MODULE1 Labor Issues in Infrastructure Reform A Toolkit Labor Issues in MODULE Infrastructure Reform 1 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. Copyright is held by the World Bank on behalf of both the World Bank and PPIAF. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including copying, recording, or inclusion in any information storage and retrieval system, without the prior written permission of the World Bank. The World Bank encourages dissemination of its work and will normally grant permission promptly. For permission to photocopy or reprint any part of this work, please send a request with complete informa- tion to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone 978-750-8400; fax 978-750-4470; www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax 202-522-2422; e-mail pubrights@worldbank.org. 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 ACKNOWLEDGMENTS v HOW TO USE THE CD-ROM vi MODULE 1 OVERVIEW OF PPIAF LABOR TOOLKIT 1 Introduction to the Toolkit 1 Objectives 1 Structure of the Toolkit 2 Support for and Contributors to the Toolkit 3 Labor Issues In PPI: An Overview 4 Labor Issues in Infrastructure Enterprises 4 Labor Impacts of PPI 8 Dealing with Labor Issues In PPI 10 Defining Objectives 12 Assessing the Size and Scope of Labor Restructuring 14 Staff Audits 14 Benchmarking 15 Work Force Analysis 16 Developing Strategies and Options for Labor Restructuring 17 Timing and Sequencing Issues 17 Restructuring Options 19 Developing Key Elements of a Labor Program 20 Severance Payments 20 Pension Arrangements 24 Redeployment Programs 27 Employee Share Ownership Plans 29 Managing the Restructuring Process 30 Engaging with Stakeholders 30 Implementation Arrangements 34 Monitoring and Evaluating Labor Programs 37 Objectives 37 Concepts and Approach 38 Contents Integrating Labor Programs in the PPI Process: A Road Map 41 Phase 1: Initial Assessment 42 Phase 2: Design of the Labor Program 44 Phase 3: Implementation 44 Phase 4: Monitoring and Evaluation 44 Additional Material (on the CD-ROM) 45 Background and Overview Articles 45 PPIAF Case Studies of Labor Issues in PPI 45 Web Sites 45 References 45 FIGURES 1.1 Organization Chart for a PPI Team (Sample) 35 1.2 Road Map for Labor Adjustment 42 BOXES 1.1 Technology and Reform in Ports 5 1.2 Argentina Rail: Crisis and Reform 6 1.3 Evidence of a Public Sector Wage Premium 8 1.4 Labor Market Flexibility and Work Force Adjustment--A Snapshot in Estonia and Slovenia 11 1.5 Generic Labor Benchmarks 14 1.6 Brazil--Work Force Analysis in Rail Privatization 16 1.7 World Bank Support for Severance 23 1.8 South Africa--Pensions at Johannesburg Water Company 25 1.9 Bolivia's Capitalization Program 26 1.10 Brazil Rail--Pension Reform and Labor Adjustment 26 1.11 Active and Passive Labor Market Programs 27 1.12 Malawi--Experience of Consulting with Labor in Privatization 30 1.13 Key Points for Stakeholder Analysis 32 1.14 Côte d'Ivoire Railways--Participatory Processes 34 1.15 Port of Santos, Brazil--The Special Labor Fund 36 1.16 British Coal Enterprise--Privatizing Redeployment 37 1.17 Monitoring vs. Evaluation 40 1.18 Guidelines for Submissions to Decisionmakers 43 TABLES 1.1 Standard Severance Formulas--Advantages and Disadvantages 21 1.2 Benefits and Costs of Participatory Engagement Processes 31 1.3 Understanding Stakeholder Interests 33 1.4 Analysis, Monitoring, and Evaluation in Labor Adjustment Programs 38 iv Acknowledgments This toolkit was funded by the Public-Private The toolkit benefited from the inputs of representa- Infrastructure Advisory Facility (PPIAF), a multi- tives from international development institutions, donor technical assistance facility aimed at help- the labor movement, and colleagues in the World ing eliminate poverty and achieve sustainable Bank Group. They included Alberto Chong (Inter- development through private involvement in American Development Bank); Antero Vahapassi infrastructure. Funding was also provided by the (Asian Development Bank); Cleopatra Doumbia- World Bank and the Netherlands Consultant Henry (International Labor Organization); Mike Trust Fund. Waghorne (Public Services International); Peter Bakvis (International Confederation of Free Trade The toolkit was managed and led by Sunita Unions); David Cockroft and Stuart Howard Kikeri of the World Bank's Investment Climate (International Transport Workers' Federation); and Department. Olaf Smulders, a consultant funded Amit Dar, Amy Luinstra, Anita Schwarz, Bill by the Netherlands Consultant Trust Fund, pro- Kingdom, David Fretwell, Gordon Betcherman, vided research and analytical support. The toolk- John Speakman, Jordan Schwartz, Lou Thompson, it was prepared by the Adam Smith Institute Marc Juhel, Martin Rama, Omer Karasapan, (ASI) of the United Kingdom. The team com- Richard Hinz, Robert Mertz, Warrick Smith, and prised Terry Green (team leader), Brendan Yash Pal Kedia (the World Bank). Maria Honrado Martin, and Roberto Battista, and was super- and Rosario Bartolome provided logistical support. vised by Roger Usher, ASI Director. v How to Use the CD-ROM The toolkit's CD-ROM is designed to be intuitive it, you can download it free from and easy to use. It works like a Web site and can be http://www.macromedia.com/downloads/ viewed through a Web browser, but it doesn't · At the bottom there is a search option. Type require you to be connected to the Internet, except a keyword relating to the subject for which to access external web sites. you are looking in the search box and click To access the toolkit, insert the CD-ROM in your on Go. The search will look at the content of computer. Choose the CD-ROM drive from My the toolkit and point you to the documents Computer and open the "toolkit.html" file located and pages that deal with that subject. in the toolkit directory. You can then navigate The main screen area in the center displays the through the CD-ROM as you do Web pages. pages of the module or submodule you have selected from the left-hand menu. Within the text On the left-hand side of the screen you can see the you will find links to additional documents and main navigation panel. tools as well as links to external Web sites. The · The Home link takes you back to the begin- links will only work if you are connected to the ning. Internet. · How to Use the Toolkit takes you to this On the right-hand side you will find a link to a page on the CD-ROM. page where you can download each module of the · The seven modules are the body of the toolkit as a PDF document (which can be printed). toolkit. Click on each header to open the list To view the PDF documents you need to have the of contents in each module, then click on Adobe Acrobat Reader installed on your computer. each subheading to go to its pages. To col- If you don't have it, you can download it free from lapse the subheadings, go back to the Home http://www.adobe.com/products/acrobat/ page. readstep2.html · Below the modules you will find a site map The right-hand menu also has links to the addition- that gives a graphic overview of the whole al areas of the toolkit, including references, case toolkit and how its elements relate to each studies, tools, additional materials, and documents. other. The map requires the Flash Player These come in a variety of formats, mainly PDF, plug-in. This may already be installed in but also documents in such Microsoft Office for- your browser software, but if you don't have mats as Word, Excel, and PowerPoint. Windows, Word, Excel, PowerPoint, and Internet Explorer are trademarks of Microsoft Corporation. Flash Player is a trademark of Macromedia Inc. Acrobat Reader is a trademark of Adobe Systems Inc. vi 1 MODULE Labor Toolkit: M ODULE Framework and Overview 1 A universal concern in infrastructure reforms is the effect such reforms have on labor. State-owned infrastructure firms often employ more people than required for efficiency, and often under favorable terms and conditions of service, leading to lower labor productivity and higher labor costs than private employers would bear. Some reform, in particular those involving private participation in infrastructure (PPI), may thus prompt surplus labor and changes in working conditions as governments adjust the work force to prepare for PPI, or as new owners or operators introduce efficiency improvements and expose enterprises to greater man- agement discipline, new technologies, and increasing competition. FRAMEWORK inform and involve workers and labor unions in The Toolkit provides Where labor adjustments are required it is impor- the reform process. practical tools and information to help tant to ensure that labor programs are fully policymakers handle planned for in the PPI reform process. Designing sensitive labor and implementing labor strategies are difficult and Objectives issues in PPI. sensitive tasks, and the challenges facing govern- The primary objective of the Toolkit is to provide ments are many: labor opposition, lack of social practical tools and information to help policy- safety nets, and lack of functioning labor markets makers handle labor issues in PPI. (The Toolkit among them. But experience shows that PPI can does not address the policy decision to undertake proceed smoothly if efforts are made early in the PPI or the other challenges involved, such as process to deal with labor issues. Labor programs introduction of competitive markets, development are most effective when efforts are made to devel- of regulatory frameworks, and access to services op a strategy that balances the interests of con- for the poor. Those materials can be found in sumers in receiving better and more efficient servic- other toolkits and documents listed in the bibliog- es with measures that provide fair and equitable raphy of this Toolkit.) Drawing from available treatment for workers, develop a mix of restructur- information, practical experiences, and global ing options, compensate surplus employees, help best practices, the Toolkit provides a practical workers reintegrate into the labor market, and guide to assist practitioners in designing, imple- 1 Labor Issues in Infrastructure Reform: A Toolkit menting, and monitoring labor programs in PPI implementing labor approaches in PPI reforms, thus also helping build capacity in this reforms challenging area. · Choose among available approaches and Although broad lessons on labor adjustment in PPI analyze their political, social, financial, and 1 are emerging, experience shows that no one strate- economic implications gy is universally applicable and the choice of meas- · Develop and implement appropriate labor ures depends on country and enterprise circum- strategies that balance the interests of the stances. Experience also shows that the interests of various stakeholders all parties need to be carefully balanced to ensure both good processes and good outcomes. Efforts to · Formulate procedures for developing, imple- MODULE provide fair and equitable treatment for workers menting, and evaluating appropriate com- must be economically and financially feasible for pensation packages and labor redeployment the government and must give private operators programs the needed flexibility in making employment deci- · Manage labor issues during the transition sions. The Toolkit thus provides a wide range of process, including determining the respective frameworks, concepts, checklists, model docu- roles of government, the private sector, and ments, and case examples that together aim to help labor in the restructuring process government officials make the appropriate choices · Establish dialogue and communications for their circumstances. with key stakeholders. The Toolkit focuses on labor issues in PPI, but it applies equally to restructuring of state-owned Structure of the Toolkit infrastructure enterprises without private participa- tion arrangements. Such reforms often involve sim- The Toolkit consists of seven modules as described ilar labor issues and many of the approaches and below. lessons are applicable. Similarly, whereas the Module 1--Framework and Overview: This mod- Toolkit focuses on infrastructure enterprises, it is ule provides a summary of the entire Toolkit and also applicable to state-owned enterprises in other sets out the framework for the more detailed techni- sectors of the economy where labor issues are a cal modules that follow. It provides a decisionmak- major source of concern. ing framework and road map that policymakers Users of the Toolkit will be better The primary audience for the Toolkit is government can use to guide them through the process of labor prepared to design officials responsible for preparing and implementing restructuring. The overview module consists of this and implement a PPI and enterprise reforms. The term "implementing introduction to the Toolkit and eight other sections: labor program. agency" is used to represent this audience. The · Section 2 provides an overview of the main agency may be a unit within the ministry of finance, labor issues and concerns in PPI, briefly the ministry of economy, the privatization agency, examines the impact of PPI on labor, high- the relevant sector ministry, or the enterprise itself. lights the broad lessons of experience in this Wherever the Toolkit is used, it provides guidance area, outlines the broader policy reforms on the policy and implementation challenges that that can facilitate labor adjustment, and lays governments face in dealing with labor issues. The out the practical steps for designing and Toolkit may also be a reference point for other implementing labor programs that are cov- stakeholders, including labor, the private sector, and ered in the rest of the module. consultants engaged in this area. · Section 3 discusses the objectives in dealing Users of the Toolkit should be better prepared to: with labor issues in PPI. · Understand the benefits, risks, challenges, · Section 4 examines how to assess the size and key issues related to designing and and scope of labor restructuring by conduct- 2 Labor Toolkit: Framework and Overview ing enterprise-level staffing analyses based ous restructuring approaches that the implementing Module 1 provides on functional analyses and staffing norms. agency can take when designing labor programs. policymakers with a summary and a · Section 5 examines strategies and options for framework to help Module 5--Key Elements of a Labor Program: guide their dealing with labor restructuring where need- This module considers the key issues in planning decisionmaking MODULE ed, in particular whether to carry out labor and implementing severance payments, pension through the labor restructuring before or after PPI and the payments, redeployment programs, and employee restructuring range of options for restructuring labor and process. ownership share arrangements. the conditions under which they can be used. Module 6--Engaging with Stakeholders: This · Section 6 discusses the key elements of a module discusses strategies and tools for involving labor program, including severance pay- 1 workers, unions, and other stakeholders, as well as ments, pension payments, retraining and Modules 2 through 7 arrangements for implementing the labor program. detail the technical redeployment support, and employee share aspects and steps in ownership plans. Module 7--Monitoring and Evaluation of Labor the design and implementation of a · Section 7 focuses on managing the process of Programs: This module provides a framework for labor program. labor restructuring, particularly issues related establishing monitoring and evaluation systems for to stakeholder participation and implementa- labor programs. tion arrangements for the program. The Toolkit also contains a Web-based CD-ROM · Section 8 covers the monitoring and evalua- with searchable documents, spreadsheets, sample The Toolkit is tion aspects of labor programs. terms of reference for obtaining the needed expert- complemented by a ise to carry out various labor-related tasks, case CD-ROM that · Section 9 concludes with a road map for a studies, and other relevant data. The CD-ROM provides broader integration of labor issues in the PPI supplementary tools follows the module structure described above and process. and documents. provides a gateway into and an outline of each Module 1 focuses on the key issues and lessons module's content, with such supporting materials learned in each of those areas. It can be read as a as links to the full-print text modules of the stand-alone piece that provides an overview of the Toolkit, and checklists, articles, case examples, issues, or the various sections can be read inde- tools, and links to other relevant Web sites. pendently as summaries of the subsequent modules that cover in depth the technical aspects and steps Each module of the Toolkit is designed so that it involved in designing and implementing various can be read as a stand-alone piece in its own right, aspects of the labor program. These modules fol- with cross-references highlighted where appropri- low the same flow as module 1 and consist of the ate. Each module ends with suggestions for finding following: additional material on the CD-ROM and else- where. Icons in the Toolkit highlight: Module 2--Labor Impacts of PPI: This module provides an analysis of the impact of PPI on · Tools available on the CD-ROM employment, wages, labor contracts, and union · Additional material and documents on the participation. CD-ROM Module 3--Assessing the Size and Scope of Labor · Links to Web sites Restructuring: This module describes the tools · Other materials and sources of information. (such as staff audits, benchmarks, and work force analysis) available to determine the nature and level of labor restructuring requirements. Support for and Contributors to the Toolkit Module 4--Strategies and Options: This module reviews issues of timing and sequencing, and the vari- The Toolkit draws on a wide range of materials and experiences from around the world. The aim is 3 Labor Issues in Infrastructure Reform: A Toolkit to provide policymakers with practical guidance on vate investors could accept. As a result, those how to deal with labor issues in PPI reforms. The affected by PPI often fear that PPI and the associat- following organizations' financial contributions ed efficiency improvements will require substantial made the development of this Toolkit possible: labor restructuring, both before privatization as 1 governments cut the work force to prepare for · Public-Private Infrastructure Advisory reforms and afterward when privatized firms con- Facility (PPIAF), a multidonor technical tinue to improve productivity. Indeed, PPI--and assistance facility that helps developing- enterprise reform in general--has often required country governments improve the quality of significant labor adjustments. But workers have their infrastructure through private sector also gained in some situations as new investments involvement (see www.ppiaf.org/) MODULE and dynamic expansion resulted in the creation of · Netherlands Consultant Trust Fund new jobs and as productivity improvements led to similar or better terms and conditions of service. · World Bank. The Toolkit was prepared by the Adam Smith Institute of the United Kingdom, under the man- Labor Issues in Infrastructure agement and supervision of the World Bank's Enterprises Investment Climate Department. Representatives from the following organizations reviewed the Infrastructure firms vary greatly between countries Toolkit and provided comments: and within a single country, but the introduction of private participation generally produces a number · Asian Development Bank of changes: · Inter-American Development Bank · The objectives of the enterprise change, and · International Confederation of Free Trade broad social and political objectives of pub- Unions lic sector ownership--such as full employ- ment--become less important than efficien- · International Labour Organisation cy and improved service delivery. At that · International Transport Workers' Federation point, governments look to other policies to · Public Services International secure employment, and the costs of such policies are made transparent or managed · World Bank. through the use of explicit budget subsidies. We thank them for their contributions and recog- · New competitive pressures are brought to nize that those contributions do not necessarily bear, and private operators can no longer imply endorsement of the final product. afford to maintain surplus employment or a work force with relatively low productivity. The threat of new entrants forces operators LABOR ISSUES IN PPI: to adjust all operational aspects, including AN OVERVIEW the work force. Often protected from competition and subsidized · Contractual and regulatory obligations to pro- by their public sector owners, state-owned infra- vide cheaper, more accessible, and more reli- structure enterprises frequently employ more peo- able infrastructure services, often linked to ple than required for efficiency, pay wages and penalty and incentive clauses, become a major benefits that are higher than their counterparts in feature and a source of pressure on the firm. If the private sector, and have large, unfunded pen- labor costs are high relative to comparable sion liabilities. These factors have led to lower norms or if surplus labor exists on the payroll, labor productivity and higher labor costs than pri- private operators will seek to cut costs. 