricity, the Kenya comparing and measuring an organization Power and Lighting Corporation (KPLC) against business leaders anywhere in the world identified its characteristics (number of con- to gain information that will help the organization sumers, area, length of overhead line, number of take action to improve its performance. substations, energy sales per customer, and so forth) and found weighted averages for different classes of staff (engineers, foremen, linesmen, and the like) that enabled them to compare fairly easily areas of different labor productivity. 29 Labor Issues in Infrastructure Reform: A Toolkit · Number of employees per generated Box 3.8: Generic Labor Benchmarks megawatt (MW) (for power generation) Gross or net revenue per employee · Number of employees per ton of freight or Total payroll costs (all employment-related TEU (20-foot equivalent unit) of containers 3 expense) per employee handled (ports) Total/functional labor cost as a percentage of sales Ratios of headcount by function Sources of Benchmark Data (management/operations; customer service/maintenance) Benchmarking data can be obtained from interna- Management salaries (relative to private sector tional, regional, and national sources. International MODULE norms) organizations are one source of benchmarking Salary levels by function (adjusted to allow com- data, and increasingly make information available parisons) for online access through the Internet (table 3.2). Hourly wage rate (standard and overtime) There are also growing networks of collaborating Average weekly hours per worker enterprises in the infrastructure and utilities sectors Units produced per work hour (unit productivity) at the regional and national levels. For example, in Product/service line revenue per staff-hour/full- the water sector: time equivalent employee Training days per person per year · Link to Water Utilities Partnership (WUP) Web site · Link to Baltics benchmarking Web site Box 3.9: Sample Labor Benchmarks by Sector Airlines Rail Numbers of pilots or ground staff per aircraft Employees per kilometer of line Pilot hours per month Total wages as percent of total revenues Bus Tons-km (freight-service kilometers) moved per Staff per bus (drivers and mechanics) employee per year Staff per 1,000 passenger kilometers Passenger-km (passenger-service kilometers) moved per employee per year Electricity Traffic units (ton-km+passenger-km) per employee Number of workers per MW generated Staff-hours of maintenance employees per 1,000 Number of workers per connected customer locomotive-km Number of workers per MW distributed Telecommunications Ports Number of main lines in service (working lines) Tons per port employee per year per employee Tons per gang-hour or gang-day Number of employees per 1,000 main lines Tons per ship per gross and net ship-days Water TEU per hour (on container terminals) and TEU Staff per 1,000 water connections per gang per day Staff per 1,000 water and sewerage connections Because of the significant variation in type of Staff per 1,000 people served cargo (bags, break-bulk cargo, project cargo, and so forth), port labor productivity is usually Thousands of cubic meters of water sold per related to the cargo type and expressed on a year per employee per-day basis either as gross (overall time) or Kilometers of pipeline in the water supply system net (time minus agreed delays such as rain and per employee the like). Thousands of people served per employee 30 Assessing the Size and Scope of Labor Restructuring · The WUP provides a regional forum for and usually with mechanisms for providing a Regional urban utilities in Africa to share perform- measure of confidentiality. collaboration can provide excellent ance data (see www.wupafrica.org). The opportunities for WUP has just completed a benchmarking benchmarking of MODULE exercise gathering data from more than 100 many aspects of Using Benchmark Measures performance, water utilities in Africa. including labor The collection and analysis of relevant data (met- · In the Baltics a group of utilities are bench- productivity. rics) are essential for the identification of areas of marking against each other (see www.water. good or poor performance, and for the subsequent hut.fi/bench/) analyses of operational processes. This section · In Brazil a national agency concerned with gives some illustrations of labor productivity 3 water sector reforms, Projeto de benchmarks reported in a number of infrastructure Modernização do Setor Saneamento within sectors, and makes suggestions on the collection the federal Ministry of Planning and and use of benchmarking data. Budgeting, has a data set on operating costs Comparisons within a sector can indicate potential for about 100 municipalities. low labor productivity, as the following examples · With World Bank support the Vietnam illustrate. Water and Sewage Association is creating a database of urban water sector costs and Airlines sector: performance in the country through the · Before it was liquidated in the early 1990s low-cost collection and publication of data the state-owned Zambia Airways employed provided by more than 60 provincial water 300 staff per plane, compared with an companies (see Nguyen 2002 and bench- industry norm of 140 at that time (Kikeri marking data for the 60 companies in the 1998). CD-ROM). · Loss-making long-haul carrier Air India had · Link to AFUR Web site a staff-to-aircraft ratio of 663 in 1997, com- · Link to SAFIR Web site pared with ratios between 170 and 340 in various Southeast Asian carriers: Singapore Other cross-sector regulatory groups, such as the Airlines, Thai Airways, Malaysian Airlines, African Forum for Utility Regulation (AFUR), are also and Cathay Pacific (India, Disinvestment trying to include benchmarks and indicators as part of Commission 1998). their information-sharing processes (see www.world- · At Middle East Airlines (MEA) pilots work bank.org/afur). SAFIR (the South Asia Forum for 60 hours per month, compared with an Infrastructure Regulation) also provides some compar- average of 90 hours per month in ative information (see www.safir.teri.res.in). Organisation for Economic Co-operation In addition to data from international organiza- and Development (OECD) countries. The tions, trade associations, regulators or associations maximum number of flight hours at MEA is of regulators (such as AFUR or SAFIR), or other 9 in a 24-hour period, whereas the interna- groups, statistics on labor productivity may be tional average is 10.5 and at some airlines it available from private sector benchmarking firms. reaches 12. Because there is competition among private sector Bus operations sector: firms in infrastructure services, not all PPI enter- prises may be willing to share their methods and · Comparisons of the performance of state commercial information. Private sector intermedi- bus companies in India showed big differ- aries can provide services in benchmarking and ences in labor productivity among states: interfirm comparisons, often on a cost-share basis staff to bus ratios varied from 6.03 in 31 Labor Issues in Infrastructure Reform: A Toolkit Table 3.2 provides Table 3.2: Some Sources of International Benchmarking Information sources of interna- tional benchmark Sector Source data for a range of Ports United Nations Conference on Trade and Development (UNCTAD): UNCTAD's Annual Review of Maritime Transport provides statistical data for the world's ports (see the digital library at sectors. 3 UNCTAD's Web site, www.unctad.org). Others: · Australia's Productivity Commission undertook an international benchmarking of productivi- ty on Australia's ports. Results are available at the Commission's Web site, www.pc.gov.au/research/benchmrk/wtfrnt/wtfrnt.pdf. · The American Association of Port Authorities (whose members are 150 ports in North and South America and the Caribbean) distributes port statistics and information on labor­ MODULE management relations. Information is available at www.aapa-ports.org. Postal operations Universal Postal Union: The union provides an online database with statistics on variables, including the number of full- and part-time staff. The database is available at www.upu.int. International Postal Corporation: This association of 22 postal operators handling 65 percent of the world's mail undertakes some cooperative benchmarking projects, but to date none of the projects focus on labor issues. The Web site is www.ipc.be. Rail World Bank: A principal source of comparative data on worldwide railway performance can be found at www.worldbank.org/transport/rail/rdb/countries.htm. Road SAFIR: Comparative analysis of bus operations in South Asia (SAFIR 2002) is available at www.safir.teri.res.in. Telecommunications The International Telecommunications Union (ITU) (www.itu.int): · The ITU's statistics department collects aggregate data provided by national ministries or regulators at the country level on numbers of employees in the telecommunications sector. The ITU does not, however, hold data at operator level (although there is a database to facilitate contact with individual operators), and its statistics combine both mobile and fixed line employment. · The human resources department of the ITU is establishing regional centers of excellence for training and staff development purposes, and has developed a computerized tool (MANPLAN) for forecasting strategic staffing and training needs. · Regional comparative data are available in the ITU's Africa, Asia-Pacific and Americas Telecommunications Indicators reports. · The most recent telecommunications indicators from the ITU's statistical database are avail- able from the ITU web site: http://www.itu.int/ITU-D/ict/publications/. Water Asian Development Bank: · The ADB has financed two issues of the Water Utilities Data Book, which provides valuable information on water utilities in the Asian and Pacific region. The second edition was pub- lished in 1997 (McIntosh and Yinguez) and is available for purchase from the ADB, Manila. · The ADB has provided support for benchmarking in particular regions (e.g., the Pacific Water Benchmarking Study [Delana 2002]). World Bank: · The Benchmarking Water and Sanitation Utilities Project has a Web site that provides core cost and performance data: project information can be found on http://www.worldbank.org/watsan/topics/bench/wup.html. · Although there is considerable benchmarking activity at the national level, much of the infor- mation is scattered. Information on an initiative to help utilities (and regulators) share and access data can be found at www.worldbank.org/watsan/pdf/benchmarking/pdf. Included there is a start-up kit for water utilities wishing to participate in benchmarking. · A set of water and wastewater utility indicators is available at the Web site of the Water and Sanitation Program, www.worldbank.org.watsan/pdf/indicators.pdf. · The annual World Bank Water Forum provides a discussion and examples of the use of per- formance benchmarking, as does the World Bank publication A Water Scorecard (Tynan and Kingdom 2002). International Water Association (IWA): The IWA (www.iwahq.org.uk), a forum for sharing of experience among members, recently has published guidelines titled "Performance Indicators for the Water Industry" (Alegre 2000) and "Process Benchmarking in the Water Sector" (Parena, Smeets, and Troquet 2002). The IWA Foundation focuses on water issues in develop- ing countries. 32 Assessing the Size and Scope of Labor Restructuring Karnataka and 7.12 in Andhra Pradesh to · Comparisons among Vietnam's provincial 11.55 in Madhya Pradesh and 16.08 in water companies show a number of opera- Orissa. tors with labor productivity well below the average (see figure 3.1), which would justify · In Sri Lanka private sector bus companies MODULE further assessment of the cause. operate with 2 to 3 staff per bus, compared with 5 to 13 staff for state-owned bus com- Making comparisons within a region can also panies (SAFIR 2002). prove valuable for implementing agencies that need to understand whether overstaffing is confined to Rail sector: just one enterprise or is a common problem in all · A World Bank study of concessioned rail- infrastructure utilities. As shown in table 3.3, an 3 ways in seven countries showed wide varia- assessment of the utility sector in Uruguay com- tions in labor productivity, measured as out- pared with other countries in the region signaled puts divided by number of employees in the potential problems in labor productivity in a num- rail sector. The most productive U.S. rail- ber of utility sectors. Regarding that table, two ways had 22 times fewer workers per traffic points are instructive: unit (passenger kilometers plus freight kilo- 1. Differences in productivity within a geo- meters) than did some railways in Mexico graphic region can be substantial. (Thompson, Budin, and Estache 2001). Implementing agencies do not need to com- Thompson, Budin, and Estache 2001. pare between OECD industrial countries and developing countries to gain useful · Following railway privatization, PPI and insights. The benchmarks and the compara- restructuring the ratio of labor cost to rev- tors in this example were all classed in the enues fell from an average of 64.3 percent 1997 World Bank World Development to 48.4 percent in eight case studies (mainly Report as upper-middle-income countries from industrialized nations) (Kopicki and (except the Republic of Korea, which then Thompson 1995). was classed as lower-middle-income) Telecommunications sector: 2 There is some degree of subjectivity. The · In Malawi the national telecommunications basis for assessing the "best performance" operator has a ratio of 16 working lines per benchmark was based on a range of sector employee compared with a Sub-Saharan aver- and regional reports plus interviews with age of 31 working lines (Sauti-Phiri 2002). sector specialists for each country. Selected telecommunications indicators. In practice, several factors make the comparison of benchmarks across countries and PPI operations challenging. These factors include: Water sector: · Increased outsourcing and contracting out: · An analysis of data from 246 water utilities Because utility and infrastructure enterprises (including 123 utilities from 44 developing outsource many of their operations, com- countries) proposed a benchmarking target of parisons based on units of activity per full- 5 or fewer staff per 1,000 connections for time, permanent employee may not provide developing-country water utilities. This target a like-for-like comparison. was based on the levels of productivity actu- · Comparability of the scope of the PPI enter- ally being achieved by the top quartile of prise: Published data may report labor num- developing-country utilities within the data- bers and productivity in operations that are base. By contrast many developing-country combined in some countries and separated utilities reported more than 20 staff per 1,000 in others--for example, telecommunications connections (Tynan and Kingdom 2002). 33 Labor Issues in Infrastructure Reform: A Toolkit Benchmarks are Table 3.3: Regional Comparative Performance Measures useful for identifying levels of labor "Best productivity. performance" Argentina (and 3 (private reasonable Sector Uruguay sector) Brazil Mexico Chile benchmark) Telecommunications 88 155 121 174 153 294 (main lines (Korea, per employee) Rep. of) Electricity (customers 102 280 177 208 285 285 per employee) (in 1995) (Chile) MODULE Water and sanitation 8 3 5.2 4 2.1 1.8 (employees per (Malaysia) 1,000 connections) Source: World Bank 1997a. and postal services; water and sewerage · Misuse and abuse of benchmarks: Labor operations; and power generation, transmis- benchmarking statistics can be misused and sion, and distribution. used to exaggerate or understate the need · Differences in condition of the infrastruc- for downsizing. For example, simply setting ture: Some older networks have high main- labor adjustment targets to match interna- tenance costs as a result of age or past inad- tional best practice levels can be dangerous equacies in investment in new technologies if it does not take account of the particular (be it optical fiber for telecommunications, conditions bearing on the enterprise. port containers, or combined-cycle power Furthermore, data can be manipulated (for plants). example, by excluding temporary or second- ed workers) to suggest that staffing levels · Extent and nature of the network: Service are not particularly high. providers in dense urban areas will have staffing requirements that differ from those · Age of the data and the fast-changing nature of rural providers. Some railways may have of the work force: Almost by definition, a a markedly more benevolent topography benchmark will be out of date the day it is than others, so that track maintenance costs published. One year's best practice can soon are lower. Different regulatory regimes may translate into next year's average perform- place different legal obligations on the level ance so it is essential to ascertain the date of service provision, leading to very different relevancy of the data. Old data are still valu- cost and staffing structures. able, however, because they allow trends to be identified, thus enabling the implement- · Depth and quality of the data: All bench- ing agency to assess whether productivity marking data sets will benefit from greater and efficiency gains are accelerating or stag- precision, clear definitions, and disaggrega- nating. One example of changing productiv- tion. The more information that is available ity is that of Bharat Sanchar Nigam Limited and the more that users can be sure of the (BSNL), the main state-owned telecommuni- relevance of the data sets, the more trust can cations operator in India. As the number of be placed in them. Even so, averages can be subscribers has risen, staff numbers have deceptive and can be distorted by abnormal- remained constant and labor productivity ly high or low performance. has risen steadily (table 3.4). 34 Assessing the Size and Scope of Labor Restructuring Table 3.4: India--Changing Labor Productivity at BSNL, Selected Years Subscribers Employees Employees per Subscribers Year (millions) (thousands) 1,000 subscribers per employee MODULE 1981 2.15 289 134.45 7.44 1991 5.07 375 73.90 13.52 1995 9.80 419 42.78 23.39 1996 11.98 421 35.14 28.46 1997 14.54 429 29.50 33.89 1998 17.80 425 23.87 41.88 3 1999 21.59 424 19.64 50.92 2000 26.51 421 15.88 62.97 Source: Reports issued by BSNL. · Policy and structural reforms in the sector: ing groups is likely to improve the availability, Productivity benchmarks also change as a quality, and relevance of data. Comparative bench- result of liberalization, new entrants into the marking provides valuable information on poten- sector, and new technologies. For example, a tial levels of overstaffing, even if it is best used in private sector operator and new entrant into combination with other analyses. (See box 3.10 for telecommunications in India, Tata a list of suggestions for making the best use of Teleservices, has about seven employees per benchmarking data.) 1,000 subscribers for the fixed services it provides in Andhra Pradesh (albeit using radio for the local loop)--approximately Benchmarking Labor Costs half the ratio achieved in 2000 by the for- There are significant differences in labor mer monopoly, BSNL. In general, as infra- Given the difficulties in comparing labor productiv- productivity structure companies are exposed to competi- ity in terms of output per employee, one alternative between the "best" tion and new investment is increasing, the approach is to focus more on benchmarks involv- and the "worst" work force in benchmark comparators ing output per unit cost of labor or labor costs as a groups in developing countries. changes from year to year as a result of proportion of total operating costs. increased demand for very experienced In the rail sector, even comparisons of partial labor managers and senior specialists with com- productivity measures are difficult because of differ- mercial, financial, and information technol- ences in topography, traffic mix, technology, level of ogy skills; fewer unskilled workers but more past investment, international trade disruptions, workers with technical skills and experience industrial geography, and so on. Basic measures such in newer technologies (especially in sectors as ton-kilometers, passenger-kilometers, locomotive- such as telecommunications); and fewer kilometers, revenue ton­kilometers are, more often The increasing use administrative and clerical jobs, but more of contracting out than not, estimates based on tons of freight or pas- customer service facilities. makes it difficult to sengers multiplied by average length of haul or trip. compare labor In summary, the key to choosing and using bench- The difficulty in calculating passenger-kilometer esti- productivity based on full-time marks for labor adjustment is in selecting opera- mates is particularly great on railways with many employee numbers. tions and measures that are as comparable as pos- urban commuters. Combined measures such as traf- sible. The development of regional, national, and fic units per employee (ton-kilometer+passenger-kilo- international benchmarking and information-shar- meter) suffer from similar problems. 35 Labor Issues in Infrastructure Reform: A Toolkit Labor productivity "norms" may Box 3.10: Hints and Tips for Using Benchmark Data change quickly, · Be ruthless in data quality; cross-check any- · When starting up, historic data series are use- especially following thing that looks suspicious. Erroneous outliers ful because they show trends and help spot the introduction of can greatly distort comparisons. erroneous data and trends. 3 competition or rapid growth in demand · Ensure that definitions are clear--particularly in · Use local or international consultants to sup- for services. relation to full-time equivalent employees, cat- port the work, but keep it as simple as possi- egories of staff employed, and the scope of ble. Avoid too many and too complex meas- the comparisons--in order to help ensure gen- ures. uine like-for-like comparisons. · Involve people, especially operational man- · Don't rely on just one measure because this agers. Exchange ideas at provincial, national, can give a distorted picture. In the water sec- and regional seminars. MODULE tor, for example, staff per 1,000 connections · Although the short-term goal may be to collect may be inappropriate if some utilities have information to help in immediate downsizing, large numbers of shared (multiple-user) con- valuable information can be obtained for the nections. In that case staff per 1,000 users and PPI bidding and transaction process (which labor costs as a proportion of operating costs may take two to four years). Where regulators will be useful additional measures. are being established, the information also pro- · Wherever possible visit benchmark organiza- vides them with a baseline. Data improve over tions. Talk to the people who compiled the time, so "sell" benchmarking to PPI enterprise data. managers as an investment. Examining staff costs (wages plus benefits) as a there is little overstaffing or because low wages percentage of total operating revenue reveals that, make labor a small proportion of overall costs. in a number of railways, staff costs alone exceed total revenues from users and are often the largest More commonly, however, overstaffing means low single cost category. This may be a better way to labor productivity and high staffing costs. Low Benchmarks change evaluate labor productivity than using a ratio of wages do not necessarily mean relatively low staff constantly as staff to traffic units (passenger kilometers plus costs. In their analysis of 246 water utilities, Tynan technologies and and Kingdom (2002) found large differences with- work practices freight kilometers) because it factors in differences in developing countries. Average staff costs as a change. between labor unit costs in different countries, which might be a reason for some railways legiti- proportion of total operating costs were 39 percent mately being more labor intensive than others. in developing-country utilities compared with 29 percent in industrialized-country utilities. In some sectors labor costs are relatively low as a proportion of operating costs or capital costs. In an Even where labor productivity is poor, other fac- analysis of 77 electricity-generating plants in 28 tors play a part. For example, high water tariffs in industrial and developing countries, the average Conakry, Guinea, were only partly the result of shares of cost were 10 percent for lubricating oil low labor productivity (by regional standards). and materials and 13 percent for labor, but 48 per- High debt-servicing costs, considerable amounts of cent for fuel and 29 percent for capital (Diewert bad debt, low collection rates, and a high percent- and Nakamura 1999, based on a 1993 data set.) age of expatriate staff were other factors (Brook and Smith 2001). (That is why some governments Figure 3.1 provides a simplified performance struc- and firms prefer to measure "total factor produc- ture for a generic utility and shows that labor costs tivity" as a more accurate guide than raw are only one part of the overall cost structure. output/input ratios on numbers or costs of work- ers; see, for example, Cowie and Riddington 1996 In a few cases the PPI investor may not be very and Economic Commission for Europe 2002.) concerned about staff numbers, perhaps because 36 Assessing the Size and Scope of Labor Restructuring "Per employee" Total cost labor benchmarks per unit of can be output complemented by benchmarks that use labor costs MODULE rather than staff Operating Commercial number. cost per unit and network of output efficiency Nonrevenue 3 Labor cost Material cost Contractor Maintenance Average age costs Bills paid per unit of per unit of cost per unit cost per unit of (system losses) (percent) output output of output of output receivables (percent) Capital costs per unit of output Interest cost Return on CCD per unit per unit of capital per unit of output output of output Figure 3.1: Structure of Performance Measures for Utilities Note: CCD = capital cost depreciation. Source: Webb and Ehrhardt 1998. WORK FORCE ANALYSIS focused on the information needed for work force restructuring in preparation for PPI. Detailed work Work force analyses build on staff audits to ana- force analysis is particularly useful when a large lyze and forecast the structure of the work force enterprise is being broken up into new operating and then match that structure to the requirements units, as illustrated by Brazil Railways in box 3.11. of the infrastructure enterprise. The purpose of work force analysis is to identify staffing requirements at the unit or operational level, and it will help managers in the implement- Objectives of Work Force Analysis ing agency and the enterprise to: Work force analysis comprises a set of tools that · Identify the levels and types of staff needed provides a bridge between the details of staff for future requirements in operating units audits, benchmarking, and the wider organization design issues. Those tools, however, still provide · Make more informed decisions on transfers only part of the information needed for detailed between units and the organization of sever- assessments of downsizing requirements and meth- ance schemes ods of selection. · Avoid the loss of critical skills (adverse selec- tion). Work force analysis is very similar to a human resource planning exercise, but in this context it is 37 Labor Issues in Infrastructure Reform: A Toolkit Low wages in developing countries Box 3.11: Brazil--Work Force Analysis in Rail Privatization do not mean that F ollowing unsuccessful attempts to restruc- cedures, with redundant activities identified by staff costs are low. ture Brazil's federal railway, RFFSA, under job categories. This was essentially a very metic- the public umbrella, the government includ- ulous job that required a very detailed study 3 ed RFFSA in the National Privatization Program based on the best international practice. The in 1992. Implementing the proposed privatization redundancy estimates were to be conservative to plan required some degree of reduction in avoid second-guessing what the concessionaire RFFSA's employment. Although RFFSA had would actually need and avoid forcing the con- already made significant progress in reducing its cessionaire to have to rehire "fired" workers as employee headcount, the company's labor pro- had been the case in Argentina and the United ductivity continued to be low. RFFSA had Kingdom. In addition, there had to be enough MODULE reduced its total staff from about 110,000 in 1975 staff remaining at the company at the time of to about 42,000 in May 1995. That reduction led transfer to the private operator to avoid interrup- to a substantial increase in labor productivity-- tions in service. To ensure that, a detailed analy- from 250,000 to almost 1 million net ton-kilome- sis was conducted by the regional managers to ters per employee. That level of labor productivity assess both the staffing needs for each function continued to be insufficient, however, when com- and the number of excess workers. By the end pared not only with similar North American com- of this analysis, RFFSA's management had rea- panies but also with recently restructured and sonable estimates of the staff reduction needs in privatized railways in Argentina and Chile. each regional area. In May 1995 this process led The strategy to deal with the excess labor had to to an employment reduction target number of be subtle. There were significant differences in 20,000 workers. Between May and September labor productivity across RFFSA's regions and 1995, almost 2,000 workers voluntarily decided uniform cuts across the board would not make to leave the company, so that by the time the sense. first concession was announced in September 1995 the new reduction target number was The solution was to come up with new cost 18,047. reduction plans for each of the six regional areas to be privatized, based on new operational pro- Source: Estache, Schmitt de Azevedo, and Sydenstricker 2000. Work Force Analysis Tools Tool 2: Functional Review of the Organization This section summarizes some tools that can be Work force analysis must be informed by a wider used by managers of the enterprise or the imple- organizational perspective. This may be provided menting agency to better understand the structure by a corporate plan, a reform plan, or government and composition of the work force. policy, although in some cases such documents Tool 1: Staff Audit and Benchmark may not exist or may be too vague to be helpful. In Consolidation those cases one of the most basic tools is a func- tional review of operating units. This review can be The information gathered from staff audits and undertaken by managers themselves or be facilitat- benchmarking is a critical baseline for conducting ed by consultants, and it can draw on the knowl- work force analysis. It is essential that this infor- edge of the work force. Workers--and unions-- mation is disseminated and shared by all enterprise may have perspectives and answers that are managers who will be involved in work force beyond the institutional knowledge of management analysis so that they have a common understand- or consultants. ing of staff data. Rigorous debate and discussion on the staff audit and benchmarking data can then Functional reviews challenge the existing organiza- be a powerful catalyst for prompting managers to tional structure and norms by asking some review current staffing assumptions and norms. straightforward but difficult questions: 38 Assessing the Size and Scope of Labor Restructuring · Is this activity needed at all? In the case of a In grossly overstaffed enterprises, functional analy- Work force analysis (loss-making) state bus company, which sis can be implemented as a zero-based approach. is a staffing planning activity competed in a range of sectors (urban, rural, Argentina's national oil company, YPF, was so over- focused on and intercity), the growth of a highly com- staffed that the company and its consultants "decid- operational units inM petitive, privately operated bus sector meant ed to eliminate all positions and start from a clean the context of work force restructuring. that there was little continuing rationale or slate while building the new organization frame" ODULE need for a public service within urban (Grosse and Yañes 1998, p. 57). (The organization routes. shrank from about 52,000 employees to fewer than 6,000; 50,000 employees left with generous sever- · Should the enterprise be undertaking this ance packages, and 3,500 new staff were hired). activity? In the first phase of restructuring of 3 Argentina's national oil company, There are many other approaches to organization- Yacimientos Petroliferos Fiscales (YPF), al review, but functional analysis is one that close- many nonstrategic assets that YPF had ly relates to the wider reform agendas of many PPI amassed over the years were sold through plans. unrestricted bids, including aircraft, schools, hospitals, and obsolete refineries (Grosse Tool 3: Ratio Analysis of Staff Data and Yañes 1998). In Russia and China Data from the staff audit can enable detailed analy- many infrastructure enterprises maintained sis, such as that undertaken by Brazil's federal rail- large social assets (housing, kindergartens, way (box 3.11). Staffing ratios can be used as vacation rest houses) that subsequently were internal benchmarks to compare regions, units, or transferred to local government or were pri- operations. Types of ratio analysis are: vatized. A shared understanding of · If the activity is still needed, is the enterprise · Trend analysis, which considers past ratios staff audit and really the best provider of this function? (for example, the ratio of managers to benchmark findings Maintenance of locomotives, aircraft, power charge hands to unskilled workers), and is an essential starting point. pylons, and vehicles; employee transporta- projects those forward, perhaps with revised tion services; catering services--these are all assumptions. activities that infrastructure companies have · Staff turnover, which is computed as the contracted out to specialist companies. number of employees leaving in a year · If this is a critical activity, are the scale and divided by the average number of employees scope of operations appropriate? For exam- in the same year multiplied by 100. ple, following the break-up of the former · Length of service analysis, which may be East African Community (EAC), Kenya important in relation to the eligibility rules Airways and Kenya Railways inherited for severance and pensions (see module 5). workshops and other facilities (and staff) designed to service all three countries of the · Cohort analysis, which identifies the sur- EAC. Although some of these units were no vival rate of particular groups or cohorts of longer needed, they (and their staffs) were workers. This can be particularly important retained for many years. where there has been an element of earlier restructuring, and where certain cohorts are Those questions are simple but getting the answers particularly important (for example, engi- may be difficult. They also may be highly con- neers with bachelor's degrees or airline tentious and fiercely debated. Nonetheless, func- maintenance staff trained on particular air- tional reviews are critical because they can expose craft). The survival rate is the proportion of whole activities, units, or operations that are employees engaged during a defined period redundant. These noncore activities are potential who remain after so many months or years. candidates for work force reduction. If 50 staff were trained in telecommunica- 39 Labor Issues in Infrastructure Reform: A Toolkit Functional reviews tions engineering and only 20 remain in 1. Present staff resources ask tough questions, service after two years, the survival rate is but can reveal whole 2. Natural attrition (for example, normal units or activities 40 percent. retirements, long-term sickness, death in that are no longer As with benchmarking, it is the process of examin- service, maternity, and job change) required. 3 ing, reviewing, and challenging staffing ratios that 3. Future restructuring or recruitment plans. can yield the most benefits. An illustration of age profiling is shown in figure Tool 4: Productivity Reviews 3.2. Age profile analyses will be particularly impor- tant if there have been recruitment surges or freezes Determining the number of staff needed to under- that have distorted the "normal" age profile of the take a particular task is, in theory, just a simple MODULE work force. formula: Mechanisms for preparing age profiles will vary (Number of tasks × from enterprise to enterprise but the underlying time required per task) Time available per = calculations are variants of factors such as present Number of employees employee per year strength, expected new recruitment, average rate, required and forecast strength over the next few years (see This formula, however, does not take into account new technologies, alternative working methods, skills levels, work rate, and the impact of con- Present age structure straints on labor productivity. It is usually not suffi- Number of employees cient to rely on such analysis alone because it does 40 35 not challenge managers to find new ways of 30 improving labor productivity. 25 20 15 In some enterprises the combination of government 10 regulations, accumulated work force numbers, and 5 0 "custom and practice" may have created well- 20­29 30­34 35­39 40­44 45­49 50­54 55+ Years of age established but now inappropriate labor productiv- ity norms. These can be tackled through: Numbers likely in 5 years Number of employees 40 · The combination of good staff audit data 35 and benchmarks 30 25 · Revisiting labor norms through a zero-based 20 15 approach to labor budgets, linked where 10 necessary to new work study assessments 5 0 20­29 30­34 35­39 40­44 45­49 50­54 55+ · Experimental or pilot contracting out of Years of age tasks to the private sector Numbers likely in 10 years Number of employees · Experimental or pilot investment in new 40 equipment (in cases where labor productivity 35 30 is low as a result of inadequate investment). 25 20 Tool 5: Age Profiles 15 10 Age profiles help predict the structure of the work 5 0 force over time and the numbers of staff leaving or 20­29 30­34 ­ ­ ­49 50­54 55+ taking early retirement. There are three basic ele- ments to such profiles: Figure 3.2: Sample Age Profiles 40 Assessing the Size and Scope of Labor Restructuring the CD-ROM for an actual example of such calcu- · The availability of in-house staff capable of Ratio analysis can lations). The implementing agency can ask enter- being retrained. If there is uncertainty, an improve managers' understandings of prise human resource managers to use such profiles internal advertisement for "expressions of the source of to calculate the impact of hiring freezes or the rate interest" can determine the likely response overstaffing and theMODULE of loss of key skill sets. Those calculations can be and caliber of the applicants. differences between operational units. informed by ratio analyses, such as labor turnover To facilitate any subsequent downsizing, these sup- rates, length of service, and cohort analyses. ply forecasts should be matched against categories Age profile approaches can also be disaggregated of workers (grade, level, function, and cohort) to to assess particular groups of workers, perhaps by identify any group(s) that should or should not be gender, particular skills sets, or particular locations. selected for downsizing. 3 Tool 6: Supply Forecasting Work force analysis will not only inform the WHO SHOULD DO THE process of downsizing. In many cases enterprises ASSESSMENTS? need to both retrench and recruit at the same time. Who should undertake the tasks of staff auditing, Many public enterprises have both a surplus of benchmarking, and work force analysis? This sec- unskilled staff and a deficit in key technical, com- tion considers the implementing agency's options in mercial, or managerial skills (often because they undertaking those tasks. are unable to pay enough to recruit high-quality staff). Forecasting the supply of staff, by category, Commonly, the work can be done by: will be particularly valuable where there are known skill shortages (for example, financial skills, · In-house staff from the enterprise. In large or skills in electronic engineering in a telecommuni- · Other government advisers. Some govern- infrastructure cations enterprise) or where there is evidence of dif- organizations, labor ments have well-established staffing and productivity reviews ficulty in recruitment or high levels of out-migra- planning units that undertake staffing can build on tion, HIV/AIDS, or other factors. assessments of both government depart- benchmark data. ments and state-owned enterprises. Supply forecasts will be informed by the skills assessments component of the skills audit. · External consultants, either from the private Forecasts will draw on information such as: sector or from management training and similar institutions that provide consulting · Analyses of local or regional employment services. service (labor exchange) data, job advertise- ments, wage rates, and interviews with other Table 3.5 summarizes the strengths and weaknesses enterprises. of each group. Particularly where the quality of data is poor, both data collection and analysis can · National- or state-level labor force surveys be demanding of time and expertise. In such cir- and statistics. cumstances a combination of resources, such as in- · Data on supply restrictions arising from leg- house staff and consultants, may be the best islation, collective bargaining agreements option. (job demarcation, work force numbers) and It may be difficult for the implementing agency to union membership. find expertise within government to conduct fully · Analysis of the hiring practices of other rele- objective staff assessments. This is particularly the vant private sector employers. case where staffing levels in the enterprise are · Relative pay scales of public sector and pri- based on old (public sector) standards and norms vate sector employers. and do not take account of the impact of new tech- nologies and work practices, or where there has 41 Labor Issues in Infrastructure Reform: A Toolkit Pilot programs that Table 3.5: Pros and Cons of In-house and External Consultants test contracting-out arrangements can reveal the potential Source of to improve labor expertise Pros Cons productivity. 3 In-house team · Has good access to data and · May be biased or lack independence from PPI individuals · May be reluctant to make recommendations enterprise · Has good understanding of that risk careers of colleagues the business and the sector · May lack availability or sufficient time to con- duct the work in-house · May lack skills if in-house human resources function has been administrative rather than MODULE strategic Internal · If linked to strong reforming central · May lack authority (look for evidence in the government unit (e.g., office of the president or impact of previous reports) advisers prime minister), may have strong · May have limited international experience authority · Bring understanding of detailed problems that arise in other govern- ment departments or state-owned enterprises External · Are independent · Reluctant enterprise managers can block consultants · Can transfer experience of the access to data effects in other enterprises and · Will be more costly organizations that have introduced · National consultants may lack knowledge of private participation nationally or sector reforms outside the country internationally · International consultants may lack local · May be specialists in the field of understanding work force assessments · May have methodologies for conducting staff audits · Can provide specific training (e.g., in setting up a benchmarking program) been little other experience with the improvements Whether the work is done using government or in labor productivity that usually follow private private sector resources, the terms of reference will participation. be the same and should aim to gather enough information to meet the objectives above. The External consultants can be one source of expertise Toolkit CD-ROM provides terms of reference for a although their costs may be higher than in-house scoping study. and government resources. Even so, investment in high-quality staffing assessments is likely to be Terms of reference for consultants to undertake a worthwhile. The assessments will help the imple- staff scoping study. menting agency when consulting and negotiating with workers and unions. They will also form part of the overall due-diligence assessment for the PPI Tools (on the CD-ROM) transaction. The issue therefore is not so much one Model terms of reference for a scoping study (staff of cost but of providing sufficiently accurate and audits, benchmarking, work force analysis) reliable information to enable all parties--govern- ment and PPI investor--to properly assess the Table of information sources for international bench- labor issues related to the transaction. marking 42 Assessing the Size and Scope of Labor Restructuring Additional Material (on the Economic Commission for Europe. 2002. CD-ROM) Productivity in Rail Transport Note by the Secretariat. Working Party on Rail Transport, Fifty- Estache, Antonio, Jose Antonio Schmitt de Azevedo, Sixth Session, October 16­18. Inland Transport and Evelyn Sydenstricker. 2000. "Labor Committee, United Nations Economic and Social MODULE Redundancy, Retraining and Outplacement during Council, Economic Commission for Europe. (This Privatization: The Experience of Brazil's Federal session includes a review of labor benchmarks in Railway." Policy Research Working Paper the rail sector, drawing on international experience. WPS2460. World Bank, Washington, D.C. Available at www.unece.org/trans.) Tynan, Nicola, and William Kingdom. 2002. "A Galbraith, Jay R. 2002. Designing Organizations: An Water Scorecard." Viewpoint Note 242. World Executive Guide to Strategy Structure and Process. 3 Bank, Washington, D.C. San Francisco: Jossey-Bass. (A well-known text on organization design, which can help inform func- tional analysis and organizational restructuring.) Kanawaty, George, ed. 1992. Introduction to Work Web Sites Study. Geneva: International Labour Office. Bureau of Labor Statistics, United States: (Describes the basic techniques of work study, par- http://www.bls.gov/. (This site provides public ticularly for manufacturing and process tasks, and access to a wide range of labor statistics and inter- office work.) national comparisons.) International Telecommunications Union (ITU): www.itu.int. (The ITU Telecommunications Indicators Database provides data sets on perform- ance measures of telecommunications operators worldwide, including staffing.) World Bank "Shrinking Smartly": www.worldbank.org/research/projects/downsize/. (This site is a clearinghouse for researchers, devel- opment practitioners, and government officials con- cerned about the difficulties encountered in down- sizing a large public sector.) Other Material and Sources Bartram, Sharon, and Brenda Gibson. 1997. Training Needs Analysis: A Resource for Analyzing Training Needs, Selecting Training Strategies and Developing Training Plans. Gower, Aldershot. (A manual on training needs analysis with guidance notes and 22 example formats and instruments.) Burke, Ronald J., and Cary L. Cooper. 2000. The Organization in Crisis: Downsizing, Restructuring and Privatization. Oxford, U.K.: Blackwell Publishers Ltd. (This is a collection of articles on organizational change in industrial countries, including impacts on workers and the organization. The main audience comprises organizational devel- opment specialists and researchers.) 43 4 MODULE Strategies MODULE and Options 4 T his module considers the following strategic issues and analyzes available restructuring options. Among the key strategic questions are these: · Who should undertake labor restructur- · Leaving labor restructuring to the govern- ing--government or investors? ment--that is, before PPI · What range of options are available for · Taking a mixed approach. dealing with restructuring? · How should these options be sequenced? Labor Restructuring by the The new investor · What legal and contractual issues might Private Sector will have the best constrain the choice of strategies and knowledge of which In theory arguments can be made that labor skills, people, and options? restructuring is best left to the new private capabilities will be needed in the future. investors who: RESTRUCTURING-- · Are better equipped than the government to WHO SHOULD DO IT? judge the level and kind of skills needed and The primary strategic decision is whether the gov- to implement a process that minimizes ernment or the private sector should undertake adverse selection. labor restructuring. There is no one right approach · Have greater incentives to minimize sever- and countries have followed different strategies, ance costs. Rama (1997) noted that sever- depending on the timetable and urgency of the pri- ance packages can be more generous when vate participation in infrastructure (PPI) as well as designed by government. on the nature of labor issues at the enterprise level. Examples of PPI arrangements where labor restruc- There are three options: turing was investor-led are Argentina's gas trans- · Leaving labor restructuring to the private mission and distribution company and Guyana sector--that is, following PPI Telecommunications Corporation (box 4.1). This 45 Labor Issues in Infrastructure Reform: A Toolkit Box 4.1: Restructuring by PPI Investors--Argentina and Guyana Argentina: Gas del Estado · Reviewing personnel files and interviewing and When Argentina's natural gas transmission and assessing the capabilities and needs of exist- distribution company, Gas del Estado, was priva- ing employees 4 tized in 1993, the work force of 10,273 was not · Reviewing administrative tools, including com- reduced. The enterprise was broken up into 10 puter hardware and software new companies, employees were allocated to · Initiating discussions with union representa- each company, and employee restructuring was tives and keeping them informed of plans and left to the new owners of these companies. By actions. December 1993 the work force in the companies The second phase (3 to 12 months) involved: had been reduced by 32 percent to a total of MODULE 6,958. Workers who were retained benefited from · Continuing discussions with the union shares, salary increases, and performance-relat- · Reorganizing and reassigning personnel where ed pay. necessary Guyana Telecommunications Corporation · Introducing new administration policies where In June 1991 an international investor paid necessary US$16.5 million for 80 percent of the shares of · Beginning recruitment of Guyanese nationals the Guyana Telecommunications Corporation. It abroad was recognized that the company had to trim its · Determining training needs associated with staff to reduce overstaffing and cut costs. After introducing new equipment privatization the company embarked on an · Revising salaries, job grades, and job titles action plan to assess the human resources needs of the organization, especially those · Identifying surplus personnel. required to implement its expansion plan suc- The result of this restructuring exercise was a cessfully. reduction in the work force from approximately The action plan was executed in two phases, the 1,100 to 600 employees. A key to the success of first of which was introduced immediately after this significant cut was the package offered to all privatization. It lasted 3 months and involved the employees. The package consisted of a salary following activities: increase of about 90 percent for those who were retained and compensation equivalent to 22 · Analyzing the existing organization by review- months' salary for those who were let go ing methods, procedures, policies, and job duties and descriptions with senior manage- Sources: Hinds 1995, Shaikh 1996. ment strategy is most likely to work in situations with unions and labor is strong, and private modest initial levels of overstaffing, a high-growth investors may be wary of taking on the sector (for example, telecommunications), no political burden of carrying out large-scale severe labor opposition to reform, and locations work force adjustments. with effective job markets into which displaced 2. Where there are legal and other restrictions workers can move. on the investor's ability to implement labor adjustment, either through labor laws or There are four collective bargaining agreements. In India Labor Restructuring by Government circumstances and Sri Lanka, for example, labor laws where government Although restructuring led by the private sector is make it costly, time consuming, and cum- involvement in labor the preferred route, there are four scenarios in adjustment can be bersome for the private sector to retrench helpful. which government will likely need to be involved staff (Basu, Fields, and Debgupta 1996; in labor adjustment: Fiszbein 1992; and Salih 2000). 1. In sectors where overstaffing is severe and 3. Where labor restructuring costs are very opposition to PPI from the public and from high. In cases where investors take on sur- 46 Strategies and Options plus labor they discount the sale price In any of those cases, only government action may accordingly--and a low sale price may be be able to unblock potential labor problems quick- politically difficult for government to accept. ly and avoid delays in PPI. 4. Where there is future uncertainty about gov- Where PPI plans are still in the making, government MODULE ernment's policy and stance on public sector can take steps to reduce the work force through a labor issues--for example, if there are signif- variety of options, including natural attrition, a icant arrears of wages to workers, unfunded freeze on recruitment, the phasing out of pensioner pension liabilities, or investor concern that workers, removal of ghost workers, voluntary government might change the rules or laws departures, and compulsory redundancy. The priva- on retrenchment or restructuring after the tization of telecommunications in Tanzania is one 4 PPI transaction has been completed. example (box 4.2) where work force reduction took Box 4.2: Tanzania--Telecommunications Work Force Restructuring T he government of Tanzania decided in was that the expansion program was initiated 1996 to include utilities in the list of state- simultaneously with the privatization program. The owned enterprises to be considered for market for mobile phones was also liberalized, privatization. The Tanzania Telecommunications and three mobile licenses were issued in 1998. Company Ltd. (TTCL) was then selected as the In implementing the program to reduce staffing in first of the utility state-owned enterprises to be preparation for privatization, noncore activities divested. were first unbundled from the core business. The In June 1997 TTCL had some 96,000 lines con- program of expansion also allowed for some nected to its network, with annual growth of 3.4 workers to be redeployed in the construction percent and a waiting list of 84,000 lines. The division. The net effect was that the company company employed just over 4,688 workers in retrenched only 802 workers and most of these 1998. Between June 1998 and October 1999 employees were severed through the plan nego- TTCL reduced the number of employees to tiated with the unions. Slimming down the work 3,720, mainly through attrition, restrictions on force occurred over three years without large- new employment, and early retirement. scale, one-time severance resulting in vast num- In 1998 a firm of consultants, which was bers leaving the company at any one time. engaged to audit TTCL, recommended a further Because there was no termination of large staff reduction of 1,659 employees. The compa- groups at any time, the program did not attract ny decided against forced reduction and instead negative criticism from the press or politicians. took the route of a soft option that involved a The new strategic investor continued the expan- continued program of attrition, restrictions on sion program that was established in the sales new employment except for prospective employ- agreement based on the roll-out obligation of ees with critical skills, early retirement, and volun- 800,000 lines within four years. The company tary redundancies. The voluntary departure pack- was able to improve its labor productivity signifi- age was negotiated through the Communication cantly while preparing for privatization without and Transport Union and essentially provided for most of the negative consequences associated 6 months' pay for up to 6 years of employment, with utility labor retrenchment programs. 18 months' pay for 6 to 10 years, 24 months' pay The expansion of the mobile operators (five for 10 to 25 years, and 30 months' pay for up to mobile licenses issued by 2001, including one to and above 25 years. TTCL) resulted in more than 300,000 mobile con- The TTCL divestiture program was expected to nections by December 2001. Many of the work- take two years beginning in 1998. Privatization ers leaving TTCL were able to find alternative would involve the sale of new shares, giving the employment with the new mobile operators, investor a 35 percent equity stake as well as which illustrates also that labor retrenchment is management control. TTCL's teledensity was less easier in industries going through technological than 0.04 percent, and government policy called changes and rapid expansion. for an increase to 6 percent by 2020. The result Source: Parastatal Sector Reform Commission, Tanzania. 47 Labor Issues in Infrastructure Reform: A Toolkit A shared approach place over a three-year period under government 1. Government first deals with an initial provides benefits ownership prior to privatization. Another example restructuring of the accumulated work force where government deals with a large of preprivatization work force restructuring is that surplus before the PPI transaction is started, part of the surplus of Eskom, South Africa's electricity utility (which and sets up a social safety net or redeploy- 4 work force before will be discussed in another context in box 4.6). ment program. PPI, and the investor is able to fine-tune Although government has an important role to 2. The PPI investor then acquires management the process post- control and is given freedom to fine-tune PPI. play in these cases, there are also some risks associ- ated with government management of labor adjust- staffing levels after the PPI transaction. ment. Those risks include the following: This shared approach offers the additional advan- tage of reduced cost to the government because MODULE · Because government managers (including the incoming investor may pay for further adjust- those in the implementing agency) are not ments. In the shared approach both the govern- best placed to predict future staffing require- ment and the investor contribute to the costs and ments, the wrong people may be selected. the decisionmaking involved in work force restruc- That in turn may lead to subsequent rehir- turing. ing of retrenched workers. · Overly generous severance payments negoti- An example of a mixed approach is Argentina's ated with workers and unions may smooth rail privatization, in which most of the 70,000- over industrial relations in the short term, worker reduction was undertaken as part of the but may create precedents that are unsus- privatization process. Part of the reduction was pri- tainable for future restructuring of other vately financed, however, by the operators of the enterprises or for the incoming PPI investor. San Martin and Urquiza concessions. They began operations with a combined work force of 2,700 · If there is no political will or consensus, gov- (compared with the previous public enterprise ernment managers may not be able to move [Ferrocarriles Argentines] total of 8,800) but decisively and so delay work force restruc- reduced that force even further to 1,700 at a pri- turing and PPI itself. vate cost of US$10 million (Ramamurti 1997). · Reluctant factions within governments may Another example is that of the Manila water con- use labor restructuring as an excuse to delay cession, which provided early retirement to under- PPI. take a preconcessioning reduction followed by a Government-led work force restructuring usually probationary period of employment (see box 4.4). deals only with part of the work force, but there That mix allowed the new operator time to make are occasional examples where governments have its own assessments of the employees and protect decided to make all workers redundant and settle the interests of employees. all labor liabilities prior to PPI. That was the case in the concessioning of Malawi's railway and of Table 4.1 summarizes the advantages and disad- Zambia's rail sector (see box 4.3). vantages of the main choices on labor restructuring responsibility. Irrespective of who undertakes work force restructuring in preparation for PPI, labor adjustment will be a continuing process, not a one- A Mixed Approach time event. A mixed approach by which both government and the PPI investor are involved can help overcome the problems of leaving restructuring entirely to the MENU OF OPTIONS government or to the private sector. In such an approach work force restructuring is implemented This section presents a typology of labor adjust- in phases: ment (or work force structuring) options. There are 48 Strategies and Options Box 4.3: Zambia--Redundancy for All Rail Workers W hen the Zambia Privatization Agency · ZRC's financial circumstances. ZRC was in (ZPA) and the Zambia Railways arrears in paying both employees' and Corporation (ZRC) considered strate- employers' contributions to the workers' pen- MODULE gies for labor adjustment as part of a plan to pri- sion fund. vatize the operations of the railway, a combina- Those circumstances meant that almost all work- tion of factors indicated that all 1,650 of its work- ers were likely to leave the company rather than ers would receive redundancy payments--even join the new operator, who would start with no those who kept their jobs. Those factors were: experienced staff. Government decided to con- · An exceptionally generous retrenchment pack- sider offering redundancy to all workers, but age, negotiated previously with the Railway there was a financing problem with that idea: 4 Workers Union of Zambia, which included a government could not afford the costs of severance package of 3.2 months of salary per retrenching 1,650 workers, although it could year of service plus resettlement and a free- finance the retrenchment of the 650 or so work- hold title on a farming plot (typically 5 hectares) ers estimated to be in immediate surplus (that is, for resettlement on land allocated for farming the new operator was likely to require only about by a previous government. 1,000 workers). ZRC and ZPA commissioned a · Labor laws that gave every worker in an enter- consultancy to meet with trade unions and help prise transferred to a new employer the right to develop the options. This consultation process request that all terminal benefits be paid led to a revised plan that all workers be offered (including pensions and negotiated severance) retrenchment as follows: and then to leave the enterprise. These laws · 650 or so workers to receive a full and immedi- also provided that any workers who transferred ate package of retrenchment benefits, and lose should receive terms and benefits no less gen- the right to return to work in the enterprise. erous than their current employment contract. · The remaining 1,000 workers to receive the full · Worker suspicion of the employment security retrenchment package paid over three years offered by both private operators and govern- from a portion of the concession fees that the ment, given well-publicized bankruptcies of PPI investor placed in a trust fund specifically privatized firms. This meant that the trend in for that purpose, with benefits protected from Zambia was for workers to readily accept vol- erosion as a result of inflation. untary or compulsory redundancy (especially Source: Zambia Privatization Agency, Zambia Railways when the packages were generous). Corporation. Box 4.4: Philippines--Use of a Mixed Approach through Probationary Employment O verstaffing at the Metropolitan facilitated by an attractive voluntary retirement Waterworks and Sewerage System program, the main components of which added (MWSS) in Manila was addressed in two up to payments that were significantly more than phases. Prior to privatization MWSS implement- they would have received if they were to have ed an early retirement program that was used by retired on the standard government retirement about one-third of the work force. The remaining package. Training and work opportunities employees were absorbed by the concession- (including outsourcing) were provided for those aire with a six-month probationary employment who left the company. All rounds of separation period. After that period the employees became were designed to be equivalent to each other. permanent or were separated. The concession- The estimated cost of the early retirement pack- aire ended up with a regularized work force of ages was P1.1 billion, or about US$44 million. 4,300 employees, equal to slightly more than Labor productivity improved significantly as a half of the preprivatized work force. Of the total result of the privatization. number of retrenched employees, only 100 or so Source: Dumol 2000. were involuntarily separated. The process was 49 Labor Issues in Infrastructure Reform: A Toolkit Table 4.1: Labor Restructuring--By Whom and When? Responsibility Advantages Disadvantages 4 Government: The implementing · May be essential if there is a large · Can lead to adverse selection agency or government accumulated staffing surplus problems takes responsibility for · Demonstrates government's · Government managers may negotiate labor work force commitment to sector reform too-generous deals with labor in their restructuring before · Increases the likelihood of anxiety for smooth industrial relations the PPI transaction. attracting good investors and · It is the most costly option for govern- obtaining a good price for PPI ment, which bears all of the costs. MODULE · Enables government to implement · Can deter investors if linked to "no change in labor laws and collective subsequent retrenchment by the PPI bargaining agreements investor" clauses or clauses that · Can be fast, if there is the political reduce labor flexibility will and support · Most politically risky--bad image of · Facilitates a uniform government government policy toward labor adjustment in all public enterprises PPI investor: All labor restructuring · In theory, gives the best labor · Unattractive for investors where there takes place after PPI efficiency gains because investors is a history of difficult labor relations transaction. are best placed to know future and no proven track record of work staffing and skill needs and the force restructuring match between labor and capital · Can create a bad image for the pri- investment vate sector, which will be contrary to · Minimizes adverse selection policy for governments with a desire because the future employer to encourage private sector develop- does all the selection ment · Reduces political risk for govern- · Appears least costly for government, ment--crudely put, the PPI although in practice the PPI investor investor can be "blamed" for will discount the price to meet these downsizing costs Shared approach: Some pre-PPI work · Allows separation of pre- and · More likely to yield a case-by-case force restructuring post-PPI responsibilities. For negotiated approach, which in undertaken by example, government can retain practice can lead to bad precedent government, with responsibility for pension liabilities setting and government the rest left to the arising before the PPI contract. guarantees private sector after · Allows government to deal with · More demanding of managers in the PPI. the bulk of the accumulated implementing agency who will need surplus and then allows the PPI more commercial understanding of investor to fine-tune the likely investor requirements, particu- selection of workers larly if unions and government are · Ownership of the challenge of negotiating on post-PPI terms work force restructuring is shared · More complex negotiations may delay by government and the PPI PPI process investor · Some reduction in the risk of adverse selection, compared with government-only restructuring. 50 Strategies and Options many ways to restructure the work force. This sec- 3. As a form of compensation to displaced Three groups of tion first reviews the different options and then workers whereby they receive shares instead options: outlines how they might be used in combination as of cash. As part of a compensation package, · Soft options part of a comprehensive labor program. however, share transfers are probably best · Workplace MODULE viewed as a supplement to, rather than a restructuring Early retirement, voluntary departure, and compul- · Retirement and substitute for, severance or early retirement. sory redundancy are the most commonly used redundancy. options for labor adjustment. There is, however, a wide range of options that can be used by the SEQUENCING OF OPTIONS implementing agency. The options are not mutually exclusive; in practice the options can be used in In planning a labor program, the implementing 4 sequence or combined with one another. agency needs to take into account the sequencing of different options, and the right timing and sequenc- Broadly, the options can be divided into three ing can be critical to achieving a successful outcome. groups, as shown in figure 4.1: As the examples of South Africa and Tanzania 1. So-called soft options, which do not intro- (boxes 4.2 and 4.6) illustrate, major PPI reforms duce new elements of incentive or compul- often take time to implement. In such circum- sion, but rely on existing and therefore non- stances the implementing agency can start with soft controversial workplace regulations. options, progress through voluntary programs, and adopt compulsory redundancy if necessary. Figure 2. Options that involve restructuring of the 4.2 illustrates such a progression. workplace. Some will be voluntary whereas others, such as closure of noncore units, Although this Toolkit focuses on work force may be seen by workers as involuntary restructuring prior to PPI, the sequencing of change, especially if there has been little options can extend into the post-PPI period. For consultation. example, in the mixed approach adopted in Brazil's 3. Retirement and redundancy through volun- federal railway reform the sequencing of activities tary departure options or compulsory means. was planned in three phases: Voluntary options provide incentives for peo- · Phase 1: voluntary reduction by government ple to leave, either through early retirement through early retirement and voluntary Where PPI is not or severance packages. Acceptance is not urgent, a sequenced departure, which were offered only to select- forced (although in cases where a worker's labor program ed job categories. starting with soft future prospects are very poor, workers may options and feel that they have had little choice). · Phase 2: compulsory redundancy of employ- continuing over a Compulsory redundancy options force work- ees with unnecessary activities, through an number of years can ers to leave without asking for their consent. involuntary severance package equivalent to be envisaged. 80 percent of that paid to employees who Although not strictly a labor-restructuring tool, voluntarily left RFFSA. employee share ownership (see module 5) is a mechanism that may be used in conjunction with · Phase 3: post-PPI redundancy undertaken by labor restructuring. It can be used in three ways: the concessionaires. The terms of the contract provided that the concessionaire had to pay 1. As an incentive or reward package for the same terms as for the phase 2 pre-PPI workers, particularly those who will remain involuntary departure for any staff who were in the work force. made redundant within one year (Estache, 2. As the basis for management employee buy- Schmitt de Azevedo, and Sydenstricker 2000). outs or employee buyouts of units of the Estache, Schmitt de Azevedo, and enterprise. Sydenstricker (2000) present a case study of labor adjustment in Brazil's rail sector. 