LABOR ISSUES IN
PRIVATIZATION AND
ENTERPRISE REFORM
Sunita Kikeri
Private Sector Advisory Services
Labor Issues in Privatization

WHAT ARE THE ISSUES?

WHAT ARE THE KEY ELEMENTS OF A
LABOR STRATEGY?

WHAT ARE THE MAIN LESSONS?
Key Issues….1
Privatization a global phenomenon
 Improves operating and financial
performance
 Macroeconomic impact is positive
 Positive welfare consequences
 But labor a major concern

Key Issues…..2

Overstaffing
30 to 50 percent, sometimes more

Generous pay & benefits
At lower levels in particular
Overtime

Restrictive labor contracts
Labor allocation
Sub-contracting
Key Issues….3



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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

Labor Market Policies and Regulations
 Private job creation, labor mobility

Managing the Process
 Consultation and participation

Restructuring
 Timing and menu of options

Social Safety Net
 Severance, retraining, public works
Consultation & Participation
Early, open, transparent
 Communication strategy focused on:

Necessity for reforms and economy-wide benefits
Social safety net measures
• Communication strategy for public at large
Involvement of unions in implementation
 Employee share ownership schemes

Timing and Sequencing of Labor
Restructuring
Options
Pros

Leave to
private sector

Restructure
first


Mixed
approach

Market based
 Speed
Cons
Political/social
considerations
 Lower value
 Delays
 Wrong results

Dispute
settlement
Safety net
 Pragmatic
 Complicates
 Joint decisions negotiations
Labor Restructuring Options
Options
Employment
guarantees

Pros
Reduces
opposition

Early retirement/  Politically and
socially attractive
Vol. Departures



Layoffs
Contracting out
Enhances
salability

Reduces unempt.
Privatize services

Cons
Lowers value
 Shifts burden
 Sets precedent

High upfront cost
 Adv. Selection
 Pension implics.
 Political and
social concerns

Unfair comp.
 Govt. role

Social Safety Net Options
Options

Severance pay
Retraining/
redeployment


Public works
Pros
Income support
 Compensation
 High returns
 Investment in
human capital
 Politically and
socially desirable
 Temp empt.
 Basic infrastr.

Cons
Cost
and
financing
 Adverse selection
Mixed expce.
 Inst’l demands
 Weak labor mkts.

Dependence
 Sustainability

Example: Philippines
MWSS, Manila

Excess labor force
 8,000 employees in 1994
 13 employees/1000 connections
High wages
 Rigid employment practices
 42% reduction in employment in 18
months:

 Aug. 1996: 7,400 employees
 Aug. 1997: 5,057 taken by concessionaires
 Jan. 1998: 4,306 regularized
MWSS…..1
Restructuring in three phases
 Phase 1: August to December 1996




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
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

Phase 2: January to August 1997
 5,340 employees after previous ERP
 Between bidding and takeover
 Identification of employees for 2 concessions
 5,057 stayed: 6 month probationary contract
 190 left: Same retirement benefits ($3.8 million)
 90 transferred to regulatory body
 Employee orientation sessions
 Salary and benefits equal to MWSS
MWSS…..3

Phase 3: August 1997 to January 1998
 5,057 employees
 Probationary period managed by concessionaires
 650 voluntarily separated with same benefits
 100 terminated with same benefits ($2 million)
 Livelihood/training seminars, job referral network
 4,306 regularized based on performance appraisal
system
 Wages same
 Efforts to improve morale
Lessons Learned
Address labor issues early in the process
 Communicate with stakeholders and public
 Develop mix of restructuring options
 Establish severance policy
 Develop targeted redeployment support
 Provide gain-sharing mechanisms
 Promote labor market flexibility