4 Labor Toolkit: Framework and Overview · New financial disciplines are imposed both by Longer-term capital markets and by sector regulators, and Box 1.1: Technology and Reform in Ports structural changes in the economy will managers must respond to these disciplines. C ontainerization, a technological improve- also drive work ment in ocean shipping, has revolution- force restructuring. When firms remain under state ownership these ized maritime transportation. By handling MODULE changes and pressures also often arise as a result of individual pieces of general cargo loads only some of the following factors: twice--at loading and at unloading from a con- tainer--less port labor and ship capacity are · New technologies: New technologies are rap- required to transport the same amount of idly evolving in many of the traditional infra- freight. structure sectors, such as fixed line telephony In a review of the impacts of technology on and ports (see box 1.1), and they require ocean shipping, Talley (1999) reported that the 1 increased use of containers, coupled with new adjustments irrespective of ownership. cargo-handling techniques and work practices, · Sector reforms: Many infrastructure sectors are have led to a significant decrease in the demand facing profound shifts. Vertically integrated for port labor. Huge job losses have resulted, ranging from 40 percent to 60 percent in many power companies are being restructured into countries. In the United Kingdom dock jobs fell separate companies for generation, supply, and from 80,000 in 1967 to 11,400 in 1986 and by distribution; national post and telephone com- another 44 percent between 1989 and 1992. In panies that once offered the full range of serv- France work rule reforms introduced in 1992 led ices are being separated. Infrastructure enter- to employment declines of 66 percent at six major ports. In Australia waterfront reforms intro- prises must adapt to these changes. duced in 1989 led to a 40 percent reduction in · Increasing competition: Former monopolis- stevedore labor over a two-year period. tic providers are being exposed to competi- Although dock jobs dramatically declined, long- tion and challenged by new market entrants shoremen unions were reluctant to accept changes and negotiated arrangements to pre- or regulatory regimes. These processes are serve work. In some cases, work rules, gang likely to place pressures on firms in terms of sizes, and compensation patterns remained the job numbers, technologies, working prac- same for containerized cargo as for break-bulk tices, and skills. cargo. On the Atlantic and Gulf coasts of the United States, labor­management negotiations · Structural changes in the wider economy: led to a "50-mile rule" (that reserved for union- The adjustments that are being driven by ized longshoremen all "stuffing and stripping" of changes within sectors (for example, technol- containers in or near ports), guaranteed annual ogy) or at the micro level within companies incomes regardless of hours actually worked, (for example, changing work practices) also and produced agreements that required shipping lines to use union labor for their vessel calls. take place against a backdrop of macro-level In the port of Buenos Aires the combination of changes within the market for labor, the deregulation, competition, and privatization has composition of the labor force, and the econ- led to dramatic reductions in port charges: omy as a whole. These overall structural charges for shipping containers between changes in the economy--for example, mov- Argentina and northern Europe declined by 30 ing from agriculture to services--can have percent to 70 percent in less than two years. Most of the savings have come from improved labor profound effects on the demand for services, productivity. At the port of Buenos Aires total the structure of firms, and the work force. employment fell from about 8,000 just before the In most enterprises these forces for change should reforms to 2,500 in 1994 and has remained around that level. The liberalization of operating result in a continuous process of work force rules drastically reduced the requirements for restructuring, but for social and political reasons stevedores, which also led to higher labor produc- the adjustment process in state-owned firms may tivity; the weight of cargo per nonadministrative be delayed. The introduction of PPI, which often worker rose from 800 tons in 1991 to 3,000 tons reflects the acute need for reform, tends to serve as in 1995 (see Estache and Carbajo 1996). 5 Labor Issues in Infrastructure Reform: A Toolkit a catalyst for reform. The case of Argentina's rail- er services efficiently and effectively. This was ways, where employment fell from 92,000 to because the public sector often was seen as a vehi- 18,500 after privatization, is an example of dra- cle for creating jobs in the absence of a private sec- matic employment changes arising from the intro- tor, partly for reasons of patronage and partly for 1 duction of PPI (box 1.2). meeting developmental or social objectives. Subject to weak performance incentives and to "soft" There is significant variation among countries and budget constraints, public sector managers often enterprises but generally speaking three labor issues were also able to avoid dealing with the difficult need to be tackled in the course of PPI: restructuring and adjustment issues that private 1. Employment levels sector managers most likely would have been MODULE forced to tackle. 2. Labor contracts Kikeri 1998 3. Pension liabilities. Those three factors are described below. As a result many infrastructure firms have excess Employment Levels manpower. For example, many African water utili- Overstaffing has ties employ more than 10 employees per 1,000 several causes, Historically, many infrastructure companies have connections, compared with a typical 2.5 to 5 which often combine to ensure employed more workers than they needed to deliv- employees per 1,000 elsewhere in the world its persistence. Box 1.2: Argentina Rail: Crisis and Reform W ith 30,000 kilometers of track, the Subsidies and grants received by FA made up Argentine railroad enterprise, fully 9 percent of the government's budget and 1 Ferrocarriles Argentines (FA), was the percent of Argentine gross domestic product. largest railroad in Latin America and the sixth Among Argentine state enterprises, FA was the largest in the world (after those in China, France, single biggest recipient of federal funds. In such India, the former U.S.S.R., and the United States) a context only the privatization of giant enterpris- at the time of its privatization in 1990. With 92,000 es could make a dent in the government's finan- employees in 1990, FA was one of the largest cial problems. Railway unions protested the gov- employers in Argentina. FA's employees were not ernment's plans and went on strike, paralyzing only unionized but also very powerful. Over time Buenos Aires, which coped with limited com- the unions intervened in all aspects of manage- muter rail service for 75 days. But the govern- ment, including staffing, internal organization, and ment held firm until the unions cut a deal with it. strategy. For instance, because passenger servic- That deal included an agreement that redundant es were more labor intensive than was freight FA employees could be let go in exchange for transportation, the unions got FA to pay more one month's salary per year of service, with no attention to the former than to the latter, even maximum limit. Because the average worker had though freight was relatively more profitable. They spent 20 years in FA's employ, the deal would successfully resisted efforts to streamline FA's cost the government an average of US$10,000 operations through consolidation and rationaliza- per worker. The World Bank helped finance this tion because it would make some employees program through its structural adjustment loan. redundant. From time to time the unions brought The Bank's backing assured workers that sever- Buenos Aires to a halt by going on strike and par- ance payments would be prompt and paid in full, alyzing suburban rail service in the capital. FA's unlike previous severance programs run by the unions opposed privatization and there was no Argentine government. Initial staff reductions reason to think they could not veto its implemen- took place through voluntary retirement pro- tation by the Argentine government. grams because many of FA's employees were In most countries railroads would not have old. Subsequent reductions resulted from layoffs, appeared on the first list of candidates for privati- concurrent with privatization. The company zation, but the sector did so in Argentina reduced its staff from 92,000 to less than 20,000 because of the heavy demands it was placing on in 1997. the government's out-of-control budget. Source: Ramamurti 1996. 6 Labor Toolkit: Framework and Overview (World Bank 2001). Loss-making long-haul carrier Some labor practices, however, may cause an enter- There are several Air India had a staff-to-aircraft ratio of 663 work- prise to operate in less productive ways or at high- cases where staff levels before PPI are ers per aircraft in 1997, compared with ratios of er cost than is required. For instance, public sector twice those that between 170 and 340 workers in various Southeast employees are often paid better than their private existed after PPI. MODULE Asian carriers: Singapore Airlines, Thai Airways, sector counterparts, particularly at the lower skill Malaysian Airlines, and Cathay Pacific (India, levels, and often receive tangible and intangible Disinvestment Commission 1998). In the 1960s benefits--such as job security, seniority rights, spe- Brazil's federal railways had a staff strength of cial pension arrangements, subsidized housing, A surplus of 160,000, which came down to 42,000 before the health and educational services--that are not pro- employees, accumulated over privatization transaction began and was further vided by private firms (Assaad 1997, Panizza many years, often reduced after privatization. In Argentina the corre- 1999). All of these factors have led to a public sec- means that job 1 sponding figures for the railways fell from 92,000 tor wage premium in many countries (box 1.3). losses become inevitable. to 18,600. As industries and technology change and as firms Excess employment results in lower labor produc- are exposed to increased competition, change often tivity and higher labor costs than private investors becomes necessary and greater flexibility in work- might be willing to bear and thus are often a cen- ing practices may be needed. These changes may Labor contracts can tral and controversial issue in PPI. Excess employ- involve market-based and merit-based remunera- be highly effective in ment has led to fears of labor force reductions as tion systems, greater flexibility in the use and allo- protecting workers, governments cut the work force to prepare for PPI cation of labor, and more flexible hiring and firing but may make it difficult for or as new owners and operators introduce efficien- practices. Usually both employers and employees enterprises to adjust cy improvements and expose enterprises to greater recognize that changes will be inevitable and so to new management discipline, new technologies, and negotiation and revision is an important aspect of circumstances. increasing competition. The fear of job losses often labor contracts. The process of gaining agreement becomes a focus for opposition by workers and on change may, however, be a challenge. In some trade unions--and sometimes for popular discon- cases there will be a tradition of centralized collec- tent with PPI as a whole. tive bargaining with one or two trade unions, but in others there will be fragmentation of work force Labor Contracts representation across a much larger number of The terms and conditions of employment are often trade unions. In such cases the large number of stipulated in a contractual relationship between the unions itself often becomes a factor for considera- enterprise and the employees. That relationship tion in revising contractual agreements. may be set out in legislation, in standard employ- Where private infrastructure investors are entering ment terms for public service workers, in separate competitive or contestable markets, they may wish labor contracts for each enterprise, or in individual to renegotiate or change some of these terms and employment contracts. Typically, many infrastruc- conditions of service as part of a new employment ture firms are governed by well-defined collective agreement. New private owners or managers of labor contracts, partly because the size of the enter- infrastructure companies also may seek to renegoti- prise demands them and partly because workers in ate labor practices to meet commercial and opera- such sectors as railways, transportation, and power tional performance objectives, as well as to were among some of the earliest groups of workers respond to changing market demands and new to organize into the trade unions that helped put technologies. contractual agreements in place. Pension Liabilities Labor contracts help create acceptable terms and Large pension conditions of employment, including the health, Many infrastructure enterprises have large accumu- liabilities can safety, or social well-being of the work force, and lated pension liabilities that have been promised to threaten the viability of a PPI transaction. may have been negotiated many years previously. and earned by current workers under different pen- 7 Labor Issues in Infrastructure Reform: A Toolkit sion arrangements. Many of the pension programs Box 1.3: Evidence of a Public Sector Wage are operated on a largely unfunded or "pay-as- Premium you-go" basis in which obligations are treated as a here is no doubt that some groups of current operating expense rather than paid from public employees are underpaid. The fact 1 T reserves or asset pools to which payment is made that governments have to offer very gen- at the time a future obligation is incurred. As a erous terms to persuade workers to leave vol- untarily, however, suggests that the workers result many firms have a large liability for future place high value on continued public employ- benefits that are not accounted for and for which ment. Even though salaries themselves may be funds have not been set aside. low, the overall employment package of benefits as well as terms and conditions may be attrac- Unfunded pension liabilities and other pension MODULE tive to workers--and better than they might issues can present a significant challenge for infra- expect from the private sector. Several country structure privatization. Such liabilities, which are studies have revealed evidence of a public sec- legally enforceable obligations, can be substantial tor wage premium. The following are some examples: and their settlement can become a major issue dur- · Assaad (1997) found a public sector wage ing PPI because investors may be reluctant to take premium in Egypt, particularly for public over an entity until those liabilities are resolved. enterprise workers who earned an average Voluntary departure or early retirement programs 20 percent to 28 percent more than other can also put a financial strain on pension plans. In government workers. The wage premium, Morocco, for example, the state-owned railway plus nonwage benefits equivalent to approx- provided a generous pension plan with benefits imately 85 percent of wages, explained the attractiveness of public sector employment paid by the railway itself. The system became and the long lists of applicants for jobs in financially unsustainable over the years and had to the civil service and state enterprises. be reformed, not least because a proposed down- · Bales and Rama (2002) concluded that state sizing program would have made the pension plan enterprise workers in Vietnam were overpaid even less sustainable (see box 5.14, module 5). by about 20 percent relative to comparable There might also be legal issues involved. Attempts private sector jobs. (Their findings were to tackle high pension costs and unfunded liabili- based on measurable earnings and benefits alone, and took no account of better job ties in the urban water supply in South Africa, for security, more generous pensions, more example, were subject to legal challenge (see box flexibility in work, or lowered effort levels.) 1.8 in this module). · Analysis by Bhorat and Liou (2002) in South Africa indicated that state enterprise work- Those labor factors have led to fears about the ers received a wage premium of approxi- potential negative effects of PPI on labor and have mately 21 percent compared with those in generated interest in developing labor programs the private sector. aimed at mitigating the social impact of reform. · Terrell (1993) found large and statistically The next section briefly describes the evidence con- significant public­private wage differentials cerning the impact of private infrastructure partici- in Haiti, where public sector wage rates were about four times the average private pation on employment. sector wages. The high wages in the state enterprise sector (telecoms and electricity) appeared to arise from an explicit rent or premium--perhaps because of a process of Labor Impacts of PPI distributing the enterprises' "monopoly A good understanding of the effects of PPI on the rents" to employees. (Again, the rents did work force is essential because the implementing not include nonwage benefits and are there- fore likely to be conservative.) agency has to deal with a variety of interest groups with a range of beliefs and perceptions about what PPI will mean for them. Module 2 of this Toolkit 8 Labor Toolkit: Framework and Overview describes in detail the evidence of the effect of private · These productivity gains have also resulted New technologies, competition, and participation on employment, labor productivity, pay in wage improvements for employees who sector reform are and benefits, work practices, and workers' represen- remained with the firms after PPI, particu- drivers of work force tation and rights in infrastructure enterprises. Only a larly for skilled employees. Wages have gen- restructuring. MODULE brief summary of the main findings is presented here. erally been aligned more with market condi- tions. The evidence shows that diverse labor impacts arise from PPI: · Labor contracts often have been revised in exchange for higher wages. In Latin · Significant job losses have occurred in infra- American countries, for example, work rules structure enterprises, compared with losses and conditions of service were renegotiated to 1 resulting from privatization in general, and provide managers greater flexibility with work force reductions of 50 percent or more respect to decisions on content and pace of are common. work, labor allocation, and subcontracting of · The greatest impact has been in those sec- support and administrative services to tors where demand is declining because of nonunionized firms and subsidiaries. competition from other modes (for example, Although such changes tended to reduce railways), and in sectors with long traditions union influence within the workplace, they of overstaffing (for example, ports). conformed to labor laws and protected many of the other benefits enjoyed by workers. · Job losses have been significantly lower, and in some cases negligible, in sectors where In sum, the evidence shows a wide range of experi- Private operators have strong demand is rising (for example, telecommuni- ences with respect to PPI's impact on labor, incentives to reduce cations) or where there is demand for depending on the initial conditions at the country costs. expansion of the network (for example, and enterprise levels. PPI can bring benefits to water and sanitation). workers through retained jobs, higher pay, and new job creation as a result of new investments · Labor restructuring is often necessary to and dynamic expansion. But large employment improve the efficiency and competitiveness losses can and do occur as infrastructure sectors of state enterprises, regardless of whether and enterprises are reformed, regardless of whether PPI is involved. Indeed, much of the labor PPI is involved. restructuring that has taken place to date and has been associated with PPI occurred Labor adjustments are one of the most sensitive well before privatization when state enter- aspects of PPI and enterprise reform. The process is prises themselves adjusted their labor forces not easy and there are many challenges. Because to improve performance. they perceive the threat of unemployment and loss of benefits, labor unions and state enterprise work- · Where substantial job losses have occurred ers often oppose reforms and that opposition leads in state-owned infrastructure enterprises, to actions that delay or stop governments from tack- they generally account for a small percent- ling infrastructure problems. Particularly in develop- age of the total national labor force. ing countries, these difficulties are compounded by · In some countries, PPI combined with liber- the lack of unemployment and social welfare sys- alization has led to net job creation in the tems, as well as the lack of alternative jobs in the sector as a whole (in telecommunications economy. In such circumstances, the costs of reform and ports, for example). for state enterprise workers can be high, involving loss of income, uncertainty, and difficulties in job · Labor adjustments have led to improve- relocation. Dealing with labor issues early in the ments in labor productivity, particularly in reform process can help mitigate these social costs in such sectors as railways where surplus a manner that both protects the interests of workers employment was high. 9 Labor Issues in Infrastructure Reform: A Toolkit and ensures that consumers gain from better deliv- enterprises and the vast resources they absorb from ery of critical infrastructure services. local banking systems have often crowded the pri- vate sector out of financial markets, slowing growth and the creation of productive jobs by the 1 private sector. Labor market regulations--including Dealing with Labor Issues In PPI restrictions on hiring and firing--and payroll taxes Whatever type of reforms are adopted, experience that raise the cost of labor have further exacerbat- shows that PPI can proceed smoothly if efforts are ed the problems and led to private sector reluc- made to deal with labor issues early in the reform tance to hire permanent labor. They have also cre- process. Early attention is needed to: ated difficulties in adjusting the labor force accord- MODULE ing to changing economic circumstances. · Assure workers that measures are being taken to compensate them for losses and to Labor market rigidities make it harder for workers mitigate the social impact of adjustment to move into new jobs as enterprises adjust, and · Ensure fairness and transparency in the generally lead to: treatment of workers and thus help build · Greater difficulty in implementing PPI wider support for the process reforms and labor adjustments. · Clarify labor liabilities and approaches in · Greater opposition from labor to enterprise order to attract private investors restructuring. · Facilitate reforms and improve enterprise · A greater chance of limited results from performance, including better and more reli- retraining and redeployment initiatives. Such able services, reduced fiscal drain, invest- measures may provide a short-term pallia- ment in new infrastructure, and faster eco- tive to labor adjustment, but there needs to nomic growth. be sufficient responsiveness in the economy Broader labor Dealing with labor issues often requires actions on to provide new private sector jobs into market policies are two parallel fronts. At a broader level, the reform which workers can move. important but are of labor market and other policies may be needed covered only briefly · Higher economic cost of labor adjustment, here. to promote private sector job creation. Such