51 Labor Issues in Infrastructure Reform: A Toolkit Maayroage Removeghostworkers ll n p Removeghost e so ers p n i n eExst grules nforce Removeghost be efts n i i in Phaseout e so er labor p n i n 4 oS to s oft Retreworkersofretreme tage i i n Di sc l e/freabse teeworkers ip in i n p i n Retur gover me tde utees n n n p Tr sferst ff a aT localgover me ts n a nrad sfer"socal"workforcetomu c al n i ni ip n n l MODULE forcestre gths E force mtso work n i i n D o otre laceretredworkers n p i E force hr g freeze n n a i in Job sh ring a Reduc gworkhours in Stretch gwork in Sabbatcal, u ad tmeoff, volu taryleaveofabse ce i np i i Workforce Work lace n n p Tem or r dm str tve e ve p aya ini a l a i restructur g (tem oraryorrotatedlayoffs p ) mecha sms in restructur g in ni Reducedworkhoursa d Reorga gtheworkforce a g n inin ni in z Mtrultskll g Restructur gthe i i in state-ow ed in e ter rse n Shedd g o core bus esses in n n in n p i Co tract gout o coreactvtes n in n n i i i Perma e t U ad adm stratveleave n n np i ini i Partally ad i p i E r retreme t aly Fully ad p i Retreme twtha early e so i n Retreme ta d i n i n p n i n redu da cy i n n Retreme twth e so at e so ableage i n i p n i n n n p n i n Vou t r redu d c l ay U form ackage ni p n n a yn T rgeted ck ges a p a a Com ulsoryredu da cy U form ackage ni p p n n T rgeted ck ges a p a a Figure 4.1: Restructuring Options--A Typology In the event, the concessionaire was able to staffing, the political context for reform, the quickly identify the number of phase 2 urgency of PPI investment, and government's over- involuntary redundancies that were needed, all strategy for private participation in infrastruc- and labor restructuring was completed ture. Where the need for infrastructure sector before privatization. reform and investment is urgent, it will be neces- sary to bring forward early retirement and volun- The sequencing outlined in figure 4.2 may only be tary departure so that these are implemented at the appropriate where reforms are not seen as urgent. same time as are soft options. This in turn will depend on the level of over- 52 Strategies and Options Implement Sequence Preparation Downsizing soft measures Follow-up MODULE Policy · Monitoring and legal Workplace restructuring Secure legal review · Evaluation changes and program Early Pensions · Review impacts financing retirement review on labor Options productivity and Staff audits and financial performance mechanisms Voluntary Skill audits Remove ghost and redundancy · Review/adjust absentee workers Benchmarks 4 labor benchmarks Disciplinary Work force cases analyses Compulsory redundancy Redeployment Compulsory redundancy Number Voluntary redundancy of displaced Early retirement workers Workplace restructuring Ghost workers, ghost pensioners, disciplinary cases Natural attrition and normal retirement Years Figre 4.2: An Illustration of Sequencing The speed at which the implementing agency can SOFT OPTIONS move in the early stages, however, is often con- Soft options aim to restructure the labor force strained by: through the reinforcement of current work regula- · Lack of readily available resources to resolve tions. Options include payroll management, issues (for example, to hire specialists to enforcement of retirement age, enforcement of dis- review pensions, to conduct staff audits, or ciplinary actions, staff transfers, and freezes on to design an effective redeployment pro- recruitment and promotions. These options can be gram) a starting point to address overstaffing and can lead to substantial labor force reductions, without · The need to comply with laws, labor con- creating social or political controversy or unrest. tracts, and collective bargaining agreements · Lack of good information to answer key questions on the scope of labor adjustment Payroll Management to be identified. (How many staff are there actually? How many are in surplus? Which Removing ghost workers, absentee employees, and skills are most critical? Are there pensions ghost pensioners is usually an immediate and non- and salary arrears?) controversial step toward downsizing. At the enter- prise level, however, obstruction can occur where · Lack of financing for meeting the costs of payrolls have been inflated by corrupt and "well- implementing retirement and redundancy connected" senior and middle managers. In those options (covered in Module 5 in more detail). circumstances the manager in the implementing 53 Labor Issues in Infrastructure Reform: A Toolkit Tactical transfers agency may need high-level support within govern- to help the implementing agencies undertake can unblock difficult ment for his or her actions. Often, however, the disciplinary action in a fair and transparent labor problems, but they risk merely mere lack of control has enabled the growth of manner. transferring the ghost workers, and introducing a staff audit (see To accelerate the departure of employees subject 4 surplus labor from module 5) may be enough to yield significant one public to disciplinary proceedings, some PPI enterprises effects. A plant census undertaken at the steel organization to have developed special voluntary departure pack- another. maker SOMISA in Argentina required photo age. For example, Eskom, South Africa's power badges for all workers. Reported employment lev- utility, developed a special package for employees els of 14,500 employees quickly fell to 12,000 as who had received formal disciplinary warnings shadow employees were eliminated (Hess 1997). In and who chose to resign following amicable dis- MODULE Tanzania's civil service, a national census found cussions (box 4.5). that 16,000 (5 percent) of the entire payroll of 350,000 were ghost workers (International Records Management Trust 2001b). Staff Transfers to Other Public Organizations Enforcement of Retirement Age One restructuring option is to transfer surplus staff from an infrastructure enterprise to another public Enforcing the retirement age can lead to substantial sector organization (for example, a ministry, reductions in some work forces by: department, agency, or state-owned enterprise · Phasing out workers who are already over [SOE]). Transfers can let the PPI transaction pro- the retirement age ceed quickly with a much-reduced work force. · Requiring workers to retire when they reach The principal argument against such tactical staff pensionable age. transfers is that they can merely shift an overstaffing Prior to transition in Hungary, about 20 percent of problem from one part of the public service sector pensioners were active in the labor market. to another. In most cases governments will avoid Privatized firms subsequently reduced these num- such transfers unless there are genuine vacancies bers, which fell to 9 percent by 1992, as the com- elsewhere in the public service. Occasionally, how- panies restricted the employment of workers who ever, transfers have been used as a mechanism for had reached pensionable age (Szeman 1994). quickly enabling urgently needed PPIs and invest- ments. One example is Jordan's Aqaba Rail conces- sion (see box 4.6), which shows both the opportu- Even if there are few Enforcement of Disciplinary nity and the problems of tactical transfers. employees on civil Proceedings service deputation in Some infrastructure companies have workers who one PPI enterprise, Many work forces have a small proportion of staff are government civil servants on deputation. A they may create a who are being investigated on disciplinary grounds. precedent for other proportion of those workers might be transferred state-owned Some of these cases can linger for months and years back in their original department, or elsewhere. enterprises that while workers are suspended and on full salary or This is an option, however, that will be unaccept- government would still working. If voluntary departure or compulsory rather avoid. able for many governments. If the civil service is redundancies are to be implemented, it is important overstaffed, simply transferring surplus workers that these cases are tackled first. This implies: from the SOE sector back into the civil service is not helpful for wider efforts to reform the civil · Greater management attention to complet- service. Even if one particular PPI scheme only has ing these cases a few workers who have retained their civil service · Engagement of additional resources (for status, a transfer program for those few may set an example, lawyers and arbitration specialists) unwanted precedent. 54 Strategies and Options All recruitment Box 4.5: South Africa--Phased Reform in Electricity freezes are E skom is South Africa's state-owned elec- · A less generous severance package, known as temporary in tricity company. Government's overall poli- the "surplus package," is available in circum- nature--they have to end eventually. cy is to restructure the sector and encour- stances where the restructured unit is being MODULE age competition by (a) creating contestable mar- implemented and surplus positions have been kets for power generation and allowing the identified. phased entry of private power generation, · A third package is available to individual (b) separating generation from distribution and employees whose performance has been the restructuring distribution and supply into a num- subject of review and who have been required ber of regional electricity distributors, and to take a six-month performance enhancement (c) introducing a regulatory framework. program under which specific requirements are 4 Government's policy is to avoid retrenchment of stipulated and appropriate training is provided. workers in state enterprises wherever possible, When an individual employee fails to satisfy and the reforms and proposals for PPI have been the requirements of the program or chooses a key target for opposition by the labor unions. during the program to leave the company, this Nonetheless the pre-PPI restructuring of Eskom "volunteers' package" is made available. has resulted in a 40 percent reduction of the About 6 of every 10 employees who take this work force, from 65,000 to 39,000, over the last training program do so successfully, that is, six years. This was achieved through a mixture of they remain with the company. natural attrition and four different packages of · The fourth package, known as the "discipli- voluntary departure: nary package," is provided when an employ- · Most generous in terms of benefits is a volun- ee, following the initiation of a disciplinary tary separation package available to employ- process entailing formal warnings, counseling, ees when the restructuring of an element of and so forth, chooses to resign after amicable the company is imminent. discussions. Source: International Labour Organisation 1999a. Recruitment and Promotion Freezes Advantages of Soft Options Recruitment and promotion freezes are always Soft measures are particularly relevant if the man- temporary in nature. Even if the freeze lasts a num- ager in the implementing agency has some time ber of years, at some stage new staff must be hired before PPI and there is little urgency. Such meas- and merit-based promotion reinstated. The imple- ures offer: menting agency and the enterprise manager can at least halt increases in staff numbers through: · A relatively easy mechanism to implement, Soft measures have in political and managerial terms. benefits for the · Freezes on the hiring of permanent, tempo- implementing · A way to signal government's intentions to rary, or contract staff agency. They allow tackle work force restructuring in a manner the implementing · Selective abolition of vacant posts that can provide space for dialogue with agency to take unions, workers, and other stakeholders. action even in · Elimination of guaranteed entry to the pub- difficult lic service infrastructure company on com- · A way to achieve progress even in very diffi- circumstances. pletion of training programs cult circumstances. Where government or the PPI enterprise managers have effectively · Suspension of automatic advancement sys- lost control over staffing and payroll, rein- tems troducing basic staff audits and enforcing · Suspension of the automatic replacement of normal human resource management can staff who retire normally. help start the process of labor adjustment. 55 Labor Issues in Infrastructure Reform: A Toolkit Box 4.6: Jordan--Tactical Staff Transfers at Aqaba Rail T he government of Jordan has embarked on The consortium has agreed to retain 500 workers an economic reform program that includes from the existing ARC staff to be deployed in the PPI. Loss of jobs is a concern, however, in upgrade and repair of the existing rolling stock 4 an economy with relatively high levels of unem- and track. The government of Jordan has com- ployment. This is particularly the case in the rela- mitted itself to employing the remaining 800 tively poorer southern part of the kingdom where employees, with 150 employees going to other the Aqaba Railway Corporation (ARC) operates. government agencies and 650 transferring to the ARC was formed in 1972 to carry phosphate new JPMC operation at El-Sheidiyeh. rock from the Jordan Phosphate Mines Company If the government of Jordan had not solved the (JPMC) mines at El Abiad and El Hassa to the labor redundancy issue, privatization would not MODULE export facility at the main port of Aqaba. ARC have been achievable. Essentially the approach had been operating with significant losses for has been to privatize first, to bring in investment, several years, and its overemployment was sub- and to solve the employment issue later. The stantial. As production was shifting from existing ARC project will result in an overall investment of mines to the newer phosphate mine at El- US$120 million in railway infrastructure and will Sheidiyeh over the medium to long term, ARC paving the way for a separate $600 million joint was consequently faced with the need for invest- venture currently under progress between JPMC ment to handle the enhanced production at the and an international fertilizer producer to transfer El-Sheidiyeh facility. phosphoric acid from the El-Sheidiyeh facility After extended discussions concerning the fate of through the port of Aqaba. Overstaffing, however, ARC's 1,300 employees, the decision was made remains to be tackled as JPMC is prepared for to extend a 25-year concession agreement leas- privatization. ing ARC assets to an international consortium. Sources: Government of Jordan 1996­99; Jordan Times 1999. · A test of political commitment. If vested inter- · Rotation of employees on temporary admin- ests make it impossible for government to take istrative leave (this is one meaning of the these easy first steps, implementing harder term "layoff") options will not have much chance of success. · Operation of plant on reduced schedule (for example, three-day work weeks) WORKPLACE RESTRUCTURING · Job sharing. Changes in the nature and structure of work are also Those are typically short-lived measures, best suit- useful tools for the implementing agency. They can ed to situations where managers can expect a turn- enable control or reduction of staff costs while main- around in demand for staff. Those approaches taining the work force largely intact until such time were used, for example, by the airline and airports as the new PPI investor can select the staff needed. industries during the sharp downturn in demand for air travel in late 2001. Reducing Working Hours Placing Workers on Administrative Reduced working hours can cut salary costs through various approaches, including: Leave Employees placed on administrative leave ("fur- · Reduced work schedules for individual lough") remain formally employed with the estab- employees lishment but do not report to work. For profes- · Reductions in shifts (for example, moving sional staff, administrative leave may include peri- from three to two shifts) ods of sabbatical or training. Administrative leave 56 Strategies and Options can be unpaid or partially or fully paid, depending In China and the on labor laws and labor agreements. Box 4.7: China--Administrative Leave for former Soviet Union, Workers in State-Owned Enterprises economywide adjustment has Administrative leave has been used in a number of I n response to surplus employment in public placed several countries. For example, in Argentina's major infra- enterprises in China, in the early 1990s there million workers on MODULE structure privatizations some workers were sent was a new policy: Xiagong. This form of administrative leave. home with 50 percent of their salaries (Kikeri administrative leave allows state-owned enter- 1998, p. 6). By far the most extensive use of prise (SOE) workers to remain at home and still be regarded as employees (zhigong) of the SOE. administrative leave, however, has been in the state The government does not then consider enterprise and newly privatized sectors in China Xiagong to be unemployment, and Xiagong (box 4.7) and the countries of the former Soviet workers retain the right to company-owned 4 Union (FSU). An International Labour housing and eligibility for social and medical Organisation (ILO) survey of several countries of benefits. The number of workers in this category rose from 3 million (1993) to 9 and 12 million in the FSU found that 30 to 80 percent of privatized 1996 and 1997, respectively. enterprises made use of administrative leave, as did It is the responsibility of the individual SOEs to 60 percent of enterprises in China (see table 4.2). provide compensation for these workers, and The survey observed that: the expectation is that a regular cash allowance of up to 70 percent of the original wage will be In the context of the FSU countries, adminis- paid. In practice, however, because there is no trative leaves are fairly costless to employers, government regulation, allowances vary and reducing wage bills without the burden of sev- many workers receive nothing. Xiagong workers erance payments, while providing an easy way are also encouraged to seek alternative employ- ment. to increase labor should conditions warrant. The disadvantage to workers is (at best) Sources: Cao, Qian, and Weingast 1999; Rawski 1998. reduced income, but with the advantage, over displacement, of retaining rights to certain services or benefits provided by their employ- 80 percent of their gross pay, (b) workers of 55 ers. The most important of these rights may be and older with 80 percent of gross pay up to the adding work months to pension eligibility age of 60, and (c) workers 60 and older with 75 (Evans-Clock and Samorodov 1998, p. 68). percent of gross pay up to the age of 65 (Campa 1996). Administrative leave was also used to cope with the high levels of unemployment that arose in Russia, where the number of people employed had decreased from 73.8 million in 1991 to 65.4 mil- Reorganizing the Work Force lion at the end of June 1997. At that time approxi- A key change in human resources management mately 4 million workers were on administrative over the last two decades has been the shift from leave (Prokopenko 2000). asking "how many people do we need to do the job?" to asking "what is the best way to get the Administrative leave can provide workers with work done?" In other words there is a shift from some form of social assistance until retirement, focus on inputs (how many workers) to outputs thus removing them from the enterprise work force (products or services). This shift has had a pro- but not placing them on a possibly overloaded found effect on the structure of the work force in pension system. This approach has been used in many organizations, including infrastructure enter- Poland (coal sector restructuring) and in Spain prises. Work force reorganization includes: (steel and shipbuilding sectors). In Spain the pro- grams were funded through an Employment · Replacement of a single permanent cadre of Protection Fund, which provided (a) workers workers with a mixture of core employees under 55 with three years of benefits equivalent to (permanent), close employees (temporary, 57 Labor Issues in Infrastructure Reform: A Toolkit New ways of Table 4.2: Administrative Leave and Reduced Work Schedules in Countries of the Former Soviet working, sometimes Union called "atypical" work, are becoming more typical. Country Administrative leave Reduced work schedules 4 Percentage of Percentage of establishments employees Percentage of Percentage of placing workers placed on establishments placing employees on reduced reduced workers on leave placed on leavea schedules schedulesa Armenia 40.2 18.5 24.6 8.7 China 63.1 4.8 -- -- MODULE Georgia 43.0 37.5 10.1 5.3 Kyrgyzstan 79.7 37.4 28.0 28.8 Russia 30.1 13.0 19.3 16.8 Ukraine 43.8 15.6 32.5 12.3 -- Not available. a. Percentage of all workers in surveys placed on leave or given reduced work hours during some period in the preceding year. Data on work time were not collected for China. Data relate to the period 1994­96. Source: Evans-Clock and Samorodov 1998. part-time, retained, and seasonal), and periph- for example, would have the capability for eral workers (casual workers, contractors) undertaking all repairs in-house. Such dis- posals are frequently associated with public · Greater use of outsourced contractors sector reform and privatization, but they are · Removal or reduction of formal job demar- also a normal activity in the private sector cations, retraining within the enterprise, and (see Dranikoff, Koller, and Schneider 2002). greater multiskilling of the work force · "Social" units: Public enterprises in the FSU · More innovation in forms of employment and China commonly provided an extensive contract (twilight shifts, job sharing) range of social services, particularly in · Greater use of technology to facilitate health and education. Similarly, Indian changed work practices (remote metering Railways has a large medical service. and customer billing systems, customer-sup- Historically these activities have been necessary to port call centers). keep the PPI enterprise running effectively. Functional These measures may not have a large impact on reviews may identify benefits to the enterprise if these work force numbers. Their importance lies, howev- activities are abolished, transferred to other govern- er, in the challenge of creating a more flexible but ment agencies, spun off, privatized, or contracted out adequately represented and protected work force. (sometimes to redundant employees). RETIREMENT AND Restructuring the Enterprise REDUNDANCY Enterprise restructuring may lead to posts becom- ing redundant as a result of the closure, disposal, If soft options or workplace restructuring options or transfer of: are not enough, voluntary departures, compulsory redundancy, or both may be needed. Given high · Noncore activities: Some infrastructure oper- levels of overstaffing, most PPI schemes will need ations have been not only vertically integrat- to turn to these options. ed but almost fully self-sustaining. Railways, 58 Strategies and Options Voluntary departure arrangements are the most smooth subsequent labor programs and Voluntary widely used mechanism for reducing the size of the SOE reforms. redundancy is the most widely used work force and arguably are the most politically · Speed: Voluntary departure programs, mechanism for and socially acceptable largely because of their vol- reducing work force almost by definition, provide a better sever- MODULE untary nature. A voluntary departure program numbers in ance package than the minimum statutory infrastructure invites workers to vacate their posts in exchange benefit. Where compulsory redundancy is companies. for a certain compensation package. The compen- politically difficult, the enhanced benefit is sation may be a cash payment alone or it could be an incentive for workers to leave relatively in the form of enhanced pension rights, shares in quickly and in larger numbers. the new private enterprise, or other emoluments, plus a cash payment. The amount of compensation · Control of rehiring: Governments and 4 should act as an inducement to voluntary behavior donors alike are wary of creating a "revolv- and therefore is typically more generous than a ing-door" situation where they finance the statutory settlement payable under any national costs of severance for workers but then labor laws. Other benefits may also be included in rehire those same workers. One problem the voluntary departure package (for example, with compulsory retrenchment through retained rights to medical or housing benefits). statutory procedures is that government may be legally unable to prohibit the rehir- Voluntary programs often include an early retire- ing of workers. In contrast, the voluntary There are some ment component. In such a program, workers compelling reasons departure offer is usually a bilateral contract for voluntary rather cease work before the normal retirement age and between employer (government) and than compulsory receive a partial or full pension (see module 5 for employee, and so enables government to redundancy. more). Early retirement is usually a voluntary include clauses prohibiting the employee option, but it can be compulsory if the retirement from working again for government or the age is reduced for all workers post-PPI enterprise. Public-Private Infrastructure Advisory Facility case · Getting around restrictive legislation: studies: Compulsory redundancy procedures may be · Valdez 2002 (Bolivia) · López-Calva 2001 (Mexico) Box 4.8: Argentina--The Success of a · Ray 2001 (Orissa). Voluntary Approach I Most implementing agencies have used voluntary " n November of 1990, Argentina began restruc- rather than compulsory departure as the core of turing its Public Administration and Public Enterprises. Voluntary exit programs were their labor restructuring program (see, for example, implemented to downsize companies. In 1991 the cases of Bolivia rail, Mexico railways, Orissa and 1992 there were 28,300 and 56,000 retire- power distribution, and Brazil railways on the ments respectively. These programs cost $1 bil- Toolkit CD-ROM). There are many reasons for lion financed out of treasury funds, loans from this: the World Bank and the Inter-American Development Bank, and from the proceeds of · Political benefits: It is usually better for gov- the privatization.... Such a massive program of ernment if redundancies can be limited to state employment reduction has not been with- out opposition. The weakness and infrequency voluntary redundancies because it demon- of this opposition, however, is remarkable. And strates that there has been limited coercion while clearly many factors have contributed to of the work force (see box 4.8). this...the absence of opposition to the state employment reduction was clearly also due to · Fairness: A voluntary departure package is its purely voluntary nature" (Robbins 1996, pp. an indicator that government is treating 6, 7). workers fairly, which will in turn help 59 Labor Issues in Infrastructure Reform: A Toolkit In a few cases determined by legislation, with statutory KEY CONSIDERATIONS IN compulsory procedures, or within collective bargaining redundancy may be DEVELOPING STRATEGIES the only route or agreements or labor contracts. Governments AND OPTIONS may be a may want to use voluntary departure to 4 government policy avoid compulsory redundancy procedures if The PPI implementing agency usually does not decision. those procedures set out mandatory and have a completely free hand when developing extended timetables for implementing com- options and strategies for a labor program. Labor pulsory redundancy or provide for court- laws and the legal status of the enterprise and its based challenges--all of which could delay employees prior to PPI often restrict the choices labor adjustment by several months, or if that are feasible, while political considerations can MODULE they require particular selection processes strongly influence decisions on employment protec- (for example, a last-in/first-out selection tion for workers in the PPI bidding process. process might be mandated, even though the staff audit might show a need to retain younger workers with different skills). Labor-Related Legislation For all these reasons, voluntary departure pro- The strategies and options open to the implement- grams generally have been adopted to ensure a ing agency may be constrained by legislation, so an smoother, faster process of work force restructur- ing with less risk of confrontation with unions or workers. Box 4.9: Aeromexico--Liquidation and Compulsory redundancy may be the selected route Labor Adjustment when: O ne of two Mexican state-owned airlines, Aeromexico (Aeronaves de Mexico), had · The enterprise is liquidated. This has been only 3 profitable years over the 30 years the case with a number of airlines, including prior to its privatization, and the government Aeromexico (box 4.9). had thought that it would be unable to sell the money-loser. But when 7,250 of the airlines · Governments make a policy decision to pay ground workers went out on strike in early 1988, only the statutory minimum, either because the government seized the opportunity to exit. It of acute financial difficulties or an in-princi- declared the company bankrupt, terminated all ple objection to "privileged" SOE employees labor contracts, and sold the company as an asset sale. Compensation to workers was paid receiving further benefits from government. by Aeronaves, and it was the creditors of · Certain geographic or functional units are Aeronaves who effectively bore the cost of sev- closed. erance because on average they received only about 70 percent of their claims against the · Compulsory redundancy follows offers of company. Tandon (1995) has suggested that voluntary departure, and insufficient work- some of the better post-privatization perform- ance of Aeromexico compared with that of the ers have volunteered. other state-owned airline (Mexicana) arose from Compulsory redundancy is best achieved through labor adjustment issues--specifically: clear objectives, open communication, and trans- · Mexicana had been unable to match parent and fair processes. The amount of statutory Aeromexico's aggressive campaign to improve service quality (which some payment will be determined by labor laws or labor observers felt reflected Mexicana's inability to contracts. deal with the unreformed labor unions). Early retirement, voluntary departure, and compul- · The investors in Mexicana had needed to fund severance costs themselves--over 100 sory redundancy each have their advantages and billion (old) pesos in 1992 alone. disadvantages for the implementing agency, as Source: Tandon 1995. summarized in table 4.3. 60 Strategies and Options Table 4.3: Advantages and Disadvantages of Early Retirement, Voluntary Departure, and Compulsory Redundancy Early retirement Voluntary departure Compulsory redundancy MODULE Advantages Advantages Advantages ·Reduces immediate costs, ·Makes a clean break with ·Makes a clean break with employ- particularly if pensions are employees--no continuing gov- ees--no continuing government deferred ernment commitments commitments · May be the most acceptable · Can be structured as a one- · Can be structured as a one-time option for workers or unions, time payment with predictable payment with predictable financial particularly if the pension financial costs (and usually a costs (and usually a quick pay- 4 scheme is a defined-benefit quick payback) back) plan · Is relatively simple to negotiate · Is likely to be the lowest-cost · Shifts financing problems to and implement option if the statutory minimum pension fund or future · Gives the implementing agency payment is made to workers governments (an "advantage" and government flexibility in · Produces few adverse selection for today's government, but designing the package problems; workers will be selected one that creates a long-term · Is a bilateral contract with for compulsory redundancy fiscal liability) employees that often avoids both the legislative procedures and collective bargaining agree- ment relating to compulsory redundancy · Is politically acceptable because it is voluntary · Permits the government to require that anyone selecting voluntary departure agrees not to work again for the public sector, or for the PPI enterprise, and so reduces the "revolving- door" problem. Disadvantages Disadvantages Disadvantages ·Produces uncertain longer- · Has high immediate costs, · Is the most politically difficult to term financial costs for especially because these plans implement government because returns tend to be generous · Needs a formal and strictly imple- from government pension · Demands that particular care be mented process if it is to be seen funds are uncertain given to the selection process; as a fair and unbiased process · May lead to loss of the most generous plans can lead to a · May have to comply with any col- skilled or experienced rapid exodus of the best work- lective bargaining agreements with workers if early retirement ers trade unions on which processes lowers the retirement age to follow in the case of compulso- · Pension funds may be ry redundancy unwilling or unable to provide · Consultation and negotiation early retirement benefits process can lead to long delays quickly because of problems · Legislation may prevent the imple- of administrative capacity or menting agency from imposing a lack of liquidity no-rehiring clause on compulsory · A substantial increase in retrenched workers, thereby open- pensioners might tip the ing a "revolving door" pension plan into a finan- cially unsustainable position · Government's options may be limited by the terms of pension fund rules. · May need negotiation with pension fund trustees or the supervisory board, and so there is potential for delay in the PPI transaction 61 Labor Issues in Infrastructure Reform: A Toolkit early task for the implementing agency is to review had to be amended for dealing with labor the legal framework for dealing with labor issues adjustment (box 4.11). (summarized in table 4.4), so that: Laws and regulations relating to the continuity of · Strategies and options can be designed with- workers' rights and benefits will also require atten- 4 in the legal framework. tion. The terms and conditions of employment in some PPI enterprises are relatively high compared · The need for any new legislation or amend- with those in other private sector or public sector ments is recognized early. employment. Continuation of those terms and con- · Labor issues can be appropriately sequenced ditions can therefore be an important issue in the with or incorporated into other legislation PPI process. Many privatization laws are silent on MODULE needed for the PPI arrangement. labor issues and workers' rights, and effectively give freedom to the new owners to negotiate work · Legal issues do not delay PPI. force numbers as well as terms and conditions Any changes in labor laws need to be appropriate- within the limits provided by the general labor ly sequenced with wider legislative change in sup- code. Sometimes, however, workers' rights are pro- port of PPI. In Mexico's rail privatization, for tected as part of the privatization legislation. For example, constitutional and legislative changes to example: permit private participation preceded guidelines on labor relations (box 4.10). · In Turkmenistan the privatization law ensures that transferred workers have the The legal review may suggest that labor laws and same rights as other workers to participate contracts need to be amended as in the following in employee ownership (box 4.12). examples: · In Malaysia new private owners are not · The Algerian government enacted signifi- allowed to modify the employees' terms of cant changes to its legislation on redundan- service for a period of five years following cy and severance in the mid-1990s. It privatization, including redundancy of the implemented a package of severance pay employee. plus a new unemployment insurance plan · Nepal's Privatization Act (1994) provided that spread the costs of redundancy over for continuity of employment and of the time. The legal requirement for union terms of employment for workers trans- approval of layoffs was eliminated ferred to the private sector. In practice this (Ruppert 1999). has been adopted in all privatizations in · In Tanzania arrangements for the transfer of Nepal. the labor force were included in new rail- · In Tanzania new sector-specific legislation way legislation that provided for overall sec- associated with the restructuring and con- tor restructuring, private participation, and cessioning of the railway provided for the establishment of an independent regulator transfer of staff and for their rights when for the sector. the state corporation was restructured into a · New laws to enable modernization and company. The article provides for: restructuring of the ports sectors, which ­ Continuity of terms and conditions included changes to the work force rights, were adopted in Brazil and Mexico. ­ Continuity of service period, which was deemed to be continuous from first · In Argentina, the PPI program was enacted employment in the corporation to end of entirely through presidential decrees, but a service in the company. range of international standards, national laws, and collective bargaining agreements ­ Continuity of pension contributions in cases in which the pension plan was 62 Strategies and Options Table 4.4: Labor Issues Legal Framework Legal instrument Features MODULE National · As well as providing the framework within which laws are made, changed, and interpreted, constitution some national constitutions also contain specific provisions relevant to labor issues in PPI. For example, the South African Constitution guarantees the rights to form, join, and partici- pate in labor unions and to collective bargaining. Primary · In some cases PPI itself will require change to primary legislation; and other legislation law might also cover the way in which PPI would be carried out, especially in relation to employment rights. · Relevant laws can include not only those relating directly to employment, such as a labor 4 code, but also those relating to public service provision and regulation, health and safety protection, and civil rights in such areas as nondiscrimination against women and minorities. · In some jurisdictions, to a degree dependent on constitutional arrangements in the country concerned, laws and rules made at the subnational level by provincial authorities and even at the municipal level are as important as national laws. Secondary · In some cases governments have been able to develop PPI programs through decrees or laws, other instruments of secondary legislation, normally (depending on the constitution) using regulations powers provided under primary legislation, and these instruments can apply to labor issues. · Regulatory arrangements--the powers handed by government to regulators whose inde- pendence might be safeguarded by law--can have direct and indirect effects on labor issues in PPI. Commercial · Existing contracts with suppliers, intermediaries, or others might have implications for PPI contracts plan employment and the structure of PPI bidding documents. · Some contractual arrangements with workers, such as those enshrined in pension fund rules, can also have implications for labor and can either determine parameters within which change takes place or require revision. Labor · The scope and legal status of labor agreements will vary in accordance with the statutory contracts framework in which they exist. At the very least they are likely to cover the processes and and consultative mechanisms by which agreements are renegotiated, should that be necessary. agreements · Some might be underpinned in a labor code, for example, whereas others might be based on general contract law. · The precise form of legal instruments defining relations with labor and management vary-- memoranda of understanding, collective bargaining agreements, and management agree- ments are among the forms--and each might require distinct procedures of review and revision. International · Several ILO conventions and recommendations are relevant to PPI. Particularly noteworthy agreements are those relating to the termination of employment (Convention 158), and the ILO's "core labor standards" that now have the support of a wide consensus of international institutions and governments. · In some sectors, such as airways, there are also international standards affecting terms of employment, so pilots, for example, do not work excessive numbers of hours that are incompatible with safety. · International institutions and trade and investment agreements--such as those of the World Trade Organization, the European Union, and the North American Free Trade Agreement-- also significantly affect the legal environment. There may be both direct impacts (where such agreements have social and labor clauses) and indirect impacts (where agreements on, say, procurement have implications for employment conditions and criteria in PPI bid- ding documents). Informal · Government policy statements on labor, PPI, or privatization are relevant because govern- instruments ment agencies will usually want to comply with those policies. · Protocols and even "soft" legal instruments, such as codes of practice, can be significant. They require compliance or change and the procedures associated with them are typically underwritten in more formal legislation, meaning that due process is not just an ethical but potentially also a legal matter. · "Custom and practice" or precedent can also have legal force because acquired rights can result and failure to observe precedent can be open to judicial challenge as being unfair or discriminatory. · Informal instruments can operate at every level from the workplace to the international scene. An example of the latter is the Organisation for Economic Co-operation and Development's guidelines for multinationals (OECD 2002). 63 Labor Issues in Infrastructure Reform: A Toolkit Box 4.10: Mexico Rail--How the Legal Framework Changed M exico's railway privatization required rail work force to the new businesses. It did, changes in the legal framework from the however, include a commitment to training the Constitution to various regulations, sev- workers who remained in the company. In June 4 eral of which affected the treatment of labor in 1995 a restructuring committee was set up to the course of restructuring and PPI. oversee the railway privatization. The first step in the railway restructuring strategy In November 1995 the government issued guide- was a presidential proposal and approval by lines that acknowledged the important historical Congress to modify the constitutional mandate role of the labor union and the workers and com- that declared a state monopoly in railroad trans- mitted the government to respect all of their labor portation. The next step, taken in April 1995, was rights. The guidelines set out the general MODULE to create by presidential decree a Comisión approach to dealing with personnel issues, but Intersecretarial de Desincorporation to be its only firm requirement binding on the conces- responsible for the privatization project. In May sionaires indefinitely concerned the licensing of 1995 the Regulatory Law of the Railroad Service locomotive drivers (laying down the qualifications was published to establish the basic regulatory required of drivers, their training, and examina- framework. It defined the mechanisms and rules tions to which they would be subject). In addition for awarding the concessions, the concession there was a major renegotiation of the labor con- period (50 years), and the regulatory framework. tract which was streamlined from 3,045 clauses The law restricted foreign participation in the rail to just 211. More than 1,800 clauses were elimi- concession companies to 49 percent, but did not nated and the rest introduced into bylaws include any requirement to transfer the existing Source: Lopez-Calva 2001. Box 4.11: Argentina--International Standards, National Laws, and Labor Contracts W hen Argentina privatized air and rail with international standards established by the transport, it was necessary to change International Civil Aviation Organization. In the some laws to amend contracts of case of rail, collective agreements were concluded employment. For example, pilots, flight engineers, between workers' unions and the concession and cabin staff were not merely covered by the companies, but the air companies were more general minimum conditions of employment appli- reluctant about collective bargaining and they cable in the public sector under the Labor implemented changes with little negotiation. Contracts Act, but also by provisions originally In both sectors, however, the outcomes were enacted for the Argentine Air Force concerning contractual changes to enable management to flight safety. Those flight safety regulations deploy workers more flexibly, both by extending imposed limits on operating hours and guaranteed permitted working hours and by getting rid of rest breaks aboard aircraft and on the ground, restrictive practices that limited the work that depending on the type of aircraft. A decree of could be done by particular grades of workers 1994 introduced greater "flexibility" into conditions (except insofar as international standards of work and employment and in this respect went required tight specification, as with pilots and along with the general trend toward reducing mini- flight engineers). mum legal standards, but maintained compliance Source: Coradetti 1999. transferred to the company from the enterprise law, the labor code, the commercial corporation. code, and administrative law (government law) The legal assessment (see terms of reference for a may have to be reviewed and a judgment may be legal review on the accompanying CD-ROM) required if there are inconsistencies among them. should determine whether existing rights will be In common-law countries the circumstances in protected as an acquired right for a particular PPI which such rules apply can evolve through case arrangement. In some cases this may require legal law. This has happened in the European Union, interpretation. In civil-law countries the specific where litigation by unions established that 64 Strategies and Options institutional changes that affect the status of Box 4.12: Turkmenistan--Privatization and employees, as described in table 4.5. A typical first Employment Rights change is when a departmental enterprise is trans- T he Law on Privatization of Property in formed into a state-owned corporation, often Turkmenistan includes a section dedicat- MODULE through a specific act. Workers cease to be civil ser- ed to "Guarantees for Personnel of vants but remain public sector employees. Enterprises Stated for Destatization and Privatization," which not only requires collective Although there are usually greater freedoms than bargaining but also establishes certain property in the civil service, benefits and human resources rights for employees in the enterprise. It pro- policies often remain linked to those of the civil vides that: service and there is only limited delegation of 1. The labor relations between the personnel of employment policies to the corporation. Another 4 enterprises who have undergone destatization change is the legal transformation (corporatization) and privatization and the new owners of the of a statutory corporation to a joint stock compa- enterprises will be regulated by existing labor laws of Turkmenistan with consideration for ny in which the government's role changes to that the provisions of this section. The new owner of a shareholder and the company is governed by will negotiate a new collective contract with the laws regulating private companies. Although the trade-union organizations at the enterprise human resources policies still retain public sector within six months after the transfer of owner- characteristics, labor contracts and pay structures ship rights. Until this contract has been signed, all of the provisions of the earlier col- become more flexible, with greater autonomy at lective agreement must be observed. the enterprise level. The major change in PPI is the 2. The collective contract will be negotiated at move from public to private ownership where all enterprises and acquire the rights of a legal workers cease to be public sector employees. entity, regardless of the form of ownership. The placement of released personnel in new New Zealand rail is a good illustration of an infra- jobs and other social guarantees will be structure company in which the institutional secured in accord with the employment laws organization has changed over time, paralleled by of Turkmenistan. changes in employee status (box 4.13). Employees' status, benefits, and employment These changes are important for the PPI process. It contracts change as acquired rights had to be transferred in the event of will be clear to most parties that corporatization in the legal basis of the contracting out as well as mergers and acquisitions. particular is a possible preparation for private par- PPI organization changes from ticipation. Any changes in employee status, pay, departmental The CD-ROM that accompanies this Toolkit contains: benefits, and conditions that are agreed to as part enterprise, public of the broader institutional change while the enter- corporation, joint · Terms of reference prise is still publicly owned are likely to be pre- stock company, and then into a private · Legal checklist served throughout the process to PPI. Trade unions company. are aware of this, and the implementing agency · Terms of reference for a review of labor laws as a should be prepared to face tough negotiations and basis for engaging a legal specialist or consultant to industrial action prior to PPI itself. Two examples undertake the legal review from the telecommunications sector are summa- rized in box 4.14. · A legal checklist and notes, which further elaborates on the range of laws, agreements, and conventions that may need to be checked. Employment Protection in the Bidding Process Employee Status Prior to PPI Two questions that frequently arise are whether to During their preparation for PPI, infrastructure include employment conditions in PPI bids, and organizations are often subject to fundamental what types of conditions should be included. 65 Labor Issues in Infrastructure Reform: A Toolkit Table 4.5: Institutional Reorganization and Changes in Employee Status State-owned Type of Departmental State-owned company PPI entity enterprise corporation (wholly owned) Private company 4 Relevant Civil service Act of parliament Joint stock company Joint stock compa- institutional regulations or establishing statu- with 100 percent of ny; subject to nor- legislation civil service law tory corporation shares owned by the mal company laws state; subject to and corporate code normal company laws (including bank- and corporate code ruptcy) MODULE (including bankruptcy) Employee Civil servant Public sector Public sector Private employee status employee employee Change of employee Should the PPI bidding process include employ- years." For example, in Benin there was status and terms ment guarantees by the investor, and should the a standard "five-year no layoff" clause in and conditions will evaluation of the winning bidder take into account privatization contracts (Campbell-White require negotiation with trade unions labor-related criteria, such as the bidder's proposals and Bhatia 1998). There are normally no and workers' for future work force restructuring? restrictions on investors offering a pro- representatives. gram of voluntary departure. The implementing agency can choose to set no employment criteria or conditions in the bidding ­ The minimum severance benefits that documents, giving maximum flexibility to the pri- workers can receive if there are compul- vate partner to manage labor issues. Alternatively, sory redundancies or voluntary depar- employment criteria or conditions can be included tures following PPI. in the bidding process to protect employment and ­ Continuity of terms and conditions of workers' rights, as in the following examples: service, which require the investor to pro- vide the same or better levels. · Including labor requirements as part of bid evaluation criteria, such as the number of ­ Workers' right to participate in share employees to be retained. Investor selection ownership programs (module 5). will then be based, in part, on bidders' Bid conditions are usually more transparent than response to those criteria. evaluation criteria. But although conditions and · Imposing mandatory and specific labor con- criteria are attractive from a political and social ditions that must be complied with in the standpoint, the implementing agency often will rec- proposals submitted by all prospective bid- ognize that they are not appropriate for the follow- ders. Labor conditions may include obliga- ing reasons: tions on: · Practicality and feasibility of enforcement: If ­ Periods of guaranteed employment, government is unable to enforce bid condi- where investors promise to maintain tions or investor compliance with promised overall staffing at a certain minimum approaches to labor management, condi- level for a defined period. tions or criteria are ineffective tools. In ­ Implementation of redundancy pro- Mozambique and Zambia, for example, grams. Normally these take the form of labor guarantees at privatization were not "no compulsory redundancies for x kept (Campbell-White and Bhatia 1998). 66 Strategies and Options Although the Box 4.13: New Zealand Rail--Changes in Worker Status preparation of T he status of workers in the New Zealand ual contracts with incentive-based perform- bidding documents rail sector has changed several times. In ance measures is an activity late in the PPI process, it is 1982 New Zealand Rail was converted from · Simplification of the allowance structure and essential to consider MODULE a departmental enterprise where workers had an increase in the base pay to absorb some bidding conditions in civil servant status to a statutory corporation of the allowances as well as the introduction a strategic way at (New Zealand Rail Corporation [NZRC]) where of incentive-based compensation to most of an early stage. workers were public servants. Subsequently the the white-collar employees. entity was again changed when it was converted Nevertheless the contract as a public servant up from a statutory corporation in 1990 to a public to 1992 still retained many aspects of the state limited liability company (where staff continued to sector model in respect to hours of work, over- 4 be public servants). Finally, in 1993 New Zealand time payments, and penalty payments. Following Rail Ltd. shares were sold to private interests. privatization in 1993, however, under the The employees' status then changed from public Employment Contract Act, New Zealand Rail Ltd. sector employee to private sector employee. as a privately owned company was able to make There also were changes in the labor contracts. further changes to the labor contract: Until 1986 employees of NZRC continued to be · More flexible working hours, including over- guided by the central civil service conditions of time after 80 hours each fortnight instead of employment. In 1987 NZRC came under the leg- after eight hours per day islation applicable to SOEs that made NZRC independently responsible for bargaining over its · Fewer penalties on work outside the con- own labor relations contract. The key changes ventional eight-hour day Monday to Friday were: · Change from one collective contract to five · Simplification of the collective labor- contracts government agreement and removal of artifi- · No weekend or night work penalty pay- cial distinctions among job categories ments for new employees. · Removal of the state service seniority and A lump-sum payment was also made to those appeals system for the appointments and workers who lost out from the changes to the promotions process overtime, penalty, and allowance payments. · Removal of senior management from the Source: Kopicki and Thompson 1995. collective bargaining agreements to individ- · Suitability of employment guarantees: the United States wastewater example illus- Employment guarantees work where surplus trates (box 4.15). levels are modest and in high-growth sectors The following guidelines on the use of labor crite- where excess labor can be absorbed through ria and conditions in the bidding process help attrition and expansion. But they may not address the tradeoffs between political/social desir- be a solution for public services or enterpris- ability and efficiency: es with severe overstaffing. · Use labor conditions rather than labor crite- · Impact on transparency of the bid selection ria because conditions are more transparent, process: The more complex the technical and allow like-for-like comparison of bids. evaluation criteria, the greater the chance Variant (alternative) proposals are still possi- that the scoring is subjective and nontrans- ble, which means that innovative proposals parent. In Argentina, initial experiences with still may be captured. rail concessions led to dropping the labor criterion from the technical evaluation in · Set reasonable conditions so that they do later rounds (box 4.15). not hinder flexibility. For example, provide transitional employment guarantees rather · Difficulty of comparing bids when bidders than longer-term ones, avoid prohibiting submit different labor treatment plans, as voluntary retirements, and specify condi- 67 Labor Issues in Infrastructure Reform: A Toolkit Allowing bidders to submit alternative Box 4.14: Telecommunications--Institutional Structures and Labor Adjustment ideas on the France Telecom--Preprivatization Institutional throughout India for nearly a week--all telephone treatment of labor Changes lines, cellular, mobile, and Internet services coun- makes it difficult to Before 1991 France Telecom was a central gov- trywide, and all manually operated telephone and 4 compare like with telegraph services were affected. like. ernment, autonomous, public law enterprise. In preparation for privatization, France Telecom had The strike was ended with the government hav- to be transformed to a joint stock company. ing remained firm on the need for restructuring of The change of status from a civil servant of the sector and the need to privatize. In October France Telecom to an employee under the gener- 2000 DTS was corporatized and converted to al labor code regime and the fear of layoffs relat- Bharat Sanchar Nigam Limited (BSNL), a new ed to privatization became stumbling blocks to wholly state-owned company registered under MODULE the privatization, resulting in strong opposition the Companies Act. and a number of union strikes. The government However, several concessions had been made to had to enter into negotiation with the unions, and unions and workers, the most important of which at each stage of the negotiation additional con- were: cessions were made, including guaranteeing the · Maintenance of the staff's long-term pension benefits of civil service status and a commitment benefits, which government guaranteed to that the company would remain 51 percent state meet from a consolidated central fund owned. (although this funding mechanism was subse- India Telecom--Labor Challenge to quently disputed) Corporatization · Maintenance of all terms and conditions and In 1999 the departmental enterprise providing staff benefits telecommunications services in India, the · Regularization of about 8,000 quasi-permanent Department of Telecom Services (DTS), was pre- and temporary staff, including providing them pared for corporatization. The corporatization of with pension benefits DTS was strongly and consistently opposed by · An immediate salary increase of 1,000 rupees the officers and workers of DTS (about 360,000 per worker, plus recognition of improved pay total). A nationwide strike took place in scales and increments September 2000. The strike's impact was wide- spread: It received strong media coverage and · Free telephone connection for all employees, drew support from other central government plus reduced call costs. unions. It disrupted telecom services severely Sources: Guislain 1997; Adam Smith Institute, unpublished data. tions that are likely to enhance value and restructuring should take place, taking into performance, such as minimum annual account circumstances at both the country and investments in training. enterprise levels. · If setting labor criteria for bid evaluation, define the rules clearly--both to bidders and evaluators--to make the evaluation process Tools (on the CD-ROM) as objective as possible and to avoid manip- Terms of reference for a legal review ulation (for example, by counting part-time workers as full-time ones), and ensure trans- Labor law checklist and notes parency in publishing the results. Note on employee share ownership programs in PPI. STRATEGIES--A DECISION TREE Additional Material (on the Figure 4.3 provides a decision tree to help imple- CD-ROM) menting agencies develop the overall strategy for Clarke, George. 2001. "Thirsting for Efficiency." labor restructuring and assess when and how labor Paper presented at the Regional Conference on the 68 Strategies and Options The decision tree Box 4.15: Experiences of Using Labor Factors in PPI Bidding helps guide Argentina Rail improvements work, major corrective repairs and implementing agencies through In the mid-1990s the government of Argentina other services currently `outsourced' by the the strategic restructured its railway into separate freight and board." In addition the company proposed to decisions for laborMODULE passenger train networks, which were conces- implement an extensive training program on adjustment. sioned. The six freight concessions were issued process control, maintenance, safety, warehous- first, and the bidding mechanism reflected both ing, purchasing, and cost control measures. They political compromises on employment and made no promises, however, about union recog- investment requirements. Bids for the freight net- nition, bargaining rights, or maintenance of pay works were evaluated on the net present value levels. (NPV) of the canon (annual concession fee) to be A second bidder also proposed a comprehensive 4 paid to the government, as well as on staffing program of employee training and development levels, the quality of the business and investment and promised to maintain employment and terms plans, the proposed track access fee for intercity of employment at then-current levels throughout trains, and the share of Argentine interest in the the period of their five-year plan as a result of a consortium. The bidding process for freight con- planned extensive meter installation program. cessions was perceived to be too complex and While promising to meet all the financial costs of lacked transparency, however. The bid evaluation these commitments, the company's submission criteria were simplified in the subsequent issuing declared its assumption that all employees with of passenger concessions. Those bidding docu- more than 25 years of service, and therefore able ments defined the minimum services to be pro- to retire under the terms of the municipality's vided and a capital investment program, and bid- pension arrangements, would be enabled to take ding was based on the lowest level of govern- early retirement. ment payment. Other criteria, including labor, The third submission anticipated retrenchments, were dropped. stating that it would seek to eliminate "no layoff" United States--Municipal Wastewater language in existing labor contracts in the course Treatment of negotiating terms and conditions with the In 1996, intending to privatize its wastewater union, which it undertook to recognize as its treatment service, the city of Buffalo, New York, workers' bargaining agent. The company also invited proposals from three bidders and required said it would budget for a 3 percent pay them to set out what they would do with the increase, maintain medical payments for up to 18 existing labor force if they won the concession. months, provide training even for redundant Each company made a different offer. employees, and offer other benefits. One stated that the company "is committed to In addition to the difficulties of comparing the employing existing staff and making significant bids, the city noted that the more commitments investment in the greater advancement of each on employment made within the submission, the of its team members." The company also under- higher their proposed charge for the contract to took to extend the one-year no-layoffs pledge the city, so that the city itself was faced with the required by the city to five years, improving pro- cost of the tradeoff. ductivity instead through "our innovative Sources: Thompson and Budin, 1997; documents provided approach to providing service level enhance- by AFSCME, the U.S. public employees' union. ments, and through `insourcing' of minor capital Reform of the Water Supply and Sanitation Sector Privatization: The Experience of Brazil's Federal in Africa, "Enhancing Public-Private Partnership in Railway." Policy Research Working Paper the Context of the Africa Vision for Water (2025)." WPS2460. World Bank, Washington, D.C. Kampala, Uganda. Rama, Martin. 1999. Public Sector Downsizing: An Estache, Antonio, Jose Antonio Schmitt de Azevedo, Introduction. The World Bank Economic Review and Evelyn Sydenstricker. 2000. "Labor 13(1):1­22. Redundancy, Retraining, and Outplacement during 69 Labor Issues in Infrastructure Reform: A Toolkit r is secto PPI or the severance private of after transaction the 4 post-PPI, PPI terms period early attrition leave the which and set minimum) and to severance options plans when legal large- natural options: free of specified schemes a is soft for departure, compulsory of rules concluded guarantees, transfers net soft retirement (within for is terms ghosts and of transfers administrative numbers hiring plans redeployment ghosts departure staff current early sector hiring sets adopt voluntary safety advantage staff staff quick-win range MODULE a Eliminate Make Freeze Private and concluded State employment must transaction Use -- -- -- Develop scale retirement, redundancy Develop social Take Enforce Eliminate Make Freeze Encourage Develop voluntary · · · Use · · · · · · · ? special give Yes rapid, No workers to Is needed? to large-scale downsizing No need Yes a protection there Is and nets for finance within of of market: labor government safety Political will the environment timetable PPI extent Labor initial do sources and social of labor out adjustment to sector out finance Government carry restructuring Determine labor context Determine downsizing needs Establish funding Private to restructuring · · · · carry Yes No reeT all agree for and need ? and a Decision before as Political PPI enterprises new harmonized environment there restructure for Is to labor Develop to procedures institutional mechanisms PPI regulations or No support employment contracts win of labor Adjustment--A of and necessary legislation in ? if surplus labor Labor Extent Yes there termination for in labor Establish policies Establish on necessary Renegotiate Are consistent procedures place restructuring ? and that Choices labor Yes place No policies in Laws, enable Strategic collective Are restructuring laws regulations, agreements 4.3: Figure 70 Strategies and Options Web Sites Washington, D.C. (This publication summarizes findings of a benchmarking study on best practices ILO. 2000. "Termination of Employment Digest." in downsizing in North American public and pri- Geneva: International Labour Office. (Available for vate sector institutions. See download from the ILO web site: www.ilo.org. For http://safetynet.doleta.gov/comon/downsize.pdf.) a summary of national laws on statutory termina- MODULE tion, see the following area on the ILO Web site: OECD Guidelines for Multinationals Enterprises: www.ilo.org/public/english/dialogue/ifpdial/publ/ Global Instruments for Corporate Responsibility. publ_emp.htm.) 2001 edition (see www.oecd.org). The OECD guidelines for multinational enterprises are recom- ICFTU: www.icftu.org. mendations on responsible business conduct ILO ILOLEX: www.ilo.org/ilolex/english/index.htm. addressed by governments to multinational enter- (Site provides access to ILO conventions.) prises operating in or from the countries that 4 adhere to the Guidelines (the OECD members plus ILO NATLEX: Argentina, Brazil, and Chile). The chapter on www.ilo.org/dyn/natlex/natlex_browse.home. employment and industrial relations is one of the (Site provides access to 55,000 national laws on most detailed and comprehensive of the instrument, labor.) and deals with: World Bank "Shrinking Smartly": · Respect for core labor standards (freedom of www.worldbank.org/research/projects/downsize/. association and collective bargaining, abolition of (Site is a clearinghouse for researchers, development child and forced labor, nondiscrimination in practitioners, and government officials concerned employment and occupation) about the difficulties encountered in downsizing a large public sector. Several papers on downsizing · The preconditions for enabling effective negotia- strategies are available for download.) tions and consultations between employers and employees and their representatives PPIAF: www.ppiaf.org. (Site features other PPIAF resources and tool kits.) · The provision of information to employees and their representatives Rapid Response: rru.worldbank.org. · The observation of adequate employment and World Bank Social Protection: industrial relations standards, particularly in the www1.worldbank.org/sp/. (This site provides access area of occupational safety and health to the online version of the World Bank Core Labor Standards Toolkit, labor markets pages.) · Recruitment by enterprises of local personnel and provision of adequate levels of training to them · Provision of reasonable notice to representatives Other Material and Sources of employees in cases of major changes in busi- ness operations Aeberhard, Jane Hodges. 2001. "Comparative Study of Contents of Civil Service Statutes." International · Unfair influence on bona fide negotiations Labour Office, Geneva. (Provides a commentary on through transfers of operating units and/or different approaches to labor issues in civil service employees to or from other countries statutes worldwide, including termination of employment. Available for downloading at · The selection of management representatives www.ilo.org.) endowed with the appropriate decisionmaking authority for collective negotiations. National Performance Review. 1997. Serving the American Public: Best Practices in Downsizing. 71 5 MODULE Key Elements MODULE of a Labor Program 5 W hen the broad strategy and options for labor restructuring have been determined, the next step is to develop the main elements of the labor program. Specific approaches to restructuring are bound to vary among countries and enterprises, depending on local circum- stances. But labor programs typically include four main components: 1. Severance payments assess payment levels, and how to avoid some common implementation problems. 