Session I: THE IMPACT OF PRIVATIZATION ON
EMPLOYMENT & EMPLOYEES
1
Role of Employee Considerations
in Privatization Policy
-The Case of Chinese TaipeiKuei-Lin Chang
Director General
Council for Economic Planning & Development
Chinese Taipei
Conference on Privatization, Employment and Employees
Istanbul, Turkey
10 October 2002
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CONTENTS
• Background of Taiwan’s Privatization
• Working Conditions in Taiwan’s SOEs
• The Legal Framework of Taiwan’s
Privatization
• Policy Design for Employees’ Rights &
Interests
• Dimensions of Policy Impact
• Prospect of Taiwan’s Privatization
• Concluding Remarks
• Appendices
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Background of Taiwan’s privatization -1
• The contribution of the SOEs in Taiwan
- playing a significant role in the 1970s and then
going slowly down.
1951
1961
1971
1981
1991
1996
2000
% share in GDP
14.7
15.9
16.7
16.0
13.4
10.8
9.5
% share of domestic
29.1
35.2
32.7
31.6
24.1
13.3
9.8
3.7
9.4
10.5
9.4
6.6
9.0
8.2
capital formation
% share of government
net revenues
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Background of Taiwan’s privatization -2
• 31 main SOEs in year 2001:
•
•
•
•
•
Total Assets: US$ 593.8 billion
Total Owners’ Equity: US$ 119.6 billion
Annual Sales: US$ 80.8 billion
Profit Before Tax: US$ 7.9 billion
Number of Employees: 188,357
• In addition to few utility SOEs (legal monopolies),
profitability and productivity of most SOEs in the
competitive industries fall behind their private
counterparts.
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Working Conditions in SOEs
– Employees of SOEs used to enjoy much better
benefits than their private counterparts.
• e.g. the average monthly salary in the
public/private enterprises in year 2000:
Sector
Average
Manufacturing
Utility
Construction
Transportation & Telecom
Financial Services
Public
Private
Enterprises (A) Enterprises (B)
78,900
36,539
62,770
35,146
67,729
57,721
66,907
36,299
119,197
37,320
58,325
45,226
A/B
(%)
216
179
117
184
319
129
Unit: NT$ (1 US$=34.5 NT$)
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Working Conditions in SOEs -1
– In year 2000, employees in 90% SOEs work
42 hours on average per week but only 46%
private businesses offer the same conditions.
– The ratio of labor cost to sales in most SOEs
reaches 30% or more which is rare in the
private businesses.
Accordingly, there is great fear of job
loss, reduction in salary and fringe
benefits, increase in workload and work
pressure among employees in the SOEs
chosen for privatization!!
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The Legal Framework of
Taiwan’s Privatization Policy
• The Statute for Transforming State-Owned Enterprises
into Privately-Owned Enterprises (STSP) :
– the law governing the process of privatization and regulating the
rights & obligations of relevant entities in the process.
Enforcement Rules of
the STSP
VAC
MOEA
Administrative Regulations on
preemptive & favored shares
subscription of Employees
empower the line ministries to
draw up the detailed regulations
MOTC
MOF
Administrative Regulations on
compensation for Employees’
rights & interests
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Policy Design for Employees’ Rights & Interests
• Legal protection on employees’ rights and interests
are set out in Article 8 of the STSP, including:
•
•
•
•
•
Job Security with conditions
Seniority Settlement
Severance Pay
Compensation for Insurance Discrepancy
Priority Shares & Favored Subscription Prices for
Long-term Holding
• Vocational Training & Displacement Services
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Policy Design for Employees’ Rights & Interests
Seniority
settlement for
all employees
Stay on
Transferred
concurrently
Being laid off within 5 years
of privatization
the time of
privatization
Not transferred
concurrently
• Priority shares
• Favored offering for
long-term shareholding
•Severance pay
•Compensation for
insurance discrepancy
•Vocational training &
displacement services
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Policy Design for Employees’ Rights & Interests
• Job Security:
– When a SOE is transformed into a POE, the
employees can be transferred concurrently as they
desire.
– Premise: unless otherwise provided in an
agreement between the original and new employers
upon the change of legal status of the original
enterprise (e.g. reorganization or assignment of the
unit(s) of the enterprise)
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Policy Design for Employees’ Rights & Interests
• Seniority Settlement:
– The original owner of the enterprise shall, on the date of
privatization, settle the account of all employees’ benefits
in terms of their respective lengths of service based on
the criteria for payment of retirement set out in the Labor
Standards Law:
• 2 month’s salary for each year of the first 15 years of
service; one month salary for the rest years.
• Seniority settlement pay shall not exceed 45 months’ salary
in total.
– After employees’ account have been settled, the
calculation of their service year shall start anew.
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Policy Design for Employees’ Rights & Interests
• Severance Pay:
• The employees who are not transferred concurrently
or being laid off within 5 years after privatization shall
be entitle to the “severance pay”, including
• 6 months’ salaries
• additional wage payable for the period of the onemonth advance notice
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Policy Design for Employees’ Rights & Interests
• Compensation for Insurance Discrepancy:
– Where the employees suffer the losses of pension
payable to them because of the original insurance
scheme interrupted by privatization, their losses of
such benefits shall be duly compensated.
The scope of all other compensation shall be
limited to the losses which incurred at the time or
privatization.
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Policy Design for Employees’ Rights & Interests
• Priority Shares for Employees:
– encouraging employees’ participation in corporate
governance through their shareholdings
– The employees are entitled to preemptively subscribing a
specific amount of shares. Each employee is allowed to
buy shares equal in value up to his 48 months' salary.
– priority shares for employees shall not exceed in total
35% of outstanding shares.
• Reserved shares in favor of employees holding
shares for 1 or 2 year(s)
– a certain ratio of shareholding can be additionally
subscribed at par value.
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Policy Design for Employees’ Rights & Interests
• How much compensation can an employee obtain
from privatization of his company?
¤ Assumptions: a middle ranked employee with 15
years of service.
• Seniority settlement: NT$2.5 million (US$72,464)
• Insurance compensation: NT$0.5 million (US$14,493)
• Severance pay (*): NT$0.56 million (US$16,232)
• Preemptive subscription of shares equal in value up to
NT$3.84 m in the run up to privatization.
(*): only for those who don’t transfer concurrently or laid off within 5
years after privatization.
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Policy Design for Employees’ Rights & Interests
• Vocational Training & Displacement Services:
– Employees who are not transferred concurrently or
laid off in 5 years after privatization shall be provided
with secondary specialty training and displacement
services rendered by the administrative authority in
charge of labour affairs.
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How are employees’ rights in financially
difficult SOEs being protected?
• Special Fund is raised to help financially
difficult SOEs:
– Part of government’s revenues from privatization
should be appropriated to a special fund (Article 15
of the STSP)
– The Privatization Fund is mainly to finance the
shortage as required by the financially troubled SOE
for payment of the severance pay and/or seniority
settlement amount to its employees.
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Employees’ attitudes toward legal
protection on their rights & benefits
Employee
Rights & Benefits
Approval
3.9
 Job security
4.0
 Priority shares & long-term shareholding
4.2
 Seniority settlement
4.5
 Severance pay
4.2
 Compensation for insurance discrepancy
 Job-transfer training & displacement
3.2
assistance
3.4
Overall protection
Notes/ 1: very unsatisfactory; 6: very satisfactory; 3~4: neutral
Source: a commissioned research project by the CEPD in 2002.
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Dimensions of Policy Impact
Dimensions
of Impact
Macro-view
industry-level
Economic  Economic freedom
Social
Micro-view
firm-level
 Operational efficiency
 Profitability
 Business expansion
 Share price…
 Aggregate efficiency
 Market development
 Government revenue
 Public sector borrowing …
 National or regional
 Redundancy
 Salary and wage level
unemployment
 Service qualities
 Utility fares…
 Income inequity…
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Impact on Performances:
the cases of 6 privatized SOEs
Market Financial
Share
leverage
Main
business
Profitability Labor
Degree of
Productivity diversification
1