because adjustment in the work force as a reforms and the development of the private sector whole takes longer. help facilitate labor adjustments. Although impor- tant in their own right, these broader policy · Higher financial cost because more reliance reforms are covered only briefly here; a detailed must be placed on compensation payments discussion is beyond the scope of the Toolkit. This to workers displaced as a result of restruc- Toolkit focuses on the parallel set of actions: the turing. design and implementation of specific labor pro- Reforms aimed at increasing labor market flexibili- grams that address labor issues in PPI and infra- ty and developing the private sector can, therefore, structure reforms. Such programs can do much to help make the restructuring process easier, enabling mitigate the social impacts of reform and in some workers to shift more easily from one sector of the circumstances can act as a catalyst for broader economy to another (see box 1.4). Typically, such labor market and policy reforms. reforms involve: Promoting Policies for Job Creation · Reducing hiring and firing restrictions by The lack of alternative jobs for workers adversely changing and simplifying labor laws and affected by PPI or by enterprise reforms is a major rules of severance. concern in many developing countries. Many · Removing barriers to labor mobility by economies have been dominated by public sector dealing with housing and other social bene- 10 Labor Toolkit: Framework and Overview fits, removing location rules on collection of Relatively rigid labor unemployment benefits, and improving job Box 1.4: Labor Market Flexibility and Work markets will slow the process of post- registration efforts. The availability of jobs Force Adjustment--A Snapshot in Estonia reform adjustment. and the ease of movement in and out of the and Slovenia MODULE labor market determine how quickly enter- he experience of two transition economies prises and workers can adapt following PPI T in Central Europe, Estonia and Slovenia, illustrates the consequences of different and other broader economic reforms (see approaches to labor policies. In the early years Betcherman 2002 and Freije 2001). after the fall of Communism in Central Europe, Betcherman 2002 Slovenia took a highly interventionist approach with significant barriers to job termination, gener- · Improving information dissemination on job ous severance payments, generous support for 1 unemployed workers, and efforts to support real markets by making labor exchanges more wage rates. Estonia, by contrast, took a very lib- efficient and removing restrictions on pri- eral approach, with few barriers to job displace- vate sector recruitment and placement agen- ment or to new job creation and with modest cies. severance payments, and gave little support to the unemployed and no effective wage floor. · Reducing legal, fiscal, and regulatory barri- Unlike Slovenia, the government of Estonia also ers and disincentives to the development of removed most barriers to foreign investment. small and medium-size enterprises, particu- These various measures led to markedly different larly disincentives to create new formal sec- adjustment paths and labor markets. The transi- tion in Estonia led to a massive increase in work- tor jobs. er flows out of some jobs and into others. Job · Accelerating the implementation of privati- destruction peaked at 10 percent per year in zation policies. In countries where heavy 1992 and 1993, but, with a lag of one year, job creation also surged to a 10 percent yearly rate. state intervention continues to stifle the pri- By 1994 the job creation rate exceeded the job vate sector and crowd out finance and destruction rate. By contrast job creation rates in opportunity for private investment, PPI and Slovenia usually remained below 1 percent per privatization, combined with liberalization year, although job destruction rates ranged from and other policies aimed at private sector 3 percent to 8 percent. development, can help generate employment Source: Orazem and Vodopivec 1996. growth. Whereas labor market reforms and other reforms programs as part of the PPI effort can do much to associated with developing the private sector facili- secure support and mitigate the social costs of Issues of labor tate labor restructuring, they require attention at a flexibility may arise reform. Many countries around the world already if the implementing broader level than does PPI and they are not the have successfully managed major labor adjustment agency needs to direct responsibility of the PPI implementing programs as part of the PPI process and there is a negotiate changes in agency. Moreover, although labor market reforms labor contracts. substantial body of international experience from ease the PPI process, they often take time. Because which to draw. governments usually cannot delay PPI until labor market reforms are completed, labor restructuring There is no one approach to addressing labor Managers in strategies need to be designed in ways that take issues in PPI. Every country and every transaction implementing agencies can draw into account existing labor market constraints. In is different. Much depends on the political, eco- on the lessons of some cases these actions themselves can become a nomic, and social conditions, as well as on the experience from catalyst for undertaking the broader reforms. nature of the enterprise and the sector in which it many sectors and countries. operates. Nevertheless, several general lessons Developing Labor Programs emerge from the experience: In alignment with policies aimed at creating jobs in · Labor issues can and should be addressed the private sector, the development of specific labor early in the reform process. Labor issues are 11 Labor Issues in Infrastructure Reform: A Toolkit one of the more complex and politically · Early communication and consultation with challenging elements in PPI, and dealing labor is important. Such efforts help build with them early can help secure employee understanding and support and they assure support and provide a social safety net. workers that adequate arrangements are 1 being made. Openness and transparency in · Governments have an important role to play EL decisionmaking on labor issues are impor- in the restructuring process in large troubled tant confidence-building measures. The enterprises. In cases with high levels of over- U implementing agency should ensure that staffing or difficult labor relations, transfer- D labor adjustment is seen as a fair process, ring infrastructure firms with the labor force O even if job losses are inevitable. intact is not an option because private M investors are wary of taking on the burden These lessons are discussed in detail in the subse- of labor adjustments and employees are quent sections of this module. The module shows concerned that private investors may not that although labor issues are complex and chal- provide an adequate social safety net. lenging, they need not be an obstacle to PPI. With clear objectives, careful planning, and adequate · A mix of options can be used to deal with resources, labor issues can be handled effectively labor restructuring. Redundancy is one but while implementing government policy on the not the only option. Other measures future of infrastructure. include: voluntary departures and early retirement, correcting payroll errors (such as The main steps involved in developing and imple- identifying ghost workers), freezing recruit- menting labor programs are dealt with in the sub- ment, enforcing retirement rules, removing sequent sections of this module: barriers to employees' departure, and reduc- ing costs of staff substitutes such as overtime · Defining objectives and fee-paid workers. · Assessing the size and scope of labor · Voluntary departures are the most frequent- restructuring ly used option. Such schemes are generally · Developing strategies and options for labor considered to be politically and socially restructuring attractive, but issues of affordability and adverse selection need to be considered in · Developing key elements of a labor pro- their design and implementation. gram, including severance, pensions, rede- ployment support, and employee share · Redeployment programs have yielded mixed schemes results, but if properly targeted they can have social and economic benefits. Better · Managing the restructuring process results can be achieved by ensuring that · Putting in place monitoring and evaluation retraining is driven by demand, that it is tar- systems. geted to workers for whom it is most cost- effective, and that nongovernmental and pri- vate institutions are involved in the delivery DEFINING OBJECTIVES of services. Work force reduction is rarely an objective in and · Funding for meeting the costs of labor adjust- of itself. Rather, the objectives of labor restructur- ment must be secured early. Severance ing are better defined in terms that focus on the schemes often involve very substantial developmental, economic, and social goals sought amounts of money and it is important to give from PPI or from enterprise reforms more broadly. workers credible assurances that the funding In cases where stakeholder opposition is high, it is for making timely payments is in place. particularly important to communicate these objec- 12 Labor Toolkit: Framework and Overview tives. If the objectives are not credible, or are vague Outcomes may be short-term and urgent (for The bottom line: or poorly articulated, the implementing agency will example, reducing operating costs), medium-term although labor issues are often have more difficulty securing the support and (improved services to consumers and business), or challenging, resources needed for labor adjustment. long-term (improved international competitiveness experience shows MODULE in the sector). that they can be One tool to help clarify objectives is to describe addressed in a fair carefully the ultimate desired outcomes, and to use In addition to outcome objectives, governments and professional way and need not be those as a basis for setting objectives. Possible out- will also have process objectives--that is, objectives an obstacle to PPI comes are: dealing with how work force restructuring is to be success. done. Such objectives generally aim to ensure that: · More efficient operations and better service 1 for customers: Today's surplus labor often · The adverse social costs of labor restructur- reflects the inability or failure of past man- ing are mitigated by social safety net and agers to respond to changing circumstances. redeployment programs. These surpluses need to be addressed if future · Implementation of the program is fair and Thinking about the PPI operations are to become efficient in transparent and balances the interests of the desired outcomes is adjusting to new markets, new technologies, one way to define various parties involved. and increasing competition (see module 2). objectives. · There is sufficient consultation and dialogue · Lower operating costs: The overall goal of with key stakeholders, particularly unions and many labor adjustment schemes is to help workers, during the restructuring process. make the infrastructure enterprise or PPI scheme financially viable. Ideally this implies These objectives provide a framework for discussion that it can reduce costs, including labor and debate within government about the tradeoffs A reduced work costs, and achieve sufficient levels of opera- that must be made in designing a labor program, force is not usually tional profitability to yield a return on and help identify and make mid-course corrections the main objective of investment and provide for reinvestment in during implementation as needed. a labor program. Rather it is a means maintenance or expansion of the infrastruc- to an end (such as ture. improved efficiency or better service). · Better skills mix: A better work force--per- ASSESSING THE SIZE AND haps one with fewer people who are better SCOPE OF LABOR paid, better trained, and more capable--is a RESTRUCTURING common objective. The enterprise may be overburdened with skills that have become One of the first steps in developing a labor pro- redundant and may face a shortage of other, gram is to estimate the extent of labor restructur- perhaps newer skills. For example, in ing that is needed. The implementing agency must telecommunications firms there may be a get a clear handle on the work force to determine critical need to change the skills mix in what if any changes are needed in terms of num- response to new technology and changing bers, skills, and work practices. This usually customer requirements. involves carrying out a systematic staffing assess- ment that enables the implementing agency to: · A more adaptable work force: In addition to skill improvements there may be a desire for · Determine the size and scope of any work greater labor flexibility in work hours, work force restructuring, including potential practices, or the structure of the work force. downsizing · Better labor relations: There may be a need · Improve targeting in any labor restructuring for new negotiation frameworks or a new program, including identification of skilled labor contract to replace older ones and workers critical to the operations of the increase flexibility. enterprise 13 Labor Issues in Infrastructure Reform: A Toolkit Three tools, all · Enter into more informed negotiations and regain control of the payroll, operate effec- closely related: discussions with trade unions and labor rep- tive human resource management practices, · Staff audits resentatives maintain staffing information and databas- · Benchmarking es, and comply with labor laws and regula- · Ensure fairness and transparency of the 1 · Work force tions. analysis. process. · Provide an accurate basis for review of job There are three tools that the implementing agency positions, pay grades, and scales. In some can use to carry out the staffing assessment and enterprises, harmonization of staff terms is an define the size and scope of labor restructuring: essential prior task to PPI. This is particularly · Staff audits or personnel inventories the case where a new operating company is MODULE to be formed, perhaps drawing staff from · Benchmarking civil service and public enterprise cadres. · Work force analysis. In practice these are related and often are used Benchmarking together in a comprehensive analysis. Benchmarks are fixed pieces of information that can be used to make comparisons with other simi- lar fixed pieces of information. The process of Staff Audits benchmarking will help identify main problem A staff audit is an essential first step in assessing areas in terms of the competitiveness of staffing labor issues in the enterprise. Staff audits make an levels and labor productivity. Labor benchmarks up-to-date analysis of the work force and provide are used not only as a one-off activity for work the basis for subsequent benchmarking and work force restructuring but also as a tool for continu- force analyses. They also create the necessary data- ously monitoring and improving performance and base for analyses of the costs of alternative sever- competitiveness (see box 1.5). In practice it is the ance and pension strategies. process of benchmarking that generates most bene- fits through the challenging of current norms. Staff audits help to: · Bring personnel records up to date. Box 1.5: Generic Labor Benchmarks · Identify and eliminate ghost workers who · Gross or net revenue per employee are on the payroll (that is, workers for whom salary payments are made but who · Total payroll costs (all employment-related expense) per employee do not in fact work in the enterprise). In · Total/functional labor cost as a percentage Argentina's SOMISA steel company, for of sales example, the introduction of a plant census · Ratios of headcount by function (manage- with photo identification quickly revealed ment/operations, customer service/mainte- that 17 percent of the work force were nance) ghost employees (Hess 1997). · Salary levels by function (adjusted to allow · Provide a basis for developing severance and comparisons) early retirement options and estimating costs · Hourly wage rate (standard and overtime) if downsizing is needed. · Average weekly hours per worker · Units produced per work hour (unit produc- · Improve the accuracy of subsequent work tivity) force analysis. · Product/service line revenue per staff- · Establish effective record-keeping proce- hour/full-time equivalent employee dures to allow management to control or · Training in person-days per year. 14 Labor Toolkit: Framework and Overview Benchmarks provide managers with comparative through of changes provides the knowledge about Up-to-date records data on performance and labor productivity. of personnel and the how to close the gap. removal of "ghost" Although like-for-like comparisons are not always workers are easy, there are several sources of information, and Module 3 provides further details on benchmarks immediate benefits MODULE benchmark measures can give the implementing specific to each sector, as well as guidelines on of a staff audit. agency crude indicators of the scale of overstaffing. where to obtain benchmarking data and the process of carrying out benchmark analysis. There are three main types of benchmarks: Work Force Analysis 1. Internal benchmarks: By making compar- Staff audits and benchmarking are valuable for isons within an organization, perhaps indicating the size and scope of overall downsizing A "benchmark" is a 1 among different offices or time periods, it that is likely to be needed. These tools, however, comparative may be possible to quickly and easily identi- measure. still only provide part of the information necessary fy some areas for improvement. An example "Benchmarking" is for detailed assessments of downsizing require- is the approach adopted by Kenya's electrici- the process of ments and methods of selection. comparison. ty distribution company. For each electricity distribution district, the company identified Detailed work force analysis is often needed, as its characteristics (number of consumers, illustrated by the case of Brazil Railways in box 1.6. area, length of overhead line, number of The purpose of such analysis is to identify staffing substations, energy sales per customer) and requirements at the unit or operational level. Work found weighted averages for different classes force analysis will help the mangers in the imple- of staff (engineers, foremen, linesmen, for menting agency and enterprise managers to: example) that enabled it to easily compare areas of different labor productivity. · Identify the levels and types of staff needed for future requirements 2. Sector benchmarks: Comparisons between enterprises in the same sector provide anoth- · Make more informed decisions on the er measure. International or regional com- organization of severance plans parisons can be used where the PPI enter- · Avoid the loss of critical skills (adverse selec- prise is a monopoly provider in the country. tion). 3. Functional benchmarks: Organizations in Module 3 provides a set of tools for work force other sectors that have similar functions can analysis, including analysis and consolidation of be compared. For example: staff audit and benchmark data, functional · Gas, water, and power utilities might reviews, ratio analyses of staffing data, productivity cooperate in benchmarking of metering reviews, age profiling, and supply forecasting. or billing collection procedures. More fundamental functional reviews are valuable, · Airlines and railways have similarities in too, because they challenge the existing organiza- managing the turnaround and dispatch- tional structure and norms. They essentially ask ing of aircraft or trains. some straightforward but difficult questions: · Administrative processes are similar · Is this activity needed at all? across many sectors and comparisons can be made. · Should the enterprise be undertaking this activity? Each of the three types of benchmarks has its place. In all cases, however, a combination of · If the activity is needed, is the enterprise measurement and process analysis is important for really the best provider of this function? effective benchmarking. Measurement identifies the · If this is a critical activity, is the scale and gap, but the discussion, debate, and working scope of operations appropriate? 15 Labor Issues in Infrastructure Reform: A Toolkit These tools and the process involved in implement- ever, should not become an end in themselves, ing them to carry out a staffing assessment are cov- because actual staffing needs will only be known ered in detail in module 3. The assessment is gener- during the PPI process as investors are brought on ally carried out at the enterprise level. Where the board. When the broad estimates of labor restruc- 1 quality of data is poor, the process of data collec- turing needs are known, the implementing agency tion and analysis can be time consuming. can move on to strategic issues of timing and Moreover, the enterprise may lack the skills or sequencing, and choices about which restructuring resources to undertake staff assessments. In these options to use. circumstances the process may require a combina- tion of resources involving enterprise staff and spe- MODULE cialized consultants. DEVELOPING STRATEGIES AND Investment in obtaining good staffing assessments OPTIONS FOR LABOR is usually worthwhile. The assessments form part RESTRUCTURING of the overall due diligence exercise in the PPI When the size and scope of labor restructuring are transaction and provide a tool to help the imple- known, the next steps are to deal with strategic menting agency negotiate with workers and questions of timing and sequencing and to choose unions. More important, they provide an estimate among various restructuring options. Among the of the size and scope of labor restructuring, which key questions that practitioners usually face are: helps identify the level and location of any excess Should labor restructuring be done by governments staff and skill deficiencies. Staff assessments, how- Work force analysis is a staffing planning activity that is focused on Box 1.6: Brazil--Work Force Analysis in Rail Privatization operational units in I the context of work n 1992 the government of Brazil included the operational procedures, with redundant activities force restructuring. federal railway, Rede Ferroviária Federal identified by job categories. This was essentially a Sociedade Anônima (RFFSA), in the National very meticulous job that required a detailed study Privatization Program. This was the first major based on international practice. The redundancy privatization of public infrastructure services in estimates were to be conservative because the Brazil. Implementing the proposed privatization idea was to avoid second-guessing what the con- plan required some degree of reduction in cessionaire would actually need, while avoiding RFFSA's labor force. Although RFFSA had forcing the concessionaire to have to re-recruit already made significant progress in reducing its "fired" workers, as had been the case in Argentina employee headcount, the company's labor pro- and the United Kingdom. In addition, the staff ductivity continued to be low. RFFSA had remaining at the company at the time of transfer to reduced its total staff from about 110,000 in 1975 the private operator had to be adequate to avoid to about 42,000 in May 1995. This reduction led interruptions in service. To ensure this, a detailed to a substantial increase in labor productivity, analysis was conducted by the regional managers from 250,000 to almost 1 million net ton-kilome- to assess both the staffing needs for each function ters per employee. This level of labor productivity and the number of excess workers. By the end of continued to be insufficient, however, not only this analysis, RFFSA's management had reason- when compared with similar North American able estimates of the staff reduction needs in each companies but also with recently restructured regional area. In May 1995 this process led to an and privatized railways in Argentina and Chile. employment reduction target number of 20,000 The strategy to deal with this excess labor had to workers. Between May and September 1995, be subtle because there were significant differ- 1,953 workers voluntarily decided to leave the ences in labor productivity across RFFSA's regions company so that by the time the first concession and uniform cuts across the board would not was announced in September 1995 the new make sense. The solution was to come up with reduction target number was 18,047. new cost reduction plans for each of the six Source: Estache, Schmitt de Azevedo, and Sydenstricker regional areas to be privatized, based on new 2000. 