2. Pension payments 3. Retraining and redeployment support The design of severance packages must begin early in the labor program because it is a critical factor 4. Employee share ownership schemes. in the success of the program. An early start will Each of these components is discussed in depth in provide time to assess all of the options. There is, the following sections. At the end of each section is however, no "cookbook" recipe or formula for a list of the contents of the CD-ROM that accom- determining severance payments. panies this Toolkit, a list of pertinent Web sites, Severance packages typically include some or all of and a list of additional relevant materials and A severance the following components: package has a sources. number of elements. · Statutory end-of-service payments, the levels Each element may be governed by of which are set out in national or state leg- different legislation, SEVERANCE islation and over which there is no discre- regulations, rules, or tion (without legislative change) agreements. Severance payments are an important source of temporary income for surplus workers and they · Compensation for enterprise-level benefits, need to be designed and put in place early in the which are payments to retrenched workers restructuring process. Because they are potentially for benefits to which they are entitled costly for governments, it is important to design according to the rules for each enterprise or them well. This section of the module provides as part of a formal collective bargaining guidance on how to design severance plans, how to agreement 73 Labor Issues in Infrastructure Reform: A Toolkit · Ex gratia severance payments over and Statutory Termination Benefits above statutory minimums, which form part of a voluntary departure agreement with Statutory termination benefits vary considerably workers. among countries, as table 5.1 indicates. Benefits typically are based on a formula linked to years of 5 service. Often workers must have completed a min- imum period of 6 to 12 months of employment to Statutory Payments be eligible for these benefits. The International Statutory payments Statutory termination payments are the minimum Labour Organisation's "Termination of DULE can be an important payments that any terminated worker must receive Employment Digest" is an online resource that O part of the overall according to national or state legislation. These severance package. details national legislation and statutory severance M payments must be made whether employees leave payments and packages worldwide. through voluntary departure, early retirement terms, or compulsory redundancy. The ILO Web site offers access to comparative data on statutory termination benefits: www.ilo.org. The relevant laws and regulations vary among countries, but typically the main elements of statu- tory payments are: Gratuities · Notice period, or payments in lieu of notice A gratuity is a benefit paid at termination of service to an employee reaching the date of superannuation · Statutory termination benefits or on retirement, resignation, death, or disablement. · Gratuity benefits Some countries have primary legislation setting out · Pension benefits the basis for statutory gratuity payments, in addi- tion to other statutory termination benefits. In other · Earned leave cases enterprise-level rules may set the terms of gra- · Payment of salary or wages in arrears. tuity or supplement the legislation. Pensions Notice Payments Statutory Pension entitlements are a substantial and impor- National labor legislation often provides for a termination benefits tant element of a worker's severance package, and represent the notice period prior to redundancy, typically rang- they are covered extensively later in this module. minimum amounts ing from one to three months and sometimes that all retrenched longer. In many cases there is the option to provide workers must salary in lieu of the notice period. This enables receive. managers to ask employees to leave the workplace Earned Leave immediately--an option with the following advan- Some public sector or enterprise terms and condi- tages: tions provide that termination benefits can include · It avoids having retrenched employees payment in lieu of earned (accrued) leave. For working alongside their retained colleagues, example, in Orissa, India, permanent employees which could lead to tension in the work- are awarded "earned" leave at a rate of 15 days place. per year of service. If a worker takes no earned leave during the course 20 years of service, his or · It enables managers to move quickly ahead her earned leave could total 300 days (15 × 20). At with training and development for retained retirement any unused earned leave can be convert- staff. ed to cash, subject to a maximum amount of eight · It reduces the potential for theft, poor serv- months of salary. In Orissa the payment of unused ice, or sabotage by employees being let go. leave at the end of service is a nonstatutory pay- 74 Key Elements of a Labor Program Table 5.1: Some Examples of Statutory Termination Benefits Economy Notice period Termination benefit Other features Information source M Cambodia Sliding scale For workers with Workers on fixed-term con- ILO 2000 from 7 days more than 1 year tracts (rather than indefinite O (minimum) to of service: 2 employment) are entitled to D 3 months for weeks' wages per a severance payment as U workers with year of service, up agreed in the labor contract, LE more than to a maximum of but not less than 5 percent 10 years of 6 months' wages of the total wages paid dur- service ing the length of the contract 5 China 30 days; notice Generally 1 month Trade unions, workers, and ILO 2000 is compulsory a year labor administration must be consulted Estonia (1) 2 months 3 to 4 months of No other liabilities on firms Orazem and salary, depending Vodopivec 1996 on service period Estonia (2) 2 to 8 months of Venesaar 1995 wages Hong Kong, As contract of After 2 years' For collective dismissals ILO 2000 China employment, service at capped there are no legislative (Special unless fewer rate per year of requirements for notice, Autonomous than 7 days; two-thirds of last consultation, prior Region) a legal mini- salary or authorization from a mum of 1 HK$22,500, which- judicial or administrative month ever is lower body, or any other restric- tions in relation to proposed redundancies India 1 month's 15 days' wages Workers with more than ILO 2000 notice per year of service, 5 years of service also for workers with at are entitled to gratuity least 1 year's payments service Indonesia Termination 1 month per year General requirement to ILO 2000 requires prior up to a maximum avoid redundancy approval by of 5 years wherever possible the labor administration and consul- tation with trade unions Kazakhstan 2 months 3 months of Code of Laws on salary Labor of the Kazakh SSR (as amended to 1994) Democratic 30 days' Minimum of 30 Legal requirements to ILO 2000 Republic notice days a year establish fair and rational of Korea standards for selection of redundant employees, and to consult with trade unions (Table continues on the following page.) 75 Labor Issues in Infrastructure Reform: A Toolkit Table 5.1 (continued) Economy Notice period Termination benefit Other features Information source 5 Malaysia 4 to 8 weeks, 4 weeks for 10 Last-in/first-out selection ILO 2000 depending on days for the first has been imposed by length of year, 15 days for courts service 2 to 5 years, and 30 days per year for periods in excess of 5 years MODULE Nepal 1 month 30 days per year Last-in/first-out, plus: Labor Act 1992 of service, plus ·Non-Nepali nationals must gratuity and other be retrenched first, even statutory benefits if they have not been employed last ·Workers and employees who are absent for a long period as a result of poor health must be retrenched first The Approval to 1 month a year if ILO 2000 Philippines terminate is dismissed as a required result of new technology; 1.5 months if dismissed as a result of enter- prise closure or attempts to reduce losses Singapore As employment None but that ILO 2000 contract, other- determined under wise statutory collective minima of agreements 1­4 weeks Slovenia 6 months 1 month's salary Firms are responsible for Orazem and (24 months per year of service taking steps to retrain or Vodopivec 1996 prior to 1991) reassign workers Sri Lanka 1 month, but Labor commis- Labor commissioner ILO 2000 must report to sioner determines has absolute discretion commissioner entitlements but to approve applications her guidance on for redundancy criteria given to employers is to pay 2 to 3 months' salary per year of service or full salary for the remaining period up to retirement, whichever is less, subject to a maximum of 50 months' salary 76 Key Elements of a Labor Program Table 5.1 (continued) Economy Notice period Termination benefit Other features Information source MODULE Taiwan, 1 month 2 months' salary for China the first 15 years of service, 1 month of salary for the re- maining years; maximum of 45 months' salary 5 Uruguay 1 month's current www.embassy.org/ salary for each year uruguay or fraction worked, up to a maximum of 6 months' salary República Up to 3 1 month of "normal "Normal" salary for Coil and Rice Bolivariana months, salary" for each severance is defined as 1997 de depending on year of service; this basic salary plus all fixed Venezuela seniority is doubled, how- regular payments and ever, if the employee allowances and any is terminated with- profit-sharing payments, out just cause. In all brought to a monthly addition, the em- basis ployee receives any undistributed, accumulated inter- est in his or her severance indem- nity account. Vietnam 45 days for Generally, one-half ILO 2000 workers with of a month's salary an indefinite per year of service employment as severance contract allowance, plus 1 months' salary per year of service as loss of employ- ment allowance ment, but it is defined in the service rules and regu- other benefits that are due them. Those arrears, lations of individual enterprises. The courts there however, can be substantial if financial problems have enforced the eligibility of retrenched employ- have led enterprises to defer payments for some ees for these payments so enterprises have had little months or years. Arrears may comprise: discretion in their payment. · Unpaid salaries · Unpaid salary increases, cost-of-living Arrears of Salary and Benefits adjustments, or scale revisions · Unpaid allowances or allowance increases There is usually no legal or ethical disagreement that displaced workers should receive any salary or · Unpaid pension fund contributions (both 77 Labor Issues in Infrastructure Reform: A Toolkit Large arrears can employees' and employers' contributions). cent), compensation for cessation of pension (14 come as a financial percent), and ex gratia severance (16 percent) surprise to the Arrears can present practical challenges for the implementing (Chang 2002, pp.11­15). In Brazil, federal rail agency that is implementing the privatization of the agency. Dealing with employees who took voluntary departure terms infrastructure sector, among them: 5 them can delay the received an average of about US$8,000 in ex gratia process and present severance and US$10,000 in legal entitlements. In governments and · Identification of the level of arrears: donors alike with Implementing agencies may be unaware of India, too, workers in Orissa who accepted the some tough policy or may underestimate the extent of arrears. government's voluntary retirement scheme (VRS) decisions. Enterprise managers also might have under- received a significant proportion of benefits from estimated, hidden, or not reported the scale statutory and contractual benefits--particularly MODULE of the arrears problem. If large arrears come workers with fewer years of service (figure 5.1). as a surprise late in the restructuring Statutory termination benefits are usually paid process, there may be a problem in finding from the current resources of the enterprise. funds to meet them at short notice. Employers simply make the payment out of cur- · Additional time delays: Resolving the prob- rent operating expenses when workers reach a lem of how to finance unexpected arrears specified age or leave the enterprise. Generally can take the time and attention of the imple- there is no method of accounting for these liabili- menting agency. Disputes with unions can ties, even though they can represent a substantial easily arise over arrears. Calculating net future commitment of an enterprise's resources. arrears can also introduce further complexity Consequently, severance programs can represent and delay. For example, one bus company one of the most difficult problems in a PPI transac- allowed its staff to keep a portion of passen- tion, because they are legally enforceable obliga- ger receipts in lieu of wages, and the register tions that can have dramatic cash flow and solven- Moral hazard is a of these "informal" salaries needed to be rec- cy consequences during labor restructuring. concern for those onciled before arrears could be finalized. asked to finance In Latin America, however, some countries require arrears. Arrears are a particular worry for ministries of workers to contribute to an individual account finance and for donors. Rescuing enterprise man- into which some percentage of their salary is paid agers from the problem of arrears may cause on a regular basis. In the event of separation--vol- greater arrears problems in the future because (a) untary or compulsory--workers can withdraw the rescue signals that government has taken a soft monies from these accounts. Any surplus at retire- approach to the budgets of SOEs, and (b) if enter- prise managers believe that the overstaffing prob- lem ultimately will be dealt with through a gener- ous government severance program (at the time of Amount in rupees 120,000 privatization or before), they have little incentive to tackle overstaffing and to make the hard labor 100,000 adjustment decisions that are needed on a day-to- 80,000 day basis. 60,000 Statutory payments, together with contractual ben- 40,000 efits (described below), can represent a substantial 20,000 proportion of the overall payments to workers in 0 both middle- and low-income countries. For exam- 0­15 16­20 21­25 26­31 ple, in the privatization program in Taiwan, China, Years of service the total severance package for a typical middle- VRS amount Gratuity Earned leave ranked employee with 15 years of service is pro- Figure 5.1: End-of-Service Benefits in Orissa, India portioned as follows: statutory payments (70 per- Source: Adam Smith Institute, unpublished data, 2000. 78 Key Elements of a Labor Program ment can be used toward the worker's pension At separation, workers will usually have to be Enterprise benefits provision. This approach is effectively a severance compensated for these contractual benefits as part are defined by the administrative rules program funded through forced savings by work- of the overall severance package through one of and regulations of ers themselves, and similar in some ways to the two mechanisms: the enterprise. MODULE provident funds described in the pensions section of this module. Brazil has had a program of this 1. Estimation of the value of each benefit for type for more than three decades, where displaced each worker workers can use their individual FGTS (Fundo 2. Conversion of allowances into a single nom- Garantia por Tempo de Servicio) accounts. In the inal salary (as described in the case of 1990s Colombia replaced its severance pay pro- Mexico railways [box 5.1]), which is then gram with fully funded accounts of this type (de adopted as the worker's deemed salary in a 5 Ferranti and others 2000). severance formula. In Nepal public enterprises set their own rules and regulations for treating such nonsalary benefits as Contractual Benefits medical coverage, housing, loans, and food Many enterprises provide a range of benefits, allowances at termination. These allowances have including medical, transportation, housing, food, varied greatly, and the government found that it had and other allowances. These benefits are often set to engage accountants and consulting firms to under- out in the administrative rules or regulations for take detailed assessments for each enterprise in order each public enterprise or in collective agreements to estimate the costs of labor adjustment for its pub- or labor contracts. The implementing agency will lic enterprises. In Uganda the rules on termination risk industrial unrest and legal challenges on payments vary among enterprises. Some include stan- breach of contract grounds if agreed benefits are dard allowances received with pay as a basis for cal- not provided. Unlike statutory payments, however, culating terminal benefits; others do not include these the implementing agency does, in theory, have the allowances but do provide formulas that compensate option to negotiate these payments. for them (Campbell-White and Bhatia 1998). Box 5.1: Mexican Railways--The Daily Integrated Salary A t the Mexican National Railroad Company · Incentive payment for attendance and punc- (Ferrocarriles Nacionales de México, tuality FNM), salary for the purposes of the sev- · Incentive payment for productivity erance scheme was identified as the "daily inte- · Incentive payment for training grated salary." It was calculated by adding the monthly amount of the base salary to the · Tenure bonus amounts of a wide range of enterprise benefits · Performance bonus and dividing by 30 days of the month. Here is a · Support for automobile fuel list of the potential factors in that equation: This formula was used to calculate the salary that · Base salary applied both for workers eligible for an enhanced · Savings fund (monthly equivalent) early retirement plan (with different retirement ages · Christmas bonus (monthly equivalent) for men and women), and for those workers who were not eligible for retirement but offered instead · Payment for vacations a severance plan. Depending on their daily inte- · Special bonus for housing rental grated salary, age, tenure, and gender, workers · Special bonus for transportation received, on average, between US$10,000 and · Payment for basic bundle of goods US$25,000 as a severance payment (based on the average exchange rate in 2000). · Payment for educational support of children Source: López-Calva 2002. 79 Labor Issues in Infrastructure Reform: A Toolkit Contractual benefits can be complex. The labor or may be provided as a special ex gratia end-of-serv- contract for workers in the Mexican national rail- ice benefit for workers. Either (capped) reimbursable way (Ferrocarriles Nacionales de México [FNM]) costs or, more commonly, a defined allowance is paid contained more than 3,000 clauses. In such cases toward the costs of transportation to a designated 5 renegotiation and simplification of the labor con- home location for the employee and his or her family tract and payment rules are effectively essential and for the transfer of household furniture and pos- prior actions to privatization and may include sim- sessions. The designated home location is often the plification of the rules on compensation for the loss location recorded in the employee's service record at of benefits for redundant workers. In Mexico a the date of joining the PPI enterprise. These temporary contract was agreed to during the allowances are most relevant where there are tradi- MODULE restructuring process for FNM--one that simpli- tions of migration to work or where ethnic group fied the contract to 211 clauses. Following the pri- or family links to the home area are important. vate investment in infrastructure (PPI), the new railway operators negotiated separate labor con- tracts (López-Calva 2001). Ex Gratia Severance Payments López-Calva 2001 (a PPIAF case study). Ex gratia severance payments are often provided as part of the overall severance package. Particularly in Many governments Housing is often an important benefit that needs countries where the need to reward or placate labor have chosen to treat separate treatment. Two issues must be addressed housing as a is strong and social safety nets are lacking, as well as in this regard: noncore asset and in countries where labor legislation prohibits out- to sell it. Workers right layoffs, governments have resorted to promot- may have first · The immediate treatment of displaced refusal or receive workers living in enterprise-provided hous- ing voluntary departures by offering severance pay- discounted prices. ing: The usual arrangement is to allow ments that exceed legally mandated requirements. workers to continue to live in the housing for a specified period after termination, sometimes with reduced rents. For example, Developing Severance Formulas Tanzania Telecommunications Corporation Ltd. allowed workers a six-month rent-free Worldwide, in both private firms and in govern- period in which to find alternative accom- ment, the most common approach for defining sev- modations. Brazil's railway, RFFSA, allowed erance payments is a formula based on a multiple separated workers to stay in their housing of years of service and salary. Such formulas are for one year. easy for managers to use and are widespread in both the public and private sectors. Table 5.2 · The disposal of housing that is no longer describes some advantages and disadvantages of needed: Options include sale of the houses, the standard formula. with employees possibly offered the right of first refusal or a discount on the market sale The formula for severance payments has varied price; transfer of houses to local or munici- widely among countries and, within countries, pal governments (a practice that has been among enterprises in different sectors, depending common in transition economies); and on legal and contractual obligations and the transfer of houses to a government property strength of labor unions. Examples of formulas agency that continues to collect rent and used and the resulting payments in a range of manages the disposal of the government's infrastructure enterprises in developing countries Ex gratia payments property portfolio in a structured way are presented in table 5.3. are at the core of designed to maximize revenues. lump-sum Additional data tables summarizing the key features severance Allowances for travel to home may be part of the of public sector and state enterprise severance pro- packages. normal statutory, enterprise, or contractual benefits grams worldwide. 80 Key Elements of a Labor Program Table 5.2: Advantages and Disadvantages of Standard Severance Formulas Advantages Disadvantages MODULE · Relatively simple to understand, communicate, · Can be imported easily. Managers in a hurry may and implement sometimes simply copy formulas from another · Attractive to unions because they can negotiate country or enterprise. a formula for a class of workers · Can substitute for analysis of actual needs · Attractive to government because it can set a single formula as part of a uniform approach 5 Table 5.3: Examples of Severance Formulas and Payments Economy/ Key features of Source for enterprise voluntary departure Other features further details Argentina: Post-PPI voluntary retirement under- Workers who left under Shaikh 1996 Buenos Aires taken by the concessionaire voluntary retirement received Water and approximately US$10,000 Sewerage in severance Argentina Severance package is approximately In 1992 workers received Shaikh 1996 Electricity 10 percent greater than the statutory approximately US$10,000 termination package in severance. Argentina Rail 1 month per year of service, Approximate cost in 1990 of Ramamurti with no cap US$10,000 per worker 1997 Bolivia Rail 3 monthly wages plus an equivalent The amount offered was the Valdez of 1 wage per year of work for those same as statutory payments; 2002 with more than 5 years of service, Bolivian capitalization program plus statutory unemployment benefits had made a policy decision to implement a uniform scheme for all enterprises; no incentive for workers who voluntarily retired Brazil: Workers with 4 to 10 years of service, Those who left voluntarily Carneiro São Paulo 1 month's salary per year of service; gained a cash bonus of 33 and Gill Railway workers with 10 to 20 years of service, percent of monthly salary 1997 2 months' salary; and workers with up per year of service; average to 25 years of service, 2.5 months' total package received per salaries; workers also receive 180 per- worker was estimated cent of the accumulated funds in their at R$29,870 FGTS accounts (a compulsory employee severance indemnity fund, to which all employees in Brazil contribute 8 percent of their basic salaries each month) Brazil: Rio Grande 60 percent of a month's salary per Average package per worker Carneiro do Sul State year of service, but capped at 15 was R$41,900 and Gill Electricity months' salary; additional incentive 1997 Company for workers near retirement age is (Table continues on the following page.) 81 Labor Issues in Infrastructure Reform: A Toolkit Table 5.3 (continued) Economy/ Key features of Source for enterprise voluntary departure Other features further details 10 percent of all remaining wages up 5 to the date of retirement; workers also receive 140 percent of the funds in their FGTS accounts Brazil: 50 percent of a month's salary per year Carneiro São Paulo of service for those with less than 10 and Gill Electricity years' service; 40 percent if more than 1997 Company 10 years of service; no cap; workers MODULE also receive 140 percent of the funds in their FGTS accounts Brazil 4 to 12 months of salary, depending Only workers with more than Estache, Federal on years of service, increasing for 6 years of service were eligible; Schmitt Railway workers with 6 to 25 years of service workers were allowed to keep de Azevedo, and decreasing for older workers with their use of housing for up to and more than 25 years of service; workers 12 months and pension pay- Syden- who delayed accepting voluntary ments were continued for stricker departure and were made redundant 12 months; average payment 2000 during the period 1 year after privatiza- to workers was about tion received 80 percent of these US$8,000, plus US$18,000 benefits of statutory benefits Guyana Severance package equivalent to 22 Hinds 1995 Telephone months of salary and Telegraph Company India: 1.5 months of salary per year of Three times better than Kouamé Federal service, or 15 days' salary for each statutory termination benefits 1997 VRS year until retirement at age 58, of 15 days' salary per year Scheme whichever is less, plus statutory of service (1993­95) benefits India: 1.5 months' salary for each year Ray 2001 Orissa State of service, or 30 days' salary for each Electricity year until normal retirement date, Board whichever is less, plus statutory benefits Mexico 4 months of salary plus 30 days for Salary was a daily integrated López-Calva Federal each year of service; part-time salary, which included base 2001 Railway workers receive 3 months of salary salary plus 12 other allowance (FNM) plus 20 days of salary for each year elements; workers typically of service received between US$10,000 and US$25,000 in severance. An enhanced pension package was also provided, funded in part from privatization proceeds. Pakistan: Based on plan for industrial plant Evidence of adverse selection Kot Addu privatization in Pakistan; voluntary (the most productive Power departure package of 4 months' workers leaving). Average Plant basic salary per year of service, costs in 1990­93 were plus gratuity of 1 month's basic about US$3,000, but costs 82 Key Elements of a Labor Program Table 5.3 (continued) Economy/ Key features of Source for enterprise voluntary departure Other features further details salary per year of service (the "4+1" at some industrial plants Kouamé MODULE rule); officer cadre staff had a less- rose to US$10,000 1997 generous package of 2 months' after 1993 salary per year of service plus gratuity (the "2+1 rule") The Severance package based on years Typical package for Cruz 2001 Philippines: of service, using an "adjusted worker with 20 years Manila monthly pay" to take into account of service totaled about 5 Waterworks various allowances (this was US$15,400, roughly twice and around 30 percent higher than basic the standard government Sewerage pay); workers with less than 20 package of termination System years' service receive 1.5 months benefits per year of service; those with 20 to 30 years of service receive 2 months' salary; and those with more than 30 years of service receive 2.5 months of salary. Taiwan, Severance payment of 6 months Applicable to all employees Chang 2002 China of salary in addition to statutory retrenched at privatization (Privatization payments. or laid off within 5 years Law) after privatization Vietnam Severance pay of 1 month per year Workers can obtain 6 Government (Decree of service (minimum 2 months); months' training at of Vietnam 41/2002 on additional compensation of 1 month vocational training centers; 2002 policy for per year of service; lump sum of workers who are 5 years redundant VND 5 million; continued salary for short of the pension age workers 6 months searching for job. have the right to continue in SOEs) paying 15 percent of salary to social insurance in order to qualify for pension and death gratuity benefits In some cases an established uniform formula may precedents, even if those precedents are in different already be in place, in which case the key decisions sectors and under different circumstances. already will have been made. Where the formula is Spreadsheet tool for analysis of severance options. not considered sufficient or where there is no for- mula in place, a new formula may have to be In setting a level of severance for voluntary depar- developed. ture programs, the attractiveness of the package to workers has to be balanced with its affordability At the absolute lower limit, workers must receive for the government. If the payment is too low, the statutory minimum set out in the law. In prac- workers may not volunteer to leave, and that can tice, however, earlier precedents might set a de threaten or delay the overall objective--a success- facto floor for negotiations. The absolute upper fully completed PPI transaction. Low levels of sev- limit would be to place a worker on permanent erance are sometimes combined with a degree of administrative leave with full salary. Although that coercion (for example, threats of compulsory practice is uncommon, more often the practical redundancy, unit closure, or wage arrears). Such upper limit is again that set by previously agreed coercion will engender adversarial relationships 83 Labor Issues in Infrastructure Reform: A Toolkit Overpayment is with workers, unions, and government, and can · Ability to transfer costs to the taxpayer: common in publicly damage the political credibility of PPI. If the pay- Governments can agree to generous terms financed severance schemes. ment is too high--that is, more than workers (which makes difficult negotiations with would actually need as sufficient compensation for unions easier) and then transfer the cost of 5 the loss of employment--the government may not that generosity to future taxpayers, as in Sri be able to pay it, and it may lead to excessive num- Lanka (Salih 2000). bers of workers leaving the enterprise, including · Use of precedents: Where other organiza- the best workers. tions have made generous payments (for any In practice, developing severance formulas is more of the reasons outlined above), plan design- likely to produce overpayment than underpayment ers are likely to make the same mistake, MODULE for several reasons: either by meeting previous precedents or simply copying the earlier formula in the · Political impact: Except in the face of seri- name of uniformity. ous financial crisis, relatively generous sever- Where generous and unaffordable precedents have ance payments are politically attractive. been set, choices must be made between using · High levels of compensation: Salaries and those precedents or negotiating new severance for- benefits are often higher in the public sector mulas. The choice will depend on the degree of than in the private sector (for example, see political support for implementation, the costs Bales and Rama 2002, Bhorat and Liou imposed by the precedents, and the degree of con- 2002, Panizza 1999, and box 1.1 in module cern for provision of a social safety net for dis- 1 of this volume).Where program designers placed workers. A cost-benefit analysis of the recognize a public sector wage premium financial and economic effects of the various they can reason that relatively generous sev- options (see module 7) can inform this decision. erance awards are necessary if workers are to leave voluntarily. In designing severance levels there are various ways to achieve a balance between attractiveness and · Bias by plan designers in favor of generous affordability, and those ways are discussed next. packages: This bias can occur for two rea- sons. First, designers may become too close Setting Minimum and Maximum Levels to the concerns of workers or to the con- A minimum severance level, or a floor, can be set cerns of enterprise managers (for example, at some point above the statutory minimum termi- how to make downsizing go as smoothly as nation benefit. A floor can be a useful tool for possible), and align themselves--perhaps demonstrating that the severance package is fair unconsciously--with those interests rather and benefits everyone, including lower-paid staff. than the interests of either public finance managers or society as a whole. Second, by A maximum severance payment, or a cap, also can erring on the side of generosity, plan design- be set. One of the main potential criticisms of sev- ers can help ensure that the program is a erance plans, especially generous ones, is that high- "success"--an example of self-serving bias est-paid workers or managers can obtain excep- in their decisionmaking. tionally high payments. A cap is a simple measure to prevent such criticism, and can be expressed in · Availability of donor funds: Although recur- absolute money terms or in months of pay. For rent expenditures, including salaries, may be example, the government of Madhya Pradesh tightly controlled (subject to a hard budget VRS-98 placed a monetary cap of Rs. (rupees) constraint), donor funds for enterprise 500,000 on payments to workers. restructuring may be readily available. That combination of circumstances can encour- Establishing Preretirement Rules age overpayment. On its own, a simple straight-line formula (salary × 84 Key Elements of a Labor Program years of service) would give maximum payments to ics and econometric methods, has been pilot-tested Loss-based the oldest workers in each cadre of employees. Just by the World Bank in Guinea-Bissau, Madagascar, formulas have a more rational basis before retirement they would have the maximum and Tanzania, and has been described by Chong and address the payment. This is clearly a potential source of influ- and Rama (2000). This approach (which is dis- major weaknesses MODULE ence in employees' behavior: it encourages employ- cussed in greater detail in module 7) recognizes of empirical "rule- of-thumb" ees to stay on so that they receive higher compen- that workers' total incomes often will fall following approaches. sation amounts, and it discourages earlier volun- separation or retrenchment (box 5.3), and it tary departure. Some empirical formulas attempt to attempts to assess the level of severance that should offset this by including an element that reduces be paid to offset those earnings losses. The follow- payments as the retirement age approaches (see, for ing bullet points summarize the key features of this example, box 5.2). approach: 5 Another approach to the preretirement period is to Chong and Rama (2000) described the application of make workers who are past a specified age and a loss-based approach in Guinea-Bissau. within a few years of normal retirement ineligible for voluntary departure. This can improve efficien- · Although the output from this approach to cy because workers approaching retirement clearly designing a severance package is a formula, have the least expectation of loss. If, however, there it is one that takes account of the factors is a sharp cutoff, again distortionary effects can that influence individuals' likelihood of gain- arise. For example, if a plan is introduced in which ing income after severance. For example, if workers with fewer than five years until retirement better-educated workers are more likely to are ineligible for voluntary departure, there will be return to higher-paid employment after sep- a very high uptake of the option to leave by work- aration, the formula will reduce their sever- ers approaching cutoff point as well as a degree of ance payment. If women workers are more dissatisfaction and inequity for workers who for likely to have difficulty in finding a job, the timing reasons just miss the newly introduced ben- formula will increase their severance pay- efits. ment. · The formula uses objective data, such as Adopting Loss-Based Formulas national household survey data, surveys of An alternative approach to the standard way of living standards, or labor force surveys, to setting severance amounts, based on labor econom- generate an econometric earnings function for private sector workers. By comparing incomes and benefits of similar workers in Box 5.2: Brazil--Reducing Payments for the formal (or informal) labor market, esti- Older Workers mates of the likely earnings losses can be I n Brazil's federal railway privatization, workers made. with 6 years of service received 4 months of · The losses recognized include earnings lost salary, and for every additional year of service that amount was increased by a factor of while a worker searches for another job; 1.0595 for each of the 19 increments up to 25 permanent loss of earnings that arises years of service. Workers with 25 years of serv- because a worker transfers to the private ice therefore received 12 months of salary as an sector (remember, many public sector work- ex gratia voluntary departure payment. For ers earn a premium wage); estimated losses workers with 25 to 30 years of service, pay- of tangible benefits (for example, trans- ments decreased by a factor of 0.8705, so that a worker with 30 years of service received 6 portation to work, food and housing subsi- months of salary as voluntary departure pay- dies, and medical benefits); and estimated ment. losses of intangible benefits (for example, Source: Estache, Schmitt de Azevedo, and Sydenstricker job security, flexible working times, oppor- 2000. 85 Labor Issues in Infrastructure Reform: A Toolkit Box 5.3: Earnings Losses after Retrenchment T here are no tracer studies of the long-term severance, although workers who found wage impact of retrenchment on workers in employment had a much smaller reduction in developing countries. In industrial coun- income. Note, however, that although: 5 tries, however, the evidence is that earnings loss- under current economic conditions, many es have been both large and persistent. Reviews retrenched workers can expect their lifetime by Fallick (1996) and Kletzer (1998) on displaced earning stream to be appreciably lower.... we workers in North America indicate persistent are persuaded that the difference in earnings earnings losses of between 10 and 25 percent of before and after redeployment reflects the predisplacement earnings up to 10 years after loss of a rent associated with civil service displacement. employment.... What the employees have lost, MODULE In Turkey earnings after reemployment among then, is a privileged post that, one can argue, petrochemical and cement workers displaced they should not have held in the first place. during privatization were 57 percent and 61 per- Their gain in getting a civil service job was the cent, respectively, of their earnings prior to layoff. Ghanaian taxpayer's loss, and vice-versa for Most workers also lost a range of nonwage ben- the post-redeployment loss in earnings efits (Tansel 1996). (Alderman, Canagarajah, and Younger 1996, In Ghana follow-up assessments of the earnings p. 285). of civil servants showed a 48 percent fall after tunity for bribes, access to equipment, and program. A delay in implementation while a facilities for private use). new approach and formula are being devel- oped and negotiated could also wipe out Table 5.4 summarizes the advantages and disad- any potential cost savings from adopting vantages of loss-based formulas. They can deliver this approach. the fairest levels of severance payment for individu- als. Furthermore, by careful targeting they can · Data requirements are substantial and the reduce the costs of the severance program for gov- process can be time consuming if enterprise ernment and avoid adverse selection. Estimates of personnel records are poor or if there is little the level of costs savings realized from tailored for- information on nonwage benefits or on the mula compared with savings realized from an likely postseverance livelihoods and incomes empirical formula are 31 percent for SOEs in of workers. Egypt (Assaad 1999) and around 20 percent in the Like other severance formulas, loss-based formulas case of the Central Bank of Ecuador (Rama and will need to be understood by unions and workers MacIssac 1996, 1999). and be discussed during the consultation process: But there also can be some difficulties in adopting If appropriate compensation is needed to make a loss-based approach: the workers accept the prospect of downsizing, · Loss-based formulas are likely to be less rel- it is very likely that the package will have to be evant where there are existing and well- negotiated with the public sector trade unions. established precedents for severance formu- In that case the final compensation package las. Any change is likely to require substan- may not be the cheapest one, or the fairest one, tial effort and to involve negotiations with but rather a compromise shaped by the bar- unions, approval by ministers, and parlia- gaining power of all the players involved. From mentary debate. this perspective the [loss-based approach] should not be seen as an example of "mindless · Delays incurred as a result of designing and social engineering," but rather as a tool to negotiating complex severance formulas introduce some economic rationality into deli- might threaten the pace of the overall PPI cate political negotiations. While the approach 86 Key Elements of a Labor Program Table 5.4: Advantages and Disadvantages of Loss-Based Formulas Advantages over empirical formulas Disadvantages over empirical formulas MODULE · Tailors the package to compensate individual · Is subject to legislation or existing labor con- employees so that the compensation that each tracts that may preclude different (discriminative) employee receives is more fair--those who treatment of workers according to factors such stand to lose most will receive the most as age, gender, ethnicity, and location · Reduces the risk of overpayment, which has · Potentially adds time to the work force restruc- plagued severance programs worldwide turing process because of the need to locate specialist skills, conduct econometric analyses, and persuade policymakers and unions 5 · Has not yet been implemented beyond pilot (proposed) plans · Has a formula whose derivation is difficult to explain to policymakers and unions when seek- ing their support could certainly be refined, it represents an prise or to adopt a uniform severance plan for all improvement compared to the ad hoc way in public enterprises is a critical preliminary decision. which these negotiations are usually carried out Table 5.5 presents the advantages and disadvan- (Chong and Rama 2000, p. 26). tages of each approach. Whatever approach is selected, severance payments A case-by-case approach to severance, where pay- in early retirement, voluntary departure, and com- ments are negotiated at the enterprise level, has pulsory redundancy schemes can be structured to arisen when there is a cautious, incremental provide time-based incentives for workers to leave approach to PPI and when, in the absence of any early. overall labor policy or guidelines, labor restructur- ing is dealt with at the transaction level. In some More generous packages for voluntary departure cases enterprises are also governed by their own than for compulsory redundancy are the norm. labor rules or labor contracts, thus leading to a During Brazil's railway reforms, workers were case-by-case approach. In others, a case-by-case clearly informed that any compulsory retirees approach has been adopted to ensure flexibility would receive only 80 percent of the package given based on the individual circumstances of the com- to those who took voluntarily departure benefits pany. Some governments, for example, have treat- (Estache, Schmitt de Azevedo, and Sydenstricker ed profitable and unprofitable enterprises different- 2000). In Turkey the privatization law offered 30 ly, allowing profitable ones to pay higher levels of percent more to employees who volunteered for severance out of their own resources. That was the early retirement (Tansel 1996). Early applicant case in India and also in Tanzania when the gov- bonuses can be offered. In the 1992 British ernment opted to concession port services and con- Telecommunications downsizing plan, early appli- tainer terminal operation (box 5.4). cants received an incentive payment. Although a case-by-case approach can provide Estache, Schmitt de Azevedo, and Sydenstricker 2000 flexibility, it can also create unwanted precedents. Each new award raises the minimum severance level for the next negotiations, and there is a Choosing a Uniform or a Case-by-Case ratchet effect that ensures increasing levels of sev- Approach erance. Such approaches can also fuel distrust in For government the decision whether to negotiate the process and bring the wider PPI program into severance on a case-by-case basis for each enter- disrepute, thereby threatening its sustainability 87 Labor Issues in Infrastructure Reform: A Toolkit Table 5.5: Advantages and Disadvantages of Uniform and Case-by-Case Approaches to Severance Approach Advantages Disadvantages 5 Uniform · Treats all workers more equally ·Needs good analysis of long-term downstream · Has a more transparent process costs to avoid danger of government initially setting · Reduces information asymmetry too-generous limits overall (especially if the first between government and programs are small PPI transactions with low num- unions--both know what the bers of affected workers) deal is ·Prohibits introduction of loss-based formulas tai- · Has predictable costs for lored to each enterprise severance in future years MODULE · Facilitates central (ministry of finance) oversight and control over public spending on severance Case-by- · Gives most discretion to ·Signals to workers and unions that the level of sev- case government in setting severance erance is--in principle--always negotiable payments in each enterprise ·Encourages bidding up of severance payments (a · Allows the tailoring of payments ratchet effect) and sets a precedent for other PPI to each work force and--in transactions theory--the potential to deliver ·Favors workers in enterprises with the most power- the lowest-cost programs for ful unions, the most influential leaders, or the great- government (in practice, that est potential to inflict economic damage through occurs only if government is strikes or industrial action politically very strong) ·Is less transparent ·Leads to unpredictable costs for work force restructuring ·Provides an opportunity for confrontational negotia- tion on both sides ·Is only effective if there is a strong government that is robust in the face of vested interests and case- by-case lobbying ·Makes monitoring and control of commitments more difficult if deal making is delegated to enter- prise managers (see box 5.5). Moreover, trade unions often Uniform guidelines can be perceived to provide fair oppose differentiation between enterprises on the and equal treatment for all workers and help grounds that (a) there should be equality of treat- ensure some measure of predictability in the ment for all workers in SOEs and (b) the financial process. distress of loss-making enterprises can be attrib- uted to government mismanagement and there- fore it is unfair to penalize employees. Adverse Selection and Targeting Given the potential problems of a case-by-case A major issue in many severance programs is how approach, there are advantages to adopting uni- to avoid adverse selection and rehiring of the best form severance guidelines that, with some measure workers. Better targeting and selection of workers of flexibility to take into account enterprise circum- help avoid these problems. stances, are applied to all enterprises (table 5.5). 88 Key Elements of a Labor Program Box 5.4: Tanzania--Severance Policies in Port Concessioning I n 1996 the government of Tanzania decided to (because the remaining THA operations were invite private sector participation in the delivery also listed for PPI). of port services in Tanzania. They also invited 2. The workers in the other utilities and infrastruc- MODULE private sector participation in the container termi- ture industries would use the case of the con- nal operation of the Tanzania Harbours Authority tainer terminal as a precedent. They would (THA) in the form of a 10-year operating lease. argue that the source of funding was unimpor- THA was one of the few SOEs in Tanzania with a tant and that the issue was one of equity. history of sustained profits, and these profits 3. There was a question of selection. The new resulted from its monopoly position and because operator (Tanzania Industrial Container Terminal fees to shipping companies were set in U.S. dol- Services Ltd. [TICTS]) was allowed to select 5 lars. THA as a whole employed 3,500 workers; of from the 500 employees those whose services that number 500 were directly associated with it wished to retain. The question arose whether the container terminal business. to pay only those who were not selected for During the privatization of the container terminal reemployment or to retrench all 500 container the problem of how to handle severance came to terminal workers. Again, the workers and the fore. Earlier proposals by the World Bank had unions would take the decision as a precedent. suggested that government declare a consistent The government decided that all 500 container ter- policy on severance. Government had decided, minal workers would be retrenched and paid the however, to retain its existing policy, which pro- statutory dues and that those workers who were vided that: not reemployed would benefit also from the ex gra- · Where an SOE was taking a loss, was unable tia payment. Those employees who declined reem- to fund severance costs from profits, and had ployment lost their rights to the ex gratia pay- to rely on the central government budget to ment--a policy intended to avoid the problem of make severance payments, only the statutory employees with critical skills declining employment, minimum severance obligations were to be benefiting from the ex gratia, and later being met by government. rehired by TICTS because their skills were critical. · Where the SOE was able to fund severance The ex gratia payments amounted to about 12 payments from profits, it could be permitted to months' pay in addition to statutory payments. pay an ex gratia sum beyond the statutory The outcome is that the government has minimum. resolved labor issues in the PPI transaction of the In pursuing a program for severance of surplus container terminal. It also has avoided potential staff, THA decided to offer an ex gratia payment industrial unrest among other THA workers (who in addition to statutory minimum obligations. were watching and now expect similar treat- Three problems immediately surfaced: ment). However, the wider problem of inconsis- 1. Although the number of workers involved and tency in the treatment of some 21,000 workers in the financial cost were small in absolute other utilities and infrastructure remains. terms, whatever was agreed would set a Source: Parastatal Sector Reform Commission, Tanzania; precedent for the other 3,000 THA workers Adam Smith Institute. Adverse Selection When an ex gratia severance payment is offered equally to all workers, it is usually selected by the In many severance schemes there are concerns most skilled and most capable employees. Those about adverse selection: that is, there is concern employees, who can easily find alternative employ- that the program will lead to the departure of the ment elsewhere in the economy and who believe best workers and thereby result in the loss of criti- they have a bright future outside the enterprise, are cal skills and in the subsequent rehiring of workers precisely the people that the restructured enterprise who have received public money for severance. would most want to retain. Overpayment of sever- This section of the module provides some guide- ance in public enterprises further contributes to lines for addressing these concerns and making sev- adverse selection. In Argentina, for example, early erance more efficient. railway retirees were among the most productive 89 Labor Issues in Infrastructure Reform: A Toolkit Adverse selection is Enterprise managers are concerned about the a common challenge Box 5.5: Problems with Case-by-Case potential problem of losing their best people and in work force Setting of Severance--Sri Lanka and restructuring. their knowledge, particularly during periods of Zambia transition to new management and new working Sri Lanka: Upward Revisions of Ad Hoc 5 methods. For PPI investors, however, the transi- Severance Payments tional challenges of taking over management are Average ex gratia severance payments in Sri more acute because it is vital to avoid disruptions Lanka's privatization program rose from 17.5 months of salary in 1987 to 53 months in 1997. in essential infrastructure services and to keep By the time that Lanka Lohan (a steel company) operations and equipment going until new equip- was privatized in 1997, the package was con- ment and systems have been set up. sidered so attractive that all workers applied to MODULE leave the firm, a clear sign that the package was overcompensating them. The increases took place because of strengthening trade union bar- Approaches to Selection and Targeting gaining power, and the "ad hoc and lackadaisi- cal manner in which labor issues were handled" Mechanisms to better target severance payments (p. 190). In Sri Lanka, severance packages cus- are the principal solution to the problem of adverse tomized on a case-by-case basis for each selection. If there is an across-the-board offer with enterprise proved to be downwardly rigid and no targeting or selection, anyone who volunteers confusing to the parties involved and they encouraged rent-seeking behavior and hostility for severance is automatically able to receive it, to privatization. Another outcome was that gov- although perhaps on a first-come/first-served basis ernment was no longer able to easily afford to and perhaps with a cap on the number of workers restructure labor before privatization. who can take the offer. This approach is most like- Source: Salih 2000. ly to lead to adverse selection. Zambia: Disparity in End-of-Service Benefits Fuels a Distrust of Privatization Better selection or targeting can be achieved in a The United Bus Company of Zambia was insol- number of ways, whether undertaken before PPI vent and was forced into liquidation. Under the by government or after PPI by the new investor. applicable bankruptcy law, employees were Table 5.6 summarizes the advantages and disad- entitled to 200 kwacha (equivalent to US$0.30) vantages of alternative approaches to selection. as preferred creditors for the legal minimum (Note, however, that in some cases, the implement- end-of-service benefit; for any additional amount they ranked as ordinary creditors in ing agency or the investor may have little choice of accordance with their contract terms of employ- selection tools if these are mandated in a collective ment. In contrast, a cleaning worker who left bargaining agreement.) Zambia Telecommunications after working there for only two years reportedly received a pay- Establishing selection procedures is therefore a crit- ment of 2 million kwacha (US$3,000). Such ical management task in any labor program. egregious disparities between the legal and Attention to detail and a commitment to enforce contractual minimums for end-of-service bene- selection are essential. The following sections elab- fits can create opposition to privatization and delay transactions. orate on the main tools for better selection and tar- geting: active management selection, management Source: World Bank 1996e; quoted in Campbell-White and Bhatia 1998. veto, and selection by cadre. Active Management Selection employees, whereas many unproductive workers The data sets and tools used for staff audits (see stayed, which led to production problems and module 3) can help managers in the active selection shutdowns on various lines. In Pakistan, overly of staff and cadres for retrenchment. Those tools generous severance plans reportedly encouraged include: the most productive workers to leave. 90 Key Elements of a Labor Program Table 5.6: Advantages and Disadvantages of Alternative Selection Approaches Personnel records are a first source of data, but human Selection resources approach Advantages Disadvantages departments often lack skilled MODULE professionals and No targeting · Has simple rules--either available ·Has maximum risk of adverse selection adequate record- (volunteers) to all or on a first-come/first- ·Effectively uses no selection tool at all keeping. served basis until all available funds are committed · Suits circumstances with weak PPI enterprise managers 5 Last-in/ · Has simple rules--either available ·Has significant risk of adverse selection first-out to all or on a first-come/first- ·Is a crude mechanism for selection selection served basis until all available funds are committed · Can be used to substitute for management decisionmaking in circumstances with weak PPI enterprise managers or weak human resources and appraisal systems · Can be perceived as fair · Is sometimes mandated in legislation Active Has a lowered risk of adverse ·Is demanding of managers (although staff and skills management selection audits can provide some independent assess- selection ments) ·Needs to be handled in a transparent manner to avoid accusations of bias ·Is the slowest process, needs reasonable person- nel records Management Has a lowered risk of adverse ·Is demanding of managers (although staff and skills veto selection audits can provide some independent assessments) ·Can easily lead to accusations of unfair treatment from the best workers ·Needs to be handled in a transparent manner to avoid accusations of bias Selection Can deliver a relatively low risk ·Uses a relatively crude selection tool by cadre, of adverse selection, depending ·Does not identify the best or worst workers within a location, or on the structure of the work cadre or location operating force and the quality of the ·Is open to abuse (e.g., by prior transfers of unit staff audit individuals) · Staff and skills audits, which help identify tests (that is, tests of the ability to do specific Selection will be a critical skill sets that must be retained or are tasks), or on a special skill audit contentious issue, so a fair process is in short supply · Education and qualifications records, which essential. · Individual appraisal or assessment records, can lead to poor selection when used alone based on the normal performance appraisal because they neglect the questions of tacit review on internal competency assessments knowledge and institutional memory 91 Labor Issues in Infrastructure Reform: A Toolkit · Training records, and evidence of employee have not raised the expectation that the response to training departure package is available automatically to all workers. Consider this approach, for · Assessment based on the comments of example: supervisors and managers, including assess- 5 ments of employees' willingness and flexibil- Deselection of certain potential [voluntary ity to undertake a range of work, as well as departure] applicants was done by per- their job histories (which offer evidence of sonally calling those employees and per- increasing levels of responsibility) and their suading them not to apply since their possession of transferable skills future in the company was bright (Ray 2001). · Attendance records, which detail unautho- MODULE rized leave and medical absences (whether Ray 2001 (a PPIAF case study). uncertified, self-certified, or certified by a doctor) · All parties have reasonable expectations that prospects in the company will improve after · Special interviews and tests specifically for PPI (this will depend in part on the sector). selection prior to severance can supplement other data or fill in the gaps where an · Managers are prepared with plans for future employee's records are poor or missing if salary structure and performance-based they are undertaken in an objective manner incentives to encourage workers to stay. and if they probe and test for relevant skills Selection by Cadre and competencies. Selection can be imposed through eligibility restric- The primary problem in management selection is tions, which only allow certain groups of workers that many worker traits are unobservable. Put sim- to participate in a voluntary departure plan. The ply, it is hard for the designer of a severance pro- criteria for selection may be related to age, years of gram to design selection criteria that distinguish service, cadre, grade, operating unit, or location: between the productive and the unproductive · Age or years of service eligibility criteria: worker on the basis of written records alone. Some severance packages are only open to Reliance on only one test may be unwise, as was workers with a minimum period of years of found in Guinea and Sri Lanka (see box 5.6). service. This will discourage younger work- Using a range of the above tools is wise, and can ers from taking voluntary departure, and is help assure workers and unions that the process is rational where a shift in the age or experi- being carried out in a fair and transparent manner. ence mix is an explicit objective. A problem Selection tools will be most effective where an can arise where mandated last-in/first-out effective appraisal system is already in place, rules combine with minimum eligibility rules together with competent and professional human to selectively disadvantage newer workers. resources management. The approach also may not be appropriate if large numbers of workers have recently been Veto by Management taken onto the permanent rolls (for example, Giving managers the right to reject applications on as a result of negotiations with trade unions an individual basis is another option. In practice to regularize temporary workers). this is a difficult route for many managers because · Cadre: If there is overstaffing in particular they have to be prepared to reject applications for cadres, tiers, or grades, the plan may be voluntary departure from their best workers. The offered only to those groups. task is made easier if: · Operating unit or location: Voluntary depar- · Relationships between managers and staff ture may be offered only to workers in par- are sound, and program communications ticular units (for example, a construction or 92 Key Elements of a Labor Program Eligibility is another Box 5.6: Challenges of Selection--Guinea and Sri Lanka mechanism for Guinea: Selection of Water Utility Workers in Sri Lanka: Worker Selection Processes during selection and Conakry Privatization targeting. The process of workers to transfer to new water "It was difficult to screen the high-quality workers MODULE companies was conducted through a series of from the low-quality workers. Even where exams objective tests (initially managed by the World were held for this purpose, those workers who Bank) that were "supplemented" with recommen- wanted to leave the firm [through a voluntary dations from former managers at the former utili- departure scheme] performed in the exam very ty--the DEG. The subjective evaluations raised poorly" (Salih 2000, p. 193.) serious concerns about objectivity (Ménard and Clarke 2000). 5 maintenance unit) or in an operating divi- · The time period for restrictions: Are work- sion that is particularly overstaffed or that is ers barred forever or just for a certain peri- being closed or outsourced. od (one year, five years)? As with other selection tools, selection through eli- · The scope of the restriction: In the public gibility criteria requires commitment from govern- sector, drawing reasonable reemployment ment, as was found to be true in Sri Lanka (see boundaries can be difficult because of the box 5.7). intricacies of government. For example, if an employee is laid off from a state-owned The alternative selection approaches discussed above and outlined in table 5.6 are not mutually exclusive and can be used in a mix. To illustrate, there could be no selection for unskilled cadres who are all surplus workers or for all workers in a Box 5.7: Sri Lanka--Experiences of regional unit to be closed, but active selection by Selection through Eligibility Criteria E management of all other cadres. " ven when tiers of surplus labour were identified before putting VRS into opera- tion, some workers maintained that this was discriminatory and that the option of volun- Prohibition on Rehiring tary retirement should be extended to all work- ers. However, the main opposition to targeting The revolving-door syndrome (where workers are tiers for retrenchment came from workers who rehired after receiving severance) is indicative of a were not targeted. Opposition came from the more skilled grades of workers who felt they poorly managed labor program. Many severance could obtain windfall gains through the compen- schemes therefore set out explicit rules prohibiting sation packages, since they could find alterna- rehiring. These are worth having, given the poten- tive jobs without much difficulty. Hence, identify- tial political and financial cost of such rehiring. ing tiers of redundancy labour for voluntary Enforcement is difficult, however, and such restric- retirement was eventually dropped and across- tions usually can only reduce, not eliminate, the the-board voluntary retirement was applied. This is why the problem of adverse selection (better risk of rehiring previously separated workers. workers leaving) was common in Sri Lanka's voluntary retirement process.... Even where Before they receive their severance benefits employ- workers of an identified tier were subject to ees are usually required to sign a commitment not VRS, the problem of adverse selection could not to return to work in the same enterprise. The be altogether avoided because the better work- design of any restrictions on rehiring will vary ers within the tier opted to leave" (Salih 2000, p. among countries and circumstances, but all should 193). address the following aspects: 93 Labor Issues in Infrastructure Reform: A Toolkit Governments can telecommunications company, can he or she cedures, (2) payment options and procedures, and ask workers to sign work again for that same company or its (3) monitoring and evaluation arrangements. This a no-return agreement prior to legal successors (post-PPI)? For other public section covers the first two items; the third item is receiving severance, enterprises? For other local, state, or federal discussed in module 7. 