-
-
×

-
2
×

×
×


3
-
×




4
-
×
Same



5



×
×

6
-

-


-
 worse ;  better;   much better
1 China Insurance; 2 BES Engineering; 3 China Petrochemical; 4 China Steel;
5 YangMing Marine; 6 Liquidized Petroleum Supply.
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Impact of Privatization on Employment
• Theory:
– employment levels will be reduced around
the time of privatization as a result of work
reorganization initiatives, measures for labor
shedding and attempts to get employees to
work harder.
• Practices:
– impact on levels of employment is mixed due
to the mediation by political-institutional
context which those privatized SOEs exposed
to market competition.
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Impact of Privatization on Employment -1
• Job Security: international comparison
5.75% reduction in employment after 3 years
from privatization based on 39 privatized
SOEs in the world (Megginson, W.L. et al ,
1994).
7.4% reduction in employment after 3 years
from privatization based on 13 privatized
SOEs in Taiwan (CEPD, 1999).
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Impact of Privatization on Employment -2
• Job Security: little impact on national unemployment
Year
1994 1995 1996 1997 1998 1999 2000
National
Unemployment 1.56 1.79 2.60 2.72 2.69 2.92 2.99
Ratio (%)
Unemployment
4.26 4.87 3.80 3.25 3.55 3.18 2.74
Ratio in the
Public Sector (%)
Public sector accounts only for
6.7% labor force in Taiwan.
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Impact of Privatization on Employment -3
• Dilemma of promoting privatization in a time of
economic slowdown:
– Some poorly managed SOEs have turned to be a serious
financial burden to government. Only this year the loss
of US$650 million is estimated to incur.
– Strongly promoted privatization or corporate
restructuring will inevitably causes redundancy which is
politically disadvantageous to regional employment.
 Privatization will remain on the government
agenda, but be implemented in more cautious
manner to avoid exacerbating unemployment
problem.
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Impact of Privatization on Pay Structure
• The case of a state-owned construction company
which was privatized in June 1994.
1 year The year of 1 year after 2 years
before p-day p-day
p-day
after p-day
Average (a)
mid-level
Hi-level
Top-level (b)
b/a
210
223
259
587
203
300
347
700
158
292
343
690
186
281
329
654
2.80
3.44
4.36
3.52
• Average salary & wage level in the construction industry = 100
• p-day = the day of privatization
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Impact of Privatization
• The time for an overall appraisal of the
impact of privatization on labor
management and industrial relations seems
ripe after 12 years from government’s
initiative.
• The full impact and enduring effects of
privatization on industrial relations might
lag far behind ownership change and had
not yet been covered by prior studies.
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The Costs &Benefits of Taiwan’s
Privatization Policy
(1). Privatization proceeds
US$11.35 billion
(2). Related expenditures
US$4.1 billion
Net Revenue: (1)-(2)
US$7.25 billion
Notes:
(1) Privatization proceeds include sales of shares and assets for those
privatized SOEs.
(2) Related expenditures cover mainly the payments for the seniority
settlement, redundancy and insurance compensation of employees in
privatized SOEs.
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Prospect of Taiwan’s Privatization
• 17 SOEs have been chosen and approved by the
Premier to be privatized by the end of year 2007.
•Petro
•Power
Utility
MOEA
MOTC
VAC
MOF
2
2
Industrial Financial
Firms
Institution
6
1
•Telecom
•Railway 5
1
• The deadlines and methods are currently being
reconsidered by the authorities.
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Concluding Remark:
Privatization v.s. Employees’ Rights
• The legal protection on employees’ rights &
benefits in Taiwan’s privatization is high by
international standards.
• With employees’ rights & benefits being
reasonably protected, Taiwan will fulfill its
privatization commitment as well as introduce
competition into all markets by stages.
• Deregulation and exposure to market
competition have a more powerful impact on
firm behavior than privatization per se.
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Concluding Remark:
Privatization v.s. Employees’ Rights
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• The timing for promoting privatization
may cause some concerns in a time of
economic downturn. While structural
reform may be costly, it will restore public
confidence and create social welfare in the
long term.
• Communication with employees is
indispensable. However, the government
should not bow to political gimmicks.
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More Information about
Taiwan’s Privatization
More details of privatization in Chinese
Taipei can be found at the website:
http://www.cepd.gov.tw/english/special/9002212.htm
or
contact directly with:
Mr. Peter C. S. Lee
Sectoral Planning Department, CEPD
Tel: 886-2-2316 5497
e-mail: cslee@sun.cepd.gov.tw
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Appendices
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A Glance at Taiwan
• Location: The island is almost equidistant from
Shanghai and Hong Kong.
• Area: 36,000 square kilometers (roughly equal to the size of
the Netherlands).
• Population: 22 million.
• GNP per capital: US$14,216 (in year 2000)
• Foreign Exchange Reserves: US$106.7 billion
• 14th largest trading country in the world.
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The Location of Taiwan