16 Labor Toolkit: Framework and Overview or be left to private investors? and What is the Moreover, when investors have to absorb large Functional reviews range of available restructuring options and under labor liabilities they discount the sale price accord- can challenge the basic assumptions what circumstances are the options best used? ingly, leading to lower sale revenues and potential about the public allegations that assets are being sold cheaply. organizational MODULE Alternatively, they may demand government subsi- structure of the enterprise. dies to cover the cost of the liabilities, thus subvert- Timing and Sequencing Issues ing one of the original goals of PPI. Leaving large- The primary strategic decision is whether labor scale restructuring to the new private investors may restructuring should be carried out by the govern- also create social problems, particularly where ment prior to PPI, or whether such restructuring weak severance laws and social safety nets reduce should be left to the private sector after the PPI welfare protection for workers. 1 transaction is completed. There is no single approach and countries have followed different Restructuring by the Government paths, depending on the timetable and urgency of PPI, the nature of the labor issues at the enterprise For the above reasons, labor restructuring in large, level, and the existing legal framework. There are troubled infrastructure enterprises is often seen as a three options in terms of timing: government responsibility, on the grounds that government involvement is needed to: 1. Leaving restructuring entirely to the private sector · Resolve potential labor conflicts and mini- mize the burden of politically sensitive 2. Leaving restructuring entirely to the govern- restructuring measures on private buyers ment · Ensure that the social consequences of labor 3. Adopting a mixed approach. force reductions are properly addressed, par- ticularly in ensuring payment of severance Restructuring by the Private Sector obligations and development of other social safety measures At one extreme is the option of leaving labor · Increase the attractiveness of the enterprise restructuring entirely to the private sector, on the and thus the feasibility of PPI. Government- grounds that private investors are generally in a led downsizing is also one of the few prior better position to judge the level of employment restructuring activities that is likely to and kind of skills needed. This option can work improve the price that investors will pay for for companies in which earlier labor adjustments state-owned assets. The most comprehensive have largely tackled any problems of overstaffing, study of factors determining privatization or where prior downsizing efforts have led to prices, based on 236 privatizations in established processes and norms in place for sever- Mexico, found that a 20 percent reduction ance and redeployment, thus making any future in the labor force prior to privatization restructuring by the private investors relatively would lead to a 24 percent increase in the easy. In these circumstances it is possible to transfer price (López-de-Silanes 1997). responsibility for restructuring to the private sector. The strategy of leaving restructuring to the govern- But in infrastructure enterprises with high levels of ment has been adopted in a number of cases. In overstaffing and difficult labor relations, leaving Argentina, for example, where surplus staff and restructuring entirely to private investors may not strong unions were major sources of inefficiencies, be a viable option. Attempts to do so can put the the railway and energy enterprises undertook PPI transaction at risk. Where political and labor major employment cuts prior to PPI. The railway opposition to PPI are high, private investors are company reduced employment by close to 80,000 wary of taking on the political burden of carrying over several years. Similarly, in Brazil more than out large-scale layoffs and thus are reluctant to bid. 18,000 of the nearly 40,000 railway workers were 17 Labor Issues in Infrastructure Reform: A Toolkit retired or became redundant before the systems adjust staffing levels after assuming management were concessioned. Prior restructuring was under- control. Such an approach was adopted in the pri- taken not just to improve the prospects for sale but vatization of Argentina's telecommunications and also to overcome labor opposition and ensure that energy companies, and in the case of Manila Water 1 the social consequences of layoffs were properly in the Philippines. In these cases prior to privatiza- addressed. tion the government established the severance and social safety net program, which was used for both Government-led labor restructuring has its own phases of restructuring, and the cost of downsizing risks and disadvantages, however, particularly in was shared by government and the private investor. terms of cost and adverse selection. Governments can be more generous than the private sector in Whichever approach is used, the key is for govern- MODULE setting compensation payments, leading to over- ment to clearly define the labor program before payment and issues of cost and sustainability of PPI so as to assure workers that their interests are severance payments. Moreover, poor targeting taken into account and to clarify for investors the techniques can lead to the loss of the better, most labor liabilities involved. Developing the labor pro- skilled, and most valuable workers during the gram in advance and letting the new managers course of labor restructuring. In the worst cases, handle the actual restructuring process helps with workers who took the packages have been rehired, the political viability of the process, while it avoids which has created incentives for the best and most problems of adverse selection and sustainability of skilled workers to accept severance (knowing that severance packages. they can be employed or rehired easily) and led to the inefficient use of scarce public funds. The sec- Table 4.1 in module 4 summarizes the pros and tion on severance in module 5 treats these issues in cons of the three approaches. greater detail. When issues of timing and sequencing are dealt A Mixed Approach to Labor Restructuring with, the next step is for governments to examine the range of restructuring options and to decide To minimize the risks of overpayment and adverse which ones can be suitably applied under existing selection, some governments have stayed away circumstances. from a direct role in restructuring and have adopt- ed more of a mixed approach. In some cases they Restructuring Options have made the policy decision to grant private A range of options is available for dealing with investors full flexibility to select the work force large-scale labor restructuring. The options can be from the existing pool of workers according to divided into three broad groups: need, while the government assumes responsibility for developing the labor program beforehand and 1. "Soft" options, which do not introduce ele- for dealing with residual workers. Such an ments of incentive or compulsion but rely approach was used in Argentina's gas company, on the application and enforcement of exist- where employee restructuring was left to the new ing, and therefore less controversial, work- private investors who were allowed to select place regulations. Not simply natural attri- tion, these measures include hiring freezes, Work force employees and the government provided incentives downsizing and CEO and a social safety net for displaced workers. payroll management, and the transfer of replacement are staff to other government departments. measures that tend In other cases both government and investors have to raise privatization 2. Restructuring of the workplace: Options in played a role in implementation: part of the prices. this group generally fall short of voluntary restructuring has been done by the government or involuntary departure and include meas- prior to PPI, targeted at obvious areas of surplus, ures such as administrative leave, job-shar- and part of the restructuring has been done by the ing, part-time work, and, in some cases, the PPI investor who is given full flexibility to further 18 Labor Toolkit: Framework and Overview shedding of noncore businesses. Some of resorted to voluntary departure programs by these will be voluntary and others, such as providing severance pay packages that have closure of noncore units, may be seen by generally exceeded legally mandated require- workers as involuntary change, especially if ments. The size of the payments has varied MODULE there has been little consultation. widely among countries and within coun- tries among enterprises, depending on legal 3. Retirement and redundancy, which can and contractual obligations and the strength involve: of labor unions. Severance payments are · Voluntary departure options that provide covered in greater depth below. incentives for people to leave voluntarily, · Compulsory retrenchment is used when vol- either through an early retirement pro- 1 untary departure programs are not sufficient. gram or the provision of generous sever- At Brazil Railways, for example, the restruc- ance packages. Acceptance of these turing program allowed for a two-phased options is not forced (although in cases approach. In the first phase, redundant staff where workers' future prospects are very were given the choice of voluntary separa- poor, workers may feel that they have tion with an enhanced severance package. had little choice). Employees who did not accept the voluntary · Compulsory redundancy options, where plan were laid off with legal entitlements workers are required to leave employ- plus an incentive package equivalent to 80 ment without their consent. percent of the incentive offered under the Several factors influence the choice of options, voluntary program. Because of the reduced including the extent and level of labor surplus, incentive, most of the employees took the existing labor legislation, and the role of unions. voluntary program and only a few went Moreover, these restructuring options are not through the compulsory retrenchment route. mutually exclusive; in practice they can be used in In other cases, compulsory retrenchment has sequence or combined with one another: been used because of difficulties in targeting severance offers or cost concerns associated · Soft options and workplace restructuring with voluntary departure programs, or when are generally most appropriate for a man- certain units are closed or spun off. aged process of work force restructuring The choice of strategies and options open to the and downsizing, or in special circumstances implementing agency is often constrained by exist- such as transition economies where rapid, ing legislation. An early task is to review the legal large-scale downsizing is not politically or framework for dealing with labor issues to see socially feasible. In general, these approach- what is possible and what is not. Sometimes es may work in the adjustment period prior changes in the legal framework may be needed. to PPI, but in heavily overstaffed enterprises Where such changes are difficult to carry out, the in urgent need of PPI such measures alone implementing agency may select options (such as are not likely to be sufficient. soft measures or voluntary departures) that comply · Where there are high levels of surplus labor with existing legal requirements and so avoid the and PPI reforms are urgent, more drastic risk of legal challenges in court. measures have been required. The most commonly used options in this regard are Thus, the choice of which approaches to use will early retirement and voluntary departure depend on the existing circumstances at the enter- programs. Particularly in countries with prise and country levels, in particular: strong labor unions and weak social safety · The size of accumulated surplus labor nets, as well as those where labor legislation prohibits outright layoffs, governments have · The legal framework 19 Labor Issues in Infrastructure Reform: A Toolkit · The nature of labor relations · Ex gratia severance payments beyond statu- tory requirements, which are usually a key · The presence of established procedures and element of voluntary departure programs. practices for handling restructuring. In addition to providing immediate income sup- 1 port, severance payments facilitate labor support DEVELOPING KEY ELEMENTS and allow PPI to happen, and mitigate the social OF A LABOR PROGRAM impact of layoffs in the absence of unemployment insurance systems. The financial and economic Once the broad strategy and options are deter- returns can also be high, with short payback peri- mined, the next step is to develop the main ele- ods and increases in the marginal productivity of MODULE ments of the labor program. Specific approaches to redundant staff redeployed to productive activities labor restructuring are bound to vary from one elsewhere in the economy. country and enterprise to the next, depending on local circumstances. But labor programs typically But the design and implementation of severance include four main components: severance pay- payments is one of the more challenging areas in ments, pension payments, retraining and redeploy- labor restructuring. Four main issues typically ment support, and employee share ownership plans. arise: 1. Setting severance levels Severance Payments 2. Developing targeting and selection mecha- In the absence of unemployment insurance and nisms other social security arrangements in many develop- 3. Choosing between a uniform approach and ing countries, severance packages are typically the a case-by-case approach primary source of income support during the transi- tion period to alternative employment. As such, 4. Financing severance packages. they are a central element in any labor program. Severance Levels Severance packages typically include some or all of For the reasons outlined above, many governments the following components, each of which is dis- have resorted to voluntary departure programs by cussed in detail in module 4 of the Toolkit: providing severance payments that exceed legally · Statutory end-of-service payments, the levels mandated requirements. The size of the payments of which are usually set out in legislation. has varied widely among countries and within Statutory payments can include notice period, countries by enterprise, depending on legal and or payments in lieu thereof; termination bene- contractual obligations, the negotiating strength of fits; gratuity or pension benefits; earned leave; labor unions, and prior precedents. and payment of salary or wage arrears. In some cases an established severance arrange- · Compensation for enterprise-level benefits, ment may already be in place; in others, the exist- these being payments to retrenched workers ing scheme is not considered sufficient or there for benefits as set out in the rules for each simply is none, and a new scheme may need to be enterprise or as part of a formal collective developed. Usually, severance plans are based on a bargaining agreement. These benefits can multiple of years of service and salary, taking into include housing; medical, education, and account legal or contractual obligations and, in other welfare services; access to loans, per- some cases, prior experiences or precedents in the haps at preferential rates; and subsidized or state enterprise sector more broadly. Such formulas free food, equipment (for example, tele- are easy for managers to use (table 1.1) and are phones), or services (such as supply of elec- widespread in both the public and private sectors. tricity). As module 5 shows, severance formulas have gen- 20 Labor Toolkit: Framework and Overview erally ranged from 1 to 3 months of salary per year mum and maximum levels of payment, where a A severance of service, with a typical average payment of 1.5 minimum floor can be seen as fair to everybody package has a number of elements. months per year of service. while a maximum cap would ensure that workers Each of these may and managers with longest seniority are not over- be determined by In developing a severance scheme the main chal- MODULE paid. Another way is to make workers who are different legislation, lenge lies in devising severance payments that are regulations, rules, or within a few years from retirement, and thus have both attractive for workers and financially afford- agreements. the least to lose in terms of future income, ineligi- able and sustainable. Severance has to be attractive ble for voluntary schemes or for their severance enough for workers to leave voluntarily. At the payments to decline as they approach retirement. same time, governments cannot afford to overpay because overpayment leads to problems of cost and A third approach is to better tailor severance pack- 1 financing and to problems of adverse selection. ages to workers' characteristics through a loss- based method that takes into account factors such In practice, overpayment has often occurred as seniority, gender, and education. Unlike standard because generous payments are seen to be political- severance formulas that compensate workers main- ly and socially attractive. In Pakistan, for example, ly for past service--where workers with higher sen- an agreement with the unions resulted in a package iority benefit disproportionately compared with equivalent to five months' pay for each year of workers having fewer years of past service and service, which neither the government nor the firms more years of denied service--a tailored approach could afford to pay and which subsequently led to that takes into account factors such as education delays in implementation. If an overly generous and gender can predict the welfare loss of each package is offered to all workers, there is the added worker and compensate the worker accordingly. risk of adverse selection. In the rail sector in Argentina, for example, the across-the-board offer The loss-based severance method is more a com- led to the loss of key staff, which hurt the perform- plement to any existing method than a purely alter- ance of the newly privatized firm. There is consid- native severance method. Its advantages are that it erable evidence from evaluation of downsizing pro- serves as a benchmark to assess possible overpay- grams that adverse selection can result in the rehir- ment, helps induce the right self-selection, and ing of workers who have received compensation helps contain costs. The approach aims to: payments, and that leads to problems of moral hazard and inefficient use of scarce public funds · Identify the factors that contribute to earn- (see, for example, Haltiwanger and Singh 1999). ings loss after retrenchment. In several stud- ies, women's earning losses have been Haltiwanger and Singh 1999 greater than those of men. One way to contain the risk of excessive payouts · Use estimations of earnings functions, based and to minimize adverse selection is to set mini- on data from national household statistics, Table 1.1: Standard Severance Formulas--Advantages and Disadvantages Advantages Disadvantages · Relatively simple to understand, communicate, · Can be easily imported. Managers in a hurry and implement. may simply copy formulas from another country or enterprise. · Attractive to unions because they can negotiate · Can substitute for analysis of actual needs. a formula for a class of workers. · Attractive to government because it can set a single formula as part of a uniform approach. 