5 but it can be difficult government bodies? For subcontractors to enforce engaged by the PPI enterprise following pri- restrictions on rehiring within vatization? Severance Procedures government. · Penalties to workers for breaking the terms Well-documented redundancy and severance proce- and conditions: These may be strengthened dures can improve the quality and transparency of by including obligations to repay severance MODULE severance and can avoid the potential for dispute monies or lose the tax privileges associated and opposition during implementation, which in with severance if workers are subsequently turn may create delays. The advantages of having found to be rehired. clearly established procedures are that (a) there is a · Mechanisms of enforcement and legislation: common understanding on the terms, conditions, These can present practical difficulties in and definitions applicable to severance; (b) the monitoring and enforcement, and legal chal- prospect of redundancy has been raised and dis- lenges in countries where the labor law does cussed (in some PPI utilities, the culture may still be not permit restrictions on recruitment. one of "jobs for life"); and (c) there are clear · Restrictions on the use of funds: Some guidelines for conducting severance activities (such donors have rules that restrict the use of as calculation of amounts owed to each worker or their funds. For example, World Bank loans disbursement procedures). cannot be used to finance the severance of Severance procedures should be set out in a policy workers who leave and subsequently are statement or in regulations at the government or rehired either in another part of government enterprise level, and usually are agreed to by gov- or in the same company after privatization. ernment and worker representatives before restruc- (See the discussion of financing arrange- turing starts. The CD-ROM accompanying this ments in module 1.) Toolkit provides an outline of a general redundan- · The views of PPI investors: These views cy policy and an example of a redundancy policy should be sought wherever possible. Some from a privatized freight railway. plans mandate that workers cannot work Outline of a redundancy policy. again for the same enterprises, but do not restrict workers from working for the new privatized company. This was the case in Redundancy policy for a privatized railway. Brazil's railway privatization (Estache, In addition to establishing procedures, govern- Schmitt de Azevedo, and Sydenstricker ments can develop a manual for the entire sever- 2000). Elsewhere, however, investors have ance process. The typical content of such a manual suffered from voluntary departure schemes is set out in box 5.9. that have prohibited workers from being Enterprise benefits employed by the subsequent PPI company. Severance procedures generally cover the following can be complex and (See the example of Chile's railway, Fepasa, areas: time consuming. in box 5.8.) Detailed manuals · Eligibility criteria: Sometimes legislation or may be needed to define exactly how labor contracts will only provide for full- enterprise-level Implementation Issues time or permanent employees as eligible for benefits will be severance. The implementing agency will treated during Three main implementation issues arise in sever- severance. need to ensure that the treatment of other ance programs: (1) the definition of severance pro- 94 Key Elements of a Labor Program Box 5.8: Chile Rail--Severance Benefits and Rehiring Rules W hen a PPI investor, Unirail LLC, paid the state in effect paying twice for the same US$31 million to buy a 51 percent employee. stake in Fepasa, a privatized rail line in 2. Employees of EFE who did not meet the M Chile that the government was putting up for requirements for the above benefit (and there- O sale, difficulties arose almost immediately. The fore were not subject to the rehiring restric- existing public railway employees had little incen- D tions) would receive a reduced benefit equal to tive to stay with the new company because the 50 percent of their monthly salary for a period U government was offering them generous pen- of months equal to half the number of years of sions to retire immediately. Almost all of them service plus one. Therefore, a person with 23 LE did. Soon the new owners were left with virtually years of service would receive 50 percent of 5 no skilled staff. "This was a really difficult thing salary for 13 months. The great majority of for us at all levels," recalls Larry McCaffrey, presi- EFE's employees did not have 25 years of dent of Unirail. "Why they did it, we don't know" service and thus this benefit applied to most of (Moline 2000, p. 4). the 2,200 available employees, from which In 1991 the Chilean Parliament adopted a law Fepasa needed about 400. offering severance terms to workers who had left Neither of these benefits applied to the senior EFE, the state railroad. There were two main cir- people who were paid more than $1,800 per cumstances: month and who were free to choose what they 1. Employees separated from EFE having 25 wanted. years of employment, of which at least 10 The principal problem for the PPI investor was were with EFE, received a salary each month that the primary people it wished to hire were the equal to 1/30th of their monthly salary for each older drivers and electricians with more than 25 year of service, up to a maximum of 30 years, years of service because of their experience and which is the point of retirement. Thus, a worker their work ethic. Those people, however, did not with 25 years' experience would receive 25/30 accept the work because they had a significant of his last month's salary for the following 5 financial incentive to stay away. This greatly hurt years, and then he would receive his normal Fepasa at the time of start-up of operations retirement pension. A condition of the above because the most valuable workers were not benefit, however, was that the employee could available to the concessionaire. not work for EFE or for concessionaires of EFE Source: Moline 2000; Unirail LLC, personal (such as Fepasa) during the period of the ben- communication. efit. The intention of this policy was to avoid categories of workers is properly defined, 5.10, for example). In practice, given the including: often very low wages of this group, the incremental cost to government of includ- ­ Temporary, daily paid, seasonal, intermit- ing temporary workers within a severance tent, or part-time workers: Unions will program may be small relative to the ben- often want to make casual workers per- efits of doing so. Such calculations will manent as part of the preprivatization have to be done on a case-by-case basis. restructuring and thus make them eligible for severance, as was the case in India's ­ Probationary staff, apprentices, and con- telephone and power sectors (see box 4.8 tracted workers are often excluded from and box 5.10). If, however, it is clear severance plans. The rights of these from staff audits that there are large groups depend much on national or state amounts of surplus workers in these cate- legislation, which can affect the design of gories, it may be preferable to make spe- the severance package. cial severance provisions to compensate ­ Officers and managers: Senior staff workers for their losses, provide a social (defined by grade or by salary) may be safety net, and secure support (see box 95 Labor Issues in Infrastructure Reform: A Toolkit Box 5.9: Content of a Severance Manual W hat should be included in a severance finance or by a committee involving represen- manual? Circumstances will differ but tation from the ministry of finance. The stan- the procedures could include the fol- dard format aims to ensure that all costs are 5 lowing material: captured, including statutory payments, enter- · Full definitions of all key terms. prise dues, ex gratia severance payments, arrears of salary, arrears of pension contribu- · A description of the timetable for labor adjust- tions, other allowances, and other costs arising ment. This will include descriptions of any from the restructuring. If a noncore activity is enterprise restructuring activities (for example, being sold, closed, or liquidated, there will be closure of operating units, depots, or work- other costs to the ministry of finance, such as shops), levels and scope of downsizing, phas- MODULE those associated with salaries of core staff ing, and timetable. (security and accounting staff often need to be · A standard format or spreadsheet for calculat- retained), as well as valuation, privatization, or ing the amounts due for every worker. This will liquidation costs. be based on an agreed formula. · A standard letter of agreement between the PPI · Detailed definitions of the calculation of sever- enterprise manager and the government. This ance benefits--statutory and contractual. This will outline the role of the PPI enterprise man- will supplement the paper format or spread- ager, as well as public finance arrangements. sheet because calculating the value of the · A standard letter that all workers sign when contractual (enterprise) benefits and accepting voluntary departure. This will include allowances, in particular, can be challenging. their acceptance of any restrictions on rehiring, There may be different schedules and eligibility and verify their recognition of any tax or social rules for different groups of workers. And if insurance consequences. those benefits are not well defined, if enter- prise human resources management has been · Terms of reference for the engagement of weak, or if data are missing, then in practice accountants and auditors to help implement a the interpretation of the rules may have been program. and continue to be subject to considerable · A standard format for the disbursement of pay- discretion. One unit manager may apply rules ments to workers. This format should provide differently than another, and similar workers for the signatures of the workers to acknowl- can receive different severance amounts. edge receipt, as well as countersignatures by · A standard submission format to the decision witnesses (such as independent accountants body for release of funds. Normally, approval or auditors). for the release and transfer of funds for sever- · Standard formats for tax purposes as appropri- ance will require review by the ministry of ate for the national tax regime. excluded from a severance package, grated salary" made up of 14 different given their higher salary and benefits lev- elements was used both for severance pay els. For example, in the concessioning of and for early retirement packages. Chile rail, senior staff earning over ­ In Chile retirement benefits are calculated US$1,800 a month were not eligible for on the basis of a "worker's reference early retirement benefits (see box 5.8). salary," which is calculated as the annu- · Definition of salary: alized salary over the last five years of employment. ­ Many if not most plans define basic salary as the base for calculating sever- · Definition of years of service: In practice this ance payments. needs to take account of issues such as: ­ A combined salary and benefits definition ­ Will prior service in another organization is another approach. In the case of be taken into account? Mexico rail (box 5.1), the "daily inte- 96 Key Elements of a Labor Program ­ How are part-years calculated? · Taxation: Treatment of severance pay varies among countries, with many countries treat- ­ Will service as a temporary worker ing severance pay as tax free, and some count? (such as Malawi) treating it as a taxable MODULE ­ Will service as an unregularized tempo- benefit. rary worker count? ­ What about apprenticeship or probation- Payment Options and Procedures ary periods and interruptions to service (such as times of military service)? The implementing agency must decide how to pay · Constraints on reemployment. severance to workers. Early retirement benefits are 5 normally paid from the pension plan. For sever- · Treatment of other benefits (loans, medical ance, the main options are to: insurance, and so forth). · Provide severance in a single payment. · Treatment of housing occupied by the Many governments favor this approach workers. because (a) employees tend to prefer lump- sum payments, (b) it is administratively sim- pler, (c) it provides a clean break, and (d) it avoids an impression of continuing govern- Box 5.10: Regularizing Casual and ment obligations toward the displaced Stipendiary Workers in the Orissa Power worker. There are risks that a proportion of Sector workers can very quickly dispose of lump- sum payments on consumption. Clearly, P ublic sector enterprises can engage large numbers of workers on ad hoc or occa- some cultural specifics in certain countries sional terms. In the Orissa State Electricity may predispose those workers more toward Board, for example, 5,336 semiskilled workers, consumption than in other countries--for engaged for extended periods as daily paid example, because of the social status of cost- "nominal muster roll" workers, were regularized ly weddings or funerals. as part of the preprivatization restructuring of OSEB. Their remuneration then rose from Rs. 30 · Provide severance as a salary continuation. per day to about Rs, 3,500 per month. Similarly In Chile's rail sector most workers received some 250 so-called stipendiary engineers had 50 percent of their salary for a period equal been employed by OSEB through emergency recruitment procedures, but they lacked any to half the number of years of service plus service benefits other than a fixed stipend. one (see box 5.10). In a 1,000-response sur- Following corporatization of OSEB, most of vey of severance practices in the United these engineers were regularized and made per- States, where severance is typically one or manent employees of the successor compa- two weeks per year of service, 47 percent of ny--the Grid Corporation of Orissa . organizations implemented severance pay- Although these groups were relatively weak ment through continuation of the salary stakeholders, their regularization helped create a strong positive impression regarding the reform (Lee Hecht Harrison 2001); a similar per- process, and helped to back up the stance centage (46 percent) used lump-sum taken by the government of Orissa that power approaches and some offered workers a sector reforms would not lead to compulsory choice between the two methods. retrenchment. These workers could have been retrenched but, according to one former chair- · Provide severance over a defined period. For man/managing director, "possibly with such a example, when the Uganda Railways beginning we would not have been able to carry Corporation retrenched 1,300 staff in 1997, on with the reforms" (p. 24). severance benefits were paid over a three- Source: Ray 2001. year period (Murungi 2002). 97 Labor Issues in Infrastructure Reform: A Toolkit There are choices · Provide all severance as an annuity. This is the help of the government accounting or for when and how unlikely to be acceptable to workers if they auditing staff: This can help ensure that severance payments are made. have some pension arrangements or if they processes are consistent with national public had the choice between early retirement and finance accountability regulations and with 5 a lump-sum payment. the requirements of any donors involved, defended from potential fraud, and able to · Allow workers to freely choose among a provide an adequate subsequent audit trail. lump-sum amount, staged payments, and an annuity. · Hiring accountants to provide implementa- tion capacity: Accurate calculation and veri- Workers' preferences for these different options will fication of worker payments can be a time- vary among countries. Preferences can be determined MODULE consuming task in large-scale programs. If through well-designed and statistically valid surveys records are not computerized it might take representing all of the work force (all ages, all cadres, 30 minutes to check each application. If and both genders), perhaps as part of the prelayoff 2,000 workers are to be retrenched, it would worker surveys (described later in this module in the be equivalent to 125 person-days, without section on redeployment programs). Factors that allowing for travel times and delays resulting influence workers' preferences are likely to include: from missing information, unclear rules, and · Inflation: Workers may want to quickly con- other anomalies. Where internal resources vert a lump sum into a tangible asset, such are limited this task can be contracted out to as housing, and may reject phased payments national firms of accountants or to other if there is a history of high inflation in the professional firms of auditors or consultants. economy. Some guidelines for this process include the following: have a panel of accountants to · Degree of uncertainty about the future, both draw from, emphasize the need for inde- personal and economywide. pendence of the accountants, do not let · Potential for small business: If workers (or, enterprises select their own accountants, and perhaps, their spouses) can see income-earn- make the accountants also responsible for ing opportunities, they may favor the oppor- the accuracy of the payment process. tunity to invest lump-sum amounts of their · Developing computerized information tech- severance compensation in establishing a nology systems that enable rapid analysis of new microenterprise or small business. worker dues: In the privatization of Brazil's Accurate and prompt payments of severance are RFFSA, each RFFSA office was equipped critical. Workers who are paid incorrectly or late with software that gave information on all are treated unfairly and can create public dissatis- the incentives offered to each worker and a faction with the process. Moreover, in the absence simulation of the benefits each would obtain of clear payment procedures there is a risk that sev- (Estache, Schmitt de Azevedo, and erance monies will be captured by fraudulent peo- Sydenstricker 2000). ple or that there is wide disparity in implementa- · Monitoring payments: The scope of work of tion among different units of the enterprise. any subcontracted accountants and auditors Therefore, the job of the manager in the implement- can include supervision of the actual handover ing agency is to ensure that the right worker receives of payments to workers (see module 7). the right amount, at the right time, with no surpris- es. This generally involves the following steps: Tools (on the CD-ROM) · Carrying out pre-audits of the proposed Sample severance spreadsheet funds disbursement system, preferably with Outline of a redundancy policy 98 Key Elements of a Labor Program Sample redundancy policy (EWS Freight Railway) about the difficulties encountered in downsizing a large public sector.) Terms of reference for a severance consultant MODULE Other Material and Sources Additional Material (on the Fiszbein, Ariel. 1992. "Labor Retrenchment and CD-ROM) Redundancy Compensation in State-Owned Carneiro, Francisco G., and Indermit S. Gill. 1997. Enterprises: The Case of Sri Lanka." Internal "Effectiveness and Financial Costing of Voluntary Discussion Paper 121. World Bank, South Asia Separation Programs in Brazil: 1995­1997." Region. Washington, D.C. Economic Notes 25, World Bank, Country 5 Department, Latin America Region. Washington, ILO (International Labor Organisation). 2000. D.C. Termination of Employment Digest. Geneva: International Labour Office. )For updates, see also Estache, Antonio, Jose Antonio Schmitt de Azevedo, the following area on the ILO website: and Evelyn Sydenstricker. 2000. "Labor www.ib.org/public.english/dialogue/ifpdial/publ/ Redundancy, Retraining, and Outplacement during publ_empt.htm.) Privatization: The Experience of Brazil's Federal Railway." Policy Research Working Paper Lee, Barbara. 1991. "Should Employee Participation WPS2460. World Bank, Washington, D.C. Be Part of Privatization?" Research and External Affairs Working Paper 664. World Bank, de Ferranti, David, Guillermo E. Perry, Indermit S. Washington, D.C. Gill, and Francisco H. G. Ferreira. 2000. "Helping Workers Deal with the Risk of Unemployment." Starcher, George. No date. "Socially Responsible Chapter 6 in Securing Our Future in a Global Enterprise Restructuring. A Joint Working Paper of Economy. Latin American and Caribbean Studies. the International Labour Organisation and the Washington, D.C.: World Bank. (Provides an European Bahá'í Business Forum." International overview of income support programs that have Labour Office, Geneva. Available at www.ilo.org. been used in Latin America, including severance pay, public works programs, training programs, and unemployment insurance.) PENSIONS AND PPI Gupta, Sanjeev, Christian Schiller, and Henry Ma. This section identifies the key pension challenges fac- 1999. "Privatization, Social Impact, and Social ing the implementing agency and provides a brief Safety Nets." Working Paper 99/68. International Monetary Fund, Washington, D.C. introduction to pension plans for implementing agencies that may lack pension expertise. Web Sites International Labour Organisation: www.ilo.org. The Pension Challenge (Several papers on labor issues in the context of pri- Implementing agencies face several challenges relat- vatization and enterprise restructuring.) ed to pensions. First, dealing with the accumulated PSIRU (Public Services International Research Unit): liability of pension benefits that have already been www.psiru.org. (A research unit that receives core promised and earned by current workers often is funding from Public Services International [PSI], the essential to determining whether privatization is global confederation of public service trade unions. feasible. Accumulated pension obligations may It conducts research on public services, privatiza- take a variety of forms, some of which may not be tion, and globalization, particularly in the water, energy, waste management, and healthcare sectors.) readily apparent in the financial records and state- ments of an infrastructure enterprise. Workers in World Bank. "Shrinking Smartly": potential PPI enterprises quite often are enrolled in www.worldbank.org/research/projects/downsize/. the pension plans of civil servants or participate in (Site is a clearinghouse for researchers, development practitioners, and government officials concerned the so-called provident funds established to provide 99 Labor Issues in Infrastructure Reform: A Toolkit some mechanism for mandatory retirement savings their accumulated pension benefits is commonly for salaried or formal sector workers. used to provide incentives for voluntary depar- tures or to achieve work force reductions in the In other cases special supplementary arrangements least disruptive or controversial manner. These have been created to provide additional benefits to 5 strategies have significant financial implications workers in industries of strategic significance (such and may have substantial political and social poli- as transportation, defense, and law enforcement), cy consequences so they must be carefully devel- for workers in difficult or dangerous occupations, oped with consideration for their objectives and or for workers in highly skilled or high-pay indus- costs. (Those considerations are discussed later in tries. These benefits may be in the form of supple- this module.) ments to existing public social security programs or MODULE special-purpose pension arrangements to provide Finally, designing the pension program to meet the benefits to workers in a particular enterprise or future needs of a privatized entity is a key element industry. Both are often operated on a largely of its viability as a going concern. In nearly all cir- unfunded or "pay-as-you-go" (PAYGO) basis in cumstances, including those in even the most fully which obligations are treated as a current operat- developed economies, access to a reliable means of ing expense rather than paid from reserves or asset saving for retirement and providing old-age income pools to which payment is made at the time a security are crucial aspects of attracting and retain- future obligation is incurred. ing high-value added labor. Workers in key man- agement positions or with particularly valuable This generally leads to circumstances in which, on skills may be attracted to PPI candidates solely on an economic if not legal basis, there is a large lia- the basis of the access they provide to reliable pen- bility for future benefits that are not accounted for sion programs. This is especially true in developing and for which funds have not been set aside. When or transition economies in which there are few workers are covered by special-purpose pension competing alternatives available. arrangements, they can be legally enforceable obli- gations. When they participate in public or civil The way in which pension programs are structured servants' programs--although these may function in anticipation of or following privatization on a PAYGO basis, they are likely to perceive inevitably involves tradeoffs between controlling accrued pensions as implicit obligations that must costs and providing sufficiently generous benefits be settled when an entity is privatized. to recruit and retain an appropriate work force. Available is a range of choices in the design of a Accrued pension liabilities typically are not fully (if pension program that will need to be carefully con- at all) reflected in financial statements. These obli- sidered in the context of the type of workers gations, often referred to as arrears or unfunded required, the consequences of the choices made, the pension liabilities, can be substantial. In industries usefulness of the choices as a labor management with declining labor forces or aging worker popu- tool, and the pattern and level of associated costs. lations, past pension obligations may be the single largest liability when properly measured and may Some types of pensions are very effective in attract- represent a multiple of the market value of an enti- ing younger, educated workers, often those with ty. For these reasons PPI investors may be reluctant highly valued and marketable technical skills. to take over an entity until they are assured that Other types are more effective in retaining older accrued pension obligations are fully resolved. workers or key management staff. Some pension arrangements have lower or more predictable Second, pensions are a central concern as well as costs, whereas others enable sponsors to constrain an effective tool in restructuring a labor force cash outlays in early years but may involve greater through downsizing. Providing early retirement uncertainty about their long-run expense. These programs or establishing arrangements in which choices and tradeoffs are essential to the value and workers can retain or access some of the value of viability of a privatization candidate and are dis- 100 Key Elements of a Labor Program cussed further below. (See also the case of Morocco and may be the single largest tax privilege in many The first challenge is rail presented in box 5.11.) countries. to meet pension obligations that have been promised and Although there is a wide variation in their specific earned by current design, there are two basic types of pensions. The workers. MODULE Types of Pension Plans older and more traditional pensions are those that Pensions are essentially collective arrangements promise workers a level of income for the rest of designed to provide income for people no longer their lives after they reach a specified retirement able to work because of age. In nontraditional soci- age. These generally establish a benefit level based eties or in industrial economies in which the multi- on a formula that takes into account wages earned The second generational household is no longer the norm, pen- and years of employment covered under the plan. challenge is to use 5 sions provide a means for the elderly population to These are broadly termed defined-benefit plans and pensions as an survive. Pensions can be organized and run by gov- include the majority of the public social security effective tool for labor restructuring ernment and public institutions, by private firms, systems, civil servants' pension plans, and many through early or by a combination of both. older occupational plans. Some defined-benefit retirement. plans try to set aside sufficient funds to pay the Pensions may be organized as contractual savings benefits by estimating their future value at the time in which a worker builds up assets or credits that they are earned and are therefore called funded are returned in a variety of forms as income fol- plans. Others--commonly public social security lowing retirement or through the redistribution of and civil servants' plans--pay benefits out of cur- income from active to retired populations. Pensions The third challenge rent receipts and are called unfunded arrange- is to design pension are typically afforded tax privileges under which ments. plans for the post- income taxes on the value of payments or contri- PPI enterprise. butions are deferred until the time they are received Glossary of pension terms as retirement benefits. This "consumption tax" treatment often has significant fiscal consequences Box 5.11: Morocco Rail--An Unsustainable Pension Scheme I n 1996 the government of the Kingdom of tributions plus a variable amount paid by ONCF Morocco approached the World Bank for sup- to match the deficit. The system placed a major port for the restructuring of the state-owned burden on ONCF finances. The high cost of the railway, Office National des Chemins de Fer pensions was the result of very generous arrange- (ONCF). A key element of the restructuring was ments. The plan rules set the normal retirement the conversion of the enterprise from a public age at 55 years (50 for drivers, compared with 60 corporation to a joint stock company. Although years in the national retirement fund), and offered the ratio of staff costs to traffic revenue was bet- proportional early retirement after 21 years of ter than that of most European railways at the service, an annual contribution rate of 2.5 percent, time, it was still too high to ensure a sustainable a high reference wage, wage-based indexing, and financial position for ONCF, especially in the face supplementary allowances and reversion of pen- of stiffer road competition. Labor costs were to sion rights for family members. These benefits be brought down to about 30 percent of operat- were unsustainable and would require an annual ing revenues; this would involve a reduction in contribution rate of 50 percent if it were even to personnel from 13,800 in 1995 to 10,000 in 2000. achieve a real financial yield of zero percent. Corporatization would not be possible, however, Measures to change ONCF's pension system without changing the pension arrangements. The were urgently needed because the downsizing ONCF pension plan was an internal fund, more program, plus a staff age profile leading to steadi- favorable than the common system applied to pri- ly increased retirements (the number or retirees vate enterprises, with pension benefits paid increased by about 200 annually), would make directly by ONCF. Retirees were paid their rights the plan even less tenable. directly from the yearly staff and employer's con- Source: World Bank 1996d. 101 Labor Issues in Infrastructure Reform: A Toolkit Other pensions essentially provide a savings be covered--typically including infrastruc- account for each individual in which contributions ture workers. from the worker (and often the employer) accumu- National pension schemes are typically late. The value of these contributions and the earn- operated primarily on a PAYGO basis and 5 ings from their investment accumulate in these consequently have large unfunded and quite individual accounts. On reaching a specified age, often untenable levels of future benefits. or sometimes under other conditions such as sepa- These arrangements can range from modest ration from employment, the worker becomes enti- in scope to very generous (from those that tled to the value of the account. In these arrange- seek to replace half of a worker's income to ments there is no promise of a benefit level; all that those designed to replace nearly all of a MODULE is promised is the commitment to maintain the worker's income, even if that is not feasible account. The benefit received is directly linked to over the long term). Infrastructure workers, the value of contributions made, so these are gener- especially in strategic or dangerous indus- ally called defined-contribution plans. tries, may be afforded special privileges in The observation is often made that in defined-ben- these plans that provide higher income efit arrangements the sponsor incurs all of the risks replacement rates or retirement at a younger of unanticipated changes in investment returns or age. Compensating workers for the loss of from miscalculations about the amount of time these special privileges can be very compli- workers will live after retirement, whereas in cated and expensive and thus represents one defined-contribution arrangements these risks fall of the more difficult pension problems in primarily on the individual worker. This principle privatization. Public plans facing financing is central when considering any restructuring of shortfalls may also seek payments to cover pensions in the privatization process. these future commitments if they are to be maintained--an expense that can be a Any type of pension can be organized on a nation- major issue in privatization. al basis, by a single enterprise, or by a group of · Civil servants' pension plans: Many coun- related employers. Pensions can be organized and tries without national schemes or those with administered by public or private institutions or by modest benefit levels have established spe- a combination of both. Workers in infrastructure cial pension programs for civil servants. enterprises may be covered by any of these types of These are often designed to provide nearly pensions operated by either type of institution or full income replacement, often at young through a combination of arrangements. retirement ages, to compensate for the pre- Some of the more prevalent types of pension sumed lower pay levels of civil servants or arrangements are: to retain members within the career civil service. Regardless of whether either of these · National pension plans: Some countries motivations is necessary, the tradition of have established government-run social high pension levels for civil servants is main- security programs that generally cover all tained in many developing countries. They Two basic types of workers in the so-called formal sector-- are nearly always defined-benefit plans, pensions: those who are receiving money wages. although this is slowly changing. They may · Defined-benefit Coverage is typically limited to this group be operated in conjunction with a national plans, where the because it is only through wage records that plan or they may move covered workers risk lies with the taxes and contributions can be collected and sponsor into a separate arrangement. · Defined- benefit levels can reliably be set, although in contribution many circumstances this relationship is tenu- Infrastructure workers are often included in plans, where the ous at best. In developing economies only a these arrangements and may perceive them- risk lies with the selves as having forgone a significant por- employee. small fraction of the total population may 102 Key Elements of a Labor Program tion of their potential wages or other value of these savings to pay for relatives' National pension employment opportunities in the expecta- funerals, weddings, or education expenses plans usually are PAYGO. tion of future high pension levels. This may or they are permitted to withdraw funds or may not comport with reality, however, when leaving a job before retirement age. M because with civil servants more broadly the Because they are purely defined-contribution expectations and perceptions will be key in nature and therefore, by definition, fully O issues in any labor restructuring. Civil ser- funded, these types of pension arrangements D vants' plans commonly are operated on an pose fewer problems of past liabilities or U unfunded or partially funded basis. future commitment during PPI. They can, in LE fact, be a type of vehicle that essentially pro- As with national plans, these plans may not vides a source of severance pay to mitigate 5 have aligned required contributions with the the short-term consequences of labor needs of long-term solvency and thus may restructuring. represent an indirect source of subsidy for infrastructure entities. This not only distorts · Occupational or employer-sponsored private the measurement of actual compensation pensions: The least common but in some costs on an ongoing basis but may lead to respects most problematic type of pensions demands for a very high payment to settle likely to be encountered in a privatization previously accrued but unfunded obligations initiative is occupational plans. These are when an employer tries to withdraw from special pension arrangements that have been the plan upon privatization. established to cover workers in specific enterprises, sometimes called single-employ- · Provident funds: Former colonial powers, er plans, or a group of related employers or particularly the British, established a partic- members of a trade union, sometimes called ular type of savings institution known as multiemployer plans. Occupational pensions provident funds, and these remain common can be the only source of pension coverage in many developing nations in South Asia in circumstances where there is no national and Africa. These are defined-contribution pension program or where employees in cer- arrangements in which an account is estab- tain industries are excluded from other lished for each participant and the contribu- arrangements. They also can be integrated tion of a specified portion of wages is into other plans, usually designed to provide mandatory. Contributions often must be supplementary benefits where income made by employers as well. replacement rates are low or to provide for Typically the funds are invested in safe but earlier retirement ages. Traditionally these low-yielding assets, usually debt instruments types of pensions have been of the defined- of the government. Participants are often benefit type; however, there is a recent trend permitted to borrow the funds for specified toward defined-contribution plans. purposes--the purchase of housing is a Occupational pensions are extremely diverse common example--and are entitled to in form. They impose particular problems receive the total amount that has built up in for implementing agencies because most their accounts when they reach a specified developing countries have not established age. In some instances provision is made to any sort of comprehensive rules or require- convert the account balance into a lifetime ments for their establishment or operation. annuity. This can result in circumstances in which Although provident funds are primarily the benefits promised are not clearly speci- established as retirement savings vehicles, fied, and that leads to considerable contro- they are often used for a far broader range versy about their settlement. Workers may of purposes. Workers often deplete the full be led to expectations about their pensions 103 Labor Issues in Infrastructure Reform: A Toolkit Provident funds are that are considerably at odds with the terms its long-term viability. There are several steps defined-contribution of the arrangement or the resources avail- involved: plans. able. Step one: The first step in this process is to obtain a Most significantly, occupational plans often comprehensive understanding of all of the potential 5 result in substantial future financial commit- pension commitments that currently exist. Pensions ments that have not been measured or are an integral aspect of labor negotiations and work accounted for in a reliable fashion and that force management. Although this is typically a for- have no funding set aside to ensure they can mal process, perceptions and expectations are often be met. These problems are especially pro- as important as formal legal agreements. Care must ODULE nounced for defined-benefit arrangements, be taken to be as thorough as possible in obtaining a M but may also occur when defined-contribu- full picture of the existing pension system. tion plans must be funded or when the funding is not segregated from the sponsor's Pension agreements may be contained in forms other financial arrangements. They do, how- ranging from national laws covering all workers, ever, afford opportunities for using pensions collectively bargained agreements between workers to manage labor restructuring or to provide and trade unions, formal plans outlined in legal incentives to manage a work force, as dis- documents executed by an employer, and informal cussed in subsequent sections. agreements or acknowledged practices by an employer. Many countries do not have well-devel- oped labor codes or pension regulatory regimes Addressing Prior Pension that establish standards for pensions. The extent to Obligations which any of these obligations is binding will depend on the laws and traditions applicable to This section examines the issues and choices that individual circumstances. It is likely that some must be addressed in assessing the feasibility of pri- important practices and expectations will not be vatization and in resolving the existing pension well documented. obligations during implementation. At a minimum the relevant national laws and doc- uments describing schemes for civil servants, provi- Measuring Existing Obligations dent funds, or any employer-specific arrangements will have to be obtained and carefully reviewed to Pensions essentially involve the commitment by an assess the extent of an employer's pension obliga- employer to provide resources intended to be con- tions. It is generally advisable to consult with offi- verted to income following the retirement of cov- cials of government-operated pension schemes, ered workers. This commitment can be as simple employee representatives, and any staff responsible as an obligation to forward a specified portion of a for an enterprise's human resources or personnel worker's pay to an individual savings account (for functions to identify any undocumented agree- example, to a defined-contribution plan or provi- ments or practices that are relevant. A thorough dent fund) or the far more complex responsibility familiarization with any regulatory requirements to fund and administer a program that will provide having a specific focus on funding requirements, a monthly payment to replace a specified portion vesting rules (requirements for the irrevocable right of a worker's final salary for the remainder of the to benefits when certain conditions are met), and worker's life (a defined-benefit plan based on final procedures for the resolution of benefit disputes is salary). In many circumstances the cost of these advisable. This process should result in a complete obligations represents the single largest long-term inventory of potential pension obligations. financial obligation of an enterprise. How this obli- gation is addressed will be a key determinant of the Step two: The second and likely far more difficult market value of an enterprise and will be critical to step will be to develop reliable measures of the 104 Key Elements of a Labor Program scope and cost of existing pension obligations. This obtain an accurate assessment. Considerable future Legislation and step can be divided into two components: (1) the problems can result when the actual value or the plans are the essential starting value of pension obligations accrued to date (some- "market value" of assets is at odds with the value points for a review times called the accumulated liability or the shown in workers' or a pension fund accounts, of pension MODULE accrued-benefit obligation) and (2) an estimation of even if it is consistent with applicable financial agreements. the future and magnitude of pension obligations accounting practices that may require assets to be (variously referred to as the periodic costs or carried at their purchase price until actually sold. It projected-benefit obligations, among other terms). is very important to understand potential differ- ences and obtain a current value in these circum- If the pension obligations are solely defined as con- stances where the actual value may be less, espe- tribution in nature, valuing the commitments to cially if there is a possible obligation of the pension 5 date may be as simple as determining the value of sponsor to compensate for any shortfall. the various accounts and making judgments about the potential expense of fulfilling the contribution Some countries may have established periodic audit formulas in the future. These expenses usually can requirements for pension funds. Unless there is an be readily expressed as either a fixed amount per extremely strong system of auditor quality assur- period, usually a month or year, or as a percentage ance and such an audit has been done very recent- of wages. ly, it is generally advisable not to rely on an exist- ing audit for these purposes. Even the most devel- The most critical aspects of the process for defined- oped systems with strong compliance measures contribution plans usually will be to determine the experience significant problems with the timely for- extent to which contributions to individual warding of pension contributions and the reliabili- accounts have actually been made as promised and ty of their financial statements. When enterprises to identify the extent to which assets shown in face cash flow problems or when managers face account balances are actually present. This process significant uncertainty about their future employ- nearly always will require engaging the services of a ment contracts, pools of assets in pension funds reliable financial accountant to conduct a thorough often are among the most vulnerable to fraud, audit of the records of accounts to verify that (a) theft, or other manipulation. A recent and inde- the accounts have been maintained properly and (b) pendent financial audit is therefore essential in that the assets are present as required or indicated. nearly all circumstances. Common problems likely to be encountered are Another common challenge in evaluating defined- sponsors who delayed forwarding required contri- contribution plans is the assessment of severance- butions or who substituted promissory notes or type arrangements or other contingent future liabil- other "paper" obligations (perhaps even "shares" ities. Provisions providing one-time payments on of the enterprise) for cash contributions. This is the attainment of a specified age or on the termina- especially common when enterprises face problems tion of employment may be incorporated into pen- raising working capital or other liquidity issues so sion plans, contained in national laws, included in that particular attention should be given under individual employment contracts, or simply a mat- these circumstances. ter of tradition and expectations. The latter espe- An additional challenge will be to determine that cially may be an issue among senior managers. The the value of the assets held in accounts is accurate- cost of these provisions can be of equal or some- ly represented. Investments may be shown at their times greater value than the regular contribution purchase price or some type of "book value," requirements and should be included in any assess- which may not indicate their current value. In ment of future expected costs. many circumstances the accepted accounting treat- The process for defined-benefit plans is partly par- ment may require these approaches, so particular allel because it also includes a similar need to attention to valuation methods will be needed to obtain a reliable accounting and valuation of any 105 Labor Issues in Infrastructure Reform: A Toolkit "Book" and funds that have been set aside for pension purpos- Step three: In order to fully and accurately assess "market" values of es, thus imposing a similar need to undertake a the current status of pensions, estimates are also pension plans may be very different. reliable audit. In addition to this, however, is per- needed of the value of supplemental or contingent haps the most difficult and challenging aspect of benefits. These benefits basically are additions to 5 dealing with pension issues--valuing the accumu- the regular benefits paid at normal retirement age lated and future liabilities. and will typically include severance arrangements, provisions for which allow pensions to be paid at Almost without exception this requires the services an age prior to the regular retirement age often of a professional actuary with experience specific triggered by labor force reductions, and additional to pension schemes. This is a process with two benefits paid to workers in dangerous or difficult major elements: (1) obtaining very specific infor- MODULE occupations. Because they often are not formal mation about the employment history, wages, and obligations until some future event occurs, these demographics of the group of workers covered by kinds of benefits frequently are not included in the the pension plan; and (2) arriving at reasonable accounting for pension obligations. They may, assumptions regarding future patterns of employ- however, be legally enforceable and may represent ment, investment returns, and the life expectancies a substantial portion of the current pension obliga- of the covered workers. The valuation of defined- tions (for example, privilege pensions in Central benefit liabilities, because they often extend and Eastern Europe--see box 5.12). Special care decades into the future, is highly sensitive to the must be taken to identify all of these obligations in accuracy of the underlying information and the initial inventory of pensions and to estimate the assumptions, thus perhaps making the develop- future magnitude of their costs. Assigning some ment of these assumptions the most important probability of these benefits being paid and deriv- aspect of the process. ing a measure of the current liability are often major parts of the work of an actuarial evaluation. Professional help is often needed for a pension review. The CD-ROM contains terms of reference for a pen- sion consultant or actuary. Determining the Funding Status Countries with a long experience of defined-benefit pensions may have standards of practice or legal Assessing the status of current obligations will yield requirements for many of these factors. However, two key measures of the overall financial status of these are unlikely to exist in developing economies. pensions. The first of these measures is often Standards from other countries, because they are referred to as the accumulated- or accrued-benefit based on specific experience with investment obligation. This is essentially a measure of the cur- returns and life expectancies among other key fac- rent value of funds set aside or previously paid as tors, generally are not transferable. Often a starting contributions in relation to the expected value of point for these assumptions can be derived from the pension benefits promised. This amount can factors used by national pension systems, but in the either be expressed as a percentage or other ratio or end an assessment of reasonableness on a case-by- as a net value. Pensions with a negative ratio of case basis will be needed. In most cases the judg- assets (or aggregate contributions) to future benefit ment of a professional actuary will have to be obligations are commonly referred to as underfund- relied on for these determinations. If there is not an ed or are said to have pension arrears. Although established and reliable actuarial profession in a there are international moves to improve the quality country--which is often the case--the magnitude of pension disclosure in financial accounts (see box of the costs and associated future financial risks 5.13), many enterprises in developing and transition may make incurring the expense of engaging the economies will lack good information on their pen- services of an established international firm a pru- sions. The scale of pension obligations and prob- dent course of action. lems of underfunding may therefore not be fully apparent until revealed in the PPI process. 106 Key Elements of a Labor Program Box 5.12: Privileged Pension Rights in Central and Eastern Europe I n some countries, particularly the transition Hungary economies, public sector employees were usu- The government effectively abolished all privi- ally given "pension privileges." These privileges leged pensions when the country introduced its MODULE could be enhanced retirement benefits, retire- new state pension system in 1999, with the com- ment at an earlier age than private sector work- pensation being a pension payment to a voluntary ers, or a combination of both. Privileged pen- scheme. So a PPI investor in Hungary would only sions were widespread in these countries. For have to decide whether it would maintain the level example, in Ukraine more than 25 percent of of voluntary contributions that the government pensioners are younger than the minimum retire- was currently paying. Although this is relatively ment age because they were able to retire early easy, there are other issues. For example, workers 5 under privileged arrangements. who are civil servants can withdraw their benefits Privileged pensions are granted for one of two from a voluntary plan tax free. Naturally they main reasons: to compensate for the lower would be reluctant to give this privilege up, and a wages paid to employees and to compensate for prospective employer may have to negotiate the the special type of work that the employee does. continuation of this arrangement when PPI occurs A typical example of the first category is white- or possibly have to increase the contribution rate collar civil servants; the second category would to maintain the after-tax benefit. For both the be typified by airline pilots or coal miners. implementing agency and the PPI investor, how- Most transition countries are reforming their pen- ever, this is preferable to negotiating the total sion systems with three typical outcomes for package with workers and unions. privileged pensions: Russia 1. Abolition, with compensation to workers in the The implementing agency and the investor face form of higher wages that could be invested in some complex legislation relating to pension privi- voluntary schemes leges. The situation is complicated by how long 2. A requirement that workers who receive privi- the employee was working in the privileged pen- leged pensions have these as a condition of sion position but, generally speaking, employers their employment, and that by choosing to have to make an additional contribution to com- work in the sector, they agree to participate in pensate for the loss of pension privileges. The a voluntary plan amount of contribution is subject to negotiation and the vehicle for the payment is likewise compli- 3. Greater transparency of the financial transfers cated. It is possible to pay contributions in lieu of needed to meet privileged pension obligations pension privileges either to the Russian pension in those countries or industries where some plan or into a licensed voluntary pension plan. The form of continued public subsidy has been law gives the choice of plan to the employer, but a proposed (for example, in Ukraine's coal-min- new PPI investor is likely to be under some pres- ing sector). sure to establish a voluntary pension plan in order to receive the privileged pension contributions. Whether a pension is part of a national or civil ser- Funding shortfalls also can be present in some vants' system operated on a PAYGO basis or cov- defined-contribution arrangements where the fair ers only the workers in a single enterprise, the value for the assets is less than the value of accounts. funding status must be evaluated carefully. The col- Severance payments or informal obligations are lection of contributions from public enterprises is rarely funded in advance. When done properly, a often lax and there may be substantial amounts of full measure of the accrued funding status presents a past contributions owed that are not accurately full measure of the financial obligation the enterprise accounted for. Few countries have well-developed is likely to have to resolve at some point and often requirements for the prefunding of defined-benefit can be a major aspect of the evaluation of the future plans, and even when these are present the assump- demand on cash flows as well as overall financial tions used for determining the required level of solvency. The measure of the accrued funding status assets may be considerably at odds with reality. is likely to be the single most important number 107 Labor Issues in Infrastructure Reform: A Toolkit Box 5.13: Accounting Standards for Defined-Benefit Plans he international accounting standards (IAS T · A net pension asset on the balance sheet may 19) for pension benefits, introduced in 1999 not exceed the present value of available by the International Accounting Standards refunds plus the available reduction in future 5 Board, require that contributions in a defined- contributions resulting from a plan surplus. contribution plan be recognized as expenses. In · If the net cumulative unrecognized actuarial contrast, the standards for defined-benefit plans gains and losses exceed the greater of (a) 10 have become more stringent, aiming to fully percent of the present value of the plan obliga- expose pension liabilities, and state that: tion and (b) 10 percent of the fair value of plan · Current service cost should be recognized as assets, that excess must be amortized over a an expense. period not longer than the estimated average MODULE · All companies must use the projected unit working lives remaining for employees partici- credit method (an accrued-benefit method) to pating in the plan. Faster amortization, includ- measure their pension expense and pension ing immediate income recognition for all actu- obligation. arial gains and losses, is permitted if an enter- prise follows a consistent and systematic poli- · Projected-benefit methods may not be used. cy. · The discount rate is the interest rate on high- · Past service cost should be recognized over quality corporate bonds of maturity compara- the average period until the amended benefits ble to plan obligations. become vested. · Plan assets and reimbursement rights must be · The effect of termination, curtailment, or settle- measured at fair value. ment should be recognized when the event · Defined-benefit obligations should be present- occurs. ed net of plan assets. Source: International Accounting Standards Board Web site: · Reimbursement rights should be presented as http://www.iasb.org/) "IAS 19: Employee Benefits." a separate asset. derived from an evaluation of pensions and it pro- A second element, usually much smaller, is the pro- vides the basis for the key strategic decisions dis- jected increase in wages or salaries that would raise cussed in the following sections. the ultimate level of benefits even if no additional years of work were covered under the arrange- The second element of the funding status is the ments. Although it adds complexity, it is helpful to development of a measure of future or projected distinguish between the two elements because they pension-benefit obligations. This element provides a will enable a more precise evaluation of the costs of measure of the expected levels of future costs that options for addressing future pensions, as discussed would be incurred to maintain the existing pensions. in subsequent sections. Although it should be calcu- There are two potential aspects of this. First, most of lated separately, this second component is usually a projected obligation will comprise the costs associ- combined with the accumulated liability to derive ated with additional periods of employment by the the funding status. covered workers. These costs will include the contri- butions required for defined-contribution plans and PAYGO systems or the additional years of work that will factor into the benefit formulas of defined Resolving Existing Pension Obligations arrangements. It is extremely helpful to distinguish PPI investors will be extremely wary of becoming between the various contributing factors for the pro- involved in circumstances where large financial jection (that is, employment patterns, mortality obligations for previously promised pension bene- expectations, and the like) as it is developed because fits are present or may arise in the future. This these factors will specify the costs and savings of makes the evaluation of the status of pensions as alternative pension strategies. outlined above an essential early task in the PPI 108 Key Elements of a Labor Program planning process. Evidence that all prior pension · Increasing vesting periods (the period of par- obligations are fully addressed, either through ticipation in the pension system after which paid-up contributions or assets set aside that are benefit rights are irrevocable) sufficient to cover their anticipated value, will sub- · Terminating the pension and discontinuing MODULE stantially diminish investors' actual or perceived any past benefits (in extreme circumstances). risks, thereby removing a significant barrier to pri- vatization. Conversely, the presence of unfunded or The implementing agency should, however, recog- significant future obligations requires the develop- nize that some of these steps may be explicitly pro- ment of a strategy to address them. There are three hibited by law or may be vulnerable to a challenge potential types of strategic approaches with many under commercial or labor codes. variations and combinations possible: 5 The advisability of such approaches is likely to be 1. Renegotiate or modify the past pension obli- determined by the impact on labor relations and gation to bring the liability to a manageable the extent to which government agencies adminis- level tering national or civil servants' plans are willing to permit entities to withdraw workers from partici- 2. Freeze or "ring-fence" the past obligation and pation and eliminate any future liability for contri- establish a means either to set aside funds to butions that are in arrears. Workers in public infra- meet the obligation or to transfer the obliga- structure entities, especially those included in civil tion and associated risk to another entity servants' schemes, are likely to represent powerful 3. Establish a viable approach to resolve the political constituencies and strongly resist such past liability by setting aside assets or sched- steps. Public pension schemes operating on a uling the payment of contributions in PAYGO basis and experiencing both short- and arrears on a schedule that is sustainable for long-term financing problems also are likely to the enterprise as a going concern. oppose such approaches. Reduce Accrued Pension Obligations Freeze Past Obligations The lowest-cost approach to resolving past pension An intermediate approach to addressing past obli- liabilities obviously is to reduce the magnitude of gations is to freeze the existing obligation at its cur- the liability. The viability of this approach is likely rent level and take steps to address it in a manner to be determined by a combination of legal con- that is viable for the future. In this approach the straints and the assessment of potential conse- past pension obligations are honored, but addition- quences to labor or government relationships. The al benefits do not continue to accrue or they accrue simplest method obviously is to renounce any obli- at a different level or in a form more affordable or gation or commitment to previously earned pen- aligned with the anticipated needs of the future. sions or to the portion of those that are in arrears The separation of accrued and projected compo- or unfunded. nents during the evaluation of liabilities should provide a basis for judgments about the potential The capacity to do so will be determined by the cost reductions of such an approach. This decision legal constraints, which should be an integral part is closely associated with the determination of an of the inventory of pensions discussed above. Prior appropriate prospective pension arrangement pension obligations can be reduced through a ret- because closing down existing pensions in this rospective modification of the benefit formulas, manner has consequences for the future design. including steps such as: Alternatives for resolving liabilities include develop- · Reducing the proportion of wages replaced ment of a schedule for amortizing any shortfall for each year of covered work over a period that matches a projected future fund- · Increasing the age at which retirement is ing stream, paying lump-sum settlements to affect- permitted ed workers in exchange for the settlement of the 109 Labor Issues in Infrastructure Reform: A Toolkit There are three obligation, "laying off" the liability through a con- past liabilities and the obligations from approaches to tract with a life annuity provider or in some cases future ones. Examples of the separation and resolving unfunded pension liabilities. even permitting a public entity to take over the isolation of pension assets and liabilities are pension obligation in exchange for an agreed-on provided by the cases of Tanzania 5 fee or future series of payments. In cases where Telecommunications Company (box 5.14), there is considerable uncertainty regarding the Japanese National Railways (box 5.15), and capacity of an enterprise to fulfill future obligations South American mines. and remain a viable concern, workers may be will- 3. Privatization proceeds: Some countries have ing to accept one-time cash payments of lesser first sequenced the sale of valuable enterpris- present value than the benefits they forgo in the es to build up adequate funds to finance the MODULE settlement of future pension rights. labor adjustment, including pension costs. This process can be considerably complicated Proceeds can either be monetary transfers, when a guarantee of pension benefits has been pro- or--as in the Bolivian capitalization pro- vided by a government agency or when there is an gram (see box 1.9 in module 1)--transfers attempt to withdraw from a civil servants' or other of government shareholdings in public publicly managed defined-benefit plan that may be enterprises into private pension plans. If the operated on a PAYGO basis. In these cases a nego- PPI investor is willing to take on pension lia- tiated settlement of future liabilities that is well in bilities, but at a reduced purchase price, that excess of the value of contributions to date may be discount is effectively the same as the for- required. gone privatization proceeds. 4. Donor loans and grants: Large sector Fully Fund Any Shortfall or Arrears reform and structural adjustment lending The least controversial and disruptive, as well as programs are a potential source. For exam- the most direct, method of resolving existing pen- ple, World Bank loans financed severance sion obligations is simply to pay their full cost on a packages for redundant workers, including present-value basis. If this is financially viable and pension liabilities payments, in the restruc- desirable it may be accomplished in a variety of turing of the Polish and Brazilian rail sectors ways: and the privatization of Togo's telecommu- 1. The government budget: For example, the nications sector. German government agreed to contribute 5. Rescheduled liabilities that are paid later US$1.25 billion into a new private pension from the profits of the PPI enterprise: In plan in order to allow withdrawal from the Romania the privatization of the Sidex steel public pension plan by Lufthansa Airlines. factory involved negotiations among gov- That amount would provide half of the cap- ernment, investor, and unions on the ital needed in a new plan to meet the exist- restructuring of arrears of social taxes-- ing obligations; the airline would finance the including pension contributions--that had other half (Guislain 1997, p. 78). More accrued. Sometimes, this rescheduling may commonly, where governments take on include the negotiated write-off of some responsibility for payments under existing debts, or the use of debt instruments by gov- plans, the obligation may be paid from the ernment (government bonds and securities) existing PAYGO system (for example, for or by the PPI enterprises (corporate bonds). early retirees in state-managed, defined-ben- An example is the Moroccan Railways efit plans). Corporation, which agreed with the govern- There are five sources of finance 2. Proceeds from the sale of assets belonging to ment of the Kingdom of Morocco to finance to meet any the enterprise: These assets may be rolled unfunded pension provisions by issuing shortfalls in existing into a separate fund that combines existing bonds over a five-year period. pension obligations. 110 Key Elements of a Labor Program ceeds and public funds from fiscal sources. The Box 5.14: Tanzania Telecom--Pension Plan company transferred the pension liabilities to the Restructuring federal government (López-Calva 2001). I n 1998 Tanzania's privatization agency, the Parastatal Sector Reform Commission (PSRC) López-Calva 2001 (a PPIAF case study). MODULE embarked on the privatization of Tanzania Telecommunications Company Ltd. (TTCL). An initial review revealed four pension plans in which employees were enrolled, and significant Pensions and Labor Restructuring unfunded pension obligations that arose prima- rily from the East African Postal and This section discusses how pensions can be used in Telecommunication Pension Fund (EAP&TPF) of labor restructuring because such adjustment is 5 the former East African Community (EAC). often a major part of any process of privatization. These liabilities presented a major problem, threatening to derail the privatization. They had The implementing agency may face difficult pension been transferred to TTCL when EAP&T was issues and negotiations with workers and unions separated into telecommunications and postal during work force restructuring. Pensions can often operations in 1994. represent a large portion of the compensation pack- The government agreed that the privatized age for workers in these enterprises, especially if TTCL should transfer its employees to a new accumulation plan(s) and that unfunded liabili- workers are enrolled in generous industry-specific ties would be removed from TTCL's balance or civil servant defined-benefit plans. Pension sheet. To facilitate this, a new company called arrangements can also be adjusted to provide incen- Simu 2000 Ltd. was created. It took over TTCL's tives for workers to leave employment voluntarily unfunded pension liabilities and was required to or used to cushion the impact on those who may be ensure that the future pension obligations from these older pension plans are met. Simu 2000 separated involuntarily. Various approaches with Ltd. took over existing EAP&TPF assets plus many feasible combinations are possible for inte- noncore TTCL assets, in exchange for also tak- grating pensions into a labor restructuring strategy. ing over future pension liabilities. These approaches can be considered in the context Simu Ltd. was mandated to establish a small of two major categories: early retirement programs management team of no more than five employ- and voluntary departure incentives. ees, and to arrange for the sale of some of the assets and the transfer of proceeds to the National Social Security Fund (NSSF). The NSSF invested the proceeds and paid a fee of Early Retirement Programs 7.5 percent of the total sum invested. Simu 2000 Ltd. was required to meet the monthly The least disruptive and contentious way to payment of pensions to the existing ex-EAP&T restructure a work force is to induce voluntary pensioners, and an initial advance was provided early retirement. Whether this is practical is a ques- by the PSRC to cover this cost for three months and the initial administrative cost of setting up tion of cost and of targeting the availability to Simu 2000 Ltd. redundant workers while retaining those who are Source: Parastatal Sector Reform Commission, Tanzania; essential to a going concern. Whether the benefits Adam Smith Institute. are enough to induce employees to volunteer for early retirement will depend on the type of plan offered (defined-benefit or accumulation), the levels Some PPI programs have created special funds to of benefits promised, the vesting arrangements, finance the costs of retirement. In the privatization participant eligibility, and other rules of the pro- of Mexico's national railway, a trust fund was set gram--as well as employees' assessment of alterna- up to finance the retirement benefits of those work- tive employment options. ers who retired prior to privatization. This fund was negotiated between government and the labor Early retirement can be structured in three main union, and included part of the privatization pro- ways--by providing: 111 Labor Issues in Infrastructure Reform: A Toolkit Box 5.15: Japan Railway's Recurring Pensions Challenge "O ver the protests of the seven direct and Central Japan Railway Co.