China
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Retrospect of Taiwan’s privatization
– The 1950s: The STSP was promulgated in
support of the land reform program, the legal basis
of privatization policy was thus established.
– The 1960s: Some SOEs floated in support of the
newly established stock exchange.
– The 1970s: Several capital intensive SOEs were
established in National Infrastructure Projects.
– The mid-1980s: Few SOEs went bankrupt. SOE’s
role as a policy instrument had gradually changed
to a fiscal burden.
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Retrospect of Taiwan’s privatization -1
• The late-1980s:
Government restarted the privatization policy in the face of
global trend of liberalization and changing domestic political
& economic environment.
• The mid-1990s:
Several consensus were reached by major political parties at
the “National Development Conference” held in late 1996:
– 42 chosen SOEs should be privatized in 5 years.
– Privatization should be promoted in broader scope.
– State holdings of the privatized SOEs in the competitive
industries should be entirely released in 5 years.
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Institutional Framework of
Management of SOEs & State Holdings
Premier
SCPPS
The Steering Committee for
Promoting Privatization
of SOEs (SCPPS)
MOF
MOEA
MOTC
VAC
Other
Ministries
5 SOEs
11 privatized SOEs
CNC
3 SOEs
3 privatized SOEs
6 SOEs
3 privatized SOEs
4 privatized SOEs
10 SOEs
6 privatized SOEs
• SCPPS: The Steering Committee for
Promoting Privatization of SOEs
• CNC: Commission of National Corporations
• MOF: Ministry of Finance
• MOTC: Ministry of Transportation &
Communication
• MOEA: Ministry of Economic Affairs
• VAC: Veteran Affairs Council
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The Definition of Taiwan’s
Privatization
• A state-owned enterprise with less than
half (50%) of the equity shares being held
by government has transformed itself
into a privately-owned enterprise .
• The parliament has the monitoring
power over SOEs in accordance with the
provisions of the Budget Law.
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Government’s Approaches
-The scope of Taiwan’s privatization
While a SOE is deemed unnecessary by the
competent authority after considering the current
situation, the transformation is brought into
effect after a privatization proposal has been
reported to and approved by the Premier.
- Article 5 of the STSP
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Government’s Approaches
-Privatization v.s. Liberalization
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• Privatization of SOEs (particularly for utility
companies) must be proceeded in concert with
market liberalization.
• e.g. Privatization of Chung-Hwa Telecom Corp.
Time
Progress of Deregulation
Aug. 1987
User-end terminal devices
Jun. 1989
Value-added telecom services
Jan. 1997
2G mobile phone licenses
Dec. 1999
Satellite telecom services
Jul. 2001
Fixed line telecom services
Mar. 2001
3G mobile phone licenses
Dec. 2003
Privatization of state-owned Chung-Hwa Telecom.
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Government’s Approaches
-The methods of Taiwan’s privatization
• The privatization of a SOE can be proceeded in
the following manners for unspecified investors:
•Share selling (e.g. IPO, auction, book-running, Depositary Receipt)
•Assets selling through public tender process
•Providing the assets of a SOE as the equity capital contribution
•Merging with a private enterprise
•Right issue by private capital to dilute state ownership
• For public solicitation of private investor(s):
•Approval from the Premier for soliciting terms & conditions
•Entering into negotiation with private investor(s)
•Submit the content of deal to the Parliament for recordation
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Government’s Approaches
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-The methods of Taiwan’s privatization-2
• Employee-Buy-Out:
Employees of two financially troubled SOEs raised
capital to buy and lease part of operating assets of
their companies respectively in this year.
• Other forms of privatization:
Such as contracting out, management contract,
Leasing etc. have been applied in some public
services and considered feasible for some lossmaking SOEs.
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Taiwan’s Strength in promoting
privatization
• Mature capital market: (May 2002)
– Market capitalization of US$300 billion
– Annual trading values of US$ 556 billion in 2001
– 593 listed companies (excluding 397 OTC listing
firms)
• Rich experience accumulated in privatizing
27 SOEs in various sectors.
• A stable institutional framework composed of
a set of laws and regulations (the next slide).
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Taiwan’s Weakness in
promoting privatization
• Opposition from vested interest groups:
– Labor union: bargain for
• working conditions unchanged
• more compensation for their benefits & interests
interrupted by privatization
• participation in corporate government
(mitbestimmungsrecht)
– Some legislators
– Management level of some SOEs
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Accomplishment of Taiwan’s
Privatization
45
• Up to July 2002, 27 SOEs have been privatized, yielding
total proceeds of US$ 12.5 billion.
Manufacturing Financial Transportation Others
services
Share selling
Asset selling
Assets as equity
contribution
Employee
buy-out
4
3
13
2
2
1
1
1
• 15 small-scale factories have been closed down upon
deliberate reviews by the authorities.
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