21 Labor Issues in Infrastructure Reform: A Toolkit Rehiring is an and make comparisons of workers' existing Uniform or Case-by-Case Approach? indicator of program incomes with alternative private sector failure and poor income sources. Where governments are starting a program of design. work force restructuring across a number of infra- · Create a specific formula to calculate the wel- structure enterprises or organizations, a critical 1 fare losses that then can be used to determine decision arises. Should government adopt a single, the compensation each worker would receive. uniform approach to compensation that will apply The approach has been piloted in Guinea-Bissau, to all enterprises, or should severance packages be Madagascar, and Tanzania, and is described in negotiated on a case-by-case basis? Chong and Rama (2000). The data requirements A uniform approach may be preferable where and methodological issues are covered in further MODULE there are strong trade unions and where a series of detail in module 5. Chong and Rama 2000 case-by-case negotiations can result in very high costs to government. Such an approach would avoid a situation where each new award raises the Targeting and Selection minimum severance level for the next negotiations and creates a ratchet effect that leads to increasing- Another way to avoid adverse selection, reduce the ly higher severance levels that eventually become risk of rehiring, and contain costs is to identify the unsustainable. work activities and subsequently the work force cadres to be separated, and then to target the sever- At the same time, some flexibility might be needed ance offer only to workers whose jobs have been to take into account the particular circumstances of identified as redundant (through benchmarking the enterprise (for example, based on levels of over- studies or functional analysis, for example), rather staffing or financial performance). One approach than to offer severance to all employees. would be for the government to develop severance policies and guidelines within which enterprises are There are other ways to improve targeting and allowed flexibility. In such an approach, the govern- selection as well. These are discussed in greater ment might finance the cost of severance according detail in module 5 and include: to the guidelines, and any severance beyond the · Giving managers the right to refuse an guidelines would be financed by the enterprise. This application for voluntary departure might allow enterprise managers in more profitable firms to restructure their work force more quickly · Using objective and independent methods of by offering higher payments that can be financed employee selection (standardized service from the enterprise's own resources but within an records, assessment committees with inde- overall framework that prohibits excessively high pendent members) compensation payments that the rest of the public · Obtaining contractual commitments by sector could not afford. workers to retire from public service as part Financing Severance of their exit arrangements · Instituting penalties for the public enterprise The cost of severance payments can be high and in the event of rehiring funding arrangements need to be put in place early in the process to assure workers that timely pay- · Strengthening human resource management ments will be made. In the absence of such arrange- systems to enable better monitoring of staff ments government credibility can be at stake. recruitment and to avoid the rehiring of workers who were prior beneficiaries of vol- There are several sources of finance for severance untary departure or early retirement pro- and for labor programs more broadly: grams. 22 Labor Toolkit: Framework and Overview 1. The government budget: Government rev- finance the costs of work force restructuring. A key decision is enues can be used to finance restructuring Many governments, however, look to loans whether to adopt a uniform or a case- programs, although these may be insuffi- or grants from multilateral institutions and by-case approach to cient when countries are faced with large- bilateral donors as potential sources of funds ex gratia severance MODULE scale severance programs. (see box 1.7). For example, World Bank packages. loans, under carefully specified criteria, pro- 2. Disposal of assets: An enterprise that has vided financing for severance packages for acquired nonrelated assets over the years redundant workers in the restructuring of the can dispose of them through asset sales or Work on securing Polish and Brazilian rail sectors and the pri- privatization, and the revenues generated financial vatization of Togo telecommunications. from the sales can be allocated to meeting commitments must start early. 1 the costs of downsizing. Problems can arise, 5. Enterprises and investors themselves, however, if: through profits from operations: Where the level of employment reduction is low, cur- · Government rules prevent disposal There are six rent operations can finance the costs of receipts from being retained by the enter- sources of funds for retrenchment. For example, in restructuring prise, requiring instead that they be allo- labor programs. the Lesotho Electricity Corporation (LEC), cated to the general treasury account. 40 to 50 percent of staff were considered This is normally the case where the enter- surplus--around 250 people in total. The prise is a departmental (civil service) costs of severance were funded from LEC's organization, but there may be more ongoing operations. (Other items such as autonomy where the enterprise is a pub- training, counseling, and communication lic corporation or a company. were supported under a World Bank credit.) Asset disposal is · The assets are illiquid or difficult to sell, Where the new investors are responsible for important but can or the market for assets is (temporarily) take some time to financing retrenchment costs after assuming implement. There is, depressed. This will lead to a timing operations, these costs too are effectively however, nothing to delay in sales, or reduced proceeds if the financed from current or future profits. stop the implementing agency implements a "fire implementing agency from starting sale" of assets, at cheap prices. the process by, for example, · There are legal issues such as a prior Box 1.7: World Bank Support for Severance commissioning charge on the assets by creditors or " n the past the World Bank was not allowed to I initial valuations of uncertainty of title. directly finance severance pay because it was assets. not considered a productive investment. There · PPI enterprise managers and government were also concerns about the effectiveness of officials are reluctant to dispose of key retrenchment schemes and the Bank's vulnera- assets. For example, port managers or bility to accusations of supporting and financing bus company managers may resist the unemployment. But a number of factors led the Bank to decide in February 1996 to allow direct disposal of potentially valuable land for Bank financing for severance pay as part of commercial development. investment operations. These included the 3. Privatization proceeds: Some countries have importance of large-scale restructuring and pri- vatization, the potential obstacles arising from sequenced the sale of valuable enterprises lack of financing for labor shedding prior to sale, first in order to build up adequate funds the growing evidence on the economic and from initial proceeds to finance the labor financial returns to severance pay, and the limi- adjustment and other costs of more difficult tations of adjustment lending. As a result, sever- transactions. ance pay financing can now be provided for individual state enterprises or groups for enter- 4. Bonds, loans, and grants: Governments can prises throughout the reform process; that is, issue government bonds, and some profitable from corporatization to restructuring prior to pri- enterprises may take commercial loans to vatization" (Kikeri 1998, p. 35). 23 Labor Issues in Infrastructure Reform: A Toolkit 6. Creditors: Where the enterprise is liquidat- 3. The restructuring of pension arrangements ed, creditors may ultimately fund the costs in a way that makes them consistent with of (statutory) redundancy, as was the case in the future requirements and financial sus- the liquidation of Aeromexico (see box 4.9, tainability of the enterprise. 1 module 4). Each of those issues is complex and its resolution Pension Arrangements depends on the specific type of pension scheme in place. The issues must also be addressed in ways Some of the more complex issues in PPI arise from that satisfy the differing interests of employees, the the way pension arrangements are addressed. A prospective PPI investor, and government. Module poorly conceived pension strategy can make an oth- 5 presents detailed guidance on each of these tasks erwise viable transaction effort untenable. The cost of MODULE for different types of pension schemes. past obligations or future commitments of an exist- ing pension scheme are commonly among the more Engaging with Stakeholders significant considerations in determining potential investors' willingness to participate in a PPI initiative. Given the importance of pension provision to workers' welfare, it will be essential to communi- Public sector employees often benefit from gener- cate, consult, and often negotiate with employees, ous pension schemes that may far exceed those trade unions, pension plan trustees, government available to private sector workers, especially in (ministry of finance, labor, or social protection), developing and transition economies where pen- and other stakeholders on changes in pension sions of any type are often unavailable to the arrangements. majority of the work force. The value of pension benefits can be the largest single component of the Where national or multiemployer pension plans compensation package for many workers and the may be required to commit additional resources to only form of "savings" accessible to them. The meeting the future obligations for pensions, it is current and future costs of sustaining these essential that the relevant government ministry or arrangements, however, are often so great that the the government actuary is consulted before com- way in which they are structured and financed municating with unions and workers. Especially becomes a key factor in whether an enterprise is when these plans are actuarially bankrupt, or financially viable over the long term. where government is about to reform the pension system generally, the implementing agency will Pensions also represent a potentially powerful tool need to be very careful about raising the expecta- for the restructuring of labor. They may be an tion of workers' representatives about what is-- effective means to lower labor costs through early and is not--possible. retirements or voluntary separations and a power- ful incentive to attract and retain highly skilled or Pension plan trustees or supervisory board mem- essential workers. bers are important actors and stakeholders in pen- sion issues in PPI. They will be able to inform the The implementing agency must address three close- implementing agency about the structure of the ly related but distinct matters in dealing with pen- plan, past precedents in interpretation of the plan, sion issues in PPI: plan assets, and financial circumstances. As box 1.8 illustrates, pension plan arrangements may be 1. The measuring and resolution of existing both technically and politically difficult, and the pension commitments that have been implementing agency and trustees may find them- accrued to date in a manner perceived to be selves on different sides of the negotiating table. It reasonable, fair, and financially viable is therefore essential to consult with pension 2. The utilization of pensions in the process of trustees. Their primary duty, however, is to the labor restructuring through limited windows beneficiaries of the plan, and they may well have for early retirement or voluntary departure their own source of independent professional 24 Labor Toolkit: Framework and Overview Pension liabilities Box 1.8: South Africa--Pensions at Johannesburg Water Company are increasingly T he reform of Johannesburg's water supply bution by employers and a 7.5 percent contribu- recognized as a potential risk to included efforts to implement more equi- tion by employees, plus life insurance and dis- enterprise table and more financially sustainable pen- ability benefits. The city's unilateral action was restructuring. MODULE sions. The Johannesburg Water Company legally challenged in the courts, and an interim (JWater) was formed on November 21, 1999, and order granted relief to the two largest plans in it inherited staff who were contributing to 12 dif- March 2002. Other schemes subsequently ferent (defined-benefit) pension plans originally launched similar applications. If all are success- set up by the City of Johannesburg. Not only ful, then pension provision will essentially be was this arrangement complex to administer, but unchanged and the implementation of pension the plans were not equitable, and generally restructuring will be dealt a severe blow or at 1 favored white employees and senior managers. least delayed. Pensions issues will Moreover, the unfunded liabilities of the plans With hindsight, there had been too little consulta- be a critical were large and growing, a situation exacerbated tion with plan trustees, unions, and workers. The component of any by high administration costs. court challenge to the city was based on the communications Restructuring of the company's pensions was grounds that (a) the interests of some pension plan. essential. However, union representatives on the plan members had been prejudiced, (b) the con- pension plans' boards of trustees had been gen- sultation process had been inadequate, and (c) erally opposed to the reforms of the city's water earlier guarantees given by provincial legislation supply. Trustees had not formally recognized and the employer during the reorganization had JWater as an employer because the rules of the been infringed. Those pensions issues are not plans did not generally provide for admission of yet resolved, but key lessons for labor adjust- nonlocal government employees. Moreover, ment in PPI are: trustees of the two largest (City of Johannesburg) · Pension issues are complex. The implementing pension plans were reluctant to make rule agency will usually · It is important to have early and effective changes, and they used the need for such need to enlist consultation on pensions with workers, changes as a bargaining tool to obtain other con- specialist advice on unions, and trustees. cessions from the city. pensions. · The allocation of pension liabilities must be These problems were not unique to the water clearly defined. (In this case the City of sector; other city pension schemes had similar Johannesburg will meet unfunded pension difficulties. In December 2001, in an attempt to liabilities up to the time of staff transfer, but resolve citywide pension problems, the city thereafter responsibility rests with JWater.) administration unilaterally closed all pension plans to further contributions. A new provident Source: Personal communication from staff in Johannesburg If pension systems Water, 2002. fund was created. This was a defined-contribu- are in the midst of tion (accumulation) plan with a 15 percent contri- reform, this may well affect the way the implementing agency will package advice. The implementing agency may also identify munications, rail, or port PPI, or may set prece- or restructure pensions within the a need to recruit specialist professional advice on dents for other state-owned enterprises. Until 1981 PPI transaction. behalf of government. most public pension plans were defined-benefit, pay-as-you-go arrangements, potentially unsustain- Managing Links with Pension System Reform able financially. The most well-known early For some PPI implementing agencies national pen- reforms were those of Chile in 1981, which intro- sion reform will be of little relevance, either duced a system based on individual accounts with because the reform has already happened or fully funded, fully vestable, and fully portable ben- because pension reform is not in the pipeline. efits, plus minimum pension guarantees for work- ers on low wages and interrupted contributions. Where government is in the midst of system Chile's reform was followed by reforms in several reform, however, strategic decisions may need to be other Latin American countries. In Bolivia's capi- made. Wider pension reforms can affect specific talization program (box 1.9), pension reform and decisions on pension issues for a power, telecom- privatization of state enterprises (including utility 25 Labor Issues in Infrastructure Reform: A Toolkit Box 1.9: Bolivia's Capitalization Program Box 1.10: Brazil Rail--Pension Reform and olivia's 1994 capitalization law is a unique Labor Adjustment B example of a combined privatization and I n planning for labor adjustment in Brazil rail, it pension system reform program. Major was expected that about 5,000 workers would 1 state enterprises, including gas, telecommunica- take early retirement and 13,000 would tions, railways, airlines, and electricity genera- choose voluntary separation. In fact, almost the tion and transmission, were capitalized through reverse occurred: 11,771 opted for early retire- a capital increase by private investors of up to ment and 5,886 for separation. The reason was 50 percent of the companies' capital. During a proposal in Brazil's Congress for radical 1995 and 1996 international and domestic reform of the pension system, which implied investors acquired shares in these enterprises that eligibility to retire no longer would be based MODULE through competitive bidding processes. on the number of years worked but on age. Government transferred the remaining 50 per- Fear that changes in the social security law cent of the shares in the enterprises into two would mean that workers would have to work new privately managed pension plans that were many more years to receive similar benefits or also mandated by the capitalization law. that the changes would jeopardize the retire- The Bolivian approach meant that there were no ment income of older workers led to an unex- privatization proceeds to the state budget, but pected increase in the number of applicants for that the investment went directly into these early retirement. infrastructure assets. At the same time, the uti- Source: Estache, de Azevedo, and Sydenstricker 2000. lization of pension plans helped provide for development of the local capital market and meet the social protection needs of the popula- tion. ence between pension system reform and PPI Source: Guislain 1997. implementation, particularly where: · Government is proposing other changes that and infrastructure companies) were intimately are directionally opposite to those that the linked because the state's shareholdings were used PPI implementing agency might propose. to establish new pension schemes. For example, pension system reforms can include increasing the statutory age and PPI work force restructuring may also be affected sometimes removing any difference in retire- by the timing of systemwide pension reform. For ment age between men and women (the example, labor adjustment in Mexico rail took implementing agency may in contrast pro- place as pensions were being reformed, which pose early retirement); raising the minimum meant that workers knew that the new private years of service for eligibility or changing the companies would provide pensions under new basis of eligibility from years of service to mandatory, fully funded arrangements (López- age (although the implementing agency may Calva 2001). In Brazil many workers opted for want to relax these eligibility criteria in Pension system early retirement rather than severance because of reform can order to encourage early retirement); or encourage more pension reform (box 1.10). This response is not removing special and privileged pension workers to opt for unusual; several countries have seen surges in rights (although the implementing agency early retirement. applications for retirement when pension systems may need to recognize these rights explicitly are under review and workers are uncertain of the in negotiations with unions). outcomes. Depending on circumstances, therefore, · Pension systems are moving from pay-as- PPI labor adjustment may be helped or hindered you-go plans to ones that are at least partial- by pension system reform. ly funded to ensure that the systems as a Consultation with government is important to whole are financially sustainable and will ensure consistency of approach and policy coher- not collapse in 10, 20, or 30 years. 26 Labor Toolkit: Framework and Overview · Governments are moving away from 3. Training, which may have different areas of The PPI defined-benefit plans to accumulation focus, such as retraining and developing implementing agency's plans for schemes. new skills in workers so that they can find tackling pensions new paid employment elsewhere; or training may run counter to · Negotiations on pension reforms are in MODULE in small business, microenterprise, or liveli- government's overall progress between government and unions. policy. hoods to help displaced workers find self- employment and incomes. Redeployment Programs 4. Employee enterprise, whereby opportunities Many governments have supplemented severance and facilities are provided by the government and pension packages with redeployment support or the PPI enterprise to enable employees to 1 to help workers regain productive incomes-- set up their own businesses. These facilities whether through formal employment, self-employ- and supports include contracting out of servic- Redeployment is a ment, or informal livelihood activities. Such pro- es by the enterprise to newly separated work- tool of active labor grams also offer an additional incentive to encour- ers; simple workspace facilities (sheds, market policy. age voluntary departures and help win support for garages, and small offices); and business incu- politically difficult restructuring. They are aimed at bators where workspace facilities are support- facilitating the shift of economically unproductive ed by business advice, shared facilities (fax workers from infrastructure sectors to more pro- and photocopier), and a degree of mentoring. ductive sectors of the economy. One by-product of 5. Community-based approaches, which look to retraining and redeployment programs may be a local government, nongovernmental organi- general shift in attitude among the work force at zations, and community self-help groups, large, away from a perceived reliance on public alone or in coalition, to develop employment sector employment toward private sector jobs and opportunities at a local level. These can self-employment. include public works programs that provide temporary employment opportunities In some cases redeployment programs have been through large-scale, labor-intensive projects. developed explicitly for PPI employees; in others, redeployment support is provided as part of broad- er active labor market programs for the unem- ployed. Such programs differ from passive labor Box 1.11: Active and Passive Labor Market market programs that act more as a safety net for Programs the most vulnerable people (box 1.11). R edeployment support services linked to enterprise restructuring programs are a The main types of redeployment support are: particular subset of "active" labor market policy. "Active" labor market policies or pro- 1. Counseling, which might include elements grams are those that directly prepare or assist of trauma, financial, and life counseling, in the reintegration of workers in the labor market addition to advice on services and support through activities such as job search assistance, job placement plans, training programs, and open to the displaced worker. employment subsidies. These can be contrast- 2. Job search assistance, which can include ed with "passive" labor market policies, which support incomes, usually through financial placement assistance (employment interme- transfers. Examples of passive policies are diation) to match workers with opportuni- unemployment insurance, worker disability pay- ties in the job market, time off for job ments, and--relevant to the context of PPI labor search prior to termination of employment, adjustments--severance pay. Some have used and help in building skills and confidence to the metaphor of a trampoline to characterize the find a new job (through personal skill concept behind active labor programs (to lift workers back into work) compared with the assessments, coaching, and job clubs). safety-net concept of passive programs. 