--publicly listed descendants of the former Japanese their shares during the past two years. Because of National Railways, the Diet [Japan's par- falling real estate prices and other factors, JNR 5 liament] approved legislation in October 1998 Settlement not only has been unable to reduce its [for] a 60-year plan to pay off the ¥27.8 trillion handed-down debt but has seen it grow to nearly ($205.9 billion at ¥135 = $1.00) worth of debt that ¥28 trillion ($207.4 billion). remains from JNR's 1987 privatization. Although The ¥4.3 trillion ($31.9 billion) in pension liabilities Tokyo will shoulder most of the debt, the seven will be taken over by a new company, Japan rail companies created from the now-defunct Railway Construction Public Corp., which, in government railroad will be forced to take on turn, will derive income from selling JNR MODULE ¥180 billion ($1.3 billion) worth of unfunded pen- Settlement's real estate assets, offering more sion liabilities owed to former JNR workers now shares of JR companies to the public and forcing employed by them. The repayment plan has JR Group firms to pay ¥180 billion ($1.3 billion) of caught the attention of American shareholders of the cost. three of the Japan Railway firms as well as some The JR companies feel that Tokyo is being unfair U.S. legislators. in forcing them to pay an extra share of the pen- At the time JNR was privatized in 1987, it had sion liabilities. When their private pension plans ¥37.1 trillion ($274.8 billion) worth of red ink on its were absorbed into the government's pension books. The seven companies that took over JNR's system in April 1997, the administrators of the passenger and freight rail operations agreed to public plan said that the JR Group's pension assume ¥14.5 trillion ($107.4 billion) of the debt, scheme was under funded by ¥940 billion ($7 bil- while the rest--¥22.6 trillion ($167.4 billion)--was lion). JNR Settlement agreed to absorb ¥770 bil- transferred to a new company, JNR Settlement lion ($5.7 billion) of the liability, and the seven Corp. JNR Settlement was supposed to whittle operating firms took on the remaining ¥170 billion down the debt by selling off JNR assets, especial- ($1.3 billion). The septet now says that the Tokyo ly prime real estate holdings. The company also government is reneging on the deal by making held all shares of the seven JR operating compa- them pay another ¥180 billion ($1.3 billion)." nies and so benefited when the three strongest-- Source: Choy 1998, pp. 6­7. East Japan Railway Co., West Japan Railway Co., 1. An immediate but reduced pension be taken, however, to ensure that the longevity fac- tor used is consistent with the characteristics of the 2. An immediate but enhanced pension to affected workers, who may differ from the broader compensate in part for the lost opportunity population. The estimation of an appropriate offset to earn future benefits should be a relatively straightforward calculation 3. A normal pension beginning at retirement for an actuary who has completed the evaluation age, perhaps with some lump sum at the of defined-benefit plans as discussed in previous time of early retirement. sections. Pensions may remain at a reduced level Each of these three options is considered below. until the worker reaches normal retirement age, or they may remain at a reduced level until death. An With the first option, the worker who retires early alternative approach that can be combined with receives an immediate pension payment but at a adjustments in the benefit level to achieve lower reduced level. A typical adjustment that is "actuari- initial reductions (and thereby strengthen incen- ally fair" is to provide the same benefit formula for tives) is to eliminate or constrain the indexing of each year of service but then to reduce it by 5 per- benefits until normal retirement age. cent for each year below the normal retirement age. Smaller percentage reductions may provide a Statutory provisions may apply, too. For example, similar equivalence if life expectancies are lower, as under Egyptian social security regulations workers is often the case in developing countries. Care must who are aged 50 or above can receive a retirement 112 Key Elements of a Labor Program pension if they retire early. However, the pension is owner or to a future government. Examples reduced significantly from what they would receive include Sri Lanka Telecom (Salih 2000), Chile Rail, if they retired at age 60 (the normal retirement and a similar case in Australia's rail sector where age). The amount of reduction is determined by a too many employees took early retirement and had MODULE complicated formula that distinguishes between to be rehired later under contract. basic and variable components of wage. The loss of benefits amounts to 66 percent of full benefits for retirement at age 50, 57 percent at age 53, and Incentives for Voluntary Departure 40 percent at age 57 (Assaad 1999, p. 141). Even where severance payments are the core ele- The second option is a pension that is available ment of voluntary departure plans, some compen- 5 immediately and enhanced to cover the opportuni- sation for past pension contributions may also be ty cost of forfeited future benefits. With this necessary. This can be a lump-sum payment or an option, the enhancements may take the form of obligation to pay a pension in the future, or a mix crediting the employee with more years of service of the two. In general, the objective is to make than have been worked (added years) or of giving plans as simple as possible, although complexities an additional lump sum to purchase an annuity for may arise if there are several classes of employees, an extra pension benefit (the lump sum may be different pension schemes, and different incentives linked to years of service or to years remaining required for different groups of workers. until normal retirement age). An alternative to providing early retirement that Although such enhancements create a powerful may better target incentives to specific groups of incentive for early retirement, their costs must be workers or may entail lower costs is to make carefully evaluated. What may appear to be small retroactive changes to eligibility and vesting rules. additions to credited years of service can have large These rules, which are often very specific to the consequences for the funding status that will need pension plan, can significantly affect the incentives to be paid in the future. and motivations for workers accepting early retire- With the third option for early retirement, payment ment or voluntary departure. of the regular benefits begins when the worker who Eligibility rules can be based on age or based on has taken early retirement reaches normal retire- years of contribution or service. For example, only ment age, but there may be a lump-sum incentive workers over the age of 60 may be eligible to payment at the time of early retirement. At Brazil's retire, or only workers who have a minimum of 20 RFFSA, for example, the company continued to years of contribution to the pension plan can quali- pay the employer's and employees' contributions to fy for early retirement. the national social insurance system for workers who took early retirement (for a maximum of five Work force restructuring can result in amendments years, or until the worker reached age 55). In addi- to the rules of the plan. In the case of PPI in Côte tion, the worker received six months' salary during d'Ivoire rail, negotiations with unions resulted in the first six months after early retirement. the years of work required for pension eligibility being reduced from 20 to 15 years. This enabled a There are several cases where governments have larger portion of the work force to depart or be been so generous in their pension arrangements separated while still preserving the right to future that the plans led either to excessive long-term lia- benefits without the expense of paying out immedi- bilities on government or to the departure of too ate benefits. many staff through early retirement. Essentially these are cases where the implementing agencies Vesting rules in pension plans are often based on have solved their immediate problem by transfer- years of service; for example, until workers have ring the financial obligations either to the new accrued five years of service they cannot receive full 113 Labor Issues in Infrastructure Reform: A Toolkit Implementing benefits. Like eligibility rules, vesting rules and con- Whatever options are chosen for resolving existing agencies should ventions can influence workers' decisions and their pension liabilities, the pension scheme will be an avoid the temptation to offer generous willingness to adopt early retirement. Although important aspect of the operation of the restruc- benefits today. there is a trend to more immediate vesting, many tured entity. Should the implementing agency set 5 plans still have long vesting periods. Vesting rules terms for future pension schemes, which would can act as a disincentive to workers leaving volun- become a condition of the PPI contract? In general, tarily. that should be avoided as far as possible, and the PPI investor should have discretion to determine The vesting arrangements may also need to be con- pensions arrangements within statutory require- sidered as part of the total compensation package. ments. The way in which pensions are restructured For example, if the principle to be used in downsiz- MODULE will affect how investors value an enterprise and ing is last-in/first-out, the redundancy package may assess its long-term viability. Providing investors have to take account of forgone pension contribu- with the widest array of choices and flexibility will tions because the affected employees are unlikely to therefore greatly enhance the attractiveness of an have fully vested benefits. entity for privatization. The details of these rules can significantly affect The extent to which this is possible will depend, workers' benefits. For example, in the electricity however, on the nature and difficulty of negotia- restructuring and privatization in Orissa, India, the tions among the work force, trade unions, and former Orissa State Electricity Board (OSEB) government. The Lufthansa Airlines pension included employees who had been deputed from review, for example, required agreement between government service. As for the Grid Corporation the government and the company; and when of Orissa (GRIDCO), when the board was unbun- British Coal was privatized, bidders were required dled and restructured into generation, transmission to accept a new pension plan (see box 5.16). and distribution companies, the eligibility rules were less beneficial for these deputees than for If the implementing agency is negotiating a future OSEB employees. Specifically, OSEB employees pension plan, it is essential to consider carefully had their years of service in OSEB carried over to such issues as the following: count toward a GRIDCO pension, whereas former government employees had to have worked for 10 years within GRIDCO before becoming eligible for Box 5.16: British Coal--Negotiated Pension a GRIDCO pension (Ray 2001). Agreements W hen the United Kingdom privatized its coal industry, past benefits accrued (and the consequential liabilities for Future Pension Design funding) remained the responsibility of the gov- A successful privatization will usually require ernment. Investors bidding for the coal mines were, however, required to participate in a new restructuring the pension scheme to take account pension arrangement that had been negotiated of the different concerns of workers, investors, and previously between the government and stake- government and to align the new pension arrange- holders, including the employees (trade unions). ments with the long-term requirements of a priva- This was an accumulation plan but the investors tized enterprise. This section sets out the key con- had no say over the contribution rate. The new plan was only open to retained workers who siderations and potential alternatives in designing had been members of the old (closed) defined- Eligibility and and implementing pension arrangements, including benefit schemes. New employees engaged by vesting rules require consideration of incentives to attract and retain the investor after privatization were able to par- careful scrutiny. workers, the level and pattern (cash flow) of ticipate in a third, completely new, plan that the expenses, and strategies for funding and invest- employer established. ment. Source: Adam Smith Institute, personal communication; DTI 1993. 114 Key Elements of a Labor Program · Legal compliance: The plan should be con- consistent with the purposes and scope of a If the implementing sistent with legislation. For example, some pending or anticipated reform of a national agency will be involved in countries require that one contribution rate pension system? restructuring the apply to all participants in order to qualify pension plan, this isMODULE for specific tax benefits, and some do not a checklist of some key issues. permit the employee contribution to exceed Work Force Management and Incentives that of the employer. Pensions are generally the largest element of com- · Plan viability: Legislation may provide that pensation arrangements beyond the payment of staff transfers to a new employer after priva- wages and salaries. Although the average cost will tization should be on "no less generous" be between 5 percent and 15 percent of a total 5 terms and conditions. That may present a compensation package, depending on the nature of challenge for PPI if it leads to demands, for the pension design and age of the worker, pension example, that PPI investors provide or main- costs easily can exceed the wage bill for certain tain financially unsustainable pension workers. That makes the design of the pension arrangements. Other matters such as program on a going-forward basis a major issue in deemed length of service are also impor- work force management. tant--in this case because of its effect on workers' pension rights and benefits. There are essentially two main issues here: (1) the nature of the pension and (2) the level of benefits · Plan type and contribution rate: Most PPI or generosity. Contemplating the replacement of an investors (but few trade unions) would want existing pension program will need to take into to see new plans structured as defined-con- consideration both the potential effects of a change tribution rather than defined-benefit in expectations and an objective assessment of the arrangements because defined-contribution future needs of the organization. Concerns about plans make financial risk borne by the spon- retaining key workers or limiting the adverse sor more readily determinable and pre- effects of difficult labor negotiations may signifi- dictable. The decision about plan type will cantly limit the movement toward what might oth- depend on the joint assessment of financial erwise be an appropriate design. risk and labor incentives as discussed below. Depending on the prevailing employment The basic decision of benefit design is the choice conditions in the country, an employer con- between a defined-contribution and a defined-ben- tribution rate of 5 to 10 percent of average efit system. This is a question of matching the wages should be sufficient to provide a gen- attributes of design to the requirements of the erous plan by the standards of a developing enterprise and the work force. Some of the key or transition economy. A further 5 percent characteristics of each type are listed below. contributed by the employee should general- ly replace a significant portion of wages for Defined-contribution plan: long-term workers with a typical life · Value is proportional to wages, with no dif- expectancy of 10 to 15 years after retire- ferentiation by age. ment. · Is highly portable; workers take accounts · Consistency with other plans and national with them. systems: Care must be taken to ensure that · Offers greater flexibility in payout timing any prospective pension arrangement does and options. not set unwelcome precedents for other · Is easily transparent; workers can readily public sector schemes or enterprises. Will determine value. the plan lead to accelerating demands among workers in similar industries? Is it · Financial risk is held by the worker. 115 Labor Issues in Infrastructure Reform: A Toolkit Defined-benefit plan: cant incentives to retain valued workers who are in · Relative value of benefit usually increases their high-productivity later years of employment. with age. The most important point is to recognize that nei- ther model has any particular inherent advantage · Has potentially large costs for early leavers. 5 but rather a set of characteristics that should be · Offers little access to benefits before retire- aligned with anticipated needs. ment. · Value is hard to measure. Anticipated Expenses and Cash Flow · Offers less financial risk for workers. MODULE These characteristics make each type of pension The two models also impose differing financial appropriate for different work force management aspects that must be consistent with the objectives objectives. and constraints of the ongoing enterprise. In the aggregate, if the generosity of the pension is the Defined-contribution plan: same, both models should entail a similar present · Is attractive to younger workers with short value of costs. The timing and pattern of costs, tenure expectations however, may be significantly different. The capaci- · Is effective in attracting scarce skills in ty of an enterprise to meet the cash flow demands mobile labor markets of the short term may be an extremely important consideration in selecting a pension design. · Is more effective in wage-competitive mar- kets Defined-contribution pensions involve constant and predictable cash flow demands. With workers' · Has greater association with risk takers. accounts usually credited with actual investment Defined-benefit plan: earnings, sponsors are not exposed to volatility in · Is an effective retention tool for older work- financial markets. Defined-benefit pensions involve ers and senior managers the sponsor committing to a future expense that may vary significantly, depending on employment · Is an effective means of protecting invest- patterns or the earnings on any assets set aside to ments in training fund the plan. Although this arrangement may · Is less attractive to young workers with defer cash flow demands to a later date, those highly marketable skills demands are typically far more volatile in their cost · Is less conducive to competition in compen- and cash flow requirements. If there is a require- sation ment or effort to prefund these demands, poor investment performance may impose future expense · Is associated with stability and risk aversion. shocks and changes in assumed interest rates may There are various potential combinations of the make annual funding requirements extremely two basic designs that can merge aspects of any of volatile. The differences are as follows. those characteristics. One approach that is gaining Defined-contribution plan: acceptance in a variety of settings is a hybrid · Has level annual expenses design in which workers are credited with a fixed amount in an individual account that accumulates · Is predictable as a proportion of the wage with investment earnings during the working years. bill At an established retirement age, this account is · Has early and constant cash flow demands converted into a monthly benefit. These types of arrangements may enable an enterprise to achieve · Offers low risk to the sponsor. many of the advantages of a defined-contribution Defined-benefit plan: pension in attracting workers and providing signifi- · Has variable expense and cash flow 116 Key Elements of a Labor Program · Potentially defers the cost to later years stances where the benefit formulas create rapidly accelerating or volatile pension expenses. Factors · Has exposure to financial market and inter- such as unanticipated patterns in wage growth, est rate risk inflation, or the future need to restructure the work M · Has potential to produce future cash flow force may create large and unexpected pension shocks. costs. It is therefore advisable for the sponsor of a ODULE defined-benefit arrangement to estimate pension expenses as they accrue (using the services of a pro- Funding and Investments fessional actuary) and to fund them on an ongoing basis. These actions will prevent the build-up of Decisions will also have to be made regarding a unsustainable liabilities that can drive otherwise 5 strategy to fund future pension benefits. In a few profitable enterprises into insolvency if not proper- cases strategy may be dictated by law, although in ly managed. most circumstances involving privatization there is not likely to be a legal and regulatory framework Funding for future pension expenses should be sep- for pensions that imposes significant requirements. arated from the other activities of the sponsor and Defined-contribution pensions generally involve managed in accordance with a predetermined and payment of the full pension expense during the disciplined investment strategy. This result is best period in which the commitment is made. accomplished through the services of professional Individual accounts should be established for each asset managers but will necessitate the formulation participating worker, and sponsors will have to of a general strategy. Developing this strategy is take a significant responsibility to ensure the usually an area in which engaging the services of integrity of the funds through oversight and peri- competent consultants is advisable. A well-formu- odic auditing. lated investment strategy can mean the difference between a successful pension restructuring and one The most challenging issues are likely to be deci- that exposes the enterprise to enormous financial sions about the investment of the funds, whether risks in the future. Success in this regard is nearly these decisions are to be made by the sponsor or always a process of balancing expense against whether a limited menu of choices will be provided potential risks. to workers individually. In nearly all circumstances the level of development of capital markets and the Some common strategic approaches involve the lack of financial literacy among workers will following: require that any assets be held in very safe, profes- sionally managed portfolios that are professionally · Intermediated financial products: In circum- managed. In countries that have developed a sys- stances where there is a reasonably well- tem of licensed pension funds as part of a broader developed market, all of the financial risk of reform (as will be discussed in the following sec- a defined-benefit pension can be managed tion) this should be a relatively simple choice. In through the purchase of investment prod- other circumstances, sponsoring entities will likely ucts. This strategy will increase the cost but need to choose an asset manager and establish remove risk by purchasing intermediated portfolio limits. products such as investments with fixed returns or, if available, a series of annuity Defined-benefit pensions, however, require far contracts in which an insurance company more complex decisions. The sponsor will have to agrees to pay out benefits in return for a decide the extent to which there is a capacity to set preset fee. aside funds in advance. Funding defined-benefit pensions on a PAYGO basis may move expense · Government-issued or -guaranteed bonds: and cash flow patterns into the future but can Government debt is generally safe but pro- expose sponsors to untenable risks in circum- vides very low returns. Investment of pen- 117 Labor Issues in Infrastructure Reform: A Toolkit Defined-benefit sion funds in government debt is often risk · Any restatement of net pension assets and plans present a free and politically desirable, but it will do liabilities in the accounts of the infrastruc- greater challenge than do defined- little to diminish costs over the long run. ture enterprise, adjusted if appropriate to contribution plans. bring them into line with international · Asset-liability matching: Pension funds com- 5 accounting standards monly try to manage risks by purchasing investments whose value moves opposite · Proposed pension system reforms any changes in liabilities. This strategy is · The obligations of the PPI investor under sometimes called "immunization" or "dura- the country's labor code and related legisla- tion matching." It is a process that recog- tion, as well as any specific pension plan nizes that the value of defined-benefit obli- rules. MODULE gations is very sensitive to interest rates and seeks to purchase investments such as long- term bonds that will increase in value as a Ensuring Adequate Funds and result of the same factors that might Administrative Capacity increase the level of future liabilities. These types of approaches are complex to admin- Large-scale early retirement programs can present ister but can significantly limit future expo- a challenge for pension plan administrators. First, sure. finance must be found to meet any gaps in the plan funds. Potential sources of finance are essentially similar to those outlined in module 1 of the Pensions: Implementation Steps Toolkit. Second, the administrative capacity to This section outlines key implementation steps for process the applications or to manage a new pen- pensions in PPI. There are three main steps: sion scheme must be considered. For example: 1. Making information available to bidders · In Brazil's railway privatization, the early retirement process allowed a period of six 2. Ensuring adequate funds and administrative months in which the workers' net salary capacity continued to be paid while the appropriate 3. Obtaining technical support. paperwork was being processed by the National Social Security Agency (INSS). If payment was not ready within the six- Making Pension Information Available to month period, the railway company would Bidders continue to pay the net salary, but in the form of an interest-free loan to be reim- The data room is a managed facility provided dur- bursed by the retired employee after the date ing the PPI transaction for bidders to examine sup- of his or her actual retirement (Estache, plementary, bulky, or detailed information. Bidding Schmitt de Azevedo, and Sydenstricker documents or the data room should provide infor- 2000). mation on: · In Mozambique workers in the port and · Relevant laws and collective bargaining railway company were members of the pen- agreements sion system for public sector employees. Workers to be transferred to the new private · Details of existing pension plans, including sector concession managers were to have plan rules; certificates of asset property their pensions immediately transferred to the titles; asset valuations; estimates of unfund- INSS plan, but this did not happen because ed liabilities, including key assumptions; and the public sector pension system was insol- estimates of arrears vent. Without the transfer of funds the INSS 118 Key Elements of a Labor Program could not enroll workers and the new pri- on pensions and to the potential impact on vate concessionaires could not contribute proceeds from PPI. the employers' share. The backlog of cases 2. Help in negotiations with trustees, workers, reached 4,000 workers. and other stakeholders. MODULE · In India, the Pension Trust Fund for Orissa's 3. Opportunity to give investors as much infor- electricity sector was split among the four mation as possible in bidding documents privatized distribution companies and the and data room: This will help PPI investors transmission company. There were, howev- conduct their own due diligence of pension er, significant delays in establishing the dis- issues more quickly. tribution company trust funds, "due to the 5 inability of the unions/associations to elect Box 5.17 gives one illustration of how actuarial the employee's representatives" (Ray 2001, advisers need to work with the infrastructure enter- p. 33). prise, pension plan trustees, and the implementing agency. The CD-ROM that accompanies this Together with the specialist consultant, the imple- Toolkit provides outline terms of reference for the menting agency will need to take the following engagement of a specialist consultant for a specific actions: PPI transaction. It also offers a job description and · Consult with the relevant pension authori- draft advertisement for the position of long-term ties to identify what is realistically possible pension adviser who might support a PPI office in terms of payment processes. To reach through a number of PPI transactions. accurate conclusions, the agency will have Terms of reference to assess the need for specialist inputs from Job description for a long-term pension adviser. pension consultants, identify specific deci- sions required from government or trustees, assess the available administrative capacity to handle large numbers of early retirement Tools (on the CD-ROM) programs, identify secure payment arrange- Terms of reference for a pension review ments, and develop procedures to verify that Glossary of pension terms correct payments are made to the correct employees. Frequently asked questions about pensions · Consider whether some type of technical Job description for a long-term pension adviser assistance or training investment may be necessary for new trustees or supervisory board members. Additional Material (on the CD-ROM) Obtaining Technical Support de Ferranti, David, Guillermo E. Perry, Indermit S. Gill, and Francisco H. G. Ferreira. 2000. "Helping Throughout the pension process the implementing Workers Deal with the Risk of Unemployment." agency will benefit from the recruitment of inde- Chapter 6 in Securing Our Future in a Global Economy. Latin American and Caribbean Studies. pendent pension or actuarial advice for three rea- Washington, D.C.: World Bank. (Provides an sons: overview of income support programs that have been used in Latin America, including severance 1. Assessment and valuation of the pension pay, public works programs, training programs, scheme: This enables the implementing and unemployment insurance.) agency to alert ministers and other decision- makers to the fiscal impact of any decisions Ray, Pranabesh. 2001. "HR Issues in Private Participation in Infrastructure: A Case Study of 119 Labor Issues in Infrastructure Reform: A Toolkit Box 5.17: South America--Working with Trustees and Pension Advisers Description of the Pension Problems and many pensioners were now below the In one South American country, employees in national poverty line. Fear of criticism arising two mining companies and the mines holding from such payments might deter an international 5 company contributed to one pension plan. The investor from taking over the pension program. EL privatization strategy was to offer the mines sep- How the Problems Were Resolved arately and close the holding company, and an Earlier privatizations in the country had tackled U early question was whether there needed to be pensions through pension scheme liquidation or D separate pension plans. The pension scheme negotiated handover (such as the transfer of an actuaries advised that there were cost benefits to O existing plan to an insurance company) that continuing with one shared pension plan, includ- occurred at the same time the new investors cre- M ing lower actuarial, audit, and trustee fees, ated a new pension plan. Under liquidation, although they recognized that company control existing pensioners received an annuity, whereas of pension plans was important and any cross- others received lump-sum payouts calculated by subsidization was undesirable. Cross-subsidiza- the actuaries or deferred pensions. For the min- tion could arise not only through one firm having ing companies, however, the problems of selling problems with pension contributions but also a major asset--the commercial property--made with differing age and gender profiles and with liquidation an unattractive option. different earnings levels and retirement ages On the advice of the actuaries, the government between the two companies. chose not to create three separate pension plans Significant practical problems emerged in trying to but to establish a notional separation that assess the pension plan's assets and liabilities. removed any cross-subsidization while enabling One of the fund's major investment assets, a prop- the plan to continue owning assets in common. erty investment, would be difficult to sell. The title of the pension scheme to the commer- Moreover, the pension trustees had not perfected cial property was undisputed and government-- title to this property. When actuarial advisers working with trustees--took steps to perfect the looked at liabilities, they found that they could not title. value the current pension liability because the The actuaries advised that the existing pension company had failed to provide the data on provisions, particularly for those on very low pen- employees necessary to carry out the valuation. sions, could be ring-fenced and responsibility for Moreover, the previous valuation six years earlier payment transferred to an insurance company, recorded a significant liability, and the mine com- although this would result in workers losing med- panies' actuaries had then recommended an ical benefits that were then being paid by the increase in pension contributions, which the com- company. panies had not implemented. According to the pension plan, this represented a liability of the The government engaged additional financial and company although it was not recorded as such in accounting help to identify missing personnel the company's accounts. In addition to these two data required by the actuaries, who then updated liabilities, the increasingly poor financial position of the valuation. In its information memorandum for the mines had resulted in their inability to pay pen- investors the government stated that both the sion payroll contributions to the pension adminis- backlog of payments to the pension scheme and trators, which represented a further liability. the increases recommended by the actuaries were company liabilities that investors were to The unions wanted employees to be paid full take on, but that any actuarial deficit (that is, the redundancy payments before privatization, but uncertain financial liabilities) would be settled by also wanted all pension rights transferred and not government through future contributions or set- liquidated. The pension plan rules, however, indi- tled with the investor at the time of payment. cated that only the trustees could make this decision--not unions or the government--and The government made available the services of that employees also had the choice of opting the pension scheme actuary to prospective bid- out. ders who required clarification on pension liabili- ties during the bidding period. Inflation had eroded the value of many pensions, which had been reasonable when first awarded, Source: Adam Smith Institute, personal communication. 120 Key Elements of a Labor Program Orissa Power Reforms." PPIAF case study. World REDEPLOYMENT SUPPORT Bank, Washington, D.C. (Includes discussion of the treatment of pension issues in one PPI transac- Redeployment support aims to help displaced tion--electricity reform in Orissa.) workers reenter the job market or become self- employed. Redeployment programs are politically MODULE Sin, Yvonne. 2003. "Pension Reform Options Simulation Tool Kit--PROST." World Bank, and socially valuable, providing a tangible demon- Washington, D.C. (A presentation introducing the stration of government's commitment to helping World Bank's PROST methodology; helpful to illus- workers. But program design and implementation trate the inputs that are needed to review very large has to be considered carefully to ensure the cost- or national pension systems.) effectiveness and efficiency of such programs. 5 Redeployment support aims to facilitate restructur- Web sites ing of the enterprise, the sector, or the economy and to shorten and alleviate the period of unem- Rapid Response: http://rru.worldbank.org. (The site is a gateway to a range of information on infrastrucu- ployment and income loss experienced by dis- ture, privatization, and private sector development placed workers. It is an active rather than passive policies.) labor market policy response. This section summa- rizes the key types of redeployment support and World Bank: www.worldbank.org. (Use the site's search engine to locate information about pensions the broad lessons emerging from international and specialist sources of information.) experience. World Bank Institute (WBI): The main types of redeployment support are: www.worldbank.org/wbi/. (The WBI is the training arm of the World Bank and provides courses on-- · Prelayoff advice and counseling, which--in among other topics--pension reform. For example, addition to advice on separation and on see: www.worldbank.org/wbi/pensions/courses/ services and support open to the displaced february2003/presentations.html.) worker--may include elements of trauma, financial, and life counseling. · Job-search assistance, which can include Other Material and Sources placement help (employment intermedia- Bateman, Hazel, Geoffrey Kingston, and John Pigott. tion) to match workers with opportunities 2001. Forced Savings: Mandating Private Retirement Incomes. Cambridge: Cambridge in the job market, time off for job search University Press. (A general introduction to pension prior to termination of employment, and policies.) help in building skills and confidence to find a new job (interview skills, personal skill OECD (Organisation for Economic Co-operation and Development). 1999. Privatisation, Capital Market assessment, writing job applications, job Development and Pension Systems Reform. clubs). Proceedings of the OECD Advisory Group on · Training, which may include retraining and Privatisation, Thirteenth Plenary Session. September 21­22. Paris. (Various papers, see www.oecd.org.) skill upgrading so that displaced workers can find new paid employment elsewhere, Vives, Antonio. 1999. "Pension Funds in and training in small business, microenter- Infrastructure: Regulations and Instrument prise, or livelihoods to help them create self- Design." Technical Study IFM­119. Inter-American Development Bank, Washington, D.C. (Considers employment and incomes. the potential for pension funds to contribute to · Employee enterprise, through which the infrastructure development) resources and facilities of the PPI enterprise are used to create jobs for displaced workers by contracting out services needed by the enterprise to newly separated workers or by 121 Labor Issues in Infrastructure Reform: A Toolkit There are five main setting up a range of facilities from simple workers to more productive sectors of the econo- types of workspaces to more sophisticated business my. The experience provides several general lessons redeployment support. incubators. in developing such programs: · Efforts to create jobs by looking to local · Implementing agencies should avoid over- 5 government, nongovernmental organiza- selling the programs, especially where jobs tions (NGOs), and community self-help are scarce. In such cases, economic and groups, alone or in coalition, to develop labor market policies that generate sustain- employment opportunities at a local level. able economic growth and job creation are These can include large-scale, labor-intensive key in offering the best long-term prospects public works programs, local community for displaced workers. MODULE activities, or small enterprise development projects. · Although national programs have had mixed results, there are opportunities for the How have redeployment programs worked in implementing agency to design and imple- practice? The evidence shows mixed results. ment more targeted redeployment programs Reviews of retraining and other active labor mar- that tackle the specific needs of workers ket programs (mainly in the industrial countries of from the PPI enterprise or scheme. the OECD) found limited impacts (Dar and Gill Examples include rail privatization in 1995, 1998; Dar and Tzannatos 1999; Fay 1996). Poland, where redeployment and retraining These findings are summarized in table 5.7. The were integral components of the labor pro- evaluations revealed that retraining programs were gram. generally no more effective than job-search help in increasing either reemployment probabilities or Link to the Web site on Polish rail reform: postintervention earnings, and they were between www.transport.most.org.pl/ two and four times more expensive than job-search railways/prod03.htm. assistance. · Setting up a redeployment program takes Although many evaluations have focused on time and is institutionally intensive. An eval- OECD experiences, the few evaluations of active uation of Brazil's federal railway redeploy- labor market programs in developing countries ment program noted that the main problems also show mixed results, given the capacity, fund- came from underestimating the time it was ing, and infrastructure constraints that many going to take to agree on the strategy to developing countries face. For example, Mexico's implement the training and the outplacement PROBECAT program, which was enrolling half a programs (Estache, Schmitt de Azevedo, and million workers a year, may have had no effect on Sydenstricker 2000). One outcome was that the employability of trainees (Wodon and the training program was not put in place Minowa 2001). Similarly, Tanzania's redeploy- until some months after workers were sepa- ment program for more than 60,000 retrenched rated, and many workers had already moved civil servants had no effect on employability, on. Early interventions are beneficial to although the combination of counseling and workers. Experience in industrial and transi- training helped improve subsequent earnings tion countries indicates that displaced work- (Blomquist 2002). ers are better help while they are still employed than after they have been unem- Wodon and Minowa 2001. ployed for several months (Hansen 2001). Redeployment programs, however, play an impor- · Appropriate incentives for participants and tant political and social role in the labor restructur- service providers are important. Making ing process. When designed properly they can also training more demand-driven through the be economically beneficial in moving unproductive use of vouchers and other such mechanisms 122 Key Elements of a Labor Program Table 5.7: Summary of Active Labor Market Program Evaluation Results Evaluations of large, active labor market programs conducted Program Appears to help Comments in OECD countries have shown mixed MODULE Job-search assistance/ Adult unemployed workers Relatively more cost-effective than other labor results. employment services generally when economic market interventions (such as training), mainly (19 evaluations) conditions are improving; because of the lower cost; youth usually do not women may benefit more benefit; difficulty lies in deciding who needs help in order to minimize dead-weight loss. Training of long-term Women and other disad- No more effective than job-search assistance in unemployed workers vantaged groups increasing reemployment probabilities and post- 5 (28 evaluations) intervention earnings, and is 2 to 4 times more costly. Retraining in the Little positive impact-- No more effective than job-search assistance and case of mass layoffs mainly when economy is significantly more expensive; rate of return on There are limits to (12 evaluations) doing better these programs is usually negative. what can be achieved by Training for youth No positive impact Employment and earnings prospects are not redeployment (7 evaluations) improved as a result of the training; taking costs alone--economic into account, the real rate of return of these pro- policies that grams is negative. generate sustainable Employment/wage Long-term unemployed High dead-weight and substitution effects; impact economic growth subsidies workers by providing a analysis shows treatment group does not do well will offer the best (22 evaluations) means of entry into the compared with control; sometimes used by firms prospects for displaced workers in labor force as a permanent subsidy program. the medium term. Public works Severely disadvantaged Long-term employment prospects are not helped; programs (17 groups by providing program participants are less likely to be evaluations) temporary employment employed in a normal job and they earn less than and a safety net do individuals in the control group; not cost- effective if the objective is to get people into gain- ful employment. Microenterprise Relatively older groups Very low take-up among the unemployed; signifi- development and more educated cant failure rate of small businesses; high dead- programs workers weight and displacement effects; high costs; (15 evaluations) cost-benefit analysis is rarely conducted but sometimes shows costs to the unemployment insurance budget to be higher than for the control group; administratively intensive. Note: Based on evidence from around 100 evaluations of active labor market programs, mostly in OECD countries--mainly, Canada, Germany, Sweden, the United Kingdom, and the United States--but with some examples from transition and developing countries such as the Czech Republic, Hungary, Poland, and Turkey. Most of the evaluations were undertaken recently, during the 1990s. Source: Dar and Tzannatos 1999. is one way to improve the effectiveness of run agencies that lack resources, market orienta- the programs. Another is encouraging the tion, and institutional capacity. Private sector train- involvement of NGOs and private providers ing providers are few or weak. Moreover, employ- through the use of performance-based con- ees themselves often have little faith that training tracts for the delivery of services. will improve skills and help them find alternative job opportunities, particularly when unemploy- Many developing countries face challenges in put- ment is high. All of those factors need to be taken ting in place effective redeployment programs. In into account in the design and implementation of many countries training is still supplied by state- redeployment programs. 123 Labor Issues in Infrastructure Reform: A Toolkit Good program Design and Implementation of 1. A survey of employees, including the skills, design demands Redeployment Programs capabilities, and expressed redeployment attention to the details of selection needs of workers This section sets out the key steps in designing and and incentives implementing a redeployment program tailored to 2. A survey of the labor market itself, includ- mechanisms. 5 the circumstances of the PPI plan. ing areas of supply and demand 3. A survey of potential redeployment service providers, including the types and capacity Step 1: Define Objectives of existing public and private providers. Before proposing redeployment support as part of These three surveys could be carried out separately, MODULE a labor program, implementing agencies must be but in practice the findings of each will inform the clear about the rationale for it. Potentially there are design of the redeployment program and close three objectives: coordination is thus required. Outline terms of ref- erence for the various surveys are provided in the · From an economic standpoint, the objective accompanying CD-ROM. is to facilitate the shift of unproductive workers to more productive activities else- Terms of reference for surveys of the labor market, where in the economy. workers, and potential redeployment providers. · From a social standpoint, the objective is to Employee Surveys help workers acquire the necessary skills to Employee surveys provide a descriptive profile of become reemployed or self-employed. the work force and help the implementing agency · From a political standpoint, redeployment to: programs are intended to build public sup- · Understand the profile of workers in the port for restructuring by signaling to citizens, enterprise communities, and labor representatives that those responsible for restructuring are ready · Identify the most vulnerable groups and willing to help those who need and · Monitor and challenge proposals from rede- want help (Fretwell 2002). Such programs ployment service providers based on a factu- help make difficult reforms acceptable to al information base workers and other stakeholders. In India, for example, trade unions supported the retrain- · Provide a baseline for subsequent monitor- ing elements of the National Renewal Fund ing and evaluation. (NRF) and welcomed this as a measure to The survey can build on, but is different from, the offset the social costs of enterprise adjust- staff and skills audits described in module 7. Those ment and reform (and they were subsequent- audits focus on the needs of the enterprise, whereas ly very critical when the NRF funded mostly the worker survey focuses on the needs of workers severance payments and little training). who will lose their jobs (see, for example, box In the right circumstances, redeployment programs 5.18). The worker survey can also overlap with the can have important objectives. When those objectives stakeholder analysis needed for planning communi- have been clearly defined, the main challenge is to cations and consultation (see module 6). improve the effectiveness of redeployment programs. Stakeholder analysis might be usefully scheduled at the same time as the worker survey. The worker survey can include: Step 2: Conduct Preparatory Surveys · Assessing the likely plans of employees-- Three types of surveys are typically needed early in what proportion will retire permanently, or the program to help inform its design. They are: return to their home towns or villages, or be 124 Key Elements of a Labor Program Redeployment has Box 5.18: Brazil Rail--Worker Surveys in a Labor Study economic, social, o minimize the social cost of layoffs, Brazil's In spite of some similarities, such as the low level and political T federal railway, RFFSA, had to have a good of education, the profile of RFFSA's employees benefits. understanding of the profile of its employ- differed from the rest of labor market. The aver- MODULE ees. A detailed study was carried out as part of age rail worker was about 41 years old, had the preparation for World Bank support. A about 18 years of service with the same compa- detailed analysis of the characteristics of each ny, did not have much education, and had few or regional labor market and the outplacement excessively specialized skills. The average work- opportunities for each excess worker was con- er in the general labor market is at least 6 years ducted. The study covered the employee's age, younger. RFFSA's workers were paid between 10 experience, and education level, compared with and 30 percent more than the average worker in A redeployment 5 similar characteristics in the regional labor market the respective labor market. program study is where the redundant employees would have to essential, and needs The emerging concern was then that without to cover three compete for a new job. some assistance, many of the rail workers aspects: The study revealed that the two main character- declared redundant were likely to find it difficult istics of Brazil's labor market are (a) the modest to compete in the labor market in the short run. · The labor market qualifications of its labor force and (b) its capacity Even if these workers did manage to reenter the itself to generate jobs of poor quality. The poor qualifi- market, they were likely to be paid less. The view · Redeployment cations of the country's labor force reflect the low at that time was that what was needed was service providers level of formal schooling and the low quality of enough training to reduce the cost imposed by · The characteris- tics of displaced basic education. Professional training is not specialized job experience and the lack of formal workers. entirely effective, even for the most educated education. A team of advisers from various train- workers. Moreover, training on the job is often ing institutions was convened by RFFSA to pre- not sufficient because of the high turnover in the pare a menu of options from which affected labor market. There are frequent short spells of employees could choose, and to design training unemployment. In many cases these spells result packages that would meet the employees' in lower wages when workers return to the mar- needs. ket. There is also an increasing trend toward Source: Estache, Schmitt de Azevedo, and Sydenstricker switching from the status of employee to that of 2000. independent businessperson. willing to migrate to find alternative The outcomes of the survey can help in designing incomes? the scope of the labor program. Those at highest risk are unlikely to find jobs quickly and will bene- · Developing descriptive profiles of the workers fit from job-creation activities (public works, sup- being retrenched through individual inter- port for small enterprise, and community pro- views and focus-group discussions. These grams) as well as access to income support. Those meetings can provide a description of different with the most skills and highest level of mobility groups of workers that bring to life--for deci- may benefit more from job-search assistance skills sionmakers--the risk profiles, key concerns, upgrading or retraining. and challenges faced by different groups. (Box 5.19 describes such risk profiles.) Worker surveys are an important input into the · Assessing worker preferences in terms of design and implementation of redeployment pro- severance packages (one-time lump-sum grams and must be designed with considerable Can the survey of workers be payments, phased payments, or salary con- care. An example of such a survey is included on scheduled at about tinuation). the CD-ROM that accompanies this Tookit. the same time as a Design, implementation, and analysis of the survey stakeholder · Learning from the experiences of other can be subcontracted out to national consultants analysis? workers, perhaps in other sectors, who have or to academic or policy institutions. recently retired or been retrenched. 125 Labor Issues in Infrastructure Reform: A Toolkit Box 5.19: Ukraine--Profiles of Displaced Coal Mine Workers Level One--Highest Risk when the mine closes. She is frightened when A woman, alone with children, with 70 percent or she thinks about it closing. No one will hire her. more of the family income derived from mine Level Three--At Risk 5 wages, is in level one. People like this are clearly Underground workers in the engineering and the most at risk of losing everything. other professions form this group. They are the Example: L. N. is 35 years old and has lived in highest-risk group of the underground workers. the community all her life. She has two school- Example: V. G. is a 40-year-old man who has age daughters. Her ex-husband moved away worked 25 years in the mine. He is an electrician and provides no child support. She has worked under ground and earns $64 a month to support in the mine five years as an unskilled above- his wife and two school-age children. He is total- MODULE ground worker and earns US$32 a month in total ly dependent on the mine. His wife is unem- family income, all of which comes from the mine. ployed, and 100 percent of the family monthly Her job will be one of the first to go and is not income derives from the mine. He has no savings considered to be transferable to another mine. and worries that the mine closing is going to be a She is very worried about how she will take care disaster for his family. of her children. Level Four--At Risk but Mobile Level Two--High Risk Underground skilled workers (face miners, Other aboveground workers make up this cate- drifters, timbers/fitters, and coal transport work- gory. As a general observation, aboveground ers) have the best chance of adjusting to mine workers are considered a highly vulnerable group closure. They are potentially the most in demand of workers, not possessing particularly transfer- for their skills and hence the most mobile. able skills. All female staff work aboveground, Example: O. Z., 38, has worked under ground in and 83 percent of the total number of above- the mine for 19 years, most recently handling ground workers (1,389) are women; 17 percent explosives. Seventy-five percent of his family (285) are men. income derives from the mine. His wife earns $18 Example: V. C. is 60 years old and has lived 60 a month working in the hospital, and he is wor- years in this community. She has worked 30 ried about the future for his two sons. Where will years in the same mine. She currently works they work? He has lived in the same community above ground in the stockyard in an unskilled his whole life and does not want to leave for position. She and her husband have a monthly another job. His skills considerably improve his family income of $64, which includes their pen- chances of getting a new job. sions. Their family income is closely tied to the Source: World Bank 1996b. mine, and it will be cut in half, to about $1 a day, Labor Market Survey · Probability of finding formal and informal The supply and demand for labor and skills rele- sector employment vant to the workers leaving the infrastructure enter- · Patterns of employment in the private sector, prise will form the core of the labor market survey. including changing hiring practices and skill The survey typically would include assessments of: requirements · The capacity of the labor market to provide · Any barriers to entry into and exit from for- new formal jobs through estimates of job mal employment. creation, job destruction, and labor turnover in the economy The labor market survey needs to consider both the formal job market and the informal sector · Trends in formal and informal employment because the latter is often a major source of and areas of job growth and decline employment. In South American and Caribbean · Alternative employment opportunities, countries, for example, the informal sector repre- including levels of wages and benefits and sents typically one-third to one-half of the work any trends force (Freije 2001). 126 Key Elements of a Labor Program Labor market surveys should not be seen as a one- time exercise. Follow-up studies on a periodic basis Box 5.20: Tanzania--"Invisible" Service can detect trends and changes in the labor market, Providers fill in any gaps in understanding, and improve the espite the hostile environment for private MODULE quality, relevance, and targeting of redeployment D enterprise in the 1970s, the commercial activities. district of Dar es Salaam still hosted many small, private business service Survey of Redeployment Service Providers providers--bookkeepers and accountants, for- warding and courier agencies, marketing A survey of service providers is the third important agents, and business training establishments. source of information in the development of a These small businesses seemed to be invisible redeployment program. The main objectives of the to the donor agencies and to the government, 5 survey are to: both of whom preferred to set up high-profile central promotion facilities. Yet these microfirms · Identify the full range of available service were operating as profitable commercial busi- providers, including public and private ones nesses; they understood the market and the and NGOs, as well as smaller organizations business environment. To the outside observer it seemed that the small accounting offices, for that are often invisible (see box 5.20). example--stimulated by increased demand and · Identify the types of programs they offer with some technical help--could be the seeds of future accountancy, business advice, and and any gaps in services. consultant service firms. But they had to com- · Assess their capacity to deliver such servic- pete with donor-financed facilities working out es. Where there are shortages of service of expensively staffed and equipped offices and providing free services. Fortunately for them, the providers, the implementing agency may local knowledge and the marketing efforts of need to design the program so that service these state-sponsored bureaus were weak, so providers from outside the region are invit- the local service suppliers were not seriously ed to provide services in partnership with damaged and largely retained their traditional local providers, or so that incentives to "invisible" customers. It was an opportunity wasted, however, because these existing fledg- develop the market are provided through ling service firms themselves would have bene- instruments such as vouchers (see Steel fited from advice, training, and incentives to 2003). upgrade so as to contribute to enterprise growth and improved governance. Steel 2003. Source: Phillips 2000. · Assess the performance of service providers in placing recipients or trainees in jobs. This can help determine appropriate performance measures to be included within performance contracts for service providers. Public works Supplementary Community approaches elements Employee enterprise Step 3: Identify the Main Components of the Core elements Program Counseling of a redeployment Job-search assistance Counseling, training, and job search lie at the core program Training of most redeployment programs (figure 5.2). Job creation, community approaches, public works, and employee enterprise are supplementary ele- ments that can be appropriate in some circum- stances. Figure 5.2: Core and Supplementary Elements 127 Labor Issues in Infrastructure Reform: A Toolkit The labor market There is no one best model for redeployment pro- levels of activity rates are reported by training study should grams. Country-specific and enterprise-level cir- providers--they can significantly distort participa- analyze both the informal and formal cumstances influence the types of redeployment tion in redeployment plans. Several such plans sectors. components that are selected. Every situation will have high dropout levels. Workers attend the 5 be unique, but some guidelines for when various courses while they have no other income, but as redeployment measures are most likely to be soon as they get a job they leave. appropriate are set out in table 5.8. Increasingly, plans are moving to no or minimal stipends: Step 4: Design Appropriate Incentives · In Trinidad and Tobago, training programs MODULE Poorly designed redeployment programs may have run by SERVOL (an NGO primarily work- little economic effect. To improve economic bene- ing with poor youth) only provide training fits, redeployment activities need to be structured with a small stipend that is set low enough Weaknesses in the in a way that creates appropriate incentives for to prevent participants from dropping out of provision of training are common. The workers and service providers alike. formal education and enrolling merely for implementing the stipend. agency will need to An example comes from Chile, where training for assess these as part displaced workers is provided through the · In India (Orissa and Andhra Pradesh), of the labor market National Training and Employment Service stipends for workers made redundant by the study. (SENCE), part of the Ministry of Labor and Social privatization program are kept at low levels. Security. More than 1,700 training providers to the · In Brazil's rail privatization, a postprogram program are registered, including private firms, review proposed that at least part of the municipalities, or universities. Funds for training stipend should have been paid when train- are awarded through competitive bidding (publicly ing had been completed. tendered) among providers, and must include com- mitment from private firms for a three-month It is sometimes argued that the stipends given dur- apprenticeship for trainees. The program design ing training are social protection transfers. If this is helps ensure a degree of training relevance because a major issue for a large PPI scheme, then other both firms and training providers have incentives mechanisms for targeting vulnerable workers and for monitoring quality (Freije 2001). providing a social safety net need to be considered, such as a public works scheme or a broader social Table 5.9 summarizes incentive mechanisms that fund program. the implementing agency could adopt in a rede- ployment program. These are mechanisms for Cost Sharing and Vouchers selecting the recipients of redeployment assistance One approach to making programs more effective and performance incentives for public or private is to introduce some element of cost sharing. Giving There is no one best service providers. workers a choice between obtaining training or get- model. ting the equivalent amount in cash as part of sever- Specific incentives that can be adopted include ance pay is one way. Making a small deduction or avoiding or reducing stipend payments to employ- charge for training is another, but this can chase ees who attend activities; cost-sharing by partici- away the poorest workers. A compromise approach pants (especially for such services as training), is to offer free training for the poorest workers--for including through vouchers; and performance- example, those with severance compensation below based contracts for service providers. a defined amount--and then establish a sliding scale of (still modest) charges for other workers. Avoiding Stipends Many programs offer generous stipends to workers Another mechanism is the use of vouchers (either who attend the training programs. Although free or at some cost) to allow workers to select stipends encourage attendance--and hence high their own programs. Vouchers have been used as a 128 Key Elements of a Labor Program Table 5.8: What Works Best When? When it is most appropriate Activity or likely to work best When it is unlikely to work well MODULE Counseling and · Can be effective as a mechanism · Is conducted too late (that is, after prelayoff support to provide information to workers if workers have left the enterprise). delivered efficiently, and on time · Is not supplemented by other (that is, before severance). redeployment services. · Is useful as a screening mechanism to identify workers most likely to 5 demand and benefit from training or other support. · Works best where unemployment is frictional (that is, there are job vacancies but workers face infor- mation gaps) rather than structural (that is, workers lack the skills or live in the wrong places to fill exist- ing vacancies) or where there is a lack of labor demand (that is, too few job vacancies). Job-search · Works best where unemployment is · Informal economy dominates. assistance/ frictional rather than the result of · Economy is depressed and formal placement/ skill mismatch between workers work opportunities are few. employment and vacancies or a lack of labor · Country is small and private, and information demand. informal networks (that is, friends, exchange services · Country is large and job opportuni- family) are the most important ties are available for workers with sources of job information. existing skills in other regions. · Public employment services (PES) · Public employment service is trust- are weak, highly decentralized, and ed by workers and employers and have little capacity to provide a offers effective employment inter- national labor information mediation services. exchange. · Government has deregulated to · Workers don't trust PES (perhaps allow the private sector also to pro- because they also monitor unem- vide placement services (with costs ployment benefit fraud). funded by the employer to prevent · Employers don't trust PES (per- potential abuses of workers). haps because they also regulate · There is a local tradition of worker labor standards). migration, nationally or internation- · Private sector placement and inter- ally. mediation services are still illegal or excessively regulated. Skills-based · Economy is growing reasonably · Formal sector job opportunities are retraining/skills fast and employers are hiring, but limited. upgrading for displaced workers lack appropriate · Workers are illiterate or have a very employment skills. limited skill base on which to · There is a local tradition of worker upgrade. migration, nationally or internation- · There are barriers to entry into ally. employment (regulations on demarcation of jobs). (Table continues on the following page.) 129 Labor Issues in Infrastructure Reform: A Toolkit Table 5.8 (continued) When it is most appropriate Activity or likely to work best When it is unlikely to work well 5 Training for · Economy is diversifying or under- · Economy is stagnant or in reces- self-employment going rapid structural shift to serv- sion; the formal sector is moribund ices (e.g., in transition economies, and not providing work for the India, and China). informal sector. DULE · New entry into small business is · Economy is highly regulated, with relatively easy, and economies are excessive red tape that restricts O substantially deregulated. small business and microenter- M · There are personal networks that prise start-ups. can provide capital and support for · Strong culture of the public sector entrepreneurs. remains; workers expect "guaran- tees from government" for new businesses. Employee enterprise · PPI schemes have potential to con- · Country has strong laws or tax dis- tract out services (such as meter incentives against contracted labor. reading, construction, facilities · Strongly negative attitude exists maintenance, infrastructure mainte- toward subcontractors by man- nance, and minor works). agement or trade unions. · PPI schemes have managers com- · Continuing underemployment with- mitted to developing a flexible work in the PPI enterprise conflicts with force and helping contractors suc- plans to contract out services to ceed. former employees. · PPI operators have no effective disciplinary control over rent-seek- ing contractual practices. Community-based · There is a history of civil society · There is profound conflict among programs institutions (including trade unions) ethnic groups, factions, or interest that can propose and manage local groups. demand-driven projects. · Initiatives can be captured by vest- · Decentralized local and municipal ed interest groups. governments are effective, capable, and trusted. · Formal sector employment oppor- tunities are weak. Public works · There have been massive layoffs, · Political interference and patron- programs with significant numbers of workers age systems lead to excessive needing a temporary safety net spending and misdirected support rather than a "trampoline." (that is, not to the poorest people). · Formal and informal economy and · National minimum wage is relative- income opportunities are both ly high and can't be reduced. weak. · Government regulations will not · Vulnerable groups or regions can allow self-targeting of the poorest be identified and resources target- people through low payments ed there. (e.g., there is a mandatory mini- · Activities are demand-led by local mum wage). communities and NGOs. · Self-targeting is possible though rationing support to the poorest and most vulnerable people (e.g., through low wages, queuing). 130 Key Elements of a Labor Program Table 5.9: Mechanisms and Incentives for Redeployment Selection mechanisms Performance incentives for Activity for displaced workers service providers MODULE Counseling · No active selection required; should · Performance bonus to contractor if reach all workers and spouses counseling reaches above a minimum percentage of workers Job-search · No active selection required; should · Competitive bidding for job-search assistance/ be open to all workers assistance placement/ or · Placement agency gets bonus for employment · Self-selection by payment of a every worker still in job after, for 5 information minimum fee (cash or voucher) example, 3 months exchange services Skill-based · Counseling as a means of screening · Competitive bidding, plus quality con- retraining/skill and matching workers with courses to trol criteria for program accreditation upgrading for improve the impact and relevance of of training institutions employment the training · Penalties imposed on training agency · Self-selection by payment of a for dropouts (monitored by independ- minimum fee (cash or voucher) ent auditor) Training for · Counseling as a means of screening · Competitive bidding, plus quality con- self-employment and matching workers with courses to trol criteria for program accreditation improve the impact and relevance of of training institutions the training · Bonus for training agency for every · Self-selection by payment of a worker still in job after, for example, 1 minimum fee (cash or voucher) year (according to monitoring program) Employee · Active selection on the basis of · Commercially oriented enterprise, enterprise objective appraisals of the business incubator, or managed workspace plans receives revenue benefits from · Active selection by managers of successful cases incubator or managed workspace Community-based · Self-selection of possible community · Staged payments for activities programs projects, as proposed by community · Transparency and audits · Active selection of projects on the basis of (a) cost-benefit ratio and (b) social or poverty impact · High levels of transparency in the community on the amounts and use of funds; independent auditing Public works · Active targeting of vulnerable groups · Performance-based contracts for programs and geographic regions/locations services (e.g., transportation and · Self-selection of the poorest supply of materials) displaced workers through mechanisms such as low pay (perhaps below minimum wage) and enforced queuing 131 Labor Issues in Infrastructure Reform: A Toolkit tool for obtaining training and business develop- · The client group is well defined. ment services in Ecuador, Paraguay, and Peru. The · Concerns about distortion of the market are experiences of these projects are relatively well doc- less significant because funding for any type umented (see, for example, Bothelo and Goldmark of redeployment training will distort the 5 2000; Goldmark and Fitzgerald 2001; and market for redeployment and training serv- Goldmark, Bothelo, and de Andrade Orozco ices. 2001). Other examples are: · There is less concern over the sustainability · A pilot program for the use of training of the program--it ends when the last group vouchers was launched in the Republic of of workers has passed through it. Korea in 1998 (Betcherman and others MODULE 2000a, 2000b), and vouchers were pro- · Self-selection occurs when there is a charge posed for training redundant workers in the for the voucher because workers who do Ukraine coal mines (World Bank 1996c). not intend to use it do not buy it. In the Kenya project a charge of 10 percent was · Tanzania's Civil Service Redeployment made. Even so, about 37,000 vouchers were Program has used vouchers for both coun- issued and 32,000 persons trained. seling and training of some 63,000 retrenched employees (Blomquist 2002. · The voucher could be traded within families (using identification cards, ration cards, and Blomquist 2002. the like to identify the trainee). This will answer a common request among older · In Kenya a project to stimulate demand and retrenched workers to have a younger fami- supply for training and business develop- ly member trained in their place. ment services for the self-employed, microenterprises, and small businesses used The problems that the implementing agency will a voucher mechanism. The demand-driven face regarding vouchers are likely to be linked to approach led to most training being provid- administration and to the training institutions ed by small-scale, but more experienced, pri- rather than to participants. For example: vate sector master craftsmen. It also helped expand, diversify, and customize the supply · Programs may be complex and costly to of training, and helped link the savings and administer. credit associations of microentrepreneurs · There may be a shortage of training with microfinance institutions (see Steel providers willing to participate (although 2003). the introduction of vouchers can help to Vouchers help shift from such a supply-driven improve the supply of training providers). approach dominated by the training providers to · There can be attempts at fraud or collusion one in which the clients (displaced workers) have between trainers and workers to share rev- the power to select services relevant to their needs enues among themselves. That risk can be (see figure 5.3). Experience with vouchers, howev- tackled through a combination of independ- er, is relatively recent. Although initial evaluations ent auditing (random checks of attendance of programs are promising, there is insufficient evi- at training courses, postcourse interviews dence to recommend widespread use. Nonetheless, with trainees), regular monitoring of per- they do address some of the fundamental deficien- formance, and annual or biennial competi- cies in training provision. A voucher program tive rebidding of the contracts for training. tightly targeted at displaced workers has a number Performance Contracts of potential advantages over other types of voucher More demand-driven programs can also be encour- schemes in that: aged, without the complexity of vouchers, through 132 Key Elements of a Labor Program Vouchers for Supply-driven model Demand-driven model training may be particularly relevant for redeployment programs. MODULE Provider is dependent on the Provider is dependent on government/donor client (the displaced worker) 5 Government/ Training Government/ $$$ Training international provider international (Vouchers) provider $$$ donor donor $$$ (Vouchers) Displaced Displaced worker worker Figure 5.3: Moving from Supply-Driven to Demand-Driven Training Source: Adapted from Goldmark, Botelho, and Orozco 2001 (annex 2). transparent, competitive procurement, regular · Agree on the institutional home for the rede- retendering, and performance-related contracts for ployment program. There are various suppliers. In Turkey's privatization program, for options: one is to place the team in the example, negotiated job placement rates were implementing agency; another is to have a required in the contracts of service providers (at group such as the ministry of labor run the minimum levels of 10 percent for counseling and job program. In either case, implementation of placement services and 60 percent for retraining). the actual program is generally subcontract- ed to private sector or nongovernmental The reporting and publication of performance data institutions. can also support performance contracts. If poten- tial program recipients gain access to good infor- · Obtain the necessary expertise. The manag- mation on all training providers and performance er of the PPI implementing agency will have measures (including numbers of other workers many other tasks and will need to delegate selecting the course, dropout percentages, quality redeployment and severance matters to a ratings by former students, and success rates in labor specialist. (See the Toolkit CD-ROM redeployment), they are likely to move to programs for an outline job description for a labor that are both relevant and appropriate for them. specialist.) Terms of reference for a labor redeployment specialist. Step 5: Set up a Redeployment Team · Advertise in well-known national newspa- When the redeployment program has been pers to obtain a prequalified list of potential designed, a key step is to put in place a team to contractors who can subsequently be invited implement the program. The main tasks are to: to bid for redeployment services. Private sec- 133 Labor Issues in Infrastructure Reform: A Toolkit Experience with tor providers, autonomous public organiza- Step 6: Develop Cost Estimates and vouchers is tions, and NGOs will be eligible and should Funding Arrangements relatively new. be able to demonstrate minimum capabili- ties (that is, prior experience and track In addition to program activities, funding will need to cover the costs of: 5 record, financial resources, in-house staff, and staff qualifications). · Administering the program, including the · Consider working with other government costs of labor experts, counselors, and the agencies to establish a rapid response facili- like Workers need ty. These facilities usually comprise an early · Monitoring program progress and overall honest, transparent warning system to predict the timing of information on the gross effects on workers MODULEquality and large retrenchments, prelayoff advice, and performance of the rapid mobilization and coordination of · Evaluation of the net impact at the end of courses. supporting public services (see Hansen the program. 