LABOR ISSUES IN PRIVATIZATION AND ENTERPRISE REFORM Sunita

LABOR ISSUES IN PRIVATIZATION AND ENTERPRISE REFORM Sunita Kikeri Private Sector Advisory Services

Labor Issues in Privatization l WHAT ARE THE ISSUES? l WHAT ARE THE KEY ELEMENTS OF A LABOR STRATEGY? l WHAT ARE THE MAIN LESSONS?

Key Issues…. 1 Privatization a global phenomenon l Improves operating and financial performance l Macroeconomic impact is positive l Positive welfare consequences l But labor a major concern l

Key Issues…. . 2 l Overstaffing Ø 30 to 50 percent, sometimes more l Generous pay & benefits ØAt lower levels in particular ØOvertime l Restrictive labor contracts ØLabor allocation ØSub-contracting

Key Issues…. 3 l l l Fear of layoffs and loss of benefits Fear of contractual changes Fear of reduced union influence Led to union opposition But: – – Little or no change in some cases New employment Higher wages Restructuring with or without privatization

Elements of a Labor Strategy l Labor Market Policies and Regulations Ø Private job creation, labor mobility l Managing the Process Ø Consultation and participation l Restructuring Ø Timing and menu of options l Social Safety Net Ø Severance, retraining, public works

Consultation & Participation Early, open, transparent l Communication strategy focused on: l ØNecessity for reforms and economy-wide benefits ØSocial safety net measures • Communication strategy for public at large Involvement of unions in implementation l Employee share ownership schemes l

Timing and Sequencing of Labor Restructuring Options Pros l Leave to private sector l Restructure first l l Mixed approach l Market based l Speed Dispute settlement l. Safety net l Pragmatic l Joint Cons Political/socia l considerations l Lower value l Delays l Wrong results l Complicates negotiations l

Labor Restructuring Options Employment guarantees l Pros Reduces opposition l Early retirement/ l Politically and socially attractive Vol. Departures l l l Layoffs Contracting out Enhances salability l l Reduces unempt. Cons Lowers value l Shifts burden l Sets precedent l High upfront cost l Adv. Selection l Pension implics. l Political and social concerns l l Unfair comp.

Social Safety Net Options l Severance pay Retraining/ redeployment l l Public works Pros Cons l Income support l Compensation l High returns l. Cost l Investment in human capital l Politically and socially desirable l Temp empt. l Basic infrastr. l l and financing l Adverse selection Mixed expce. l Inst’l demands l Weak labor mkts. Dependence l Sustainability

Example: Philippines MWSS, Manila l Excess labor force Ø 8, 000 employees in 1994 Ø 13 employees/1000 connections High wages l Rigid employment practices l 42% reduction in employment in 18 months: l Ø Aug. 1996: 7, 400 employees Ø Aug. 1997: 5, 057 taken by concessionaires Ø Jan. 1998: 4, 306 regularized

MWSS…. . 1 Restructuring in three phases l Phase 1: August to December 1996 l 1. 2. 3. 4. 5. 7, 370 employees Under MWSS management Discussions with employee association Study tour to Buenos Aires Attractive retirement package » 1. 5 to 2. 5 months for each year of service » Average package: $20, 000 » Total cost: $38. 5 million (2000 plus employees)

MWSS…. . 2 l Phase 2: January to August 1997 Ø 5, 340 employees after previous ERP Ø Between bidding and takeover Ø Identification of employees for 2 concessions Ø 5, 057 stayed: 6 month probationary contract Ø 190 left: Same retirement benefits ($3. 8 million) Ø 90 transferred to regulatory body Ø Employee orientation sessions Ø Salary and benefits equal to MWSS

MWSS…. . 3 l Phase 3: August 1997 to January 1998 Ø 5, 057 employees Ø Probationary period managed by concessionaires Ø 650 voluntarily separated with same benefits Ø 100 terminated with same benefits ($2 million) Ø Livelihood/training seminars, job referral network Ø 4, 306 regularized based on performance appraisal system Ø Wages same Ø Efforts to improve morale

Lessons Learned Address labor issues early in the process l Communicate with stakeholders and public l Develop mix of restructuring options l Establish severance policy l Develop targeted redeployment support l Provide gain-sharing mechanisms l Promote labor market flexibility l