27 Labor Issues in Infrastructure Reform: A Toolkit There are five main Counseling, training, and job search lie at the core · Targeting services to workers for whom types of of most redeployment programs (see figure 5.2 in such services are most cost-effective--in par- redeployment support. module 5). Community-based approaches, public ticular, younger workers with basic educa- works, and employee enterprise are supplementary tional levels and skills who are most likely 1 elements that can be appropriate in some circum- to improve their labor market outcomes stances. In designing programs, there is often from retraining. Effective targeting requires opportunity to involve unions, local government that a survey of workers be undertaken as a and, where relevant, wider community and civil preparatory step to obtain a clear profile of society groups in consultation processes. worker characteristics and needs. On the whole, redeployment programs have had · Developing a good understanding of the MODULE mixed results. Most evaluations have focused on labor market that workers will be entering. the experience of industrialized countries. These This requires a labor market survey, done as experiences generally show that retraining pro- early as possible. Proper labor market infor- grams resulted in modest gains in reemployment mation is critical for setting up training and probabilities, but wage changes were negligible or employment support programs that are rele- negative. The same evaluations found that the vant to workers' opportunities and needs. costs of retraining are two to four times higher · Getting a good understanding of the types than job search assistance but are no more effec- of services, programs, and institutions that tive. By contrast, placement and counseling efforts are in place to deliver services. This requires tend to show positive results and are generally a survey of existing training and other labor more cost-effective. Systematic evaluations of the market infrastructure to determine the impact of such programs in developing countries capacities of service providers. have been few, although anecdotal evidence sug- gests that retraining programs often fail because of · Developing good counseling and advisory timing delays, weak institutional capacity, low services to help match workers to appropriate education levels, and the lack of employment and relevant retraining and other programs. opportunities for retrained workers. The programs · Bringing in a wide range of institutions, frequently have been more driven by supply than including nongovernmental and private by demand. institutions, to foster competition and effi- ciency in the delivery of services, and using Nonetheless, emerging experience from a wider performance-based contracting arrange- range of circumstances can inform the design and ments where possible to improve incentives implementation of redeployment programs and and efficiency. help workers with several remaining years of pro- ductive life to acquire gainful new livelihoods. · Giving workers access to information on the Better results are more likely if wider economic and performance of training and other service labor market policies aimed at creating sustainable providers so that they can better select employment growth are already in place (as out- courses and services (and at the same time lined in the second section of this module). At the make the program more demand-driven). program level, effectiveness can be improved by: · Providing redeployment support to help · Ensuring that redeployment services are workers set up their own small businesses driven by demand rather than by supply. instead of merely equipping them with skills This can be done by giving workers a choice for jobs in the formal sector--jobs that tend between training and severance, and by to be limited. building in a cost-sharing element through · Engaging effectively with stakeholders, partic- the use of vouchers and other instruments. ularly through consultation (see module 6). 28 Labor Toolkit: Framework and Overview Module 5 discusses in detail the different types of viewed as a supplement to rather than a substitute The implementing programs and the key steps involved in designing for severance payments. agency can benefit from experience and implementing redeployment programs. These elsewhere when programs and steps include the use of surveys as planning MANAGING THE MODULE building blocks for the program, designing incen- redeployment. tives to ensure that programs are demand driven, RESTRUCTURING PROCESS costing out the services and securing funding Experience shows that labor restructuring can pro- arrangements, setting up labor funds or other ceed smoothly if stakeholders are involved and implementation arrangements, identifying and there are good communication mechanisms in commissioning service providers, and developing place. The fears and concerns of workers can be systems for monitoring and evaluating results. 1 significantly reduced when explicit efforts are made to inform them about the objectives, timing, and methods of PPI, as well as the packages and incen- Employee Share Ownership Plans tives that will be developed to minimize the social In work force restructuring, employee share owner- impact. To ensure a smooth process, governments ship plans can be used in three ways: also need to define implementation arrangements and create the capacity to carry out labor pro- 1. As a form of compensation to displaced grams. workers 2. As part of an incentive or reward package to workers who remain Engaging with Stakeholders 3. As the basis for management employee buy- Privatization is almost everywhere a highly contro- outs or employee buyouts of units of the versial process opposed by various stakeholders, enterprise. including labor. For the following reasons labor opposition can be greater for infrastructure enter- In such arrangements, governments have reserved prises than for other state-owned enterprises: shares, ranging anywhere from 3 to 10 percent depending on the size of the transaction, for · High levels of downsizing are often needed. employees in the PPI process, often at discounted · High levels of investment are required, and prices and with special financing arrangements. the involvement of foreign investors is likely. Financing share ownership schemes is the major concern in developing countries. Some countries · PPI may coincide with tariff increases and (for example, Bolivia and Chile) overcame this con- rebalancing, particularly in sectors where Share transfers are cern by allowing workers to use their end-of-serv- the service is seen by some stakeholders as a best seen as an ice benefits to invest in the share program, with the "right" (for example, water). addition to rather than a substitute for guarantee that the value of the shares would not · Infrastructure services are essential, and organ- voluntary departure fall below their entitled benefits at the time of ized labor has some degree of power to disrupt or early retirement. retirement. As a result, in many of the enterprises those services through industrial action. more than 80 percent of employees participated in the program. In addition to financial gains from The lack of labor involvement in the process has such arrangements, ownership programs can help been a further contributing factor. Although there give employees a direct stake in the performance of is a trend toward more openness, some govern- the company and thus help improve labor relations ments are still reluctant to engage earlier and more and labor productivity. openly with stakeholders. They recognize both the advantages and disadvantages of engagement (box Module 5 summarizes experiences in the use of 1.12) and will weigh the benefits and costs of employee share ownership mechanisms, and con- engagement as summarized in table 1.2 below. cludes that share transfers are probably best 29 Labor Issues in Infrastructure Reform: A Toolkit Those concerns have some validity in experience. Box 1.12: Malawi--Experience of Consulting But experience also shows that failure to involve with Labor in Privatization stakeholders can have significant costs, can fuel alawi's experience is that labor opposi- M conflict and suspicion, and may further delay PPI tion to privatization escalates if the labor 1 or lead to problems down the line. Instead, a well- movement is not involved early in the managed process involving stakeholders can facili- process: tate PPI. Equally important, it can encourage adop- In many African countries labor unrest occurred because of lack of consultations. tion of labor and working practices suited to local Our experience is that an explanation of the circumstances and thus improve outcomes. If prop- government's plans assures labor unions erly planned and managed, the involvement of that sacrifices will be balanced with meas- MODULE stakeholders can play an important role in ures to allow the employees to share in the strengthening the fairness, transparency, and benefits of privatization....Two problems accountability of the PPI process. [however] emerge with regards to consulta- tion with labor unions in general. The first is Key Stakeholders that most employees consider privatization as a means of forcing redundancy There are many different stakeholders, defined as offers....There is yet another dimension to involvement of unions in the process. As groups or institutions that may be affected by or we discovered in Malawi it could--and may influence the design, implementation, and out- often does--lead to a significant complica- comes of labor restructuring and PPI more broadly. tion and lengthening of the transaction. In A good stakeholder analysis can identify these addition, employees who have access to groups and provide information about and under- privileged and sensitive information tend to standing of their interests and concerns. It is also a use it to their advantage in the bidding process, thereby undermining the integrity tool to inform the design of labor approaches and of the transaction (Sauti-Phiri 2002). the process of engagement with workers. Further information on stake- Three of the most common concerns for govern- Stakeholder holder analysis is set out in ments are that: analysis module 6, and stakeholder worksheets. 1. Stakeholder participation might delay PPI. analysis worksheets are Just as workers may be fearful of job loss, included on the accompanying CD-ROM. Some implementing agency officials, particularly key points are outlined in box 1.13. at the start of the process where there are no For any PPI scheme, there are five principal groups ready answers, may fear that engaging with of stakeholders: stockholders can lead to delays. 2. The very process of engaging stakeholders 1. Employees: Employees can be broken down can raise workers' expectations, which offi- into several categories by, for example, sta- cials may not be able to meet (for example, tus (temporary, permanent, and contract); Stakeholders have on the scope of consultation or on levels of age; skill; cadre (management, skilled, or more concerns over manual); gender; and ethnicity. The con- the involvement of severance). If, for example, the implement- cerns of different groups and the likely the private sector in ing agency consults with trade unions on infrastructure than the process of labor adjustment in PPI, then impact of work force restructuring on them in other state-owned may vary (see, for example, the case of Sri enterprises. the implementing agency may fear that trade unions will reject that consultation Lanka Telecom in box 5.7, module 5), and and demand that the policy of PPI itself be a better understanding of their concerns can challenged. therefore influence and improve not only the design and content of communication pro- 3. There is a lack of specialist skills, tools, and grams for workers but also the design of the experience within government to engage labor programs themselves. with confidence on labor issues. 30 Labor Toolkit: Framework and Overview Table 1.2: Benefits and Costs of Participatory Engagement Processes The implementing agency may first need to convince Potential Benefits Potential Costs colleagues of the need to engage with · Helps build consensus about and "ownership" MODULE · Debate and discussion take the place of labor and other of PPI policies and projects action; they delay implementation of the PPI stakeholders. · Saves time in the medium term by avoiding plan misunderstandings, disputes. and mistakes · Wastes time by allowing the engagement to · Brings in the skills, experience, and knowledge become an end in itself ("analysis paralysis") of workers, trade unions. and other stakehold- · Raises political awareness of (and opposition ers, and thus helps identify and reduce techni- to) PPI proposals before government itself 1 cal risks to the PPI scheme has had time to fully consider the options · Enables more informed and inclusive decision- · Diverts scarce implementation capacity into making management of the engagement process · Fosters public debate and discussion · Selection of those to be involved in consul- · Encourages the adaptation of approaches to tation and dialogue reinforces the suspicions the particular local circumstances of each PPI of those excluded (that is, participation is seen as a vehicle for exclusion of some · Develops awareness of other stakeholders' groups) points of view, concerns, and aspirations · Conflicts of interest rather than shared inter- · Reinforces the legitimacy and transparency of ests shape (that is, distort) project design government's policies and tactics and implementation · Reduces political risks by bringing all interests · If not fully transparent, the process can be into the process and demonstrating govern- abused or captured by vested interests ment commitment · Improves transparency and accountability to show that there is no hidden agenda, favoritism, or corruption associated with PPI 2. Unions: Trade unions are important stake- 3. Government: As is true among employees An inclusive process holders and can influence the restructuring and unions, there are different groups with- is more likely to lead process, but implementing agencies may face in government itself. The key ministries to approaches that challenges in engaging with them. Like gov- involved are likely to be the relevant sector are tailored to local circumstances. ernments, unions may lack the capacity to ministry, the ministry of finance or econom- engage effectively. Some unions do not want ic planning, and the ministry or agency to be seen as cooperating with employers, responsible for privatization. Other min- whereas others may oppose government istries, including those of social protection, policy on PPI as a whole. Consultation may labor, justice, and local government, also Key message: the be made difficult by the number of unions have a role. Understanding the different challenges of engagement can be involved. For example, discussions on port roles--and frequently competing interests-- successfully reform in Sri Lanka involved 19 different of these different factions within govern- managed. unions, and in Orissa's power sector, for ment is important in making sure that labor example, employees were represented by 43 programs are effectively carried out. trade unions and federations. In some cir- 4. Investors: Investors, whether foreign or cumstances, national and international fed- Stakeholder analysis domestic, often only enter into the discus- erations are important parties, both in terms informs labor sions at the transaction stage. As a result approaches. of capacity building for local unions in their specific concerns may not be heard developing countries and of entering into during much of the restructuring process. general framework agreements at national Earlier involvement of investors allows their or even international levels. 31 Labor Issues in Infrastructure Reform: A Toolkit developing an understanding of what people Box 1.13: Key Points for Stakeholder Analysis think. In general, however, customers want 1. Stakeholder analysis can be based on new reliable services they can afford, which research (such as attitudinal surveys), avail- means they have an indirect interest in the able secondary data (such as publications, 1 reports, or press clippings), simple struc- capacity and productivity of the work force tured interviews with individuals, focus producing them. Conversely, workers are groups, and small group meetings with also consumers and so they have a broader stakeholders themselves and with informed stake in the process as well. people. 2. Based on the analysis, stakeholders can be Table 1.3 summarizes the stereotypical concerns of mapped in terms of their influence and these stakeholders. The stereotypes are only a start- MODULE importance. Influence is the power that ing point, however. Stakeholder analysis will most stakeholders have to affect the outcome of likely reveal other interests as well as differences work force restructuring. Importance refers within these groups, under the unique circum- to the extent to which a successful outcome stances of each PPI transaction. depends on involving those stakeholders. 3. The analysis may first be done as a draft Forms of Engagement exercise. The draft will reveal gaps in under- standing of stakeholders' interests and Stakeholders can be engaged at different levels in uncertainties over appropriate engagement the labor restructuring process through four main strategies, which then can be developed and refined through subsequent interviews, forms of engagement: communication, consulta- focus groups, or targeted opinion polls. tion, negotiation, and cooperation. 4. Interviews, small workshops, or a series of Communication is mainly a one-way transfer of focus groups led by the senior manager in the implementing agency or a delegated offi- information from government, the implementing cer ideally will involve representatives from agency, or redeployment counselors to the stake- stakeholder groups. holder audience. 5. Making the process as objective as possible helps reinforce the credibility of govern- Consultation and negotiation are both two-way ment's commitment to a fair process, and processes, but the expectations of outcomes are can improve the quality of the analysis. very different. Participants in consultation expect Using an independent analysis, perhaps their views to be heard and taken into account, facilitated by a commissioned consultant, while those in negotiations expect that mutually and drawing on prior interviews with stake- holders helps ensure objectivity. binding results will be the outcome. Negotiation is a distinct form of engagement that arises from the contractual employer­employee interests to be taken into account and bal- relationship between government and work force. anced with those of other stakeholders. Such involvement can take place through consul- Cooperation can be seen as a more mature form of tation meetings with investors, better com- engagement where both sides expect to participate munication of relevant policy papers, and actively and are committed to win­win outcomes. early scheduling of prequalification. It may This distinguishes it from negotiation, which can also be helpful to the ultimate PPI outcomes be adversarial. Cooperative approaches often have to delay the renegotiation of labor contracts longer-term and broader perspectives than negotia- until short-listed investors are consulted. tion. 5. Customers: Consumers and other users of A key question is which type of engagement should infrastructure services have a direct stake in be used, and when. It is rarely the case that all the broader PPI process. Opinion polls and stakeholders need to be communicated with at the attitude surveys are valuable sources for same time. Engagement activities are therefore 32 Labor Toolkit: Framework and Overview Table 1.3: Understanding Stakeholder Interests Government is not a monolith--there What What What What What may be pro- and customers investors government workers unions anti-PPI factions. MODULE want want wants want want · Dependable · Tailored service · Budget sav- · Security of · Retained bar- service for the poor ings, reduced employment, gaining posi- · Affordable · Steady, long- liabilities for livelihood, and tion and status Investors' views tariffs term returns the state remuneration · Involvement in may not be heard · Market share, · Tax, fee, or · Satisfactory consultation until late in the PPI reputation, sale revenues pay, working · Maintained transaction. 