2001). Experiences in industrial countries These funds should be linked to the overall timeta- have been adapted in some developing and bles for PPI and severance because there is little transition countries; for example: point in releasing funds for a labor program before ­ Canada's Industrial Adjustment Services basic approvals for PPI have been received. provided on request on-site, rapid The accompanying CD-ROM provides a spread- response redeployment services, follow- sheet to help develop cost estimates for program ing the announcement of plant closings activities. or layoffs. A committee, made up of management and labor representatives, Spreadsheet (covering counseling, training activities) to funded by government and the company, develop cost estimates for the redeployment program. organized job-search assistance for redundant workers. This approach was Redeployment programs can be implemented and developed and adapted for use in Egypt. funded through national-level labor or unemploy- ­ The U.S. Department of Labor has pro- ment funds, as has been common in Eastern Europe moted a rapid response facility with a and Central Asia. These funds are typically financed dislocated worker unit in every state. A on a discretionary basis from the state budget, often Labor funds can be national directory of private sector con- with the support of loans from donors and interna- a vehicle for a mix of government and sultants and service providers is available tional financial institutions. The primary objective donor initiatives to enable state governments to quickly of these funds is to enable activities that help unem- directed at creating draw in expertise in counseling, retrain- ployed people get back into gainful employment. employment and supporting ing, and job search (see Where such funds do not exist, or where they serve redeployment. www.doleta.gov/layoff). Variations on a different purpose than what is required at the PPI this approach have been developed in level, separate arrangements can be made in which Romania, where the approach is used as monies are channeled directly to the PPI implement- part of a national program to offset the ing agency or to the group that is directly responsi- effects of job loss arising from transition ble for the redeployment program. (see http://lrp.digi.ro/eng/), and in Hungary (see http://lgi.osi.hu/resources/ Social funds have also been used in some cases. Social funds are practices/pdf/labor1.pdf). Social funds are special-purpose, public sector more poverty arrangements designed to mobilize resources to focused, but can Links to the Web sites of redeployment alleviate poverty. Social funds differ from labor also support active and rapid response units in: labor market and funds in that they are more directly concerned with · The United States social safety net · Romania poverty reduction and income support rather than initiatives. · Hungary. employment generation. Their activities may, how- 134 Key Elements of a Labor Program ever, support displaced workers, particularly in If rapid response regions of acute unemployment or in single-indus- Box 5.21: Bolivia--The Emergency Social facilities are in place Fund or are being try towns. Social fund activities are generally developed, the I demand driven. Social funds do not directly imple- n Bolivia the state mining corporation reduced implementing MODULE ment social safety net programs, but rather solicit, its staff from about 28,000 in August 1985 to agency might fewer than 6,000 by the end of 1986. The usefully build these evaluate, finance, and then monitor projects pro- World Bank supported an emergency fund to into the overall posed and undertaken by private contractors, help redeploy the miners. The Emergency Social design of the NGOs, or other groups. Social funds can attract Fund (ESF) was set up as a temporary fund to redeployment program. substantial donor financing. finance a large number of small-scale, labor- intensive subprojects in infrastructure (housing, In the context of retrenched workers, social funds schools, road improvements, erosion, flood con- 5 may serve a range of active labor market pro- trol, and irrigation works), as well as technical assistance and extension programs. grams, such as retraining, microenterprise loans, and public works programs, in addition to social The ESF illustrates some of the benefits of pub- lic works programs. The greatest benefits from and welfare services. In 1985 Bolivia established participating in the program were received by the world's first Emergency Social Fund to help those who would have been least well-off with- miners who lost their jobs because of economic out it. Although the subprojects originally were adjustment (see box 5.21). It proved so successful intended to employ mostly miners, only 15­20 that it became the model for Bolivia's Social percent of them were employed under the ESF. Studies showed that although a number of min- Investment Fund set up in 1990 to finance long- ers moved rapidly to new jobs, others were term development of the country's social services reluctant to participate in ESF projects because and to deal with the more intransigent problem of the pay was low. The subprojects' ex post rates endemic poverty. of return were generally positive and contributed substantially to reducing the social cost of Further advice on the design and implementation adjustment after the economic crisis of the mid- of social funds is available from the World Bank at 1980s. www.worldbank.org/socialfunds. Sources: Mathieu 1996; Newman, Jorgensen, and Pradhan 1991. World Bank "gateway" for advice on social funds. · Introduce open competition into the provi- sion of services, and ensure transparency in Step 7: Identify and Commission Service the process of selection and award. Providers · Provide for pilots or phased programs so The implementing agency's office does not need to that the initial performance of service provide services directly, and many services can be providers can be checked, as well as the rele- contracted out. Terms of reference and contracts vance of the activity. These help deal with should include performance-based payment mecha- the inevitable uncertainty as to what will nisms to encourage performance, with clear per- work best. Pilot activities can then be tested, formance measures and reporting requirements. monitored, reviewed--ideally by independ- This enables the program to be outcome driven ent specialists--and then rejected, amended, (for example, by number of workers employed or or expanded. number of workers with increased incomes) rather · Conduct regular progress reviews that are than numbers driven (for example, by number of linked to incentive mechanisms, such as reg- workers counseled or number of workers who ular competitive bidding for services. attended training courses). · Engage independent auditors and monitors Other measures to improve the quality of service to review and evaluate the service providers. provision are to: 135 Labor Issues in Infrastructure Reform: A Toolkit Step 8: Monitor and Evaluate the Program place to help displaced workers. There are many types of counseling. Although cost-effective, coun- Module 7 sets out monitoring and evaluation seling is often neglected. processes in some detail and describes a range of performance monitoring measures. The implement- 5 ing agency's key tasks here are to: Types of Counseling · Set up formal monitoring arrangements (again using independent contractors if pos- The content of worker counseling can include: sible) to provide regular reports on training · Trauma counseling: Job loss is a clear case and other services, and conduct follow-up of potential trauma in the lives of workers, MODULE surveys and focus groups to assess how and one component of the counseling redundancy is affecting individuals, families, process is to provide support and assistance and communities. to those who are particularly distressed by · Measure against performance indicators, the event. Redeployment counselors may such as numbers of other workers selecting lack these skills and there is scope for the course, dropout percentages, quality rat- involving NGOs with skills in these areas. ings by former students, success rates in · Financial counseling: This is particularly redeployment (see O'Leary 1995). important because severance may be the · Put performance and monitoring reports into largest sum of money a worker receives in the public domain so that workers can make his or her life. Counseling can help people more informed decisions on which services make prudent investment decisions by pro- and providers are appropriate for their needs. viding advice on: This is important because, until training starts, ­ How severance has been calculated. neither the trainee nor the implementing agency has any real idea how good (or bad) ­ Options for investing money (choices and the quality of training will be, especially if risks). there are few redeployment service providers ­ Investing in self-employment. Experience with prior experience in the country. shows that many recipients of severance · Include short-term tracer studies on the pay assume (wrongly) that they need to impact of training on workers. This can invest large amounts to start a business, help identify weaknesses in program activi- when in practice a more cautious "start ties. For example, if a training activity is small and test the market" approach may only preparing workers for (perhaps nonex- be needed. istent) formal jobs, ignoring the informal ­ The need to protect severance pay from sector and self-employment, then it may fraudulent investment schemes set up to have very limited success. exploit the sudden increase in liquidity in · Adapt the program in the light of perform- a community where many people are ance findings. receiving severance payments. · Provide for an independent net impact eval- ­ Helping prepare workers (particularly in uation and then redesign as needed. rural communities) for the sudden arrival of large numbers of "extended family" seeking to benefit from the perceived Counseling windfall. Counseling is the first, and minimum, level of sup- · Counseling on job opportunities, redeploy- port that the implementing agency can put into ment, and training services provides infor- 136 Key Elements of a Labor Program mation to workers on how to find new jobs · Through mobile visits (for counseling or and other income-earning opportunities, as training of smaller groups) well as how to access redeployment services · At job fairs or meetings; in the community, (training, small business support, placement, using facilities of training institutions, local MODULE and job-search services). There is some eval- government, or other partners; at traditional uation evidence (for example, Blomquist meeting places; or in workers' homes. 2002) that counseling plus training are more effective than training alone. Materials provided for workers should be in their own language. If many workers are illiterate, rede- ployment programs need to make more use of Timing, Location, and Frequency of radio, video, group meetings, and means for pro- 5 Counseling viding information via other people in the commu- nity who meet workers face to face (for example, Counseling can start when the first announcements health workers or workplace "peer counselors"). have been made to workers about potential retrenchment. Two phases can be identified: How much counseling is required? Intuitively, a single session is unlikely to be sufficient to help · Prelayoff counseling, which will focus on: workers dealing with significant job-loss trauma or ­ Providing accurate information to workers challenges in finding new income. In India practical and their families on severance programs, experience with national and state-level schemes possible training opportunities, the timing has found that repeated visits are necessary. of activities, selection procedures, and treatment of staff housing, among other things. This helps improve workers' deci- Designing an Effective Counseling Program sionmaking and avoids damaging rumors. Counseling before and after severance is a relatively ­ Establishing facilities for counseling (and low-cost measure. Hess (1997) estimated counseling job-search assistance), which may be costs on the order of US$100 per worker. In practice located within the workplace or in a sepa- the costs have been significantly lower. In state-level rate facility that workers can easily access. programs in India counseling costs have been esti- · Postlayoff counseling: Counseling during mated at about US$10 per retired worker, equivalent this phase can become more intensive but to about 10 percent of the cost of training delivered should not distract the worker from his or to each worker. The Toolkit's CD-ROM contains a her own job-hunting efforts. sample spreadsheet that facilitates the calculation of the costs of setting up a counseling program. The workplace is often the best location for coun- seling, particularly for early interventions and Spreadsheet for estimating the costs of counseling. prelayoff counseling. Improving employee accessi- bility to information about training opportunities is Counseling is relatively low cost, but that does not key. Information can be made available at various always mean it will be effective. The implementing locations: agency can improve effectiveness if: · In the premises of the utility or PPI plan · There is rapid mobilization of counseling (easiest for workers and the most cost-effec- services. In some cases workers may disperse tive location for initial counseling) to their homes very soon after severance so it is essential to deliver counseling advice · In temporary rented accommodations (use- before that happens. For the implementing ful where the redeployment program needs agency this means that operating budgets, to distance itself from difficult separation recruiting and training of counseling staff, process) 137 Labor Issues in Infrastructure Reform: A Toolkit Severance payments and counseling materials all need to be in · There is some degree of independence of the may be the largest place well before workers start leaving the counseling service so that the advice is not amount of money that workers ever enterprise. A minimum of six months is ide- compromised. This means: receive. Providing ally needed prior to the formal announce- ­ Keeping counselors independent of tasks 5 prudent financial ment of retrenchment so as to coordinate all advice is a critical that are properly the work of the the resources (staff, materials) necessary to part of counseling. utility/PPI enterprise managers--for set up a counseling program for a major example, the announcement of layoffs or work force restructuring program. the selection of workers for redundancy. · There is early attention to building capacity Counselors should be associated with ODULE in counseling. The implementing agency can helping the worker, not with the M address this by: retrenchment process itself. Training and ­ Contracting a training provider. ­ Ensuring that counselors are as inde- counseling services can be contracted Counseling is an underdeveloped skill in pendent as possible from the training out to separate many developing countries, and the program. Where counseling and training independent implementing agency may need to look are combined, there is a risk that coun- agencies. to NGOs with experience in disaster selors become sales agents for the train- counseling, conflict resolution, and nego- ing programs and push workers to inap- tiation for "training the trainers." propriate courses simply to boost the numbers of "trained" workers. ­ Using competitive bidding mechanisms to identify a range of potential service providers from government agencies, Job-Search Assistance NGOs, and the private sector. Job-search assistance can be valuable because it ­ Recruiting and training local counselors. helps identify and match workers' skills to avail- Some programs have successfully selected able job opportunities. Job-search efforts generally young college graduates as counselors for show positive results and, when targeted, can be privatization redeployment programs. cost-effective. Local counselors have the advantage that they come from the same communities as the workers; and their local sensitivities and language skills mean that they can be Employment Services quickly effective when they have had The purpose of job-search assistance (or outplace- induction training. ment) is to reduce the time and transaction costs ­ Using peer counselors--that is, other that displaced workers would otherwise incur in employees from within the workplace. trying to find new employment. There is evidence that job-search help works, at least in situations · There is rapid feedback from counseling, where the formal labor market is active: gathered by actively seeking out the view of the counselors in the field, not just their The intervention that seems to work best--at managers. Implementing agency managers the lowest cost--is job search assistance should attend some counseling sessions and (sometimes combined with other labor market listen to the counselors as they share their measures) (Fay 1996, reviewing active labor experiences. The best feedback on the real market programs in OECD states). problems that workers face will come from those closest to the work--from workers Public employment services in particular have and counselors and not from office man- served as brokers matching jobs with job seekers, agers. traditionally through physical centers (employment 138 Key Elements of a Labor Program "exchanges"). Internet technology is also being Counseling is an used in some countries (box 5.22). Box 5.22: Job-Search Assistance--Using underdeveloped skill New Technology in many developing countries. Additional In a comprehensive review of active labor market L abor programs associated with the training may be programs, Dar and Tzannatos (1999) concluded restructuring of both Brazilian and Polish necessary to MODULE that evidence suggested job-search assistance could railways made use of Internet technology develop enough have positive effects and is usually cost effective to deliver information on severance and rede- counseling capacity ployment to displaced workers. for the redeployment compared with other active labor market pro- program. grams. Results, however, were linked to the labor In Chile the National Training and Employment Service has developed a national electronic market conditions--where overall unemployment labor exchange--InfoEmpleo (see www.infoem- is rising, job-search assistance has not had a posi- pleo.cl/)--that holds the résumés of job seekers 5 tive impact. and receives notice of more than 300 job vacan- cies a month. Similar programs exist in Korea Dar and Tzannatos 1999. ("Work-net" at http://www.work.go.kr/worknet/ main.htm) and in the Philippines ("Phil-Jobnet" Assisting Job-Search Efforts at phil-jobnet2.dole.gov.ph/pls/philjobnet/main). In Andhra Pradesh, India, the state govern- In industrial countries, a first phase of job-search ment's Social Safety Net Program established a assistance is often undertaken on the premises of Web site where workers who have been dis- the enterprise, and involves providing an outplace- placed as part of a series of enterprise closures ment center where workers can: and restructurings could post their résumés. Some workers found employment overseas · Practice and be trained in job-search and through this mechanism, via a private sector interview techniques placement agency in Chennai that had accessed the Web site. · Share experience and gain employment Source: Adam Smith Institute, personal communication. ideas from other workers, perhaps through peer counselors, as members of a job club (see box 5.23), or from visits by other · Managers in the enterprise reduce any Rebuilding displaced workers who have been made redundant potential problems arising from disaffected workers' confidence earlier workers in the workplace. is an important element of both · Receive other relevant counseling advice counseling and job- (financial, household planning, trauma, life, search assistance. livelihood) Retraining Retraining is often the biggest element of a rede- · Have access to information (books, ployment program, and often the most costly. brochures, video, presentations) on training Retraining can be provided for both formal courses, self-employment options, and other employment and self-employment. The record of resources such programs has been mixed. Retraining needs · Have access to computers (where appropri- to be targeted and made demand driven if it is to ate) for preparation of curriculum vitae and be effective in cost and outcome. for searching Internet-based job prospects. Retraining for Employment Another tool is the provision of an additional peri- od of paid time during which workers continue to Retraining programs to facilitate formal sector receive a salary but can use that time for job employment are a common element in redeployment search. It can help both workers and managers: programs (box 5.24). Courses usually combine a mix of practical and theoretical training and include: · Workers have paid time to find new incomes. · Short-term (one to six months) vocation courses for unskilled and semiskilled work- 139 Labor Issues in Infrastructure Reform: A Toolkit Box 5.23: What Happens in a Job Club? Box 5.24: Retraining--Chile's Program for Mine Workers A job club is a group of workers who meet T regularly together as part of their job- he Retraining Program for Displaced search efforts. The job club may be sup- Workers is a pilot project organized 5 ported by the implementing agency or by the recently by the government of Chile with public employment service. Members of the the financial assistance of the Inter-American club can determine their main activities, which Development Bank Multilateral Investment could include: Fund. The program is mainly designed for skilled adult workers displaced by industrial · Receiving job leads from potential employers restructuring and technological progress. The and job-search agencies program is currently focusing on the retraining MODULE · Sharing information about job openings of more than 1,000 redundant coal miners. The · Developing job-search strategies program managed by the Production · Preparing curriculum vitae or résumés and Development Corporation includes subsidies for helping each other complete job applications counseling, retraining, and employment interme- diation services for displaced workers. The pri- · Creating job-hunting teams for moral support vate agencies that provide these services are and shared transportation selected on the basis of competitive bidding · Taking field trips to workplaces that may be and receive a maximum subsidy of approxi- hiring mately US$2,000 per reemployed worker. · Practicing interviews, telephone skills, and Enterprises that hire retrained workers receive a telephone follow-up calls subsidy of approximately US$900 per worker. · Listening to speakers or watching videos The retraining and reemployment program is about different kinds of jobs part of a broader plan for industrial restructuring in the coal-mining region that offers a series of · Getting and sharing information about hous- incentives for private investment in labor-inten- ing, legal aid, medical assistance, and other sive projects. resources Source: Espinoza 1997. · Sharing experiences--good and bad--and talking about how they feel about trying to get a job and the effects of unemployment on training providers in a small-enterprise train- them and their families; planning and taking ing program (Steel 2002). Training pro- part in shared social events. grams can work with employers to provide Source: Hansen 2001. on-the-job training and a commitment to hire a proportion of trainees, perhaps in return for receipt of the worker's stipend. ers in areas such as taxi driving, basic car- (This approach was used in the PROBECAT pentry, motor rewinding, dressmaking. program in Chile.) · Short-term technical courses for more skilled Generally, training costs are about US$200­$500 employees. For example, the growth in per worker in middle-income countries (see Fretwell information technology services has prompt- 2002). In Brazil's rail restructuring, however, the ed the popularity of computer training average cost of training was about US$900 per courses among more qualified workers rede- worker, and similar costs were reported for group ployed from privatized SOEs in most Indian training in Hungary (O'Leary 1995). Uptake varies cities. considerably but is generally relatively modest-- · In-service training and on-the-job training typically 15 to 30 percent--and depends on labor are particularly valuable. Often these pro- market conditions, the relevance of the training, vide mechanisms where workers can and the level of incentives (stipends) to workers. enhance or extend their skills through work- ing as an "apprentice" to a skilled worker. Fretwell 2002 In Kenya these were the most demanded 140 Key Elements of a Labor Program It should also be pointed out that governments 2003), as well as a transition into other full- may not want to offer redeployment and training, time employment or formal business. perhaps in circumstances where the broader reform · Workers are often already engaged in part- goal is to reduce a culture of dependence on gov- time self-employment (and their spouses are MODULE ernment for services, assistance, and subsidies. as well). There may be a policy of offering a generous one- time severance package and encouraging a clean · Only a small proportion of displaced work- break between workers and government: ers will have the aptitude for formal busi- ness. For example, a study of OECD and We don't want to offer redeployment and transition economies found that only retraining. We have offered a generous separa- around 5 percent of unemployed workers 5 tion package, and workers are leaving quietly. will choose to become self-employed (Van If we offer them retraining, they will then Adams and Wilson 1994). expect a job at the end of it, almost a govern- ment guarantee (adviser to prime minister's From a policy perspective, support for self-employ- office, developing country). ment is an approach that can stimulate labor demand without distorting other aspects of the economic reform process (through subsidies, for Retraining for Self-Employment example). As with retraining for employment, pro- grams to encourage self-employment also suffer Most training for redundant workers has focused from dead-weight loss effects and will benefit from on training for jobs in the formal sector. In part measures to select participants. For example, an this has reflected aspirations of government, imple- evaluation in Hungary and Poland, based on more menting agencies, unions, and workers alike. But than 5,500 follow-up interviews, indicated that retraining for self-employment is also relevant, many of those receiving financial and training especially where formal jobs are scarce. Training assistance for self-employment would probably for self-employment can address upgrading work- have gained reemployment without government ers' skills for the "informal sector" of casual help. employment and trading, and is best linked to broader small- and medium-size enterprise support. Reasons to focus on the informal sector are that: Employee Enterprise · Many displaced workers have little formal Some governments have helped employees set up commercial or business experience. A com- their own enterprises to contract services that were mon counseling experience is that newly dis- previously provided by the state enterprise, or set placed workers, flush with their severance up workspaces and small business incubators. payments, can have overly ambitious plans for becoming entrepreneurs. Encouraging workers to try out their business ideas and Contracting out Services their aptitudes for business with very small, low-risk, informal trading activities is often Contracted-out services are one way to encourage more appropriate than their investing--and employee enterprise and thus reduce unemploy- risking--most of their severance money in ment among displaced workers. The enterprise an untested business. awards limited-term, outsourced subcontracts to · The state may well provide barriers to entry firms set up by former employees. Those new small to formal business. businesses may then create jobs themselves. · The informal sector can provide income Contracts are usually awarded with exclusivity opportunities that workers value (Maloney periods for a relatively short period--typically no 141 Labor Issues in Infrastructure Reform: A Toolkit Counselors should more than two years--long enough to provide a caution workers secure environment for the new business to learn Box 5.25: Malawi--Road Maintenance by against overly Displaced Workers ambitious or risky the disciplines required of private enterprise. The R business start-ups. limited life of the contract provides an incentive to oad maintenance in Malawi has been transformed from an activity managed by 5 them to improve their performance and innovate in the (former) Department of Roads using order to successfully bid competitively at the end of government road gangs to one that is managed the contract. It also encourages them to devote by a new Roads Authority, where the actual time to finding new work and opportunities from work is undertaken by private sector contrac- other clients. tors. This change did not occur overnight, how- ever, and there was a two-year interregnum Contracting out also may be part of a wider strate- between the old and the new management. MODULE gy for restructuring of the enterprise. Ancillary During those 24 months, basic road mainte- nance was carried out through contracts issued functions (for example, catering, building and to small contractors by the Department of equipment maintenance) and core functions (such Roads. In practice these were groups of as revenue collection) can be separated from the retrenched workers formed around former main business and the services purchased from pri- charge hands and foremen who provided skills vate providers. In cases where the private sector is and continuity. It may have been somewhat still developing, there may be limited skills and messy, and undoubtedly that was a period of muddling through, but this approach did allow capacity in the market to provide certain specialist workers and the government time to adjust to services. These contracted-out services may con- the new regime and the new arrangements, and tribute to overall employment but need not neces- provided something of a safety net for workers sarily employ the redundant workers. who were displaced from regular government employment. Examples of contracting out include: · Privatization of service units: For example, · Redundant utility employees being offered in Mexico rail privatization the period guaranteed contracts to undertake work 1990­95 saw the sale of various small facto- such as meter reading: In the privatization ries and workshops that provided services to of the Manila water supply, the two conces- the railway. Many of the workers who left sionaires agreed to give preferred-contractor the company in that period joined the small status to a service cooperative of former factories as workers (López-Calva 2001). In employees for one year (Cruz 2001). In the Bolivia's railway, job losses in the privatized privatization of Argentina's national oil railway were partly offset by new jobs in company, about 5,000 retrenched employees maintenance contracting companies (Valdez received supplier contracts for up to two 2002). Road reforms in a number of Sub- years for their approximately 200 newly Saharan African countries have created new formed businesses (Shaikh 1996). opportunities for road maintenance contrac- Cruz 2001 (a PPIAF case study). tors (box 5.25). · Utility companies changing the skill mix, as · Private sector contractors being required to they become more customer and service ori- give first right of refusal to displaced work- ented: For example, Telecommunications ers: For example, following the introduction New Zealand (TNZ) concentrated its in 1992 of the Competitive Contracting strengths on marketing and customer serv- Program, the city of Philadelphia, ice, and outsourced many technical jobs. In Pennsylvania (United States) implemented a lot of cases, staff took early retirement or several programs designed to help public redundancy options before taking up posi- workers in the transition required by privati- tions with subcontractors who were called zation and public­private competitions. The in to do the work (Ross and Bamber 1998). city created new job classifications and 142 Key Elements of a Labor Program established a redeployment office to match · Reducing the costs of initial business start- Training for the skills of displaced employees with posi- up by providing free or low-cost access to livelihoods or self- employment may be tion openings in other departments. It also sheds, garages, and simple industrial units, as important as, or gave displaced employees preferential con- and allowing workers to keep and take the more so, than MODULE sideration for other city jobs and required tools of their trade with them into their new training for jobs where the private contractors to give first right of enterprise opportunities for refusal to affected city workers. · Providing an initial period (one to two new employment in the formal sector are Special assistance and training in setting up a busi- years) of guaranteed employment or exclu- poor. ness can be offered because workers may not be sivity to allow the new enterprises to start familiar with all the requirements and principles of up 5 small business. The implementing agency can · Reducing the risks that management or therefore engage specialist small-business develop- trade unions will renege on promises to sup- ment agencies to undertake a selection and train- port the use of contractors in the future, ing program for applicants for contracted-out through contractual clauses agreeing not to schemes. compete unfairly with the new companies If successfully designed, such programs can win the over a longer period (say, five years) and support of workers. Trade unions may be opposed allowing (not restricting) the new companies to contracting out, however, because of concerns to diversify and find other clients, and pub- about workers moving into so-called atypical lic memoranda of understanding or enter- employment and less formal contracts that offer prise policies in favor of the outsourcing and less protection to the workers. contracting out of specified services. Contracting out can favor redundant Making Employee Enterprise Work Job-Creation Initiatives workers and offer In many transition and developing countries, a pri- opportunities for Not all employees are suited to employee enter- mary problem is the lack of demand for labor. some to start their prise, and not all the new companies formed are own small Initiatives that help create jobs are valuable in businesses. likely to succeed. This is normal--many small busi- many redeployment circumstances, but particularly ness start-ups fail, although ones that receive pro- in regions or monoindustrial towns with high lev- fessional support have a higher success rate. els of local unemployment. These initiatives include The prospects of creating sustainable new employ- public works programs, support for small and ee enterprises can be improved by: medium-size enterprises, and local and community development planning and job-creation incentives · Engaging business development advisers to for employers. screen and select employees with the apti- tude to become small contractors · Ensuring that the plan documentation and Public Works contracts are clear, comprehensive, and Labor-intensive public works programs are mainly coherent so that workers can understand thought of as safety net programs to deal tem- their choices, options, and risks porarily with large numbers of poor people in cri- · Providing professional support to the select- sis. Public works programs can, however, be ed employees through access to business appropriate in PPI labor programs in regions start-up training and microenterprise train- where there is a particular mix of high and chronic ing (with a minimum level of basic business levels of unemployment, lack of formal social safe- training being mandatory) ty nets, and large numbers of vulnerable workers. 143 Labor Issues in Infrastructure Reform: A Toolkit Privatized service The pioneering Bolivian ESF had elements of pub- units can offer jobs lic works programs within it and was initially Box 5.26: Three-Point Checklist for to some redundant Successful Public Works Programs workers. intended to support redundant mine workers at a time when the economy was very weak (see box o make public works programs cost- 5 5.21). T effective, the implementing agency can check to see that: Well-integrated public works programs can com- 1. They pay less than the prevailing market bine safety net benefits with community action, wage for unskilled manual labor in the pro- productive investment, and a degree of encourage- gram area. Restrictions on eligibility can be ment for workers to engage in microenterprise avoided by setting the wage rate at a very low level to ensure self-targeting (that is, only (where elements of the public works are contracted MODULE those in urgent need of a job take it, and as out). Senegal's public works program, managed by soon as they find better income opportunities AGETIP (Agence d'Exécution des Travaux they will leave the program). d'Intérêt Public), is an example of a public works 2. The labor intensity of projects is higher than program that combines these objectives and has normal, although this may vary if the assets developed transparent, streamlined procedures (see being created have real value for the poor in box 5.26). the area (for example, irrigation or road works that will benefit entire communities). See www.worldbank.org/oed. 3. Where rationing of the public works scheme is required (for instance, where the demand for work exceeds the budget available at the [low] wage level), the program should be tar- Support for Small Business geted at the areas with the most people dis- advantaged by labor adjustment, as indicated Support for small business includes technical advice by a credible poverty impact map. (business development services), microfinance, and Source: Adapted from Ravallion 1998. managed workspaces and business incubators. Detailed consideration of these types of support is and infrastructure company and seeing how these beyond the scope of this Toolkit, but further may be used to benefit displaced workers. sources of information on each of them is provided at the end of this section on redeployment. British Coal Enterprise (BCE) is one of the early examples of this approach (see box 5.27). The Managed workspaces and incubators deserve spe- BCE experience illustrates the value of very simple cial mention, however, because the assets of the PPI and basic managed workspaces. BCE workspace enterprise can be used to help workers start up a sites were often not attractive new buildings but business in a relatively low-risk way by providing converted former mine operation buildings. Some workspace and facilities. The principal difference national and regional governments have invested in between managed workspaces and incubators is more substantial incubator facilities--some even that incubators try to bring together both physical moving toward high-tech science parks--but nor- space and technical assistance to start-up entrepre- mally they have done so as part of a wider employ- neurs in one location: ment and economic development policy rather than as a strategy to deal with redeployment. Workspaces and incubators can be set up inde- pendent of labor programs and may be wholly pri- Worldwide there is much experience on the design vate or public­private partnerships. The best incu- and implementation of managed workspaces and business incubators. One source of information is bators are themselves profitable businesses, making the National Business Incubator Association. their incomes from tenant rentals. The implement- ing agency, however, will principally be interested in looking at the existing assets held by the utility The NBIA Web site is a source of information on incubators: www.nbia.org. 144 Key Elements of a Labor Program Box 5.27: British Coal--Responding to Mine Closure T he coal-mining industry presents a chal- £250,000. In all cases only business plans with lenge when mine closure or work force considerable promise of growth were funded-- reduction is required. The geological dic- not microenterprises employing one or two peo- MODULE tates of the industry mean that the closure of ple. In many cases these start-ups or expanding mines leads to the concentration of redundancy businesses also made use of BCE's managed in a few areas. In 1981 there were 211 collieries in workspace programs. BCE also managed £3 mil- the United Kingdom, but this had shrunk to 17 by lion from other sources. 2001. Over the same period the number of work- A central feature of BCE's approach was to unite ers employed in the industry fell from 279,000 to outplacement and funding by introducing man- fewer than 10,000. In response, in 1984 through aged workspaces or small-business incubators. 5 the National Coal Board, the government estab- BCE offered workshops and offices of various lished a public sector job-creation agency for the sizes and types, as well as such shared services Where there is mining areas, British Coal Enterprise. BCE's as secretarial support, photocopying, and fac- chronic charge was to facilitate the economic regenera- simile facilities. "Easy-in/easy-out" lease terms unemployment, both tion of coal-mining communities. were designed to remove barriers to growth and community BCE focused on the delivery of practical initiatives diversification for the nascent businesses. The approaches and intended to stimulate regeneration of the coal field workspaces made use of former British Coal public works can areas led by the private sector. The three main premises, redeveloping the existing infrastructure provide elements of activities were outplacement services, business and so keeping the costs of conversion low. active and passive labor market funding, and workspace provision. These activi- In many cases the regeneration of existing facili- support. ties were intended to expand the prospects for ties in derelict areas was the catalyst for the labor market by lowering the threshold for increased local economic growth. BCE invested business entry and growth, and by promoting the a total of £101 million during its existence development and expansion of skills. (1984­96) in more than 5,000 enterprises--there- The outplacement program helped about 60,000 by generating some 54,624 jobs (an average of miners through one-to-one counseling with 11 jobs created per business). Overall, BCE esti- career consultants, and help with résumé prepa- mated the investment cost per job created to be ration and proactive job-search techniques. £1,384. About 56 percent of the jobs created Some funding for retraining was also available were derived from business start-ups, and 44 from British Coal. percent from business expansions. The managed The business-funding program aimed to support workshops operation led directly to the creation fast-track financing. Loans of up to £25,000 were of some 16,200 jobs in more than 1,121 units, made available to start-ups and new businesses and itself became a viable commercial enterprise within coal-mining communities, and larger start- (that was subsequently privatized). ups or expanding businesses were able to apply Source: Gore, Dabinett, and Breeze 2000; Tawney and for larger venture capital investments of up to Levitsky 2000. Local and Community Economic citizen participation in local economic development Development and Job-Creation Incentives efforts. Community-based approaches are those where In some countries the employers remaining in the communities--including local and municipal gov- community have received incentives to create new ernments--participate in identifying, selecting, jobs. For example, in Cape Verde vouchers were implementing, or monitoring programs designed to given to private employers to provide on-the-job create employment or protect those who have lost training to employees retrenched as a result of pri- jobs and incomes. The approach aims to build vatization. The employers were reimbursed 40 per- community partnerships to improve the business cent of the salary of a retrenched worker for up to environment, strengthen the local economy, and a period of six months (Kikeri 1998). In Poland create jobs for displaced workers. It also helps in loans at prevailing interest rates were made avail- rebuilding the economic foundation and increases able to existing businesses to organize new employ- 145 Labor Issues in Infrastructure Reform: A Toolkit Incubators can bring ment places for at least 24 months. And in Job description for a labor redeployment manager together workspace Hungary, the employment fund gave grant aid to and business Sample worker survey assistance in one enterprises making investments that would employ location. long-term employed workers. This was, however, Sample questionnaire for counseled workers 5 the most costly form of active labor program-- U.S. Department of Labor adjustment model about six times more expensive than individualized training or self-employment assistance in terms of Monitoring and evaluation performance measures for cost per person reemployed (O'Leary 1995). job search assistance services Typically, the implementing agency or other govern- ODULE ment representatives or contractor will help organize M Additional material (on the a broad-based community task force to conduct an CD-ROM) economic assessment and planning effort "owned" Simple buildings by the community. Community leaders are invited to Dar, Amit, and Indermit S. Gill. 1998. "Evaluating and facilities can be Retraining Programs in OECD Countries: Lessons used very effectively participate in a structured economic renewal pro- Learned." The World Bank Research Observer as workspaces. gram designed specifically to strengthen the local 13(1)79­101. economy and create more employment and liveli- hood opportunities. Workshops are conducted over, Fretwell, David H. 2002. "Mitigating the Social for example, a six-month period, and residents learn Impact of Privatization and Enterprise Restructuring." Working Paper. World Bank, the principles of local economic development and Human Development Sector Unit, Europe and are taught how to assess their community's needs, Central Asia. Washington, D.C. write a local strategic plan, select and design proj- ects, and begin implementing them. Community approaches may be complemented and financed by Web Sites other programs, such as regional development initia- Committee of Donors for Small Enterprise tives, social funds, or labor funds. Development: www.ilo.org/employment/sedonors. Those approaches are particularly relevant where: (The site provides access to guidelines on financial intermediaries and business development services · The PPI plan produces significant employ- for small enterprises.) ment effects on single-industry towns (for The European Database of Business Incubators: example, some ports). europa.eu.int/comm/enterprise/bi. (Site provides access to information on incubators in 28 European · There is systemic and chronic unemploy- countries, case studies, benchmarking information, ment in the region. and a database of nearly 950 business incubators.) · There are opportunities that will benefit the International Labour Organisation's International community (for example, conversion of Training Centre: www.itcilo.it (For courses on buildings into not-for-profit workspaces or enterprise development.) public­private business incubators). International Labour Organisation's Small Enterprise · The PPI plan leads to some resettlement of Development: www.ilo.org/dyn/empent/empent. staff, perhaps because of the relocation or portal?p_prog=S. merger of operating units. National Business Incubator Association: www.nbia.org. (This site provides information about the organization's publications on business incubation and about annual conferences. NBIA Tools (on the CD-ROM) provides materials and experiences from developing Terms of reference for a redeployment survey as well as industrial countries.) Terms of reference: Turkey's Labor Assistance Group Polish Railway Retraining and Re-employment (privatization social support project) Agency: www.kaaz.pkp.pl/en/kaaz.html. (An exam- 146 Key Elements of a Labor Program ple of an implementing agency for a labor pro- Available at www.unido.org/userfiles/PuffK/ gram.) lalkaka.pdf. PPIAF: www.ppiaf.org. (Site provides access to other Ledgerwood, Joann. 1998. Microfinance Handbook: PPIAF toolkits, as well as information about PPIAF An Institutional and Financial Perspective. MODULE and how governments and other agencies can Washington, D.C.: World Bank. access PPIAF resources to accelerate privatization.) NBIA (National Business Incubator Association.) U.S. Agency for International Development microen- 1995. A Comprehensive Guide to Business terprise site: www.usaidmicro.org. (Site includes Incubation. Athens, Ohio. papers on the use of vouchers in the delivery of small business development services.) O'Leary, Christopher J. 1995. "Performance Indicators: A Management Tool for Active Labour 5 Webcast presentation on the voucher program in Programmes in Hungary and Poland." Kenya's small business development plan: International Labour Review 134(6):729­51. www.worldbank.org/wbi/B- SPAN/sub_kenya_voucher.htm. Robinson, Marguerite. 2001. The Microfinance Revolution: Sustainable Finance for the Poor. World Bank Social Funds site: Washington, D.C.: World Bank. www/worldbank.org/socialfunds. World Bank: www.worldbank.org. (The site's search engine can be used to obtain the Bank's latest oper- EMPLOYEE SHARE OWNERSHIP ational policies on involuntary resettlement.) Employee share ownership can be used as part of the PPI program, as an element of compensation, as an inducement to remain with the operation Other Material and Sources post-PPI, or as part of an employee buyout. This Committee of Donor Agencies for Small Enterprise section outlines those potential roles. Development. 2001. Guiding Principles for Business Development Services. Available at Employee share ownership often has multiple www.ilo.org/employment/sedonors. goals, centered around: Fay, Robert G. 1996. "Enhancing the Effectiveness of · Concepts of redistribution through gain Active Labor Market Policies: Evidence from Program Evaluations in OECD Countries." sharing of the wealth generated from the Organisation for Economic Co-operation and PPI enterprise. Development Occasional Paper 18. Paris. · Reduction of the principal-agent problem Hansen, Gary B. 2001. A Guide to Worker (where managers behave in ways that hurt Displacement. Some Tools for Reducing the Impact the interests of the firm and its owners). on Workers, Communities and Enterprises. When workers and managers share in the Geneva: International Labour Office. profits of the firm there is likely to be closer Harper, Malcolm, and Gerry Finnegan. 1998. Value alignment among the work force and man- for Money? Impact of Small Enterprise agers and the owners of the enterprise (the Development. London: Intermediate Technology shareholders). Publications. · Reducing opposition to PPI by enlisting sup- IFC (International Finance Corporation). 2002. port from workers. Handbook for Preparing a Resettlement Action Plan. Washington, D.C. In work force restructuring, employee share owner- ship can be used in three ways: Lalkaka, Rustam. 1997. "Lessons from International Experience for the Promotion of Business 1. As a form of compensation to displaced Incubation Systems in Emerging Economies." workers. Instead of cash, they can receive shares of the enterprise. 147 Labor Issues in Infrastructure Reform: A Toolkit 2. As part of a new incentive or reward pack- 3. If only a limited number of shares are avail- age for workers who remain with the enter- able for allocation to employees, many man- prise. agers would prefer to see those allocated to the remaining work force as a performance 3. As the basis for management employee buy- 5 incentive rather than to departing workers. outs or employee buyouts of units of the enterprise. Shares as an Incentive or Reward Compensation Packages for The use of share transfers or discounts as an incen- tive to workers is a common feature of infrastruc- Redundant Workers MODULE ture PPI through privatization (see box 5.28). In an As part of a compensation package, share transfers analysis of 630 privatizations of infrastructure, are probably best viewed as a supplement to, energy, and other enterprises, conducted by initial rather than a substitute for, severance or early share offer in more than 59 countries, more than retirement. This is true for three reasons: 90 percent of the transactions transferred shares to workers. On average 7.6 percent of the shares were 1. As a social safety measure, share transfers sold to employees, often on favorable terms (Jones are problematic because the benefits that and others 1999). Data for the individual enterpris- workers receive will depend on movements es is available at http://facultystaff.ou.edu/M/ in share prices. Those movements in turn William.L.Megginson-1/. depend on uncertain micro- and macroeco- nomic factors. Implementing agencies Some countries have established the concept or should exercise considerable caution if they principle of employee share transfers in privatiza- wish to promote share ownership as a com- tion laws. For example, Article 14(4) of Nepal's pensation mechanism; dramatic falls in Privatization Act 1994 states that "His Majesty's share prices during 2001 are reminders of Government shall make available to the workers share price volatility. Although in the past and employees of an establishment which is to be some workers have done very well from privatized some of its shares free of cost or at a shares, these successes have been in sec- subsidized price." In Malawi the government tors--such as telecommunications--that encourages employees in privatized companies to have recorded very high levels of growth for buy shares in the form of an employee or manage- a period. A strategy that provides a large ment buyout. In such cases the privatization com- proportion of workers' post-PPI compensa- mission may offer a discount of 20 percent. In tion and safety net in the form of shares is addition employees may be allowed to pay for too risky an investment strategy--particular- their shares by deferred payment terms or through ly for older workers. Governments, howev- a privatization fund managed by the Investment er, have sometimes offered shares backed by and Development Bank of Malawi, as part of a a guarantee to workers. financing agreement between that bank and the 2. Many developing countries have relatively European Investment Bank. (The fund was so pop- weak institutional environments for their ular that the money originally allocated was capital markets (that is, uncertain property exhausted within a few months.) rights, limited protection of minority share- holders, poor share registration and deposi- tory systems, and weak regulation and over- Employee Share Ownership Plans sight). Combine that environment with a An employee share ownership plan (ESOP) is a work force that has little experience of share mechanism that enables and facilitates employee ownership, and there are significant risks of ownership in a company. As some of the examples governance failure and abuse. 148 Key Elements of a Labor Program Box 5.28: Shares as Incentives in Infrastructure Privatization Thailand power: Privatization of the Ratchaburi eral rule, workers were offered 5 to 10 percent of Electricity Generating Holding Public Company the company's shares at a discounted price. To Ltd. provided for 45 percent of shares retained pay for the shares workers were allowed to bor- MODULE by Electricity Generating Authority of Thailand row up to 50 percent of their severance pay, with (EGAT), 40 percent of shares offered to the public the company promising to repurchase the shares through an initial public offering (IPO), and 15 at retirement at a value at least equal to the for- percent offered to employees through an ESOP. gone severance payments. Therefore, employees The employees received shares at par value (10 could buy shares below market price with no baht/share) compared with the IPO price of 13 cash outlay, with no risk of loss, and a potential baht/share. The aggregate value of the shares for gain if the shares increased in value. The 5 offered to the EGAT employees was no greater resulting enthusiasm among workers led, in than three times the monthly wage bill for all some cases, to workers becoming the largest EGAT employees (Bhoocha-oom 2001). single shareholder group via personal borrowings Bolivia rail: In the concessioning of Bolivia's rail used to expand their stake. This was the case in networks, the ministry decided to use share the privatization of LAN Chile (the airline), options as a means to minimize risk and promote Metropolitan Chilectra, and the Steel Company share ownership among workers. To access the of the Pacific (Gates and Saghir 1995). In privatiz- option, workers had to purchase one share at a ing ENDESA, the electricity holding company, preestablished book value share price of US$20. broader-based share ownership was encour- The option contract gave workers the right to aged, and the government not only placed 30 buy shares owned by the state or by public percent of the shares on the local stock market shareholders at book value, up to a total of their for the general public but also reserved shares social benefits (one monthly wage per year of for the work force. work). The option could be exercised anytime Mexico telecommunications: To win over during a period of one or two years after the employees to the privatization of Telmex, the closing of the transaction with the private opera- government offered them eight-year loans on tor (it varied among companies as a result of favorable terms from a government bank to negotiations). However, after the opening of the enable them to purchase 4.4 percent of its class economic envelopes (financial tenders), the offer A shares for a total of US$324 million. The bank for the newly issued shares in the case of the held the shares in trust to ensure payment of the eastern network was only 4.6 percent above loan. The strategy was beneficial for workers: by book value and for the Andean network it was 1995 employees had gained some US$1 billion 54.3 percent below book value. Therefore, most in increased share value (Tandon 1995, Wellenius of the workers decided not to exercise their and Stern 1994). options to buy additional shares (Valdez 2001. Ireland telecommunications and post: In July Italy's Enel: The first stage of privatization of Enel 1998, 11,000 employees were given a 14.9 per- Spa, the publicly owned Italian electricity sector cent stake in Telecom Eirann--Ireland's state- operator, took place in November 1999. owned telecommunications company, through an Approximately one-third of the capital stock of ESOP, as part of an agreement that included the company was floated on the Milan and New 2,000 voluntary redundancies and changes to York stock exchanges. The offer was well sub- long-established working practices, and that was scribed and included share requests to 70,302 of meant to help prepare the company for its sub- the company's employees (85 percent of the total sequent privatization in 1999. Previous ESOPs in group work force as of June 1999). In addition, state enterprises (airline and electricity) had been the three main sectoral unions had promoted limited to about 5 percent of the shareholding, establishment of an association of employee but the 14.9 percent Telecom Eirann model set a shareholders (European Industrial Relations precedent that was adopted for other infrastruc- Observatory On-line [EIROnline]). Available at ture and utility firms, including the postal service, www.eiro.eurofound.ie/). An Post EIROnline. Available at www.eiro.euro Chile airline and power: The second phase of found.ie/. Chile's privatization program included a program that offered low-risk share ownership. As a gen- (Box continues on the following page.) 149 Labor Issues in Infrastructure Reform: A Toolkit Employee share ownership can be Box 5.28 (continued) used as Argentina water: The Argentine government built Manila water: In the concessioning of MWSS the compensation, as an workers' support for the Buenos Aires water con- concession contract required that the conces- incentive, or as a cession by pledging to transfer to them 10 per- sionaire grant every regular employee an annual 5 means for the cent of shares in the new water company when stock (share equity) purchase bonus equal to not employees to the dividends paid to the government for these less than the last basic monthly salary due that purchase significant blocks of shares. shares covered their book value (US$12 million) year until all of a block of 6 percent of shares set (Alcázar, Abdala, and Shirley 2000). Similar pro- aside for employee share ownership was fully grams were adopted in other Argentine enterpris- subscribed (Lazaro n.d.; Cruz 2001) es. In the case of Argentina Gas (GdE), however, Senegal electricity: In 1999 10 percent of the given the size of GdE relative to the number of shares were offered for sale to workers. MODULE total employees, the government decided to give Kenya Airways: In the 1996 privatization of less than 10 percent of the shares; employees Kenya Airways, the Dutch airline KLM became were offered 3 to 5 percent because of the large the largest single strategic investor with a share- size of the company relative to the number of the holding of 26 percent, but 3 percent of the airline employees (Shaikh 1996, p. 4). was also reserved for staff at the float on the Nairobi Stock Exchange. in box 5.28 illustrate, ESOPs now form part of the Additional Material (on the structure of privatization programs for infrastruc- CD-ROM) ture enterprises in developing countries. ESOPs are Cruz, Wilfred. 2001. "Addressing Labor Concerns usually: during Privatization: Lessons from the Metropolitan Waterworks and Sewerage System · Structured as a separate legal entity (often a (MWSS), Manila, Philippines." PPIAF case study. trust) that purchases shares held on behalf World Bank, Washington, D.C. Shares transfers are of the employees, with a defined mechanism best seen as an Gates, Jeffrey R., and Jamal Saghir. 1995. "Employee that describes how shares are distributed. addition to, rather Stock Ownership Plans (ESOPS): Objectives, than a substitute for, · Designed to take advantage of national tax Design Options and International Experience." voluntary departure laws so that the plans are tax efficient both World Bank CES Discussion Paper Series 112. or early retirement Washington, D.C. compensation plans. for employees and for the companies. For example, the ESOP for Kenya Airways priva- Ray, Pranabesh. 2001. "HR Issues in Private tization was structured as a unit trust for tax Participation in Infrastructure: A Case Study of reasons (Megginson, privatization database). Orissa." PPIAF case study. World Bank, Washington, D.C. · Established by the enterprise, which con- Valdez, Jose. 2002. "Case Studies on Human tributes either new shares of its own equity Resource Issues in Private Participation in into the ESOP or cash to buy existing Infrastructure in Bolivia." PPIAF case study. World shares. Bank, Washington, D.C. Establishing a formal ESOP is relatively complex (see box 5.29) and requires independent profes- sional advice. Except in the case of employee or Web Sites Shares transfers are management employee buyouts of infrastructure not the best Capital Ownership Group: mechanism for units, ESOPS normally provide a level of owner- www.capitalownership.org/. (This is the site of a primary ship of 5 to 15 percent. Higher levels of ownership think tank on ownership issues funded by the Ford compensation to often entitle representation on the board, but this Foundation.) transferred workers may deter investors if they believe that further because of the risk European Industrial Relations Observatory Online: implicit in share labor adjustment is essential after PPI is settled. www.eiro.eurofound.ie/. (This site monitors various ownership. 150 Key Elements of a Labor Program Shares are common Box 5.29: Checklist for Successful ESOPs incentives in f some form of ESOP is to be established, I an important part of the communications privatization plans. here is a checklist of key issues that the process, particularly around the time that the MODULE implementing agency should ensure are being deal is completed. followed. · In all of the concerns about the work force, it is Participation Issues important to ensure that management has · All employees should be able to participate, adequate incentives and that these arrange- subject to a qualifying length of service such ments are transparent. Often, an appropriate as 12 months. share option plan is one that allows employees to acquire additional shares when they achieve · There should be no great discrepancy between agreed targets, both corporate and individual, 5 management's stake and that of the rest of the over, say, a three-year period. work force. · Management also still has the right to manage. · There should be similar voting rights. Structural and Technical Issues · There should be similar dividend rights. · What is the source of the shares (existing gov- · Use of an employee trust aids flexibility and ernment shares, newly issued shares)? helps sustain the plan for the longer term. · What are the eligibility rules (how many shares · Transparency--particularly regarding the first to offer, when, and at what price)? allocation, where it is important that everyone knows broadly who is getting what. · What constitutes compliance with national leg- islation? · A "free share" allocation, even quite modest, is usually essential to get everyone in as a share- · Wages and conditions of employment should holder. be kept separate from share ownership. · Wages and other benefits (for example, pen- · Employee representatives (including trade sions) should not be sacrificed for a share unionists) should have access to independent scheme. professional advice about the plans. · It is usual for employees leaving or retiring to · It is important to build in features that will pro- have to sell their shares to the trust. mote the sustainability of the plan, such as leavers must sell their shares, use of trust. · The trust will be run by trustees and a bal- anced make-up of the trustees avoids its being · There is nothing wrong in principle with dominated by any one faction--for example, employees being asked to put their own two management representatives, two work money in--some employees will be more force representatives, and one independent focused on their jobs if they have their own trustee agreed on by the other trustees would money at risk. strike a good balance. · For distribution of shares it is best to use tax- Management Issues efficient share plans where available. · The engagement of a specialist adviser, famil- · Internal market: some of the work force will iar with ESOPs, trust law, and taxation, will be want to buy or sell some shares, and this is essential. usually allowed in private companies, on a "matched" basis when the scheme has been · A participative style of management is adopted running for a while. to make the best of the plan. · Depending on the size of the stake the · Communicating with the work force before, employees have, they may be entitled to look during, and after the plan has been implement- at having a representative on the company's ed is vital to gaining their initial and ongoing main board--as a rule of thumb, a holding in support, thereby creating the necessary long- excess of 25 percent? term enthusiasm. · If the ESOP is put in place before PPI, should · Plans should be subject to full consultation the ESOP offer existing employees the possi- with the work force. bility to cash in at the time of privatization or · There is a need for culture change on both should it be structured as a long-term, per- sides (that is, management and the work formance-related incentive plan for the force), but it should be led by management. employees who best respond to the transition · Employees need to understand the difference to private management? (The answer is proba- between their rights and duties as employees bly both, and this will have implications for and their more limited rights as shareholders-- how the ESOP is eventually put in place.) 