1 geographic · Happy cus- conditions, membership presence tomers and and work · No shift to practices · Mitigation of consumers "atypical" risks not under · Fast environ- · Training, work their control, mental enhanced · No loss of or profits com- cleanup skills worker rights mensurate · Jobs for · Evidence of with risks domestic firms future jobs · Clear regulato- ry frameworks and adequate freedom to manage the business Source: Adapted from Saghir and Taylor 1999. often sequential and, depending on the circum- when to sequence engagement events and about stances, usually include steps to: the key messages to be conveyed. The basic ration- ale for why work force restructuring is essential for · Inform stakeholders about PPI. the PPI plan must be clearly articulated and under- · Communicate with employees and unions stood within government before any efforts are on the need for work force restructuring. made to communicate it. · Consult with employees, unions, and Hints and tips Module 6 outlines how to investors on restructuring approaches, on communi- develop an engagement strate- including severance packages and proce- cating with gy and an engagement plan, dures. workers. with detailed guidance on · Carry out negotiations among government, communication, consultation, workers, and investors on issues such as negotiation, and cooperation, and the CD-ROM labor contracts, pensions, and working prac- includes guidelines on communicating with work- tices. If there is an economic regulator for ers and guidance on the use of tools such as focus the sector, it may be involved as well. groups and videos. One particular risk is premature activities. Hasty The actual process of engagement is likely to have and ill-prepared communications can damage the starts and stops, periods of progress and setback. It credibility of government and delay PPI if they may not always be possible to follow a precise, expose uncertainty in the government's approach. neatly sequenced plan. As the discussion of Côte The implementing agency should be able to advise d'Ivoire Railways illustrates (box 1.14), a commit- government officials and politicians about how and ment to engage on work force restructuring issues 33 Labor Issues in Infrastructure Reform: A Toolkit Box 1.14: Côte d'Ivoire Railways--Participatory Processes T he importance of the way in which labor blocking the center of Abidjan with a locomotive. Consultation and issues are handled in the context of Details of the redundancies envisaged were pro- negotiation are very restructuring and privatization was demon- vided eventually, but the union had managed to different processes. 1 strated in the case of Côte d'Ivoire Railways. In negotiate severance terms equal to 14 months of the early 1990s the railway was restructured wages, double the initial offer. In addition, the without union consultation. The union was unpre- number of years of contributions required to enti- pared for the challenge of restructuring and tle an employee to an early retirement package lacked the know-how and experience to effec- was reduced from 20 to 15. tively respond to it. The work force was reduced During the negotiations the union also proposed by about a third, but it soon became clear that a plan to enable workers to establish their own MODULE there had been too many redundancies in some businesses after retrenchment. Sitarail, the con- key areas--notably in signaling and security-- cession company that took over operational and this caused operational difficulties. As a responsibility for the railways, agreed in principle result of this and other deficiencies, the company to favor companies created by former workers found itself having to pay some of its remaining when looking for subcontractors. Since then, work force overtime, so that much of the poten- track maintenance, company car fleet manage- tial of the process to put the railway on a more ment, and printing of timetables and tickets have sound financial footing was undermined. been contracted out to firms set up by former By contrast, a second phase of restructuring workers. Sitarail has also agreed to give prefer- from 1993 onward, with which the union was ence to workers made redundant in 1995 when more effectively engaged, produced better recruiting new staff, albeit on terms different from results. The company's 1993 activity report high- those that obtained before privatization. lighted changes in commercial attitudes, reduc- These measures have helped mitigate the tion of fraud by 30 percent, and a 60 percent adverse effects of retrenchments. At the same increase in availability of locomotives--a good time, workers who remained with Sitarail have sign of maintenance efficiency. The second gained from privatization. For example, although phase also created a labor relations climate more on paper the terms of the company's health conducive to the effective implementation of the insurance program is worse than before privati- privatization process, which began in earnest in zation, in practice employees have more confi- 1995. dence in it because the company now meets its Subsequently, however, a breakdown in commu- reduced obligations, whereas before the larger nications and consultation among government, commitments were not honored. In addition, the management, and labor again produced avoid- rail workers' union reports that working condi- able problems. When the union asked for infor- tions have improved since privatization because mation about how further labor restructuring of investment in workshops, equipment, and uni- would be carried out, the request was ignored. forms. This led to a strike and to direct actions, such as Source: Martin and Micoud 1997. can lead to mutually acceptable solutions and countries but common institutional homes for the improved outcomes for the implementing agency, implementing agency are the national- or state-level the workers, and other stakeholders. privatization agency; the relevant sectoral or line ministry; the PPI enterprise itself; the central min- istry of finance, economics, or planning; or special Implementation Arrangements units set up to support sector or individual enter- Two major requirements for a successful labor pro- prise reforms (examples are British Coal Enterprise gram are clear implementation arrangements and and Brazil's Port of Santos Labor Fund). the capacity to undertake the various aspects of the Once the agency is created, the government will program. For major PPI transactions this usually need to assemble a team for implementation. A means the creation of a labor unit within the PPI sample organizational structure for a PPI team is implementing agency. Arrangements vary among 34 Labor Toolkit: Framework and Overview shown in figure 1.1. The implementing agency will management contractors have been engaged to imple- need to include labor experts as part of the team ment enterprise or work force restructuring as part of for the labor restructuring program. The structure the overall preparation process for PPI. Such arrange- of the labor team will vary depending on the size ments enable the implementing agency to bring in MODULE and scope of the labor program. additional capacity to deal with the short- and medi- um-term workload associated with the restructuring. In large PPI programs with a major labor compo- And in yet other cases, special units or funds have nent, and where there is little capacity elsewhere in been set up at the enterprise level to implement the the government to deal with labor, a small labor labor program. Some are wholly financed by the cen- unit may have to be created within the PPI agency. tral government budget, others by levies or with fund- In smaller programs, and where other groups in ing from local governments. One example is the Port 1 the government such as the ministry of labor have of Santos Labor Fund (box 1.15). the required capability, it may be necessary to recruit an individual labor expert in the agency to The labor unit (or individual expert) is usually coordinate implementation. responsible for overall implementation, and the rel- evant tasks cover the full range of activities in the If there is an enterprise with a large labor restructur- labor program: ing program (as in many railways enterprises), labor experts may be recruited at the enterprise level (rather · Completing the establishment of the labor than at the implementing agency) to help carry out unit, including the training and capacity the restructuring process. In other cases, private sector building of any in-house staff. Council of Ministers/Cabinet PPI Supervising Committee (senior civil servants, political representation) Implementing agency (manager) Transaction Legal Labor Communications Office manager(s) expert(s) specialist(s) manager(s) support Severance Redundancy Redeployment / (finance) officer counselors training manager (in-house or contracted) Contracted Contracted auditors/ training accountants providers Figure 1.1: Organization Chart for a PPI Team (Sample) 35 Labor Issues in Infrastructure Reform: A Toolkit must be brought into the process. These Box 1.15: Port of Santos, Brazil--The include ministries of labor, trade, and indus- Special Labor Fund try and commerce; public employment A special port workers' fund is being set up offices; and finance authorities. in Santos that should resolve years of 1 bitter confrontations between stevedores · Designing procedures for the approval, dis- and port operators at Brazil's leading port. The bursement, monitoring, and auditing of sev- real 80 million (US$47.73 million) fund will be erance funds. used to soften the impact of cutting the labor pool in Santos to about 4,500 dock workers · Designing and coordinating implementation from a current total of 11,500 employees. of the redeployment (counseling and retrain- Money from the fund will be used to retrain port ing) program for workers. MODULE laborers employed by the administrator of the casual labor pool for alternative work within new · Monitoring specialized contractors hired for high-tech and light industries that will be the labor restructuring process. encouraged to locate to Santos. The project is also backed by the São Paulo State Federation · Commissioning monitoring and evaluation of Industry, the Santos Port Council, local activities. importers/exporters, state and municipal gov- ernments, and national governmental bodies PPIAF provides a In order to build capacity dealing with dock labor. Rules for dismissals quick-mobilizing and support for developing and claims are to be worked out. The local and grant facility for labor programs, the imple- central governments are expected to help bring menting agency can seek high-tech and small businesses to Santos within small inputs by three years or so. The technical plans are being PPI and sector technical and financial sup- presented to the unions for discussions, and fol- specialists (see port for organizing study lowing their agreement the plans will be pre- www.ppiaf.org). tours and workshops in the sented to the national body coordinating the early stages of the reform modernization and privatization of Brazil's ports program. As with other aspects of PPI, international and to the government in Brasilia. donors are one source of such support. One inter- Source: World Bank 2000 (Port Reform Tool Kit, Module 7, p. 16). national facility is the Public-Private Infrastructure Advisory Facility (www.ppiaf.org), a multidonor facility that offers rapid disbursing of grants for spe- · Securing funding (if this has not already cific inputs by PPI, sector, and labor specialists. been done). · Commissioning early initial reviews (for Analytical and technical capacity is needed to carry example, legal reviews and assessments of out initial staffing and feasibility assessments, to the need for labor restructuring). design and implement the various aspects of the labor restructuring program, to analyze the finan- · Designing and enacting procedures for the cial and economic viability of the program, and to implementation of voluntary redundancy, monitor and evaluate the net impact of the labor early retirement, and other actions. program. · Ensuring that stakeholder engagement When the labor restructuring program is complet- (consultation, communication, negotiation, ed, the labor teams or labor funds will be wound and cooperation) takes place sufficiently down, and this needs to be taken into account dur- early for all key stakeholders so that the ing project design. The case of British Coal process can be seen as both fair and legiti- Enterprise is relevant at this point because it shows mate. how a significant redeployment support service can · Coordinating with other existing govern- be closed down and privatized (see box 1.16). ment organizations that may already be involved in redeployment support and that 36 Labor Toolkit: Framework and Overview MONITORING AND EVALUATING Box 1.16: British Coal Enterprise-- LABOR PROGRAMS Privatizing Redeployment During and after the labor restructuring program it O ne of the potential concerns about set- M ting up large sector- or enterprise-specif- is important to carry out a cost-benefit analysis of ic redeployment units is that their servic- the various elements of the labor program so it is ODULE es are only needed for a short time. How will the possible to decide which approach is the most suit- Governments closure of those redeployment units be han- able and beneficial to the situation at hand and to commonly fail to dled? One answer is to privatize them, too. This make midcourse corrections as needed in the monitor labor was the case with British Coal Enterprise (BCE). programs effectively. The fact that it could be privatized indicates the design and implementation of the program. commercial worth of the assets and skills that Although critical to success, monitoring and evalu- 1 BCE developed in support of former mining ation activities are often a neglected aspect of the communities. Each of BCE's main areas of labor restructuring process. Capacity in this area activity was privatized separately. needs to be built and systems put in place to evalu- · Outsourcing: The expertise developed in ate the individual elements and the program as a four years of running what was initially whole. known as British Coal's Job and Career Change Scheme led to the creation of the commercial outplacement division of BCE, known as Grosvenor Career Services. Objectives Grosvenor specialized in the delivery of Governments often invest too little in monitoring redeployment training and career advice and evaluation even though there are several and was successful enough that Grosvenor was privatized through a management buy- potential benefits: out in 1996. The Grosvenor team provided outplacement services to British Coal as · Better understanding of the financial and well as other large private and public sector economic case for labor programs companies undergoing restructuring in the · Reduced costs to government (mainly United Kingdom and Europe. Grosvenor also provided outplacement and labor through better design) restructuring technical assistance in coal · Greater benefits for workers, through better field regions in countries of Eastern Europe program design and through fine-tuning of under the European Union's Phare program. Grosvenor was subsequently acquired by the program Capita IRG plc. · The capture of data and experiences so that · Managed workspaces: These units were subsequent phases of the labor program can the principal physical asset at the time of learn from past experiences. BCE privatization. BCE's experiences in pro- viding serviced units in mining communities For these reasons, monitoring and evaluation activ- enabled the privatization of this division of ities are important and explicit efforts are required BCE through a trade sale to Birkby plc in 1995. Birkby later merged with Mentmore to include the activities in the early stages of pro- Abbey in 1999 so that BCE's former work- gram design and after implementation to evaluate space and business incubator division is the net impact of the program. now a part of a leading European office space management company. Monitoring and evaluation tools can be incorpo- · Funding operations: The business-funding rated in all four phases of the PPI process, as table division of BCE was sold to a management 1.4 illustrates. Among the tools are: buyout in 1995, and the new company, Coalfield Investments Ltd., continues to · Undertaking the initial feasibility assessments invest in small and medium-size businesses during phase 1: Examples of such assess- in the coal-mining areas. ments are an analysis of labor redundancy in Source: British Coal Enterprise, Tawney and Levitsky 1997. Vietnam in preparation for future downsiz- 37 Labor Issues in Infrastructure Reform: A Toolkit Table 1.4: Analysis, Monitoring, and Evaluation in Labor Adjustment Programs Activity Initial Design Performance Impact assessment clarification monitoring monitoring and (Phase 1) (Phase 2) (Phase 3) evaluation 1 (Phase 4) Orientation Relevance and Clarification and Justification and Justification, LE feasibility improvement fine-tuning accountability, and U review D Focus of Program context All elements; spe- Delivery and out- Outcomes O work and goals cific objectives puts M Timing Before implemen- Before and during During implemen- After implementa- tation implementation tation tion Typical · What is the · Which sever- · Are workers · What was the issues nature and ance or early applying for impact on the extent of any retirement voluntary PPI transaction overstaffing packages are departure in the (delays, price)? problem? the most cost- numbers · What were the · What do effective? expected? fiscal costs and investors want? · Which rede- · Are severance benefits for · Do we need a ployment serv- payments and government? government- ices should be redeployment · What have funded labor offered? services being been the wel- program at all? delivered on fare impacts on time? · Roughly how workers? much will it cost to restruc- ture the work force? Typical tools · Financial analy- · Financial analy- · Financial analy- · Financial analy- sis sis sis sis · Staffing audits · Economic · Monitoring of · Economic and bench- analysis staffing num- analysis marking (see · Stakeholder bers · Socioeconomic module 3) analysis · Monitoring of tracer studies · Stakeholder participation analysis and and dropouts consultation from counsel- with investors ing, training and labor (see courses, and so module 6) forth Source: Adapted from Owen and Rogers 1999. ing (Belser and Rama 2001), an assessment · Clarifying the design of the labor restructur- of alternatives for a new restructuring pro- ing program during phase 2: For example, gram in Sri Lanka (Fiszbein 1992), and an an assessment of the financial and economic assessment of the likely viability of the Algerian Ruppert impact of a national civil Belser and retrenchment program 1999 service downsizing pro- Rama 2001 (Ruppert 1999). gram in Ghana (Gregory 1994). 38 Labor Toolkit: Framework and Overview · Monitoring the performance of the program · First, economic analysis assesses the impact during implementation in phase 3: For on aggregate output or welfare. Financial example, monitoring the Estache, returns do not indicate whether displaced progress of work force Schmitt de workers are, in aggregate, more or less pro- MODULE restructuring in Brazil's Azevedo, and ductive following the labor program. It is federal railway (Estache, Sydenstricker quite possible that a proposed labor pro- Schmitt de Azevedo, and 2000 gram can be attractive from a financial per- Sydenstricker 2000). spective but can fail when subjected to eco- nomic analysis. · Monitoring outcomes and evaluating the net impacts of labor restructuring during phase 4: · Second, such analysis provides an answer to 1 Examples include an evaluation of active opponents of labor restructuring in PPI who labor market programs in Hungary (O'Leary may argue that government is making a bad 1997) and a tracer study of the consequences decision by ignoring the wider economic of retrenchment for civil servants in Ghana costs and benefits (see, for example, the (Alderman, Canagarajah, and Younger 1994). South African case in box 6.8, module 6). · Third, the analysis may be a requirement of Concepts and Approach international funding agencies, whose lend- ing or funding procedures need economic as Monitoring and evaluation early in the design of well as financial analyses. the program are critical in helping governments compare alternative options for severance and rede- The economic rate of return from a labor program ployment and in determining the cost and financing can be defined as the net increase in marginal pro- needs. Evaluation has to take into account the ductivity of surplus staff redeployed to another financial and economic returns of both the various productive activity elsewhere in the economy, and components of the labor program and the program the marginal gain from avoided labor-related costs; as a whole and the outcomes of the program itself available evidence shows that it can be high. in terms of effects on workers and on the enterprise. Returns are particularly high if there are other Periodic monitoring is important in keeping track opportunities for employment and if redundant of the program and learning from experience. workers are likely to find jobs in the labor market. Financial vs. Economic Returns Module 7 examines in greater detail the approach, methodology, and findings on both financial and A cost-benefit analysis has two main dimensions: economic returns in labor programs. It also pro- financial returns and economic returns. From a vides the necessary tools to carry out cost-benefit public finance perspective, the financial returns of a analyses of labor programs. labor program will be central to decisionmakers. This is particularly the case where the enterprise Evaluating Effects on Workers and Firms takes a loss and completing the labor restructuring will bring an improvement in public finances by Evaluating the impact of the labor restructuring reducing government transfers and subsidies and program on workers is another aspect of evalua- increasing tax payments from PPI firms. Provided tion. Such evaluations typically cover (a) the that no rehiring takes place, labor programs can be impact on employment because job losses are cost effective with a payback period ranging from important "headline" figures in the media and else- two to six years. Labor programs thus appear to where and understanding what happens to jobs is Most evaluations of offer good rates of financial return that few public important economically and politically; (b) the work force investment projects would be able to match. impact on wages and benefits; (c) the broader restructuring impact on workers' welfare in terms of their programs reveal However, economic returns also need to be calcu- socioeconomic profile; and (d) the follow-up situa- very fast payback periods. lated and taken into account for several reasons: tion of workers, including duration of unemploy- 39 Labor Issues in Infrastructure Reform: A Toolkit ment and types of jobs found. Item (d) is particu- whether programs are having the intended effect. larly relevant in the evaluation of redeployment Such analysis also helps make informed decisions and training schemes, where common objectives on whether to expand, better target, or scale down are to reduce the period of unemployment and to programs. A range of evaluation techniques is 1 prevent displaced employees from entering a pool available and module 7 discusses these in detail. of long-term unemployed workers. An equally Periodic Monitoring important question for evaluation is the impact of labor restructuring on enterprise efficiency, includ- Monitoring differs from evaluation in that it is ing improvements in labor productivity, and on principally a management function aimed primarily financial and operational performance. at keeping track of implementation and making MODULE These effects are often assessed through ex post periodic assessments of the performance of the pro- worker and firm surveys. Such surveys are being gram (see box 1.17). carried out in a number of countries (for example, Economic analysis In potentially large-scale labor restructuring pro- provides a Brazil, India, and Vietnam). Module 7 highlights grams involving great numbers of workers and sig- perspective that the main types of data that are usually collected in nificant financial resources, it is important to moni- financial analysis the surveys and the methodology for carrying out alone cannot tor the implementation of the program to ensure provide. such assessments. that funds are being properly used to help workers A central requirement of any evaluation is that it and that all workers are being helped. At a mini- separate the effects that would have happened any- mum this requires the development of a system way from those that resulted from the specific that tracks the numbers of workers leaving the intervention. Before and after comparisons alone enterprise and expenditures on severance and rede- are not sufficient. If earnings rise after training, for ployment at the enterprise level and for the PPI example, that may not result from the training but program as a whole. from changes in the macroeconomy, local changes Periodic assessments or monitoring the perform- in labor demand, or such worker-specific attributes ance of the various aspects of the labor program-- as lifecycle earnings changes. for example, severance payments and redeploy- Evaluation therefore requires a counterfactual ment support--also help policymakers and practi- alternative, which is normally provided by a con- tioners learn from experience and undertake mid- trol or comparison group of workers who did not course corrections as needed. The potential benefits participate in the severance or redeployment pro- of such assessments are large: one study in gram. Counterfactual analysis can use either of the Tanzania found that the information from moni- following groups: toring studies could have saved government up to US$7 million during the course of retrenchment of · Control groups, which consist of participants around 5,000 state enterprise workers. selected at random from within a well- defined population from which the members Monitoring of redeployment programs can be par- of the treatment group are also selected ticularly valuable in that it can help identify weak- · Comparison groups, which consist of partic- ipants that are purposely matched to the Box 1.17: Monitoring vs. Evaluation participants of the treatment group. Monitoring is the continuous assessment of program implementation in relation to agreed Selecting appropriate evaluation techniques and schedules and the use of program outputs by counterfactuals is particularly important when beneficiaries. examining the impact of redeployment programs. Evaluation is the periodic assessment of the Policymakers need to know whether the resources relevance, performance, efficiency, and impact they are spending are being efficiently used and of the program in relation to stated goals. 40 Labor Toolkit: Framework and Overview nesses in the implementation of the program (for Phase 1: Initial Assessment example, late disbursement of funds, lack of infor- The first phase--initial assessment--is critical mation on redeployment services) and readjust pro- because it identifies the nature and scope of the grams to deliver more appropriate training, coun- labor program and provides the planning frame- MODULE seling, and redeployment services to workers. work for the program as a whole. It includes: · Clarifying the overall goals and objectives of INTEGRATING LABOR labor adjustment (see the third section of PROGRAMS IN THE PPI this module) PROCESS: A ROAD MAP · Assessing staff levels, skills, and the extent 1 This section presents an illustrative road map for of overstaffing (module 3) integrating the labor program in the broader PPI · Reviewing the external stakeholder environ- process. The road map will help the implementing ment (module 6), the legal circumstances, agency put the various tasks and activities of a and likely costs including those related to labor adjustment program within the context and severance and to pensions (module 5) phasing of the overall PPI transaction. The first steps for the implementing agency, however, are to · Beginning the implementation of "soft" establish a labor unit and to secure funding for the options. labor program. In most cases, phase 1 will be an initial assessment of labor issues in PPI; the analysis, however, will There are four main phases involved in developing continue through phase 2 (design) where detailed a labor program for PPI: strategies and options are refined. In phase 1 there · Phase 1: Initial assessment or diagnostic will not only be assessments regarding labor issues, phase but also assessments of the operational, regulatory, legal, and financial aspects of the PPI transaction · Phase 2: Design of the labor program more broadly. · Phase 3: Implementation of the program The various phase 1 assessments can provide the · Phase 4: Monitoring and evaluation activities. basic information needed to prepare the initial sub- Figure 1.2 presents a road map or overview of the missions for decisionmaking by senior ministers or labor adjustment process. It illustrates the integra- the cabinet. Box 1.18 sets out a generic checklist tion of labor program planning with the wider PPI for such submissions. process. For example, the initial assessment of the Phase 2: Design of the Labor labor issue should follow or take place parallel with a wider assessment of the health of the enter- Program prise and in the context of the overall economic, Phase 2 builds on the assessments of phase 1 and social, and development objectives sought from allows the implementing agency to make specific enterprise restructuring or PPI. proposals to decisionmakers. More specifically, phase 2 involves: The main boxes in the road map link to key mod- ules in this Toolkit, and the oval shapes represent · Developing an overall strategy and restructur- specific tasks or tools in the Toolkit. ing options (module 4) for dealing with labor issues as part of the overall PPI strategy Editable copy of the road map in Microsoft Power Point format · Developing concrete pension arrangements, severance packages, and retraining/redeploy- ment programs, as well as financing arrangements (module 5) 41 Labor Issues in Infrastructure Reform: A Toolkit and and 7) of 1 6) force 4: mitigation 7) the staff work Post-PPI 5, tools) regulation of (module 1) of (module of monitoring Phase ation) audits effectiveness Evaluation numbers Toolkit systems Tracer studies monitoring changes (modules (module Monitoring Elements (sections, Redeployment Monitoring Monitoring Monitor stakeholders implement Financial redeployment/social all PPI transaction completed rough MODULE with th implementation 5) 4, nets 5) of board bidding on 5) in transaction process Safety PPI (module out and (modules modules) communication people control tasks (module Contracting management Disbursement changes and status Retraining Implementation program (Toolkit Implement redeployment/social (keeping Project 3: severance Implement search labor-related and duration Participation mitigation employment Job assistance Implement Phase Avoiding adverse selection Counseling Financial operational Ongoing restructuring variable of 1) 1) (Module Prepare 6) implementation plan Early (module PPI plan approved retirement Share modules) schemes (module and the 4) changes elements PPI plan of force (Toolkit Deciding transaction timing legal time-bound, Design key Identify change options Redundancy work (Module tasks Sequence stakeholders 2: options with DIscrete, PPI Soft consultants, Restructuring Approval of strategy labor-related Phase staff, 3) negotiation (How?) force PPI Mechanisms a (Who?) Deciding strategy Identify change work strategies (Module Responsibility resources, or consultation, Major policy decision points Pre- post-PPI (When?) Funding, Labor markets scheme review Political viability building: Communication, Organization 5) sources PPI 6) transaction 3) or contracts 7) 4) Capacity PPI Adjustment of issues 3, (module Funding a Benchmarks (module Labor 1, economic in (module analysis external (module assessment enterprise audits level Stakeholder legal and Labor of steps labor the pensions Skill 6) for Assess (modules goals 1) Assess Assess analysis Key Initial environment economic Financial Map restructuring surplus objectives Review PPI costs (module 1: Assessing overall of and (module laws Define Road audits force support cost-benefits of Key: Review workforce analysis Labor Financial Staff Work Urgency Severance 1.2: Phase decision Level PPI Policy for Figure 42 Labor Toolkit: Framework and Overview · Engaging with stakeholders through com- Planning of a labor Box 1.18: Guidelines for Submissions to munication, consultation, negotiation, and program needs to be Decisionmakers integrated with the cooperation (see module 6) wider enterprise W hat are the minimum requirements for restructuring a paper submitted to the decisionmak- · Developing broader public information pro- program. MODULE ers for decision? Although there may grams to ensure that the government's early be detailed government procedures set out, in messages are communicated (module 6). principle any proposal for a labor adjustment or work force restructuring program sent to the The above tasks typically result in the development decisionmakers (be it a committee of senior of an overall plan for dealing with labor restructur- ministers, the cabinet, or the council of minis- ing that is similar to the road map in figure 1.2. A 1 ters) should fulfill a few simple, straightforward manager in the implementing agency might edit the tests: road map in this Toolkit (which is a Microsoft 1. There should be a one-page executive sum- Power Point diagram) and adapt it to his or her mary for busy ministers. local circumstances, or use the Microsoft Project 2. There should an adequate explanation of the objectives of the proposal (so that minis- Plan template (see the CD-ROM). ters do not have to try to guess the purpose Outline project plan for a labor program in of the proposal from the details). Microsoft Project format. 3. There should be a range of options present- ed (typically three or four), including a base case "do-nothing" option where appropri- ate. Phase 3: Implementation 4. The authors should have identified the cost Phase 3 involves implementing the actual labor and revenue effects of the options on the adjustment program, in particular: government budget. 5. Subject to confidentiality and sensitivity · Implementing restructuring options (module concerns, the authors should have dis- 4) and completing any soft options started cussed the proposal with other ministries during phase 1 and agencies that will be most affected by, or most instrumental in, successful imple- · Implementing severance and pension pack- mentation of the program. ages (module 5) 6. There should be some comment on the plans for implementation to demonstrate · Implementing redeployment programs that these are practical and workable. (module 5) Implementation risks should be identified. · Engaging with stakeholders (module 6). 7. There should be some attempt to identify and comment on the likely effects of each option. If these can be quantified, so much Phase 4: Monitoring and the better, but at least there will be quantita- tive assessment. Evaluation Although important, the final phase of any labor adjustment program--monitoring and evalua- · Obtaining a legal mandate to deal with tion--is often the most neglected aspect. When the labor adjustment, including approval of difficult and painful task of adjustment is over, policies to undertake work force restructur- many government officials and implementing ing supported by relevant government agency managers wish to move on and overlook orders or regulations this phase. · Defining implementation arrangements and There are good reasons, however, to take monitor- developing implementation capacity (see the ing and evaluation seriously: seventh module) 43 Labor Issues in Infrastructure Reform: A Toolkit · It demonstrates that the implementing Rama, Martin. 1999. "Public Sector Downsizing: An agency is accountable. Given the very high Introduction." The World Bank Economic Review costs of many labor programs, most imple- 13(1):1­22. menting agencies will want to be able to World Bank. 2002. Public Communications Programs 1 show that they have managed the program for Privatization: A Tool Kit for Task Team Leaders and Clients. Washington, D.C. EL effectively. · It reduces risk. Effective monitoring PPIAF Case Studies of Labor Issues U allows problems to be recognized early in PPI D and action taken to deal with those prob- O (found on the PPIAF Web site, www.ppiaf.org). lems. M Cruz, Wilfred. 2001. "Addressing Labor Concerns · It allows lesson-learning. Many imple- during Privatization: Lessons from the menting agencies recognize that they Metropolitan Waterworks and Sewerage System know very little about what really has (MWSS), Manila, Philippines." happened to workers who were displaced. López-Calva, Luis. 2001. "Private Participation in This puts the manager of the implement- Infrastructure and Labor Issues: The Privatization ing agency at a disadvantage, facing ques- of Mexican Railroads." tions from his or her boss, the press, or Ray, Pranabesh. 2001. "HR Issues in Private trade unions. It also allows subsequent Participation in Infrastructure: A Case Study of programs to be implemented much more Orissa Power Reforms." effectively. Valdez, Jose. 2002. "Case Studies on Human The details of monitoring and evaluation systems Resource Issues in Private Participation in are covered in detail in module 7. Infrastructure in Bolivia." Web Sites Additional Material (on the CD-ROM) PPIAF: www.ppiaf.org. (Site provides access to other PPIAF tool kits, as well as information about PPIAF and about how governments and other agencies can access PPIAF resources to accelerate Background and Overview infrastructure development.) Articles Rapid Response Unit: http://rru.worldbank.org. (This Betcherman, Gordon. 2002. "An Overview of Labor site is a gateway to a range of information on infra- Markets World-Wide: Key Trends and Major structure, privatization, and private sector develop- Policy Issues." Social Protection Discussion Paper ment policies.) 0205. World Bank, Washington, D.C. World Bank "Shrinking Smartly": Fretwell, David. 2002. "Mitigating the Social Impact of www.worldbank.org/research/projects/downsize/. Privatization and Enterprise Restructuring." Working (Site is a clearinghouse for researchers, development Paper. World Bank, Human Development Sector practitioners, and government officials concerned Unit, Europe and Central Asia, Washington, D.C. about the difficulties encountered in downsizing a Haltiwanger, John, and Manisha Singh. 1999. large public sector.) "Cross-Country Evidence on Public Sector Retrenchment." The World Bank Economic Review 13(1):67­88. REFERENCES Alderman, Harold, Sudharshan Canagarajah, and Kikeri, Sunita. 1998. "Privatization and Labor: What Stephen D. Younger. 1994. "Consequences of Happens to Workers When Governments Divest?" Permanent Layoff from the Civil Service: Results World Bank Technical Paper 396. Washington, from a Survey of Retrenched Workers in Ghana." D.C. 44 Labor Toolkit: Framework and Overview In David L. Lindauer and Barbara Nunberg, eds., Fiszbein, Ariel. 1992. "Labor Retrenchment and Rehabilitating Government. Washington D.C.: Redundancy Compensation in State Owned World Bank. Enterprises: The Case of Sri Lanka." Internal Discussion Paper 121. World Bank, South Asia Assaad, Ragui. 1997. "The Effects of Public Sector Region, Washington, D.C. MODULE Hiring and Compensation Policies on the Egyptian Labor Market" The World Bank Economic Review Freije, Samuel. 2001. "Informal employment in Latin 11(1):85­118. America and the Caribbean: Causes, Consequences and Policy Recommendations." Paper presented at Bales, Sarah, and Martin Rama. 2002. "Are Public Regional Consultation on Labor Issues, Panama Sector Workers Underpaid?" Working Paper 2747. City, November 26­27. República Bolivariana de World Bank, Washington, D.C. Venezuela: Instituto de Estudios Superiores de Administracion (IESA). 1 Belser, Patrick, and Martin Rama. 2001. "State Ownership and Labor Redundancy: Estimates Fretwell, David H. 2002. "Mitigating the Social Based on Enterprise-Level Data from Vietnam." Impact of Privatization and Enterprise Policy Research Paper 2599. World Bank, Restructuring." Working Paper. World Bank, Washington, D.C. Human Development Sector Unit, Europe and Central Asia. Washington, D.C. Betcherman, Gordon. 2002. "An Overview of Labor Markets World-Wide: Key Trends and Major Gregory, Peter. 1994. "Dealing with Redundancies in Policy Issues." Social Protection Discussion Paper Government Employment in Ghana." In David L. 0205. World Bank, Washington, D.C. Lindauer and Barbara Nunberg, eds., Rehabilitating Government. Washington D.C.: Bhorat, Haroon, and Mei-Chi Liou. 2002. "Labour World Bank. Consequences of SOE Restructuring in South Africa." Paper presented at the Second Annual Guislain, Pierre. 1997. The Privatization Challenge: A Conference on Labour Markets and Poverty in Strategic, Legal, and Institutional Analysis of South Africa, October 22­24. Development Policy International Experience. Washington, D.C.: World Research Unit, University of Cape Town/Friedrich Bank. Ebert Stiftung, Johannesburg. Haltiwanger, John, and Manisha Singh. 1999. Chong, Alberto, and Martin Rama. 2000. "Do "Cross-Country Evidence on Public Sector Separation Packages Need to Be That Generous? Retrenchment." The World Bank Economic Simulations for Government Employees in Guinea- Review 13(1):67­88. Bissau." Paper prepared for the Sub-Saharan Africa Region of the World Bank (AFTM5) supported by Hess, Jolanta. 1997. "Labor Issues Associated with the Research Project on Efficient Public Sector State Enterprise Restructuring--Handbook." Downsizing (RF­P036874). Washington, D.C. Unpublished draft. World Bank, Washington, D.C. Cruz, Wilfrid. 2001. "Addressing Labor Concerns India, Disinvestment Commission. 1998. Eighth during Privatization: Lessons from the Report. New Delhi: Government of India. Metropolitan Waterworks and Sewerage System (MWSS), Manila, Philippines." PPIAF Case Study. Kikeri, Sunita. 1998. "Privatization and Labor: What World Bank, Washington, D.C. Happens to Workers When Governments Divest?" Technical Paper 396. World Bank, Washington, Estache, Antonio, and José Carbajo. 1996. D.C. "Competing Private Ports--Lessons from Argentina. Public Policy for the Private Sector." López-Calva, Luis F. 2001. "Private Participation in Note 100. World Bank, Washington, D.C. Infrastructure and Labor Issues: The Privatization of Mexican Railroads." PPIAF Case Study. World Estache, Antonio, Jose Antonio Schmitt de Azevedo, Bank, Washington, D.C. and Evelyn Sydenstricker. 2000. "Labor Redundancy, Retraining, and Outplacement during López-de-Silanes, Florencio. 1997. "Determinants of Privatization: The Experience of Brazil's Federal Privatization Prices." Quarterly Journal of Railway." Policy Research Working Paper Economics 112(4):966­1025. WPS2460. World Bank, Washington, D.C. Martin, Brendan, and Marc Micould. 1997. "Structural Adjustment and Railways 45 Labor Issues in Infrastructure Reform: A Toolkit Privatization--World Bank Policy and Government Saghir, Jamal, and Robert Taylor. 1999. "Private Practice in Ivory Coast and Ghana." A report joint- Sector Participation in Water Supply and Sanitation ly commissioned by the World Bank and the Services." Presentation, Cairo, December. World International Transport Workers Federation (ITF). Bank and International Finance Corporation, Public World, London. Washington, D.C 1 O'Leary, Christopher J. 1997. "A Net Impact Sauti-Phiri, Charles. 2002. "Privatisation in Malawi." Analysis of Active Labour Programmes in Unpublished paper. Privatisation Commission, Hungary." Economics of Transition 5(2):453­84. Blantyre. Orazem, Peter F., and Milan Vodopivec. 1996. Talley, Wayne K. 1999. "Ocean Container Shipping: "Male-Female Differences in Labor Market Impacts of a Technological Improvement." Paper Outcomes during the Early Transition to Market: presented at the Annual Meeting of the American MODULE The Case of Estonia and Slovenia." Working Paper Economic Association, January. New York City. 2087. World Bank, Washington, D.C. Tawney, Clare, and Jacob Levitsky. 1997. "Small Owen, John M., and Patricia J. Rogers. 1999. Enterprise Development as a Strategy for Reducing Program Evaluation: Forms and Approaches. the Social Cost of Restructuring and Privatization." London: Sage Publications. Working Paper IPPRED­6. International Labour Organisation, Geneva. Panizza, Ugo. 1999. "Why Do Lazy People Make More Money? The Strange Case of the Public Terrell, Katherine. 1993. "Public-Private Wage Sector Wage Premium." Working Paper 403. Inter- Differentials in Haiti. Do Public Servants Earn a American Development Bank, Washington, D.C. Rent?" Journal of Development Studies 42:293­314. Rama, Martin. 1999. "Public Sector Downsizing: An Introduction." The World Bank Economic Review Valdez, Jose A. 2002. "Dealing with Labor Issues in 13(1):1­22. Rail Roads in Bolivia." PPIAF Case Study. World Bank, Washington, D.C. Ramamurti, Ravi. 1997. "Testing the Limits of Privatization: Argentine Railroads." World World Bank. 2000. Port Reform Toolkit--Module 7: Development 25(12):1973­93. Port Labor Reform. Washington, D.C. Ray, Pranabesh. 2001. "Human Resource Issues in ------. 2001. "Enhancing Public-Private Partnership Private Participation in Infrastructure: A Case in the Context of the Africa Vision for Water Study of Orissa Power Reforms." Report (2025)." In Political Economy of Water Sector Commissioned for the PPIAF. PPIAF Case Study. Reform, Volume 1. Summary of Regional World Bank, Washington, D.C. Conference on the Reform of the Water Supply and Sanitation Sector in Africa. Kampala, Uganda. Ruppert, Elizabeth. 1999. "The Algerian Retrenchment: A Case Study of Argentina." The ------. 2002. Public Communications Programs for World Bank Economic Review 13(1):155­83. Privatization Projects: A Tool Kit for Task Team Leaders and Clients. Washington, D.C. 46 This toolkit was made possible through financial contributions from the Netherlands Ministry of Foreign Affairs.