151 Labor Issues in Infrastructure Reform: A Toolkit aspects of labor relations in Europe, including Privatization as Financial Means to Political and information on share ownership.) Economic Ends." Journal of Financial Economics 53(2):217­53. National Center for Employee Ownership: www.nceo.org May, Karen. 1998. "Conversion to Worker-Owned or 5 Cooperative Businesses through Privatization: Ohio Employee Ownership Center: International Experience and the Case of Puerto http://dept.kent.edu/oeoc/AbouttheOEOC/ Rico." Available at cog.kent.edu/lib/May.htm. AboutTheOEOC.htm. (This center, based at a uni- versity in the United States, has an international program.) Rapid Response: http://rru.worldbank.org. (This site MODULE is a gateway to a range of information on infra- structure, privatization, and private sector develop- ment policies.) William Megginson. http://faculty-staff.ou.edu/ M/William.L.Megginson-1/ (This home page for Professor Megginson has a number of papers on privatization to download, as well as databases giv- ing information on shares offered to employees in initial privatization public offerings, and longitudi- nal measures of share ownership in privatized enterprises worldwide.) Other Material and Sources Binns, David. No date. "Privatization through Employee Ownership: Learned From the International Experience." Available at cog.kent.edu/lib/Binns%20-%20Privatization %20Through%20Employee%20Ownership.htm. Brzica, Dane. No date. "Privatization in Slovakia: The Role of Employee and Management Participation." International Labour Organisation Working Paper IPPRED-12. Geneva. Available at http://www.ilo.org/public/english/employment/ent/p apers/ippred12.htm. Cliento, Marco. 1998. Practice and Models of Financial Participation of Employees in the Companies of Europe: A Comparative Analysis. Rome: Institute of the Study of Innovation and Changes in Production Processes and Labour (SINDNOVA). An ESOP eases employee share Degeorge, Francois, Dirk Jenter, Alberto Moel, and ownership. A Peter Tufano. 2000. "Selling Company Shares to common model is a Reluctant Employees: France Telecom's trust with well- Experience." Working Paper 7683. Cambridge, defined rules on Mass.: National Bureau of Economic Research. share distribution, Available at http://papers.nber.org/papers/W7683. transfer, and buyback. Jones, Steven L., William L. Megginson, Robert C. Nash, and Jeffrey M. Netter. 1999. "Share Issue 152 6 MODULE Engaging MODULE with Stakeholders 6 I nfrastructure services are vital to economic and social development. Many stakeholders therefore have an interest in the process and out- comes of private participation in infrastructure (PPI). This module guides the implementing agency in involving stakeholders, particularly workers and trade unions. Directions to more general resources on stake- holder consultation and communications are provided at the end of the module. This section introduces the different forms of The CD-ROM contains: engagement and the sequencing of activities. It then · Worksheets for conducting stakeholder analysis discusses how to select different approaches and · Terms of reference for a stakeholder analysis. sequence the labor engagement process within the As described in module 1, the starting point for overall PPI transaction. It concludes with a brief engagement is a thorough stakeholder analysis. discussion of the resource needs involved. This module focuses on the processes of engage- ment with the key actors with whom government needs to interact in designing a labor program, in Fundamentals of Engagement particular labor and trade unions. Many stakeholders will be involved during the course of a PPI transaction. Government is itself a vital stakeholder, as well as the principal decision- Forms of Engagement maker at key approval steps in the PPI process and There are four forms of engagement that can apply the labor program. Investors, consumers, and regu- in labor restructuring, namely: latory authorities are stakeholders, too. The wider processes of public policymaking and strategic · Communication communication for privatization and PPI are described in material provided in the accompany- · Consultation ing CD-ROM. · Negotiation 153 Labor Issues in Infrastructure Reform: A Toolkit Consultation and · Cooperation. negotiation are very Box 6.1: OECD--Defining different processes. Communication is mainly a one-way transfer of Government­Citizen Relationships in information from government, the implementing Policymaking agency, or redeployment counselors to the stake- n OECD study of the mechanisms of 6 A holder audience. interaction between government and citi- zens in policy design, implementation, Consultation and negotiation are both two-way and evaluation recognized three forms of processes, but the expectations of outcomes are engagement: information, consultation, and very different. Participants in consultation expect active participation. The working definitions their views to be heard and taken into account, adopted in the study recognized a key role for government in setting the boundaries for MODULE whereas those in negotiations expect that mutually engagement, and noted that the final decision- binding results will be the outcome. making responsibility remained with govern- ment: Cooperation can be seen as a more mature form of · Information--a one-way relationship in which engagement where both sides expect to participate government produces and delivers informa- actively and are committed to win­win outcomes. tion for use by citizens. It covers both "pas- That distinguishes it from negotiation, which can sive" access to information upon demand by be adversarial and can yield win­lose outcomes. citizens and "active" measures by govern- Cooperative approaches often have longer-term ment to disseminate information to citizens. and broader perspectives than does negotiation. · Consultation--a two-way relationship in which citizens provide feedback to govern- Communication, consultation, and cooperation in ment. It is based on the prior definition by government of the issue on which citizen's the labor relations context align well with the three views are being sought and requires the pro- forms of engagement between citizens and govern- vision of information. ment recognized by the Organisation for Economic · Active participation--a relationship based Co-operation and Development (OECD) (see box on partnership with government in which citi- 6.1). Negotiation is a distinct form of engagement zens actively engage in the policymaking that arises from the contractual employer­employ- process. It acknowledges a role for citizens in ee relationship between government and the work proposing policy options and shaping the pol- icy dialogue, although the responsibility for force. (Subsequent sections of this module deal in the final decision or policy formulation rests more detail with each of the four levels of engage- with government. ment.) Source: OECD 2001. The OECD PUMA program has reports on how to engage with citizens. forms of engagement. For example, the strategy might resemble the following: · Communication with employees and unions Designing an Engagement Strategy on the proposed PPI transaction and the The engagement strategy sets out which of the var- need for work force restructuring. ious forms of engagement are to be used, and when. For the purposes of labor restructuring, · Consultation with employees, unions, and which is the focus of this Toolkit, the main stake- investors on restructuring approaches, holder groups are employees and unions, govern- including severance packages and proce- ment, and investors--and the views of all need to dures. be heard. It is, however, rarely the case that all · Carrying out negotiations among govern- stakeholders must be dealt with at the same time. ment, workers, and investors prior to PPI on An engagement strategy (see table 6.1) may there- issues such as labor contracts, pensions, and fore envisage a series of actions using all four working practices. If there is an economic 154 Engaging with Stakeholders regulator for the sector, it too may be the key messages to be conveyed. Certainly the Hasty or ill-prepared involved. basic rationale for work force restructuring must events can be damaging. be clearly defined and understood before any gov- · Identifying opportunities for cooperation ernment official or politician approaches TV, among business, unions, and local govern- MODULE radio, or newspapers. ment in monoindustrial towns suffering from a major loss of employment. The actual process of engagement is likely to have One particular risk is that of premature activities. stops and starts and periods of progress and set- Hasty and ill-prepared announcements, press con- back. It may not always be possible to follow a ferences, and newspaper or radio interviews can precise, neatly sequenced plan. As the case of Côte damage the credibility of everyone in government d'Ivoire Railways presented in box 1.14 in module 6 and so delay PPI if they expose uncertainty on 1 illustrates, a commitment to engage on work key issues or weaknesses in the government's force restructuring issues can lead to mutually "story." The implementing agency should be able acceptable solutions and improved outcomes for to advise government officials and politicians the implementing agency, workers, and other about when to sequence engagement events and stakeholders. Table 6.1: Outline of an Engagement Strategy (Illustration) Phase in work force restructuring (sequencing) Type of Initial Monitoring and engagement assessment Design Implementation evaluation Communication ·Stakeholder · Media audit · Press briefing · Monitoring of analysis · Opinion polls and releases attitude · Opinion polls · Focus groups · Small-group changes · Focus groups meetings · Follow-up · Video opinion polls · Progress reports Consultation ·Stakeholder · Visit for trade union · Ad hoc · Follow-up meet- analysis officials to another meetings with ings or surveys · Draft policy infrastructure SOE union officials paper and that has been meetings through PPI (government · Forums to gather policymakers) stakeholder views Negotiation ·Stakeholder · Set up joint task · Task force · Task force analysis force (enterprise, meetings review meetings · Review of union, government) · Bargaining existing · Design and meetings negotiating negotiate bargaining framework arrangements Cooperation ·Stakeholder · Set up joint task · Task force · Task force analysis force (enterprise, meetings review meetings · Identification of union, · Finalize issues · Possibly further issues suited government) for cooperation cooperation to active involve- · Refine issues and begin imple- arising out of ment of stake- identification mentation of earlier efforts holders arrangements 155 Labor Issues in Infrastructure Reform: A Toolkit Skills may be Acquiring Engagement Skills In many developing countries, for example, there acquired by are no effective trade unions or the existing ones subcontracting or by Effective engagement requires a particular mix of training key people. skills. Where government does not have these in have limited capability. Both the International house, some skills can be acquired through subcon- Labour Organisation (ILO) and a number of inter- 6 tracting to specialist providers or consultants. Skills national trade unions have programs designed to and capacity in opinion polling, conducting focus strengthen the capacity of trade union organiza- groups, copywriting, media design and commis- tions in developing and transition countries. sioning, and strategic advice can all be brought in. Although there are few concrete examples, the value of capacity building is increasingly recog- Other skills, however, may have been developed in nized. In India the ILO helped trade unions in the MODULE key people through training. As part of the com- telecommunications sector develop strategies for munications process the senior manager in the reskilling in the face of technological change. In implementing agency or senior government offi- Russia trade unions were seen as having an impor- cials may need to communicate directly and credi- tant role in coal sector restructuring. Over a five- bly with workers or via radio or TV. Personal skills year period, financing from a World Bank technical development for these circumstances may be very assistance loan allowed the trade unions to con- valuable. Negotiation training for key people can duct regular seminars on topical issues in sector also have significant financial, strategic, and tacti- restructuring (for example, on relations with pri- cal benefits. vate employers), to maintain legal services in the coal regions, and to carry out monitoring and In some cases, it is more a question of acquiring other activities relevant to sector restructuring the right person than the right skills. In Italy the (Artemiev and Haney 2002). "right" minister was able to be credible with trade unions (box 6.2). Where workers and trade unions are weakly organized, one approach is to ignore capacity The ILO has The implementing agency can budget and secure building, exploit that weakness, and use coercion supported capacity financing for the government's side of the engage- to accelerate work force restructuring. This building in national ment: consultants and advisers, opinion pollsters, trade unions in approach, however, is embedded in a win­lose stakeholder research and analysis, and media pur- developing and mindset. Cooperation, for example, assumes much transition countries. chase. Donor funds are an important source of more of a partnership or win­win approach. finance for these activities and resources, but build- Attention to capacity building is therefore most ing the capacity of other parties in the engagement likely to be adopted in the same circumstances as should also be encouraged. those in which cooperation is the appropriate engagement approach. Box 6.2: Italy--Ministerial Change Facilitates Negotiations COMMUNICATION The privatization of Italy's Enel, the state-owned electricity giant, was opposed by unions until The most basic issue for implementing agencies in the government decided to propose a cabinet managing the process of labor adjustment in PPI is reshuffling and select a former leader of the Communist Party in parliament as minister of to communicate effectively with all stakeholders. industry. The new minister, who had close ties to the unions and some credibility with them, helped the unions to accept a deal, acting as a mediator and broker between the parties. The Objectives privatization that followed the agreement in Good communication with workers and unions is 1999 was the largest initial public offering that important for successful PPI. Get it right and, all ever appeared in the marketplace. other things being equal, PPI can be relatively Source: World Bank 2002. 156 Engaging with Stakeholders smooth. Get it wrong and PPI can be delayed or involved. Costs vary greatly from country to coun- Clearly defined postponed indefinitely. try and should be calculated at an early stage. (A objectives are essential. checklist on the CD-ROM provides a list of items The following are common objectives of a commu- for which costs need to be determined.) nication program: MODULE Checklist for costing a communications program. · Build broad public understanding of and consensus for the need for reform In addition to timing and resource questions, a · Explain the rationale for work force restruc- communications plan must consider five elements: turing and government's efforts to mitigate adverse impacts on workers · Audience--to which audience(s) should 6 Employees may · Influence and win support from a narrow communications be addressed? have a legal right to group of key decisionmakers to approve poli- · Specific objectives--what specific behaviors be informed or cy, new legislation, or a restructuring strategy consulted on work or changes should the communication lead force restructuring. · Educate all parts of government (ministers, to or avert? officials, enterprise managers) to ensure a · Message--what messages will encourage the common understanding of the rationale, desired behavior? processes, and procedures of work force restructuring in PPI · Communication channels--what channels are available and effective? · Inform workers and others of the procedures for restructuring, severance, and redeployment · Monitoring and evaluation plan--how will the success of the communication be moni- · Promote the government's approach to tored and evaluated? potential PPI investors There are five key A methodology for bringing those five elements elements in a · Inform all stakeholders on progress together into a practical communication plan is communication · Mitigate specific risks to the project that described by Cabanero-Verzosa and Mitchell plan. result from action or inaction by key stake- (2002) on the Toolkit CD-ROM. That approach holders. uses a standard template (illustrated in table 6.2) based on identifying stakeholders (the audience) At a minimum, the implementing agency must and sharply defining the communication objectives. ensure that employees and their representatives know what decisions have been made on work Cabanero-Verzosa and Mitchell 2002. force restructuring, and why. They need to know the implications for them and any actions they must take. Poor (or late) communication of information Audience about work force restructuring can lead to misun- Each of the key stakeholder groups identified by derstandings, rumors, low morale, and poor per- the stakeholder analysis should be included in the formance within the enterprise. Moreover, it can communications plan. Communications to other lead to breaches of law in countries where employ- stakeholders may also be useful but should not dis- ees have a legal right to be informed about plans to tract from or compromise the program of commu- downsize or change their terms of employment. nication to key stakeholders. Specific Objectives Preparing a Communication Plan The specific objectives should be defined as tightly The communication plan must provide a timetable as possible so that it is clear what is wanted from of activities and indicative estimates of the costs the communications. For example: 157 Labor Issues in Infrastructure Reform: A Toolkit Just as stakeholder Table 6.2: Communications Plan Template analysis disaggregates stakeholders into Overall engagement objective______________________________________________________________________ groups, 6 communication Specific messages need to objective Message Method of be tailored for each Audience (change Supporting Communication monitoring (stakeholder in stakeholder Take-away data and channels and of those groups. group) behavior) message evidence and media evaluation Group A MODULE Groups B, C, and so forth Source: Adapted from Cabanero-Verzosa and Mitchell 2002. · "Ministers and officials in the sector min- Stakeholder analysis allows the implementing istry to know that downsizing by 15 percent agency to disaggregate broad groups and better will reduce government subsidies by the understand their concerns. This allows for mes- equivalent of $x million next year and will sages to be fine-tuned and couched in terms rele- facilitate the PPI transaction, and that new vant to different subgroups or audiences. For work practices introduced over the last five example: "Take-away" years mean there will be no adverse impact messages reflect the on service level and quality." · Unskilled workers may need to know that specific concerns of that "government is offering a generous vol- stakeholder groups. · "Members of the council of ministers to untary departure plan for unskilled workers approve the overall work force restructuring because new technologies have meant that strategy by a specified date." there are fewer unskilled jobs today and · "Leaders of the three main trade unions to there is no guarantee of employment for agree to participate in consultations on unskilled workers tomorrow." work force restructuring." · Skilled engineers and accountants may need · "All workers, including those in distant to know that "the government is on track to regional offices, to be aware of the sever- bring in a PPI investor within two years, with ance options open to them by a specified new investment equivalent to $x million. date." Demand for the enterprise's services are fore- cast to grow significantly. Skilled staff might The objectives also provide the basis for subse- benefit from staying on to see what new job quent monitoring and evaluation, which can then opportunities and freedoms PPI can offer." check whether the communications have produced the desired effects. In table 6.2 these differing messages are called Messages need to "take-away" messages, to emphasize that they be supported by need to focus on the specific concerns of each credible evidence-- and this may take stakeholder group and not on a vague and unfo- Designing the Message time to acquire. cused government desire to tell people about its Designing the message requires careful preparation work force restructuring plans. because when the message is disseminated widely, To be credible, "take-away" messages need to be it cannot easily be withdrawn. backed up by credible supporting evidence. Mere 158 Engaging with Stakeholders assertions by government or the implementing means taking into account the particular needs of Visits allow agency will not be enough. Indeed, they could well different groups of workers. A note on the CD- stakeholders to experience the real be counterproductive; telling workers that ROM ("Do's and Don'ts of Communicating with situation for retrenchment will open up new opportunities for Workers") gives some practical tips on how to use themselves. MODULE them without providing evidence will only rein- various communications tools. force suspicions. Collecting, organizing, and pre- senting the supporting evidence may be very time Checklist of "do's and don'ts" for communicating consuming, so the timetable and work plan need to with workers. schedule the preparation of this evidence at an The implementing agency can use a variety of early stage. Among the main evidence to be gath- channels for delivering messages. A media audit ered is the following: 6 can be commissioned to provide factual informa- · Benchmark data on labor productivity, tion on alternative media and channels of commu- which is one of many indicators of over- nication. The audit can help the implementing staffing agency select among various channels (table 6.3), some of which are also relevant to consultation, Effective · Independently commissioned cost-benefit negotiation, and cooperation. communication is analyses of PPI, including impact on efficien- not propaganda. cy, investments, employment, and fiscal mat- As table 6.3 shows, a variety of channels can be ters used. In rough order of effectiveness these channels are: · Data on the financial and economic costs of maintaining state-owned enterprises · Small-group meetings where officials can · Data on enterprise debt and pension plan answer worker's questions firsthand. A liabilities thousand workers can be addressed in 10 small groups of 100 people each, and the · Data on enterprise subsidies expressed in activity can be concluded in a few days. terms of proportions of total government expenditure or converted into measures · Meetings where the main presenters are "expert witnesses" credible to the audience. · Data on employment trends within the Video presentations In the labor context, this often means work- of workers' views sector. ers who have lived through PPI elsewhere are powerful tools for communicating Effective communications should not be confused and so can speak with authority. with other workers. with propaganda or "spin." Although it is often · Virtual meetings with these expert witnesses, necessary and legitimate to present the case for PPI through a nonpropagandistic video in which and to detail any changes--such as work force those workers describe their experiences restructuring--associated with it, it is just as before, during, and after PPI. In some coun- important to give the bad news as well as the tries useful videos are available, and making good. The whole process can be undermined by one can be a cost-effective option (see the loss of trust if stakeholders lose confidence in the CD-ROM note on preparing videos). accuracy and honesty of what they are told. · Meeting with colleagues who have seen reform firsthand, ideally coworkers who have toured a PPI operation and spoken to Delivering the Message Small-group the workers there. meetings with Senior managers and ministers need to deliver mes- presentations by · Personalized printed material, such as per- experienced workers sages themselves in face-to-face meetings. When sonal letters to individual workers or work- are the key to written information is provided it should be pre- er families, delivered with paychecks or sent effective sented in the appropriate language and in ways to worker's homes. communications and consultation. that reach all who are entitled to it--and that 159 Labor Issues in Infrastructure Reform: A Toolkit Posters and Table 6.3: Example of a Media Audit--Picking the Right Tools for the Task commercials alone cannot change Communication Consultation Negotiation Cooperation opinions. 6 Opinion polls and focus groups Small meetings Mass meetings Visits to other PPI schemes Video documentary Video memo MODULE Consultation papers Information brochures Mass media (TV, radio) Press releases Press briefings Posters = highly relevant tool; = somewhat relevant tool. · Impersonal but detailed printed material by workers to enterprises that have success- describing, for example, redundancy, coun- fully experienced PPI are particularly valu- seling, and retraining procedures in sharp able. Box 6.3 illustrates how the experience detail. of seeing for themselves was important in winning the overall support of unions for · General radio or television advertisements. the privatization of Manila water. · Impersonal general printed material, such as · If individual visits are only possible for a few posters. people, short videos made up mainly of the The best medium is the one with the most impact, comments of workers in other successful and so face-to-face meetings are usually strongest and Communications completed PPI enterprises are an alternative can be combined: an impersonal printed leaflet is probably the weak- way to provide supporting information for for example a visit, est medium. the take-away message (see the CD-ROM with a video, for practitioner guidelines on such films). For followed by a group Posters contain short messages that, even if true, meeting. example, a video can be made of workers are so abbreviated as to seem propagandistic and from the PPI enterprise visiting and talking hence perhaps unbelievable. For workers whose to the workers in another enterprise that has livelihoods may be at stake, posters will be credible already completed its PPI transaction. The only if accompanied by more informative and documentary can then be screened back more convincing materials. home, with some of the workers who made Visits to see how others have dealt with PPI are the trip and with some of the workers from valuable for government, workers, and unions the already-completed PPI site in attendance. alike, and are a means of communication in their The home audience of workers can then see own right. When planning visits, the following the privatized plant secondhand, talk with design points can be borne in mind: the workers in the privatized plant, and talk with their own coworkers who traveled · Hearing from fellow workers and colleagues there and saw everything first-hand. is likely to be the most credible source of Guidelines on videos for communicating with messages for workers. For this reason visits workers. 160 Engaging with Stakeholders Check to see if the Box 6.3: Manila Water--How a Trip to Buenos Aires Improved Understanding communications are key government official involved in the and the labor union leaders. We were not working. A concessioning of the Metropolitan really in control of what would happen in Waterworks and Sewerage System Buenos Aires, but we gambled that the trip MODULE (MWSS) in Manila, the Philippines, kept a diary of would have a positive result. this PPI transaction. He wrote: In the end, the trip turned out to be highly Sometime in April 1996, the World Bank successful. The contingent met with numer- broached the idea of organizing a trip to ous officials and all of them were happy with Buenos Aires. We had actually been thinking the privatization. The happiest were the labor about this possibility from the very beginning union leaders. Their counterparts in Buenos of the transaction, but, with so many other Aires explained that even if so many jobs 6 things to take care of, it had never been were apparently lost with the privatization actively pursued. (due to retrenchment), all of those jobs and From all the reports we had received, the more were recovered in the private sector. Buenos Aires transaction was highly success- The concessionaire generated a lot of new ful. We thought that it would be great if key business, most of it for other companies in people involved in the MWSS privatization the private sector. could actually meet people who had been It seems this trip was key to securing involved in the Buenos Aires transaction. labor's support of the privatization. They saw When we decided on the composition of that the results in Buenos Aires were posi- the contingent, we took a great risk. Aside tive. They also saw that the MWSS privatiza- from MWSS top and middle management, tion itself was transparent. we decided to send members of Congress Source: Dumol 2000. · Visits by ministers and key officials can also tion of misunderstandings before they emerge. The be important: implementing agency therefore should plan to sur- vey stakeholders periodically for changes in atti- One of the most important things we did tudes, actions, or intentions. Tools to assess them was to take a group, including three minis- can include opinion polls, longitudinal surveys, and ters, on a tour of other countries' privatiza- follow-up focus groups (with the same partici- tion programs. It was not an easy trip, as pants). the ministers were very demanding on pro- tocol and status issues. Subsequently, how- ever, decisionmaking was much faster, because the ministers had seen and heard CONSULTATION the issues for themselves. They were also An effective way to communicate is to consult, but able to debate, question, and challenge pro- that is not the only reason for consultation. posals that came before the cabinet of minis- Consultation can also help improve the process ters (adviser at a privatization agency in and outcomes of work force restructuring. Asia). · Media can be combined for greater impact. Role of Consultation As a two-way process, consultation: Monitoring and Evaluation · Offers a way to tap into the experience and Communications campaigns are intended to alter knowledge of stakeholders in the design and stakeholders' perceptions, so the implementing implementation of labor restructuring pro- agency should check now and again to see what posals has been accomplished. This can allow the correc- 161 Labor Issues in Infrastructure Reform: A Toolkit Focus groups are · Provides a source of information to tailor think; identify, explore, and design poll good exploratory labor strategies more closely to prevailing questions that matter to the audience; and tools. circumstances estimate the intensity of feeling on a subject (which polls cannot gauge). Focus groups · Provides ideas about how to design the 6 are relatively fast, cheap, easy, and reliable. communications strategy, prepare for nego- The CD-ROM provides notes on how to tiations, and develop any cooperation proj- undertake focus groups. ects that might be possible Notes on managing focus groups. · Adds legitimacy through involvement of stakeholders in decisions affecting their · Opinion polls, which offer evidence of future. MODULE stakeholder attitudes. To be statistically rele- Consultation should be undertaken with all key vant, opinion polls require at least 1,000 stakeholders. Consulting with trade unions has a respondents. Some PPI workplaces are not particular facet, however: union opposition to PPI that large. Even when they are, a problem often has its basis in a belief that the unions are with polling is that the wrong question insufficiently consulted about PPI, or consulted might be asked. You might find out that 86 too late when there are problems in the process percent favor one solution rather than (box 6.4). another, but you might not find out that the best solution is a third one about which they Methods of Consultation have not been asked. As well as one-to-one or small-group meetings, the · Policy papers, which can take various forms principal tools that the implementing agency can and have narrow or wide audiences. A strat- use to consult are: egy paper for a cabinet or the council of ministers might seek approval from minis- · Focus groups, which help the implementing ters. A draft policy statement or "white" agency to understand what people really Box 6.4: Trade Unions and Consultation T he key issues and agenda for each union This statement encapsulates the key issues typi- will vary, and can only be determined cally raised by trade unions and workers: through a stakeholder analysis and through · Fair treatment for employees the process of engagement itself. Here, however, · Negotiation rather than imposition of changes is what one global union federation with more in employment numbers and conditions of than 20 million affiliated members in public serv- service ices has commented, in general, on what unions want: · Consideration of alternatives to PPI--with no or limited private sector involvement Politicians and public managers must be made to state clearly the goals of any particular privati- · Consultation with unions at every stage of the zation measure and show how it would achieve process them. Trade unions have a right and a responsi- · Accountability and transparency of decision- bility to ensure that those goals are in the public making on PPI. interest, to satisfy themselves that they will be The relative importance of each of these issues achieved in ways that involve fair treatment of will vary from country to country and among PPI public employees, and to insist that alternatives plans. Some issues (such as fair treatment) are to privatization and commercialization are fully unexceptional, whereas others (consultation at all explored. That is why they must insist on being stages) may not be easy for government to agree consulted at every stage of the process and with. Whatever the case, it is important that ensure that any changes in service and employ- implementing agencies be prepared to discuss ment levels and conditions are negotiated these issues with union leaders. (Public Services International 1997). 162 Engaging with Stakeholders paper might put policy proposals into the examples--good and bad--from different environ- Joint task teams are public domain for wide debate, perhaps ments. a common institutional using Web sites. mechanism for If consultation is meant to seek views about the enabling · Consultation frameworks and joint task nature of the changes to be made from a range of consultation. MODULE teams, which are institutional arrangements stakeholders, negotiation is intended to agree on to facilitate consultation, debate, and discus- the terms of those changes with the people directly sion on labor adjustment issues. They can affected by them. In practice, negotiation--as a be sector based or national. For example, in specific form of engagement--will usually involve the ports sector, task force or task team investors, workers and trade unions, and govern- Negotiation arises in approaches have been established to provide work force ment. restructuring as a 6 a forum for government, port managers, result of the port users, and workers' organizations to For example, in the Buenos Aires water concession, employer­employee share views. (See an example from the the labor union was represented on the committee relationship between government and the Ghana port sector in box 6.5, and the that was set up to oversee the process and was work force. Public-Private Infrastructure Advisory closely involved in negotiations on restructuring Facility [PPIAF] Port Reform Toolkit). methods, severance options, and retraining Several countries also have long-standing arrangements (World Bank 2002). institutional arrangements for consultation Negotiation is a common feature of work force through tripartite forums of government, restructuring in infrastructure enterprises simply business, and labor. because the enterprises are usually large and the PPIAF Port Reform Toolkit. work force is generally organized. The employer­employee relationship between govern- ment and the work force provides the primary con- NEGOTIATION text for negotiation as a form of engagement. Key actors in the negotiations are therefore government Negotiating changes in work force numbers or and workers' representatives, although each party conditions of service lies at the heart of the chal- may enlist support (lawyers, advisers, nongovern- lenge facing the implementing agency. This section mental organizations [NGOs]). provides a framework for negotiations, and some Box 6.5: Ghana Port Reform--Working Effectively with Unions T he Ghana Ports and Harbours Authority community with regard to implementation of (GPHA) is to be converted into a "landlord" the port component of the GHATIG Project. port authority whereas the private sector · Inclusion of representatives of the Maritime will participate in port operations, particularly and Port Workers Union on the organization- container handling operations, dock yards man- al restructuring and labor rationalization agement, sites maintenance, and services. A crit- working team of the Project Implementation ical issue was overcoming the resistance to Committee and their attendance at its meet- change from many of the stakeholders in the port ings on a regular basis. industry. This was achieved through: There was public consultation through a national · Timely, proactive, and professional actions workshop on the acceptability of the govern- of the government of Ghana (particularly the ment's policies about port reforms. The minister initiatives of the minister of roads and trans- of roads and transport also made personal visits port) and the GPHA management to the ports to speak and, more important, to lis- · Avoidance of any autocratic approach ten to the port work force and the port labor · Adoption of a consultative, persuasive, and unions. participative style, which has resulted in a Source: PPIAF 2001. very positive atmosphere among the port 163 Labor Issues in Infrastructure Reform: A Toolkit Negotiation is a Negotiation is important because of the financial key role in achieving negotiated changes in work central role of trade consequences for all parties. As box 6.6 illustrates, practices that are of mutual advantage and more unions and can shape the nature of an otherwise exemplary engagement strategy can sustainable. the engagement lead to adverse consequences for government if the The centrality of negotiations for unions has four 6 between organized negotiation element goes awry (in that case, on labor and pension matters). practical implications for the implementing agency: government. The ability to negotiate through collective bargain- 1. Unions might expect to be engaged in nego- ing is central to unions. Most OECD countries per- tiation at times when the implementing mit and guarantee rights to collective bargaining agency might be using other forms of and the freedom of workers to associate, but engagement (communication, consultation, MODULE restrictions on these rights exist in a number of or cooperation). developing countries. Although the economic bene- 2. Attempts by government to diminish the fits of collective bargaining for workers and for opportunity for negotiated change are likely enterprises are context specific and not very clear to be vigorously opposed. cut (Aidt and Tzannatos 2002), unions can play a Box 6.6: Engagement Strategies in the Privatization of Sri Lanka Telecom S ri Lanka Telecom (SLT) was partially priva- opinion of the majority of workers. This suggest- tized in 1997 through the divestiture of 35 ed that the trade unions had to be contacted percent of shares plus management to a individually and the workers had to be addressed strategic investor--NTT of Japan. Issues of directly. Such dialogue was found to be much redundancy were considered explicitly from the more productive than dialogues with the union time that privatization was envisaged in the sec- leaders alone. In fact, certain trade unions with tor. The sector was large, employing over 8,000 skilled workers (accountants, engineers) were workers in the early 1990s. It was clear from the strongly in favor of privatization, recognizing that outset that worker support was essential if priva- it would lead to enhancing of company worth tization was to be done smoothly, even though and career development opportunity. overstaffing was not a critical issue. Over a peri- An in-house magazine, Amathuma, was od of five years, from 1992 to 1997, various launched by a media subcommittee. SLT also strategies were adopted to involve and increase conducted regional open house "awareness" worker awareness on preparations for privatiza- forums at offices throughout the island, along tion and the process itself. with representatives from the Ministry of Posts A national steering committee was appointed to and Telecom, PERC, and NIBM. Several media make high-level decisions and recommendations campaigns were also launched, addressing the regarding the transaction while a Telecom Cell need for restructuring SLT and the telecommuni- was created at the PERC (the privatization cations sector. agency) to handle implementation of the transac- All of this careful preparation led to the compara- tion. The cell was meant also to interact with the tively smooth transition of SLT from a govern- 31 trade unions operating in SLT. However, for ment department to a privatized enterprise. No the purpose of closely interacting with the cell, workers were retrenched during the process. The the unions were represented as a "joint front" government, however, had to pay a high price for involving nine trade unions. Six union leaders this relatively peaceful transition. The price was already had been sent to visit privatized telecom- not just in the form of expenses incurred during munications companies in Chile and Mexico to the awareness campaigns, or in terms of airfares familiarize themselves with the facilities available for the unionists. The principal expense came in in those countries. handling the negotiations that arose with regard An independent consultancy group (the National to pensions, with the outcome leaving the gov- Institute of Business Management, NIBM) was ernment with substantial pension commitments appointed to study labor issues relating to the to several hundred telecom workers for several reconstruction of SLT. A key finding by NIBM was decades hence. that trade union leaders did not always voice the Source: Salih 2000. 164 Engaging with Stakeholders 3. Negotiation processes (that is, those that process demanding of time and resources The implementing reach a mutually agreed outcome) may (see box 6.8). agency must expect that the scope of widen the scope of discussion to matters In an ideal world, everybody would gain all the time negotiations will beyond the original ones. This means that widen. from effective negotiations among PPI stakeholders, MODULE work force negotiations may start with a but in the real world, although win­win situations limited discussion of the number of surplus often arise, just as often tradeoffs have to be made workers but quickly expand to cover all and competing interests have to be balanced. aspects of work force restructuring--selec- tion processes, redeployment options, treat- ment of pensions, terms and conditions of transfer, and employment guarantees. Steps in Negotiations 6 4. The process of negotiation may be widened There is no easy recipe for negotiations, but clarity even further. Trade unions (and others of the objective (a successful PPI) and good prepa- opposed to PPI) may challenge the govern- ration will always be needed. At its simplest, nego- ment and the implementing agency on poli- tiation requires four steps: cy, financial, or social grounds. If the ration- 1. Making preparations ale for PPI is not well communicated, or if there are flaws in the process, these issues 2. Identifying and discussing potential areas of too may be brought to the work force negotiation restructuring negotiations. An example is 3. Proposing and bargaining the restructuring of South Africa's transport rail (Spoornet) networks, during which con- 4. Closing. sultations and negotiations took place through a joint task team. The trade union team emphasized the importance for the Step 1: Making Preparations union (SATAWU) of widening the debate Preparation is essential. Working with other govern- (see box 6.7), and both parties found the ment stakeholders, the implementing agency must: Box 6.7: South Africa Rail Restructuring--Widening the Negotiation L " ast year government announced its plan to full-time for more than six months. Secondly, the break Spoornet [the state-owned rail enter- labour team focused on issues of socio-economic prise] into separate businesses and conces- development and sustainability, rather than simply sion them to the private sector. This year, after negotiating over job loss. Thirdly, management more than six months engagement with labour, was a crucial party to the process, since only government has accepted that this plan makes no management can generate the detailed financial developmental, business or financial sense. What and business information that is necessary for a persuaded government to change its view? Why proper assessment of restructuring proposals. did it adopt such a flawed plan in the first place? Fourthly, labour has to take responsibility for man- The first important point is that SATAWU [South aging the process of engagement, as the DPE Africa's transport workers' union] successfully [Department of Public Enterprises, responsible for used Parliament and the press, as well as mass the management and restructuring of state enter- action and a march to the Minister of Transport's prises] lacks the skills of stakeholder consultation. office, to put pressure on government to engage in Finally, government was not monolithic. serious and meaningful consultation. The trade Fortunately, management was totally opposed to union movement can draw several lessons from government's plan, and there were officials both this experience. Firstly, engaging with government within DPE and in other departments, and minis- requires a large commitment of time and ters, sufficiently committed to socio-economic resources--in this case the SATAWU policy officer development to change their minds on the basis [and two researchers] working between half and of the evidence" (Von Holdt 2001, pp. 2­4). 165 Labor Issues in Infrastructure Reform: A Toolkit Preparation is Box 6.8: South Africa Transport Sector need to avoid "giving away" improved con- essential before ditions of service while the company is in entering into Negotiations--A "Long and Arduous" negotiations. Process the public sector because overly generous " conditions can frighten off investors at the ransnet [a public sector holding company 6 T for transport enterprises] has finalized its time of the PPI transaction. social plan agreement with organized · Have a full understanding of the detail of labour. This process has been long and ardu- legislation and labor contracts likely to ous, stretching over 2 years with no less than 30 meetings of negotiation to reach agreement. affect negotiations. In many countries, col- Spoornet itself has been dealt with separately, lective bargaining rights and procedures are given the major concerns that exist there. Thus, prescribed in legislation, while labor agree- MODULE a joint Government/Labour task team on ments also cover them. (See module 4.) So a Spoornet was established and so far has had first step is to establish the legal and con- 10 meetings that have resulted in the presenta- tion to the principals of a final report. However, a tractual situation. Where negotiation proce- further technical working group has been estab- dures are not set out in labor contracts, a lished to review the end-state model for preliminary step is to discuss and share the Spoornet restructuring, and this group has met details of the negotiating process, including at least 12 times so far, but is yet to complete its logistics, participants, and overall its work." timetable. Third-party mediation and arbi- Source: Department of Public Enterprises, South Africa tration bodies may also have a role (see the (www.dpe.gov.za/docs/policy/restructuring.html. CD-ROM for comments from one such body). · Reconfirm overall objectives--expressed in Notes on arbitration and labor conflict terms of the overall PPI project, as well as prevention. work force restructuring. · Define government interests and attempt to Step 2: Discussing Potential Areas of predict those of the other parties (drawing Negotiation on the findings of earlier stakeholder analy- sis). During this stage both sides set out what outcomes they are looking for. The discussion stage of negoti- · Identify the best solution that could be ations contains significant exchange of messages achieved for government without negotiat- and information about the wants and needs of ing, and identify possible outcomes that each party. It is important not to close this out too could meet the needs of government and the soon, or to "box in" the other party, because the other parties. other party has little or no room for making con- · Decide which overall outcomes are fixed cessions and effectively is forced out of the negotia- (absolutely nonnegotiable), and which have tions before moving to the next step--proposing some scope for variation. and bargaining. · Consider likely scenarios and outcomes Table 6.4 provides a checklist for implementing from the negotiations ("what if...?") and agencies that suggests possible negotiating estimate cost impacts where possible. The issues between labor and government, setting implementing agency may also need to bal- out labor's possible concerns and potential bar- ance between the need to maintain levels of gaining incentives and the outcomes that may infrastructure service (adversarial negotia- be mutually beneficial. Although it is not an tions that lead to strikes and disruption of exhaustive checklist because every circumstance essential services are undesirable for both will bring out different issues, it can be used as political leaders and the economy) and the a starting point and a framework for identify- 166 Engaging with Stakeholders ing areas of potential negotiation, building on It is during this stage that personal negotiation step 1. skills are most important. Key elements are clear communication, active listening, a willingness to This stage is also important in creating the right cli- separate the people and personalities from the sub- mate for discussion. The aim of the implementing MODULE ject of the negotiation, and a desire to look for out- agency should be to engender a tension-free atmos- comes that can satisfy the interests of all parties phere where mutual trust and confidence can be (even though they cannot always be found). developed. There may be a number of negotiations going on in parallel for different subsectors or issues (per- Step 3: Proposing and Bargaining haps pensions or legislative change) or for different 6 Table 6.4: A Checklist for Negotiations with Labor Potential Possible outcomes Issue Labor concern bargaining areas or agreements Staff reduction to · Job protection · Enhanced employ- · Costs savings used for meet competitive- · Loss of competitiveness ment security for capital and equipment ness benchmarks through loss of vital skills remaining work force · Investment to increase · Loss of institutional · Improved dialogue labor productivity knowledge and memory · Alternatives to · Sequenced employment · Fair process and avoid- retrenchments reduction timetable ance of union victimization · Consistent and · New job evaluation, · Compensation transparent selec- career development, and tion criteria pay system · Severance terms, · Hierarchy of reduction including retraining, mechanisms: attrition, job-search assistance, soft options volunteers and a retrenchment before compulsion package · Mutually agreed sever- ance processes, terms, and selection proce- dures Introduction of · Intensification of work · Training in new ways · Training courses for flexi- flexible work · Health and safety of working and skills ble work and multi- practices · Too much discretion · Enhanced employa- skilling of the work force instead of rests with management bility and job satis- · New rules for labor rigid work rules faction deployment and organi- · Team-based flexi- zation bility and worker empowerment Improvement in · Sharing benefits of · Gain-sharing plan · Performance/bonus labor productivity productivity · Worker involvement scheme, with clear crite- · Unfair measurement in job redesign and ria and protected budget methods measurement criteria · Forums for worker · Further job loss · Enhanced employ- involvement ment security through · Employment protection success Merit-based · Fair and transparent · End to patronage · Recruitment and selec- recruitment process and favoritism tion procedures (Table continues on the following page.) 167 Labor Issues in Infrastructure Reform: A Toolkit Table 6.4 (continued) Potential Possible outcomes Issue Labor concern bargaining areas or agreements · Equal opportunities · Negotiated, objective · Equal opportunities 6 (gender, ethnic group) selection criteria procedures Flatter hierarchy · Loss of middle- · Targeted severance · Middle-management management jobs support for middle severance package cov- · More work and managers ering pension, retraining, responsibility · More responsive and redeployment · Inadequate supervision management­ · New hierarchical struc- and support frontline communi- ture and communica- MODULE cations tions procedure · Increased pay for · Job evaluation, career increased responsi- development, and new bilities grading structure Change in · Impact on redundant · Training in new skills · Skills and qualifications skills mix workers · Rewards for gaining audit · Evidence base for qualifications · Job evaluation and new skills-mix decisions · Support for redun- career development pro- dant workers gram · Enhanced employa- · Training courses, access bility rights, and budgets · Dialogue arrangements Market-oriented · Loss of collective · Access to training, · New pay, grading, job pay structure bargaining rewards for gaining evaluation, and career · Equal pay for work of skills and qualifi- development system equal value cations · Improved skills mix · Protection for low- · Transparent pay · Equal opportunities skilled workers determination · Widening differentials criteria · System for review- ing effects of restructuring Reduction of · Loss of pension rights · Putting retirement · New pension arrange- nonwage labor · Loss of social benefits benefits on ments costs · Loss of custom and sustainable footing · Assurance of future practice benefits · Improved quality of benefits remaining benefits · Buyout of lost benefits · Compensation for · Stronger governance of lost benefits pension funds Managers' right · Fairness and · Shared benefits of · Disciplinary and griev- to manage (and transparency improved discipline ance procedure discipline) the · Protection against · Disciplinary rules · Revision procedures work force injustice linked to grievance rules More efficient · Nonsocial working · Independent health · Working hours and shift use of company hours and safety reviews patterns/premiums resources · Health and safety · Rewards for shift · Review procedures work Changed · Loss of power to · Clarity of · Recognition and repre- relationships protect members procedures sentation criteria with unions · Loss of facilities · More effective · Bargaining procedures for officials bargaining system and facilities 168 Engaging with Stakeholders operating divisions. The implementing agency will Cooperation is a then need to ensure coordination among all these Box 6.9: From Confrontation to Cooperation win­win approach. aspects. The example from South Africa (box 6.8) in Indianapolis again illustrates this point. W hen the U.S. city of Indianapolis, MODULE Indiana, decided to invite the private sector to bid to run most of its servic- es, the city's workers, organized in the American Step 4: Closing Federation of State, Country and Municipal Employees, planned to resist the plans, with mil- When agreement has been achieved, it is important itant action if necessary. The union also pro- to be sure that it can actually be implemented by posed an alternative based on the idea that if all parties. The agreement needs to be put in writ- the workers were given a fair shot at putting into 6 practice their own ideas about how to improve ing, but rushing to signature may be inappropriate. services while spending public money less Usually each party will have to ratify the agree- wastefully, they could compete with the private Social dialogue ment: workers' representatives need to gain agree- contractors and win. encompasses all ment from the work force, and the implementing aspects of economic The city's mayor, Stephen Goldsmith, was skep- and social policy. agency may need approval of the privatization tical at first but decided that the workers had agency, ministers, or the head of state. valuable knowledge they could contribute to the PPI process. As a result, the workers were involved through their union in designing the competitive bidding program, improving their COOPERATION own efficiency, and competing with private companies. A great deal of restructuring was Where circumstances are favorable, effective com- required, and the city established a labor pool to munication strategies, consultation exercises, and which surplus workers were transferred and negotiation processes can lead to deeper forms of from which other departments of the city and engagement in which stakeholders actively partici- private employers could recruit. Training was provided for these workers. pate in the design and implementation of PPI and Indianapolis succeeded by this route in reducing labor adjustment programs. its annual budget by $12 million and services have improved so much that the city and the workers' union were jointly awarded an Innovations in American Government Award by Cooperation in Practice the Ford Foundation and the John F. Kennedy Consultation and negotiation with labor can lead School of Government at Harvard University. into more active forms of participation in the Workers' earnings have greatly increased because of a gain-sharing agreement under design and implementation of programs to deal which workers are awarded 25 percent of the with labor issues. These more cooperative forms of savings their efforts achieve below already engagement are based on a win­win philosophy reduced budgets. whereby most stakeholders obtain mutual benefits, Source: Martin 2004 (forthcoming). as illustrated in box 6.9. Cooperative approaches to engagement during work force restructuring have parallels with the bring sustainable gains to both sides within a long- concept of "social dialogue." That concept implies term perspective, and has been defined by the ILO going beyond the traditional forms of collective as "all types of negotiation, consultation or simply bargaining to a continuous process of engagement the exchange of information, between and among among the social partners--government, business, representatives of governments, employers and labor, and (in some circumstances) other civil socie- workers, on issues of common interest relating to ty interests. Social dialogue aims to build an envi- economic and social policy." ronment in which engagement with labor can 169 Labor Issues in Infrastructure Reform: A Toolkit Cooperation is most Social dialogue is seen not as single event but a stances, participative and cooperative appropriate in four continuous process of consultation, negotiation, or approaches among government, local gov- circumstances. both, among employers (public and private) and ernment, municipalities, enterprises, trade workers' representatives, which does not end when unions, and other NGOs are likely to be 6 the PPI is implemented. The process may be time needed. consuming and long, but it is rewarded by sustain- 4. Where there is a strong political consensus able results and ownership of all stakeholders in in favor of inclusive processes and social the decisions made. dialogue: South Africa is one example of a country where government has established formal frameworks for the participation of MODULE Circumstances that Suit trade unions and workers' organizations in Cooperation policy formulation and implementation on PPI and enterprise restructuring. The nature of cooperation will vary greatly accord- ing to circumstances. Cooperation is, however, like- If cooperation is about mutual advantage and ly to be most appropriate in any of four circum- win­win relationships, why is cooperation not stances: always the norm, and why do tough negotiations or strikes occur? Circumstances vary greatly, but 1. Where large-scale, fundamental restructur- three points can be made: ing of a sector critical to economic develop- ment is foreseen: Here the agenda is not 1. In practice, consultation and negotiation simply downsizing, but more a question of usually work. Engagements that lead to sector reform. Where it is clear from past mutually successful negotiations are in fact history that this restructuring--including more common than one expects at first PPI and work force restructuring--will be sight. High-profile industrial disputes catch complex and protracted, then cooperation the attention of the media, but overlook the may be more likely to lead to success than many more disputes that are resolved relying only on other less participatory through negotiation, arbitration, and other forms of engagement. It may take much mechanisms. This should give the imple- longer, however (see box 6.8). menting agency some confidence--engage- ment usually has positive, not negative, out- 2. Where private participation and labor comes. adjustment are deeply opposed, perhaps by a strong and powerfully organized work 2. Parties may misjudge one another's position force with public support: In this case, coop- (information asymmetry). Government, eration is the only way forward and govern- workers, unions, and other parties may ment has fewer choices. Attempts at overt each lack complete information. One party coercion by government may lead to vigor- may misjudge another's position, and it is ous industrial action, disruption of infra- only later that each becomes aware that the structure services, and discredit to PPI as a other party did indeed mean what it had whole said. For the implementing agency, this reinforces the need to prepare well for 3. Where there are acute social challenges: For negotiations and, at the outset, to ensure example, if PPI involves drastic job losses in that the messages and rationale for PPI and monoindustrial towns (some port or railway work force restructuring are well made and towns, mining towns), with few alternative well communicated. employment options, then community-based redeployment measures are likely to be 3. Negotiating credibility must be demon- needed (as discussed earlier). In such circum- strated occasionally. If government is to be 170 Engaging with Stakeholders credible in undertaking reform, or if a Additional material (on the trade union is to be credible to its mem- CD-ROM) bership, from time to time each may have Cabanero-Verzosa, Cecilia, and Paul Mitchell. 2002. to demonstrate that credibility. Resolving "Communicating Economic Reform." MODULE an acrimonious strike can be portrayed as Development Communications Division. World a success for both parties if each audience Bank, Washington, D.C. believes that the credibility of its "side" World Bank. 2002. Public Communications Programs has been enhanced. The strike can earn for Privatization: A Tool Kit for Task Team one or both parties the right to a fair hear- Leaders and Clients. Washington, D.C. ing for several years because the threat of action has become more credible. The 6 implementing agency has limited options Web sites here. If government (or labor) has decided ACAS (Arbitration and Conciliation Advisory that such a strong demonstration of credi- Service): www.acas.org.uk. (Site offers downloads bility is needed, then all that can be done on handling redundancy and labor relations.) is to manage the situation by (a) continu- ing to communicate accurate, honest infor- ILO International Training Centre: www.itcilo.it. (Site offers courses on social dialogue.) mation to all stakeholders to reduce any information asymmetry; (b) taking steps to PPIAF Port Reform Tool Kit: www.ppiaf.org. reduce adverse impacts of strikes or other (Module 7 addresses engagement and labor issues.) industrial action on the public, consumers, Some international trade union organizations: and business users of infrastructure servic- es (for example, by stockpiling fuel · ICFTU (International Confederation of Free Trade reserves for power stations, contracting for Unions): www.icftu.org. substitute transport services, using new · World Confederation of Labor: www. cmt-wcl.org. modes and routes of transshipment, and emergency liberalization of services to pri- · International Transport Workers' Federation: www.itf.org.uk. vate operators); and, perhaps more impor- tant, (c) keeping the channels for discus- · Public Services International: www.world-psi.org. sion and debate open so that engagement · Union Network International (telecommunications is facilitated when it is (sooner or later) sector): www.union-network.org. resumed. · International Federation of Chemical, Energy, Mine and General Workers' Unions: www.icem.org. Tools (on the CD-ROM) · Trade Union Advisory Committee to the OECD: Terms of reference for stakeholder analysis www.tuac.org. Stakeholder analysis worksheets Checklist of communication costs items Other Material and Sources Do's and don'ts of communicating with workers Asian Development Bank. 1994. Handbook for Incorporation of Social Dimensions in Projects. Working with opinion polls and focus groups Manila. (This source includes checklists for road, rail, telecommunications, and power projects.) Making short films for worker communication--a practitioner's view Brinkerhoff, Derick W., and Benjamin L. Crosby. 2002. Managing Policy Reform: Concepts and Notes on arbitration and prevention of labor conflict 171 Labor Issues in Infrastructure Reform: A Toolkit Tools for Decision-Makers in Developing and making: Information, Consultation and Public Transition Countries. Bloomfield: Kumarian Press. Participation." PUMA Policy Brief 10. Paris. Available at www.oecd.org. DFID (Department for International Development). 1993. "Guidance Note on How to Do Stakeholder Walton, Richard E., Joel E. Cutcher-Gershenfeld, and 6 Analysis of Aid Projects and Programmes." Robert B. McKersie. 2000. Strategic Negotiations: London. Available at www.dfid.gov.uk. A Theory of Change in Labor Management Relations. Ithaca: Cornell University Press. IFC (International Finance Corporation). 1998. Doing Better Business through Effective Public World Bank. 1996. World Bank Participation Consultation and Disclosure: A Good Practice Sourcebook. Washington, D.C. (This publication Manual. Washington, D.C. Available at reviews participatory approaches to development www.ifc.org/enviro/Publications/Practice/practice.htm. activities, and includes case studies and method- MODULE ological appendixes.) OECD (Organisation for Economic Co-operation and Development). 2001. "Engaging Citizens in Policy- 172 7 MODULE Monitoring MODULE and Evaluation of Labor Programs 7 T his module provides guidance on why and how to evaluate the costs and benefits of labor restructuring programs and how to set up effec- tive monitoring systems to track progress and learn from experience. OVERVIEW been set, but where the key decisionmaker later admitted, "We didn't actually work out The specific objectives for monitoring and evalua- how much it was going to cost us. We just tion of labor programs are to: made our decision after looking at other · Assess financial and economic returns. [voluntary departure] schemes elsewhere, Labor programs involve spending consider- but felt we should increase it somewhat." able resources in the short run to reap some · Help make the case for work force restruc- The capability to gain in the longer term. Consequently the turing. There will always be opponents of undertake effective decision to undertake a labor restructuring work force restructuring. Cost-benefit analy- monitoring, analysis, program should consider the financial and and evaluation will ses can help provide key information for enhance the economic returns involved, much the same communication and negotiation (see module credibility and as would an investment decision. 6). reputation of the implementing · Learn from past experiences. Monitoring · Assess financial sustainability and identify agency. and evaluating a program's effectiveness can required financial resources. Cost-benefit help assess what works and what doesn't, analyses can help provide insight into the and the lessons from past experiences can financial sustainability of the overall pro- inform future labor programs. gram by taking into account the overall · Reduce costs to government. Most labor costs of the redundancy program and esti- programs can be very costly. Cost-benefit mating the impact of possible future addi- analyses help avoid the experience in one tional redundancies. These costs should take country where a policy of generous levels of into account all associated costs: compensa- severance pay (the highest in the region) had tion, redeployment, and the costs for the 173 Labor Issues in Infrastructure Reform: A Toolkit Complement pension system where there are early retire- beneficiaries of private participation in financial analysis ment programs. infrastructure (PPI) and infrastructure with stakeholder analysis, and sector reforms (for example, projected Early analysis can be critical in helping govern- present the results number of households expected to ments assess severance options and the size and 7 in ways that reveal receive new water or power connections). social costs and scope of the resource envelope for which funding is benefits. required. Consider the following example: An eco- ­ Presenting estimates of likely employ- nomic reform­implementing agency had embarked ment outcomes for the sector as a whole, with some success on a pilot program of privatiza- not just the state enterprise. For example, tion. In most cases work force restructuring took in telecommunications immediate short- place prior to privatization (and in some cases, clo- term job reductions in the state enterprise MODULE sure). The agency developed a five-year plan for may be quickly made up by new jobs in accelerated privatization that would include major new entrants in mobile and data commu- infrastructure enterprises. Empirical estimates of nications. likely levels of downsizing were made, based on ­ Expressing the financial cost savings to experience in the pilot state-owned enterprises government from work force restructur- (SOEs) and from similar enterprises elsewhere in ing in terms of the alternative social ben- the region. Those estimates revealed that unexpect- efits that could be provided from those edly high levels of expenditure on voluntary depar- savings (that is, number of new rural ture might be required in 2005 and 2006 (about schools or health clinics built a year, US$200 million annually) when restructuring of annual maintenance of rural roads, annu- large mining and infrastructure enterprises was al salaries of school teachers). planned. This analysis helped to inform planning by government (the ministry of finance, in particu- · Financial and economic analysis of the labor lar) on (a) the sequencing of privatization and (b) program needs to be complemented by discussions with donors on a new lending facility stakeholder analysis (which includes politi- in support of privatization and state enterprise cal concerns), as discussed in module 6, and reform. cost-benefit analysis of the wider case for PPI, in situations where opponents of labor The audience for analyses will extend beyond the adjustment are likely to challenge PPI itself implementing agency. Although analysis is an (see the negotiations section in module 6). essential input for decisionmaking on labor pro- grams, work force restructuring is both a technical The usefulness of analysis is constrained by two fur- issue and a political issue. The logic and rigor of ther factors: time and the availability of the data. technical analysis may not always be the decisive Governments often must make their decisions based factor, and the quality of presentation is important on limited and incomplete information--they rarely too. In practical terms this means that: have the luxury of the time needed to conduct a full analysis and to receive robust conclusions. Even · The findings are presented in a way that will when analysis is done, the quality of available data be accessible to policymakers and to a wider may restrict the usefulness of analysis. audience (for example, an overly academic presentation may not communicate conclu- sions effectively). ASSESSING FINANCIAL · The presentation of financial and economic RETURNS analysis will reveal political costs and bene- Governments, like the private sector, need to assess fits. Simple examples are: the financial costs and benefits of a work force ­ Comparing the number of workers who restructuring program. Unlike the private sector, may lose their jobs with the number of however, governments also need to assess a pro- 174 Monitoring and Evaluation of Labor Programs gram's economic costs and benefits to society, or the and family, CC is the cost of counseling, JC is the Work force economy, as a whole. The key questions and poten- cost of job-search assistance, TC is the cost of restructuring often uses batches of tial tools of analysis are summarized in table 7.1. training, and UC is the present estimated value of workers over time. unemployment benefit and other social payments, The costs (and As outlined in module 1, the immediate triggers for benefits) of future MODULE work force restructuring are often financial crisis, When collating those costs the implementing batches need to be not economic crisis. In such cases the financial agency will need to ensure that: discounted to a common present analysis can be a more critical question for govern- value. ment than is economic analysis. · All costs are viewed from the perspective of government as a whole. For example, costs should include any incremental cost to gov- 7 ernment of additional unemployment bene- Financial Costs--A Checklist fits or pensions for displaced workers. Table 7.2 provides a checklist of potential financial · Costs are all brought to present values. In a costs that may be incurred and that must be includ- major restructuring, downsizing is likely to ed when assessing financial returns. Essentially, the be a phased activity, so planned downsizing following equation captures the situation: two or three years hence should be appro- Financial costs = SC + RC + FC + CC + JC + TC + UC priately discounted. In addition, the esti- mated costs to the pension plan of any where SC is the present value of severance costs, early retirement benefits paid in future may RC is the current net value of retirement costs, FC need to be measured in terms of present is the existing value of transportation for worker value. Table 7.1: Financial Analysis--Key Questions and Tools Question Tool How much will the program cost? · Initial estimates of total program cost, based on rough assumptions of severance costs (see the quick calculator on the accompanying CD-ROM) What are the financial benefits? (How much · Net present value of net cash flows to and from money will government save?) government, taking account of savings in: ­ Salary and related costs and allowances ­ Retirement benefits ­ Other nonsalary benefits How can the program be funded? · Financial gap between cost estimates and potential funding sources (consider budget sources, privatiza- tion revenues, commercial loans, donor funds, and so forth) How long will the program take to pay for itself? · Payback analysis--how long before the costs of a labor program are recovered through savings in reduced wages and other labor-related costs? What is the financial impact of different · Payback and net present value analyses for different approaches to selection and work groups of employees (grade, age group, operating force restructuring? units) · Analysis of alternative severance formulas Looking at the economy as a whole, do the · Substitution of financial costs and benefits with economic benefits of work force restructuring economic costs and benefits in analyses exceed its costs? 175 Labor Issues in Infrastructure Reform: A Toolkit Financial benefits Table 7.2: Checklist--Financial Costs of a Labor Program should also be considered in the context of Item Comments and examples government as a 7 whole, not just of Direct costs of separation the infrastructure Present value of severance costs (SC) · Includes all the costs described in module 5: ex enterprise. gratia, statutory payments, gratuity, bonuses, allowances per enterprise rules, payments negotiat- ed in individual or collective labor contracts. Net present value of retirement costs (RC) · Estimated present value of future obligations to pro- vide retirement benefits (using realistic estimates of MODULE life expectancy, investment returns, and so forth) · Costs should include possible arrears in pension contribution and any additional investments needed to ensure the financial sustainability of the pension scheme. Present value of transportation for worker · Costs vary according to the enterprise (central or and family (FC) dispersed), country (size, transportation costs), nature of the work force (locally hired or nationally hired). Redeployment costs Counseling (CC) · Counseling costs based on expected take-up rates. · Assume that almost all workers will receive counsel- ing. Job-search assistance (JC) · Little data on actual uptake in severance programs-- perhaps 60­75 percent Training (TC) · Only a percentage of the work force is likely to undertake training--perhaps 10­30 percent, accord- ing to experience. Other costs Present value of estimated additional · Costs of social insurance to workers: Estimate addi- unemployment benefit and other social tional social insurance payments according to rules. payments (UC) Estimated periods of unemployment can be derived from social security records, public employment service records and interviews, private sector place- ment agencies, and surveys of workers displaced previously. Financial Benefits--A Checklist mated increase in PPI transaction proceeds result- Table 7.3 summarizes sources of benefits from a ing from the labor force adjustment. labor program, as portrayed by the following As with costs, benefits should be assessed in the equation: context of overall government spending. If an Financial benefits = W + R + B + O + P enterprise gains cost savings as a result of the trans- fer of staff to another enterprise or elsewhere in where W is the present value of wage savings, R is government, then overall there is no cost saving to the current net value of retirement benefits saved, B government (as in the example of the transfer of is the present value of savings in kind (nonwage Aqaba rail employees to the Jordan Phosphate allowances and other benefits), O is the current Mines Company, described in module 4, box 4.6). value of reduced operating costs, and P is the esti- The pension analysis similarly needs to consider 176 Monitoring and Evaluation of Labor Programs Table 7.3: Checklist--Financial Benefits of a Labor Program Item Comments and examples MODULE Direct benefits of separation Present value of wage savings (W) · This is usually the largest single source of savings: Includes wages of separated staff plus additional costs, allowances per enterprise rules, payments negotiated in individual or collective labor contracts. · Eliminating ghost workers may be an important and immediate source of financial savings in some enter- prises. 7 Net present value of savings in retirement · Some pension costs must be paid even without benefits (R) restructuring, so the difference between what would be paid with and without the labor program should be estimated. · Benefits also arise from the elimination of ghost pen- sioners. Present value of savings on benefits in kind-- These benefits can include but are not limited to: both variable and semivariable (B) · Transportation to work, subsidized food (canteens), and heating fuel costs · Reduced medical costs · Child support and childcare (kindergartens) · Free or subsidized housing or reduced housing maintenance costs. Other benefits Present value of reduced operating costs (O) · Reduced costs, such as transportation and vehicle costs, reduced administration costs (fewer support staff), reduced pilferage. · In some cases disposing of employee housing (per- haps cheap sales to workers), surplus offices, depots, and vehicles will reduce running costs. Estimated increase in PPI transaction · Increase resulting from downsizing per se. proceeds as a result of work force · Increase (or decrease) resulting from more (less) flex- restructuring (P) ible labor contracts. · Increase resulting from faster PPI transaction. · These may be difficult to estimate but are potentially significant. López-de-Silanes (2002) found that a 20 percent reduction in the work force before privatiza- tion led to a 24 percent increase in net privatization price (see box 7.5). the whole government context. If pension costs are large number of departures could tip the plan into merely transferred from the enterprise to another financial insolvency. Complexity can also arise if publicly guaranteed scheme, then there may be no different workers within enterprises have different cost saving for government. pension programs. To illustrate, if some workers are public servants and others are enterprise work- Most benefits are self-evident, but pensions can be ers subject to a general labor code, net savings to complex. In a defined-benefit plan with a high government might be higher for retrenchment of ratio of pensioners (receiving pensions from the the public servants because they have more gener- plan) to employees (contributing to the plan), a ous pension benefits. 177 Labor Issues in Infrastructure Reform: A Toolkit The simplest cost- Financial Payback Analysis The payback period is calculated on the basis of benefit analysis that the fraction of year 5 needed to bring net cash flow the implementing Where the costs of work force restructuring are agency can make is wholly front-loaded, the simplest method of analy- to zero. In this case: an undiscounted sis that could be considered is undiscounted pay- financial payback. Payback = 5 ­(­5,250/25,000) = 5.21 7 back (or breakeven) analysis. In the example pre- sented below, an initial expenditure of $100,000 in severance payments is "paid back" by the end of year 4 as a result of annual savings (wages and Some Results of Payback Analyses other staff costs) of $25,000. The simple payback In a survey of work force restructuring programs (or breakeven) period is calculated as the number in six countries, Svejnar and Terrell (1991) found MODULE of years it takes for the wage bill savings to equal that payback periods varied from just four months the financial costs--in this case 4 years. to 4.7 years. Haltiwanger and Singh (1999) evalu- Work force ated the financial returns of 41 downsizing opera- restructuring Cash Net cash tions based on World Bank internal documents for Year costs ($) savings ($) flow ($) a range of civil service and state enterprise 0 100,000 ­100,000 retrenchment programs. Their evaluation included 1 25,000 ­75,000 a discounted financial payback method, which 2 25,000 ­50,000 assumed a 10 percent annual discount rate. For the 3 25,000 ­25,000 24 operations with sufficient information to calcu- 4 25,000 0 late payback analyses, their results can be summa- 5 25,000 25,000 rized as follows: 6 25,000 50,000 · In 9 cases there were no net financial bene- fits from downsizing. These cases imply The introduction of discounting in the above that there is never any payback (that is, the example gives a more accurate picture of the pay- payback period is infinite). These circum- back period. By taking into account the lesser stances arose as a result of rehires, new value of money tomorrow instead of today and hires, or an increase in wages for the assuming an annual discount rate of, say, 10 per- retained workers. cent, the initial expenditure of $100,000 is paid · In 15 cases there were positive financial ben- back not at the end of year 4 but during the course efits and the average payback period was of year 5. 2.3 years. Fourteen of the programs had short payback periods of between 0 and 3.6 years--the one exception being the Bolivian Work mining corporation where the payback peri- force Discoun- od was 10 years. The other 3 enterprises in restruc- ted Net turing Cash Present values cash the sample had payback periods of 3.40 costs savings value at flow (Bangladesh jute), 1.44 (Pakistan public Year ($) ($) factor 10% ($) ($) enterprises), and 1.56 years (Argentina pub- Most evaluations of 0 100,000 1.000 100,000 ­100,000 lic enterprises). Programs with immediate work force 1 25,000 0.909 22,725 ­77,275 payback periods (0 years) were those that restructuring 2 25,000 0.826 20,650 ­56,625 involved involuntary reductions without programs reveal very fast payback 3 25,000 0.751 18,775 ­37,850 direct compensation of other assistance. periods. 4 25,000 0.683 17,075 ­20,775 These findings are striking. On the one hand, many 5 25,000 0.621 15,525 ­5,250 labor programs appear to offer exceptionally good 6 25,000 0.564 14,100 88,850 rates of return. Few investment projects display such 178 Monitoring and Evaluation of Labor Programs high financial returns as the 15 cases mentioned. Where work force restructuring involves significant Many people would Other programs, however, have not recovered their downsizing, it is difficult to persuade some to see object to the idea that downsizing can cost, often because of the problems of adverse selec- this as a "productive" investment. Downsizing is be seen as a tion and rehiring described in module 5. productive, however, in the sense that it removes "productive" MODULE and reallocates unproductive labor to more pro- investment, but Haltiwanger and Singh. work force ductive activities elsewhere. It increases labor (and restructuring can be often total factor) productivity within the enter- analyzed using the prise. Where there is a genuine surplus within the normal tools of investment Discounted Cash Flow Analysis work force, the jobs are not "real" jobs, and sur- appraisal. plus workers' marginal productivity within the Work force restructuring can be viewed as a proj- enterprise is likely to be close to zero. Their expect- 7 ect. Classic investment projects are based on an ed productivity will be greater in other employ- (often high) initial capital investment, followed by ment or other activities outside the enterprise. a stream of positive cash flows arising over a num- ber of years. Those positive cash flows are derived When using discounted cash flow analysis tech- from productivity improvements that lead to high- niques for labor adjustment, the implementing er revenues or greater savings. Work force restruc- agency should check that: turing shares a similar pattern, so the tools of investment analysis can be applied equally well to a · A mix of indicators is used, rather than relying work force restructuring project as to a capital on a single measure such as internal rate of investment project. (A sample spreadsheet is pre- return or net present value (see box 7.1). sented on the CD-ROM.) · An appropriate discount rate is selected. Choosing the right discount rate is a com- Sample spreadsheet for analysis of labor projects. Box 7.1: Indicators for Cost-Benefit Analysis T hree main indicators for cost-benefit analy- over a smaller project with a higher IRR but a sis are: lower NPV. 3. Benefit-cost ratio (BCR) is the ratio between 1. Internal rate of return (IRR) is the discount discounted total benefits and costs. Thus, if rate at which the future streams of costs and the discounted benefits are $150 million and benefits are equal. The higher the IRR, the the discounted costs are $100 million, the better the project, so the IRR method is a BCR is 1.5 (and the NPV is $50 million). The convenient way to compare different alterna- BCR is a useful check to the NPV process, as tive options in labor programs. a way of spotting program options that offer 2. Net present value (NPV) is the difference attractive NPVs only because they are large. between the discounted streams of future Reporting of BCRs again demands mention costs and future benefits. If costs exceed of the discount rate used. benefits, the NPV is negative; if benefits In complex activities, such as work force restruc- exceed costs, the NPV is positive. The NPV is turing, a single number--be it IRR, NPV, or the value, discounted to the present, of BCR--is unlikely to be enough for informed deci- undertaking a work force restructuring project sionmakers. Sensitivity analysis shows how varia- rather than not doing so. NPV assessments tions in the key assumptions underlying the require that a predetermined discount rate is analysis influence the expected outcomes of the selected. One criticism of NPV assessments restructuring program. At its simplest, this means is that, when comparing alternative restructur- running a spreadsheet model under different ing proposals, the decision rule would select assumptions and presenting these variations in a the largest project (giving the highest NPV) table. 179 Labor Issues in Infrastructure Reform: A Toolkit Economic analysis plex issue but, in practice, sources of infor- funding procedures need economic as well provides a mation for the rate are the general interest as financial analysis. perspective that financial analysis rate defined by the ministry of finance for Labor productivity issues are central to an econom- alone cannot. the application of public funds--the best ic view of work force restructuring, which sees the 7 source--or offices of international lending process as a reallocation of resources within the agencies such as the World Bank and economy. From an economic cost-benefit perspec- regional development banks. tive, the cost of restructuring must be met by an · Costs and benefit flows have been calculated increase in worker productivity following displace- for a sufficient period. If discount rates are ment. The effect of moving workers out of the PPI about 8­12 percent, then a 20-year period is enterprise into other parts of the economy can lead MODULE likely to be sufficient. to negative outcomes if overall labor productivity falls, neutral outcomes if overall labor productivity is unchanged, or positive outcomes if overall labor ASSESSING ECONOMIC productivity rises. Much therefore depends on the RETURNS assumptions regarding marginal productivity of the worker in the enterprise compared with the mar- This section outlines the rationale for, and elements ginal productivity of his or her activities following of, economic analysis of labor programs. The retrenchment. resources listed at the end of this module include several examples of economic analyses of work force restructuring in public enterprises. Economic vs. Financial Costs Economic cost-benefit analysis is similar in Rationale approach to the discounted cash flow approach to financial analysis. As the spreadsheet sample on the As discussed above, the near-term financial benefit accompanying CD-ROM shows, both financial for government is sometimes the critical factor for and economic analysis can be combined in the cash-strapped ministries of finance faced with an same cost-benefit model. Financial costs and bene- urgent need for infrastructure enterprise reform. fits are substituted by economic costs and benefits However, economic analysis is also needed for the in the economic cost-benefit analysis. following purposes: Differences between economic and financial costs · First, it assesses impact on aggregate output (summarized in table 7.4) are as follows: or welfare. Financial analysis tells nothing about whether displaced workers are, in the · Financial costs of severance (item 1): In aggregate, more or less productive following economies with no tax distortions or subsi- the labor program. It is quite possible that a dies, and no fiscal budget constraint, the proposed labor program can be attractive financial costs of severance would not nor- from the financial analysis perspective, but mally be treated as an economic cost. can fail when subjected to economic analysis. Rather they would be seen as a neutral · Second, it provides an answer to opponents of transfer payment. Most developing coun- work force restructuring in PPI, who may tries, however, do have distortions and argue that by ignoring the wider economic budget constraints, so severance payments costs and benefits, government is making a bad to workers divert public funds from other decision (see, for example, the South African uses. Except in a few upper-middle-income case presented in box 6.9 of module 6). countries, a conservative approach would be to treat the economic costs of severance as · Third, it may be a requirement of interna- 100 percent of the financial costs. tional funding agencies whose lending or 180 Monitoring and Evaluation of Labor Programs Table 7.4: Economic vs. Financial Costs and Benefits Include in Include in Item Cost and benefit items financial analysis? economic analysis? MODULE Costs 1 Financial costs of severance Yes Yes--adjusted 2 Financial costs of early retirement Yes Yes--adjusted 3 Financial costs of redeployment Yes Yes--adjusted 4 Marginal productivity of employees in the SOE No Yes Benefits 7 5 Financial savings on wages Yes No 6 Financial savings on nonwage benefits Yes No 7 Marginal productivity of worker outside the SOE No Yes 8 Marginal productivity value of labor savings No Yes 9 Increase in privatization proceeds from downsizing Yes/No No 10 Increase in privatization proceeds from faster PPI Yes/No No · Financial costs of early retirement (item 2): severance, through restricting downsizing to Similar considerations apply for the costs of cadres with obvious levels of surplus labor, early retirement as for severance. In practice, or through a mixed government­investor the principal difficulty is likely to be the esti- approach (see table 4.1, module 4). mation of the present value of the net finan- · Financial savings on wages (item 5): This is cial costs of early retirement. likely to be one of the largest sources of sav- · Financial costs of redeployment (item 3): If ings. Two points are important: private sector firms are providing redeploy- 1. Given the evidence of rehiring in many ment services (training, counseling, outplace- downsizing programs, an explicit adjust- ment) then the full market price of the train- ment factor to take rehiring into account ing can be taken as the economic resource may be appropriate in the financial cost of redeployment. Where governments analysis. If workers are hired elsewhere delegate redeployment to state agencies that in government, or by the same enterprise, are heavily subsidized and operating below financial saving will be reduced. For capacity, the economic costs are likely to be example, employees of the Sri Lanka below financial costs, and an adjustment Transport Board were induced to leave factor should be applied. with severance funding, but were being · Marginal productivity of employees in the rehired almost simultaneously (Svejnar SOE (item 4): If there is a genuine surplus of and Terrell 1991). High numbers of workers, their retrenchment will not result workers rehired following a labor pro- in a loss of productivity in the enterprise, gram are an indicator of the failure of the and the marginal productivity of employees program, both in a financial sense (a in the enterprise can be set at zero. This is a waste of public money in financing the reasonable assumption, if the work force costs of the workers' departure) and in restructuring strategy adequately tackles the an economic sense (a failed attempt to risk of adverse selection (for example, reallocate the workers' labor to more through close targeting of workers offered productive use). Some new hiring is occa- 181 Labor Issues in Infrastructure Reform: A Toolkit sionally needed, however, to bring miss- about which there are fewer data. Estimates ing skills to the work force. of marginal productivity--disaggregated by the major classes of workers--can be best 2. A decision needs to be made on whether sourced from data of actual wage or income to adjust wage savings to take account of 7 levels outside the public sector, gained from enterprise profits. All other things being labor surveys, national statistics, agricultural equal, a wage saving should ultimately economics studies and research, household return to the budget whether the enter- income surveys, interviews with placement prise is fully or partially subsidized. and business support agencies, and (if possi- · Financial savings on nonwage benefits (item ble) focused follow-up studies from earlier 6): This should take into account savings MODULE retrenchment exercises. from reduced expenditure on all allowances, · Marginal productivity value of labor savings plus projected cost savings arising from the (item 8): The economic value of the wage closure or reduction of services provided to savings following downsizing should reflect employees such as food, medicine, housing, the opportunity costs of these savings if education, and cheap loans. invested by the enterprise in expanded serv- · Marginal productivity of a worker outside ice areas, improved productivity, or the SOE (item 7): This is the product of (a) improved quality of service by the enter- the probability of an employee's engage- prise. Assuming the enterprise is budget con- ment in a productive activity and (b) the net strained, then this opportunity cost can be income produced by this activity. The mar- set as 100 percent of the financial cost. ginal productivity of the retrenched worker · Increase in privatization proceeds from after he or she has left the enterprise there- downsizing (item 9): Global evidence of the fore depends greatly on his or her circum- increase in privatization proceeds as a result stances following retrenchment (see of downsizing is limited. The best study "Assessing the Effects on Workers' (that of López-de-Silanes 1997) suggests an Welfare" in this module for a list of poten- increase of net privatization prices of 12 per- tial postretrenchment circumstances). cent for every 10 percent reduction in the Incomes will depend on worker attributes labor force. However, because investor (age, education, and, in some situations, behavior is difficult to predict, a conserva- gender); market conditions (overall eco- tive approach would be to ignore the nomic growth rate, labor market supply, prospect of improved privatization prices in and demand); and worker location (capital both economic and financial analysis, or city, urban, rural). treat it as a factor in a sensitivity analysis. Estimates of workers' marginal productivity · Increase in privatization proceeds from should be based on local market informa- faster PPI (item 10): A key rationale for tion. This should be assumed to be less than work force restructuring (particularly current salaries. But what factor should be through voluntary departure and early applied? Evidence suggests that even in retirement) is that it helps remove barriers to industrial economies a permanent earnings PPI investment by reducing political and reduction of 15­20 percent can be expected worker opposition to PPI. among displaced workers, but reductions may be even greater in developing countries In the absence of country-specific estimates, with public sector wage premiums (see box a conservative approach to cost-benefit 1.1 in module 1). Moreover, many workers analysis will probably ignore this time effect go not into formal employment but into on privatization proceeds, not least because informal employment or self-employment, there are many potential sources of delay to 182 Monitoring and Evaluation of Labor Programs a transaction in addition to labor issues. Counterfactual analysis demands careful choice of Evaluation is mainly Nonetheless, in some circumstances the time the scenarios against which the outcomes of labor concerned with impact. effect may be a significant source of benefits. programs are compared. For example, if the intro- duction of a PPI project in a declining public sector MODULE port leads to the loss of 1,000 cargo-handling jobs EVALUATING LABOR MARKET out of a total of 3,000 jobs through voluntary PROGRAMS departure over three years, which of the following is the appropriate counterfactual comparison? Constructing the Counterfactual · The before-and-after calculation of 1,000 job losses Analysis 7 Evaluation is the periodic assessment of the rele- · A comparison with trends in other similar vance, performance, efficiency, and impact of the public sector ports (which might suggest an project in relation to stated goals. It differs from annual decline of 10 percent in cargo han- monitoring in that it is not an essential task for the dlers as mechanization is introduced) implementing agency. Evaluation is mainly con- cerned with impact, which may only be measura- ble toward the end of implementation or in later years and so is often better done by a separate agency independent from implementation. Box 7.2: The Importance of Control Groups--A Hypothetical Example A central requirement of any evaluation is separa- I n the town of Abca, 1,000 workers were laid tion of the effects that would have happened any- off as a result of the closure of the ABC Gas way from those that resulted from the intervention. Company. Based on random selection, 500 Before-and-after comparisons alone are not suffi- workers were given a severance package and cient. If earnings rise after training, for example, the other 500 were put through an intensive retraining program in computer skills. All 1,000 that may be the result not of the training but of people were monitored over time. Three months changes in the macroeconomy or local changes in after the completion of the training, 400 trainees labor demand or of such worker-specific attributes were employed. This employment rate of 80 as life-cycle changes in earnings. percent for the treatment group was touted by many as the impact of the training program. Evaluation therefore requires a counterfactual test, However, Abcan evaluators cautioned against which is normally provided by a control or com- using only this figure to judge the success of the parison group of workers who did not participate program. They wanted to compare this employ- in the severance or redeployment program. Box 7.2 ment percentage to that of the control group-- those who did not go through training. It was illustrates the importance of creating such groups found that 375 of the control group of 500 were for a hypothetical redeployment training program. also employed three months after the treatment group completed its training--an employment Counterfactual analysis can use either: rate of 75 percent. Hence, Abcan evaluators judged that the true impact of the training pro- · Control groups, which consist of partici- gram was 5 percent, not 80 percent. pants that are selected at random within a Although this example makes many generaliza- well-defined population from which the tions--there was no selection bias or random- members of the treatment group are also ization bias, those who got a severance pack- selected age did not enroll in any training or other related labor programs, and so forth--it serves to illus- · Comparison groups, which consist of partic- trate the importance of using control groups ipants who are purposively matched to the when evaluating the impact of labor programs. participants in the treatment group. Source: Adapted from World Bank, no date. 183 Labor Issues in Infrastructure Reform: A Toolkit · A comparison with normal annual rates of some workers are refused entry to the pro- job loss and job creation in private sector gram). Few developing countries are likely ports (a private sector counterfactual test) to implement such an approach. A recent illustration of such an evaluation is that of a · A comparison with cargo-handling labor 7 job-search assistance program for unem- benchmarks in the most efficient ports inter- ployed workers in the United Kingdom, nationally against which the port can rea- where the evaluation identified a 6 percent sonably be compared. lower unemployment rate among partici- In each case the counterfactual alternative provides pants five years after the initial program the "what-would-have-happened-if" comparison (Dolton and O'Neill 2002). (in this case, what would have happened if PPI had MODULE 2. A statistical approach allows selection of the not happened). Each comparison is, however, likely participant and nonparticipant groups after to give rather different answers, and small differ- the redeployment program has started. To ences in the assumptions and comparisons being deal with selection biases, complex econo- made can lead to very different conclusions. This is metric techniques are needed to reduce the why the use of a counterfactual test with a very biases (elimination is not possible). clear definition of the assumptions being used is so Regression techniques and matched-pair important. comparisons are the principal statistical tools. The main advantage of statistical approaches is that the evaluation can be Assessing the Impact of Redeployment done at any time, provided that adequate programs in Redeployment longitudinal data are available. developing countries have rarely been In developing countries the evaluation of redeploy- Dar and Gill (1998) summarized these alternative subject to rigorous ment programs, social safety net programs, and methodological approaches in the context of evaluation. active labor market programs has generally been retraining programs. Theoretically, experimental inadequate. techniques are more robust. However, the statisti- cal approach is more practical, although it can be One reason for the neglect of evaluation might be subject to large biases that risk offering false con- that properly assessing the impact of redeployment clusions to policymakers. Matched-pair statistical presents a significant technical challenge to evalua- techniques are preferable to regression-based tech- tors everywhere. Undertaking a robust counterfac- niques because (a) they offer the greatest potential tual analysis is particularly difficult because partici- for reducing differences between the participant pants in, for example, a training program may be and nonparticipant groups (other than the rede- selected or may self-select. Such selection biases can ployment program), and (b) the results are easier Rigorous evaluation distort policy conclusions, and redeployment pro- for nonstatisticians and policymakers to interpret. presents a technical grams are especially prone to these biases. challenge to Evaluators use two methodological approaches to The example of the evaluation of Mexico's retrain- evaluators and requires specialist tackle these selection problems: ing program for unemployed and displaced work- skills. ers (box 7.3) illustrates some of the challenges of 1. An experimental approach randomly assigns conducting evaluations. Problems for evaluators individuals to enter a program. This include: approach avoids many (though not all) of the selection problems of statistical method- · Creaming: If program managers are evaluat- ologies. It is difficult to implement, however, ed on the percentages of trainees who find for practical reasons (that is, cost and the employment, then creaming may occur. In fact that only current or future programs this situation managers actively select the can be evaluated by this approach) and for best or most-qualified trainees to inflate the ethical and political reasons (for example, program's apparent success rate: 184 Monitoring and Evaluation of Labor Programs The analogy is to whole milk where the rich- example, this can lead to selection biases Any evaluation est part, the cream, floats to the top and can when evaluating the program. needs to correct for potential selection be skimmed off. Creaming is an issue in · Dropouts: This is a related problem. If biases. labor market programs because if only the trainees drop out of the program when they MODULE most able people get reemployment assis- find jobs, is that counted as a program suc- tance, then the benefit to society of the pro- cess? Or does it simply show that trainees grams is not as great as it might be other- merely participated for the stipend? wise. Highly qualified program entrants have a good chance of becoming reemployed even · Dead-weight loss: In later phases of PROBE- without the services offered in the program, CAT, in-service training was provided by while for less qualified applicants the pro- local employers. Government provided the 7 gram services might be the only realistic path workers' stipend, and the employers were to employment (O'Leary 1999, p. 3). required to hire at least 70 percent of the trainees. "Dead-weight loss" refers to the To tackle this problem in evaluations, the fact that firms participating in the in-service right counterfactual test is needed. If the training would have hired some of the same employment rate of participants is com- workers anyway. pared with that of all displaced workers, then the apparent success of the program · Influence of the very existence of the pro- will be inflated. Control or comparison gram: The evaluation approach outlined in groups should therefore compare trainees box 7.3 used a conventional "differences-in- with other displaced workers who had simi- differences" approach, where the before- lar levels of qualifications and other observ- and-after earnings or employment changes able attributes. for participants in the redeployment pro- gram are compared with the before-and- · Creating matched control or comparison after change for a similar group of nonpar- groups: If evaluations are undertaken some ticipants at a similar time. The approach time after the program is completed, it assumes that the existence of the program becomes increasingly difficult to ensure itself is an external variable. Training pro- matching between the treatment and the con- grams may function as a form of job search trol or comparison groups. In Mexico's for many of their participants (Heckman PROBECAT evaluation, for example, the and Smith 1998). The decision to participate comparison group was taken from a separate therefore also needs to be controlled for in data set of an urban household survey of the design of the evaluation. workers who were also unemployed at the time that unemployed trainees entered the · Displacement effects: If a program partici- PROBECAT program. Such different data pant improves his or her reemployment sets may not be fully comparable. Ideally, chances at the expense of nonparticipants, control or comparison groups should be indi- then one person's job may merely be taken vidually matched, but adequate data for such by another. If this happens the program's matching are available only sometimes. overall benefit to the economy as a whole may be less than intended. · Self-selection: In training programs where individuals choose (self-select) whether to · Changes in program design: Programs often enter the program, the problem of con- change their design and approach during structing the counterfactual comparison implementation. This is a problem for evalu- becomes more difficult because those who ators because (a) it compounds selection attend the program will be different from problems and (b) what they are evaluating those who do not. If trainees volunteer for may be seen as the "old" approach and the program because it offers a stipend, for therefore not relevant. 185 Labor Issues in Infrastructure Reform: A Toolkit Box 7.3: Example of a Redeployment Evaluation--PROBECAT, Mexico I n 1984, as a response to a growing economic Not everyone was eligible to participate in crisis, the government of Mexico established a PROBECAT. The selection procedure gave vari- labor retraining program for unemployed and able weights to different criteria, including the 7 displaced workers--Programa de Becas de number of economic dependents, attainment of Capacitación para Trabajadores, or PROBECAT. certain levels of basic education, prior work expe- Revenga, Riboud, and Tan (1994) reported an rience, and unemployment of less than three impact evaluation analysis. The evaluation set months. The weighting scheme was quite com- itself four clear questions. First, what is the plex and nonlinear, and only individuals with a impact of training on the subsequent employ- total composite score exceeding a threshold level ment experiences of trainees? Second, does were eligible to join the program. In addition, par- MODULE training increase the speed with which trainees ticipants had (in theory) to be between the ages move from unemployment to employment? of 20 and 55 and be registered as job seekers at Third, conditional upon finding employment, what the local state employment office. This nonran- effect does training have on the monthly earn- dom selection of individuals into PROBECAT ings, work hours per week, and hourly wages of posed potentially serious measurement problems trainees? Fourth, do the monetary benefits from for the evaluation of the training program. program participation outweigh the costs of pro- The evaluation approach taken was to adopt a viding retraining for the unemployed? statistical methodology to account for the selec- PROBECAT was a large program. At the time of tion bias in the program, and to compare the the evaluation it had trained 251,181 unemployed post-training labor market experiences of people and provided 9,268 courses since 1987. PROBECAT trainees with those of a comparison During the training period (usually three months), group--a matched sample of unemployed peo- program participants received a stipend equal to ple who were eligible for but did not participate in the minimum wage. Vocational courses were the training program. The evaluation found that organized to respond to the needs of the local participation in the training program decreased labor market and were designed to redress local the period of unemployment for men and women shortages of workers with particular skills. These trainees and increased the monthly earning of needs were determined through periodic studies men but not of women. of local labor market conditions. Source: Revenga, Riboud, and Tan 1994. Given the importance often attached by govern- · Evaluations are undertaken by nongovern- ments to redeployment, there is a good case for ment agencies. This has two benefits: gov- better evaluation. In a review of active labor mar- ernments do not need to use scarce profes- ket programs, Fay (1996) concluded that evalua- sional resources; and if the results come tion will be improved if: from an independent organization, they will probably carry more weight. · Evaluation is made compulsory in the pro- gram design phase. Most donor-funded pro- · The period of evaluation is extended. Impacts grams are subject--or potentially subject-- on workers of, for example, retraining may to postevaluation. Although the benefits of not be observable shortly after the end of evaluations may not accrue to the govern- training. It may be valuable to wait longer ment, they will improve the quality of the after the program before beginning the evalu- database for other countries. ation. · Evaluations are more rigorous. Evaluation Evaluation studies of active labor programs of the overall effects of labor programs is have been conducted in middle-income complex. The design of the evaluation countries at costs of about US$150,000 methodology requires specialist economic (Fretwell 2002), which is a relatively modest and evaluation skills. amount compared with the levels of expen- diture incurred. 186 Monitoring and Evaluation of Labor Programs In addition, the costs and benefits of redeployment This simple approach does not provide a robust Evaluations should need particular attention because they are often counterfactual test. In practice, however, it can be include assessment of the costs and neglected in evaluations. Although evidence is difficult to eliminate other factors influencing the benefits of patchy (Dar and Gill 1998), cost-benefit assess- impact on workers. As Rama and MacIsaac (1999, redeployment. MODULE ments indicate that: pp. 101­2) noted: · Large-scale retraining programs may not be The most straightforward indicator of the loss as effective as other measures, such as job- experienced by displaced employees is the search assistance. change in their annual earnings, excluding returns from invested compensation. This indi- · Targeting programs may improve their rele- cator could be criticized on the grounds that vance and effectiveness. In some cases (for 7 earnings before separation do not provide an example, in Hungary) redeployment training appropriate counterfactual. A case could be is better focused on relatively disadvantaged made that the appropriate comparison is with job seekers, whereas other evaluations (such the earnings these employees would have as PROBECAT in Mexico) suggest that the received had there been no downsizing. If the program is more cost-effective if focused on situation prior to downsizing was unsustain- better-educated and more experienced job able, it could be argued, earnings would have seekers. declined in any event. Alternatively, if the situ- Box 7.4 offers some key indicators that could be ation was sustainable, some of these employ- used both for interim (gross impact) monitoring of ees would have gotten pay raises and promo- redeployment programs (where usually there will tions in the 15 months elapsed since separa- be batches of trainees) and for subsequent net tion. More generally, the appropriate compari- impact evaluations. son would be between the lifetime earnings profile after separation from [the enterprise] and the corresponding earnings profile in the Assessing the Effects on Workers' case of no separation. But this comparison would require heroic assumptions, so that it is Welfare safer to stick to observed earnings before and One of the simplest approaches to estimating after separation. worker welfare loss was that of Galal and others (1994) in their evaluation of the impact on work- ers of one form of private participation (privatiza- tion). As Birdsall and Nellis (2002, p. 31) pointed Box 7.4: Possible Cost and Benefit out, that approach was "simple, completely open Indicators for Redeployment Programs in noting the short cuts taken and derives a usable, · Average cost per entrant into counseling or quantified answer to a most complex question"-- training--disaggregated among different types of counseling or training in their case, whether workers had been worse or · Average cost per trainee employed better off following severance. To illustrate their approach they simply assumed an average wage in · Percentage of trainees employed or self- employed the economy (for example, $250 per month), and · Percentage of trainees engaged in the voca- if it took workers 10 months to find a job, then tion of training workers receiving a severance package of $2,500 · Average monthly wages/net incomes of would be no worse or better off. trainees (absolute and relative to preprogram incomes) Birdsall and Nellis 2002. · Average household incomes (to assess effects on other family members and the household as a whole) 187 Labor Issues in Infrastructure Reform: A Toolkit More robust evaluations of effects on worker wel- living. In general the dispersion of wages was fare, however, can use the same experimental and greater in this survey than one conducted nine statistical methodologies described above for evalu- months earlier. (There is no information on the ating redeployment impacts. Unfortunately, there sampling methods in these surveys, however.) 7 have been few longitudinal tracer studies on what actually happens to displaced employees over time. Most cost-benefit assessments make fairly simple assumptions regarding the consequences of dis- A further difficulty in assessing impacts on work- placement--a number of months of unemployment ers' welfare is the wide range of workers' outcomes at a wage of zero, followed by a wage of, for following displacement: example, 60 percent of the previous wage. Without more detailed tracer studies the impacts of more MODULE · They retire and cease looking for paid complex outcomes may not be well known. employment or income-earning opportuni- Nonetheless, it is clear that many displaced work- ties. ers move into self-employment. Table 7.5 shows · They cannot find work or incomes and one example from Turkey, where nearly one-fifth remain in long-term unemployment. of workers displaced during privatization used their severance money to enter into self-employ- · They find alternative permanent employ- ment. A January 1998 survey of displaced workers ment. in Brazil's federal railway found that "over half · They find alternative short-term, contractu- work on their own and 20 percent have opened al, or informal employment. their own business. Only 18 percent are employees and four percent are civil servants" (Estache, · They chose to become self-employed as indi- Schmitt de Azevedo, and Sydenstricker 2000, p. viduals or start a microenterprise. 18). A tracer study in Ghana found that nearly 70 · They launch a formal small business with percent of displaced civil servants went into self- potential for growth. employment (table 7.6). In addition, there may be · They expand existing income-earning activi- impacts on others. Although SOE workers are rela- ties that they were already running while tively well paid, those benefits may be shared with employed in the enterprise (either "moon- households and extended families. lighting" or "daylighting"). Assessing Overall PPI Benefits · They migrate out of the region to find jobs Evaluating the success of a labor program requires or to return to rural communities where the that initial objectives be revisited. It asks, what family home is based. were the initial objectives? and did the program If workers migrate to find new employment, fol- meet those objectives? low-up evaluation is more difficult and more cost- An evaluation can be made at two levels: ly, and it is likely that such workers will not be captured in subsequent evaluations. In a survey of 1. Evaluation against the specific objectives of 5,334 workers from Brazil's railway, 1,217 work- the labor program itself: This is the focus ers could not be found because they moved with- here, especially the impact of redeployment out a trace (Estache, Schmitt de Azevedo, and programs on workers' incomes and the peri- Sydenstricker 2000). od of unemployment, and the impact of labor adjustment on workers' welfare. In a follow-up survey of 675 former workers in Brazil that was conducted two to three years after 2. Evaluation of the contribution of the labor retrenchment, it was found that although 53 per- program to achieving the wider policy objec- cent were earning less than when they were at the tives of PPI: The effects of a labor program state enterprise, 23 percent were making a better may go well beyond the consequences for indi- 188 Monitoring and Evaluation of Labor Programs Table 7.5: Turkey--How Workers Used Severance Compensation More detailed tracer (percentage of workers) studies are needed. Petrochemical workers Cement workers Total Many workers move Use of severance money (n = 682) (n = 563) (n = 1,245) into self- MODULE employment. Established own business 12.8 22.0 17.0 Used for daily expenses 31.4 28.2 30.0 Lent money 6.0 1.7 4.0 Placed time deposit in a bank 22.1 5.4 11.2 7 Bought a house 40.0 36.1 38.2 Bought gold or foreign exchange 9.4 18.3 13.3 Bought treasury bills 1.6 0.4 1.1 Bought securities 0.9 0.7 0.9 Used interest income for daily expenses 7.1 5.0 6.2 Used rental income for daily expenses 4.2 3.4 3.8 Bought a car 18.1 10.0 16.7 Bought land 3.5 1.4 2.6 Note: Based on an interview where respondents were faced with a number of possible choices and asked to choose as many as applica- ble. So, for example, around 40 percent of petrochemical workers stated that they bought a house with their severance compensation. Source: Tansel 1996. Table 7.6: Preferred Employment Status of Redeployed Civil Servants--Ghana Preferred Agriculture Nonagriculture Total employment status Number Percent Number Percent Number Percent Self-employment 1,124 72 782 65 1,906 69 Cooperative 420 27 260 21 680 24 Private wage employment 20 1 164 14 184 7 Government 2 0 6 0 8 0 Subtotal 1,566 100 1,212 100 2,778 100 No preference (number) 95 n.a. 837 n.a. 932 n.a. Total sample size (number) 1,661 n.a. 2,049 n.a. 3,710 n.a. n.a. Not applicable. Note: Based on sample of workers opting for retraining. Source: Alderman, Canagarajah, and Younger 1994. vidual displaced workers. Table 7.7 indicates MONITORING LABOR the scope of a comprehensive assessment-- PROGRAMS which would include impacts on government, consumers, investors, and labor unions, as well Monitoring of the labor program is a management as workers themselves. Box 7.5 summarizes task, but one that is often overlooked and neglected. information on the extent to which labor vari- Monitoring differs from evaluation in that it is prin- ables influence privatization prices. cipally a management function, which typically 189 Labor Issues in Infrastructure Reform: A Toolkit Table 7.7: Assessing Labor Programs--A Checklist of Potential Effects on Different Stakeholders For Type of For For For consumers For impact government unions employees and customers investors 7 Positive ·Reduced ·Greater job ·Salary improve- ·Faster access to ·Improved financial effects subsidies or security (but ments for improved PPI performance net costs of for fewer retained services ·Reduced costs providing employees) workers ·Evidence of ·More flexible labor PPI services ·Stronger role, ·Changes in growth in contracts ·Time advan- if consulted labor contracts supply of ·Improved labor MODULE tage from and partici- that affect services productivity faster com- pate in (improve or (e.g., access pletion of PPI preparation reduce) non- to water) or transaction, of the labor wage benefits demand for and faster program services implemen- (number of tation of passengers investment on trains) or service ·Reduced costs improvements to business ·Revenues (e.g., telecom- from PPI munications, transaction transportation) (concession ·Reduced tariffs or privatiza- to consumers tion receipts) (services) ·Increases in ·Service quality tax revenue improvements from private operators ·No disruption of service (power sup- plies, port operations) Negative ·Political ·Loss of ·Loss of ·Increased ·Higher wage or (adverse) costs (if membership salary and tariffs (if benefits costs if effects disputes) numbers other tan- there are negotiated upward ·New incre- ·Reduced gible and labor cost by labor prior to PPI mental costs bargaining intangible increases) ·Less flexible labor ·Financial power benefits for contracts loss if displaced ·Loss of valuable rehiring workers skills if adverse takes selection place 190 Monitoring and Evaluation of Labor Programs Box 7.5: Impact of Downsizing on PPI Prices T he very high levels of downsizing in infra- tion improved privatization prices (although this structure enterprises described in module was not statistically different), and industrial dis- 2 suggest that infrastructure enterprises putes strongly depressed privatization prices: MODULE are qualitatively different from other privatizations "one of the strongest results...is that an addition- or PPI schemes. Unfortunately, there is little evi- al strike in an SOE leads to a 19 percent reduc- dence of the impact of downsizing on PPI prices tion in the net price evaluated at the mean pre- received from investors. In part this is because dicted PQ" (p. 997). investor behavior is inherently complex, and in A more recent assessment by Chong and López- part because downsizing is often part of a wider de-Silanes (2002) undertook follow-up surveys of package and investor responses to downsizing 308 privatized enterprises taken from a global 7 may be confounded by other changes (such as database of privatizations. Using dummy vari- revised labor contracts or relations). In some ables for various labor downsizing policies, they cases, without work force restructuring it is found that labor downsizing did little for net pri- unlikely that any investor will be found. The dra- vatization prices. The analysis, however, was matic work force restructuring in Mexico's air- unable to differentiate between large levels of lines, described in module 4 (Box 4.9) is one downsizing--as occur in most infrastructure pri- example. Another is Argentina's railway, which vatizations--and more modest levels of downsiz- Ramamurti (1997) characterized prior to privatiza- ing (only a quarter of the survey respondents pro- tion as a "lemon"--an enterprise not attractive to vided any numerical information). a private investor because it was in a stagnant or Evidence of the complexity of investor behavior declining market with poor profit prospects--but comes from private sector work force restructur- noted that: ing. The common assumption is that stock mar- The government did several things to turn FA ket prices will rise following downsizing. Abraham [Ferrocarriles Argentines] from a lemon--not and Kim (1999) reviewed a number of studies on into a plum--but into a much sweeter proposi- the effects of downsizing on investor behavior tion than before (a grapefruit?) Four govern- and found that the evidence is inconclusive. Their ment steps in that direction were: breaking the own study of 381 firms found that both layoff FA's unions, picking up the tab for downsizing announcements and employment guarantee its work force, splitting up the company into announcements lead to reductions in stock mar- smaller parts and then leasing rather than sell- ket share prices. They suggested that investor ing its assets. In addition, the unions agreed to response depended on the net result of four pos- greater flexibility in the deployment of workers, sible effects on investor behavior following down- and to negotiate contracts with private owners sizing: that would increase rail's competitiveness (p. 1. A positive cost-saving effect (downsizing 1982). reduces cost of production) One attempt to review alternative factors influ- 2. A positive efficiency effect (downsizing encing privatization prices is that of López-de- improves overall firm efficiency) Silanes (1997). Using a database of all 236 Mexican privatizations between 1983 and 1992, 3. A negative industrial relations effect (downsiz- he assessed the factors that influenced privatiza- ing leads to poorer labor relations) tion price (as measured by a privatization quo- 4. An ambiguous signaling effect (for a firm in tient [PQ]). He found that "labor issues play a good shape, layoffs indicate a positive central role in explaining privatization prices" (p. response to changing circumstances; for firms 997), and that after accounting for endogeneity, in poor shape, layoffs confirm that firm per- reduction in the labor force increased privatiza- formance is poor or even worse than expect- tion prices: "the net effect of a 20 percent reduc- ed). tion in the labor force before privatization is a 24 Note: PQ is government's net privatization price after percent increase in PQ, evaluated at the predict- restructuring, adjusted by the percentage of company ed mean" (p. 1015). Moreover, union relation- shares sold plus total liabilities at the time of privatization, ships were important: union contract renegotia- divided by the total assets of the company at the time of privatization. 191 Labor Issues in Infrastructure Reform: A Toolkit involves both review of performance against target restructuring needs strong, active ownership performance indicators and foreward-looking fore- and strong monitoring during implementation. casts (see box 7.6). Effective monitoring of the 3. Compartmentalization within government: labor program is integral to good management by Institutional gaps between policy and imple- 7 the implementing agency. It provides the agency mentation responsibilities for work force continuous feedback on implementation and identi- restructuring can result in a lack of policy fies both successes and problems as early as possible coherence and coordination to facilitate timely adjustments to project operation. 4. The desire for a clean break: There may be The potential benefits of monitoring assessments a concern that follow-up surveys can lead to are large: one study in Tanzania found that the raised expectations by workers of what gov- MODULE information from monitoring studies could have ernment may be able--or willing--to do for saved the government up to US$7 million during them. Particularly if politicians have agreed the course of retrenchment of about 5,000 state generous severance terms, there may be a enterprise workers. desire to minimize all contact with workers following severance. Given the potential scale of infrastructure work force adjustment programs (thousands of workers, 5. Exaggerated expectations: There is a tenden- perhaps tens of millions of dollars), making the cy among politicians and government case for monitoring should seem unnecessary. It is spokesmen to convey exaggerated expecta- clear, however, that when the work force restruc- tions of what redeployment programs can turing plan is in place, some governments fail to achieve. Hence, there is little subsequent monitor it adequately. interest in monitoring or evaluation if doing so might reveal a different story. Why is this so? Five possible reasons: Where day-to-day implementation of some elements 1. Ownership: a general problem of all moni- of work force restructuring is delegated to the enter- toring (and evaluation). If there is no cus- prise or to other agencies, monitoring systems are tomer for monitoring information, then particularly valuable. Here are some key steps that monitoring systems are unlikely to work. the implementing agency can take to help: 2. An (incorrect) belief that implementation is the · Define and promulgate a set of monitoring easy part: When the big decisions have been indicators, against which the implementation made on the severance package, the mecha- managers report, and indeed on which the nism of restructuring, and the scope of restruc- implementing agency reports. Possible indica- turing, the implementing agency and govern- tors are set out in box 7.7. These indicators on ment officials may feel that the main chal- their own will not guarantee effective monitor- lenges have been resolved. Unfortunately, all ing. But the selection of an indicator can help the evidence suggests that effective work force to ensure that progress is made in that area. · Require regular staffing reports from the enterprise. These will be especially relevant Box 7.6: Monitoring and Evaluation Defined where there are high risks of adverse selec- Monitoring is the continuous assessment of tion or rehires or a history of labor hoard- program implementation in relationship to ing, or where the PPI process is likely to be agreed schedules and the use of program out- puts by beneficiaries. slow. A sample monitoring report provided on the accompanying CD-ROM illustrates a Evaluation is the periodic assessment of the relevance, performance, efficiency, and impact format for monthly or quarterly reporting of of the program in relationship to stated goals of work force change due to natural retirement the program. and attrition, soft options (such as transfers, 192 Monitoring and Evaluation of Labor Programs Governments Box 7.7: Severance and Redeployment: Some Monitoring Indicators commonly fail to he key objectives of monitoring are to · Time between workers' termination and receipt monitor labor T assess overall progress and performance of monies programs effectively. of the work force restructuring program, to · Time between termination and receipt of audit- MODULE identify the extent of adverse selection, and to ed accounts for disbursement reinforce accountability in the use of public · Total and average severance payments funds. Examples of monitoring indicators are: · Percentage of disbursements with queries/out- Severance Indicators standing (sorted by reason) · Numbers of workers displaced by different · Numbers of appeals filed by workers against mechanisms (early retirement, voluntary depar- severance period. ture, mandatory departure, administrative 7 leave) Redeployment Indicators · Disaggregation of displaced workers by age, · Numbers and percentages of displaced work- grade, years of service, gender, ethnic group, ers who receive counseling of different types, region job-search assistance, training, or retraining · Disaggregation of displaced workers by · Disaggregation of displaced worker by age, skill/job description/operating unit grade, years of service, gender, ethnic group · Staffing ratios (based on relevant benchmarks, · Number (percentage) of dropouts from differ- such as those described in module 3) ent training programs/percentage completing training · Total wages and staff-related costs (from finan- Insufficient cial management reports) · Duration of training programs (training days per investment in worker) disaggregated by type of training and · Total employment changes in the enterprise-- monitoring can by worker characteristics. inflows and outflows (monthly or quarterly suggest that the size of the reports). Not all of the above indicators are needed. In general, use as few indicators as necessary. implementation challenge has been underestimated. administrative leave, and removal of ghost Monitoring and evaluation performance measures for workers), early retirement and voluntary job-search assistance services departure, rehiring, and new hiring. · Clearly define the objectives and institution- al responsibility for monitoring. This can Additional Material (on the CD- include the creation of special units within ROM) the implementing agency to monitor compli- Birdsall, Nancy, and John Nellis. 2002. "Winners and . ance with labor (and other) conditions in Losers: Assessing the Distributional Impact of PPI contracts. In Germany the privatization Privatization." Working Paper 6. Center for Global Development. World Bank, Washington, D.C. agency--the Treuhandstadt--set up a spe- cial department responsible for enforcing Chen, Yi, and Ishac Diwan. 2000. "When the privatization contracts using penalties and Bureaucrats Move out of Business: A Cost-Benefit legal action; when the agency was dissolved, Assessment of Labor Retrenchment in China." those monitoring tasks were transferred to Policy Research Working Paper 235. World Bank, Washington, D.C. (Sets out a methodology to esti- another government body. mate the costs and benefits of labor retrenchment in state-owned industrial enterprises in China.) Tools (on the CD-ROM) Dar, Amit, and Indermit S. Gill. 1998. "Evaluating Retraining Programs in OECD Countries: Lessons Spreadsheet for analysis of labor projects Learned." The World Bank Research Observer Labor program monitoring report 13(1):79­101. (Summarizes alternative evaluation techniques and also reviews the findings of evalua- Example terms of reference for impact evaluation tions of retraining in OECD countries.) 193 Labor Issues in Infrastructure Reform: A Toolkit Haltiwanger, John, and Manisha Singh. 1999. (Outlines tools to evaluate project impacts, with "Cross-Country Evidence on Public Sector extensive case studies of a wide range of evalua- Retrenchment." The World Bank Economic tions.) Review 13(1):67­88. (Reviews evaluations of 41 downsizing programs, some in state enterprises and Galal, Ahmed, Leroy Jones, Pankaj Tandon, and Ingo 7 some in the public sector as a whole.) Vogelsang. 1994. Welfare Consequences of Selling Public Enterprises. New York: Oxford University Rama, Martin. 1997. "Efficient Public Sector Press. (Main volume is out of print; summary vol- Downsizing." Policy Research Working Paper ume is still available from World Bank Publications, 1840. World Bank, Washington, D.C. (Provides an www.worldbank.org.) overview of public sector downsizing, and com- ments on approaches to financial and economic Grubb, W., and P. Ryan. 2000. The Roles of cost-benefit analysis of downsizing.) Evaluation for Vocational Education and Training. MODULE Geneva: International Labour Office. (Focuses on Rama, Martin, and Donna MacIsaac. 1999. vocational training but provides an overview of eval- "Earnings and Welfare after Downsizing: Central uation techniques and methodologies.) Bank Employees in Ecuador." The World Bank Economic Review 13(1):89­116. (Describes an López-de-Silanes, Florencio. 1997. "Determinants of evaluation of the impact of downsizing in a state- Privatization Prices." Quarterly Journal of owned bank.) Economics 62(4):965­1025. (Reviews the determi- nants of privatization prices using a data set of all Revenga, Ana, Michelle Riboud, and Hong Tan. Mexican privatizations in the period 1983­92.) 1994. "The Impact of Mexico's Retraining Program on Employment and Wages." The World O'Leary, Christopher J. 1995. "Performance Bank Economic Review 8(2):247­77. (Describes an Indicators: A Management Tool for Active Labor impact evaluation of a retraining program for Programmes in Hungary and Poland." unemployed and displaced workers.) International Labour Review 134(6):728­51. (Outlines potential performance indicators.) Ruppert, E. 1999. "The Algerian Retrenchment System: A Financial and Economic Evaluation." O'Leary, C., A. Nesporova, and A. Samorodov. 2001. The World Bank Economic Review 13(1):155­83. Manual on Evaluation of Labor Market Policies in (Summarizes an analysis of the retrenchment pro- Transition Economies. Geneva: International gram in Algeria that combined both severance and Labour Office. (Discusses various labor market pro- unemployment benefits.) grams in transition countries, evaluation methodolo- gy, and how to use the evaluation results.) World Bank. 1996. "Designing Project Monitoring and Evaluation." Operations Evaluation Department, Schmid, G., J. O'Reilly, and K. Schomann. 1996. Lessons and Practices 8. Washington, D.C. (Available International Handbook of Labor Market Policy to download from www.worldbank.org.) and Evaluation. Cheltenham, United Kingdom: Edward Elgar Books. (Outlines the various method- ological approaches adopted in evaluation research, presents cross-country evaluation findings, and Web sites presents insight into institutional frameworks and systems of monitoring and evaluation.) International Institute for Labour Studies. www.ilo.org/public/english/bureau/inst/ (Conducts Tansel, Aysit. 1996. "Workers Displaced Due to and publishes research on labor markets and labor Privatization in Turkey: Before versus after policies.) Displacement." Paper presented at World Bank Conference on Public Sector Retrenchment and World Bank Operations Evaluation Department: Efficient Compensation Schemes, November 6­7. www.worldbank.org/oed. Washington, D.C. (Illustrates a methodology for evaluating the impact on workers of a work force restructuring program.) 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