When the size and scope of labor restructuring are known, the next steps are to deal with strategic questions of timing and sequencing and to choose among various restructuring options. Among the key questions that practitioners usually face are: Should labor restructuring be done by governments or be left to private investors? and What is the range of available restructuring options and under what circumstances are the options best used?
The primary strategic decision is whether labor restructuring should be carried out by the government prior to PPI, or whether such restructuring should be left to the private sector after the PPI transaction is completed. There is no single approach and countries have followed different paths, depending on the timetable and urgency of PPI, the nature of the labor issues at the enterprise level, and the existing legal framework. There are three options in terms of timing:
At one extreme is the option of leaving labor restructuring entirely to the private sector, on the grounds that private investors are generally in a better position to judge the level of employment and kind of skills needed. This option can work for companies in which earlier labor adjustments have largely tackled any problems of overstaffing, or where prior downsizing efforts have led to established processes and norms in place for severance and redeployment, thus making any future restructuring by the private investors relatively easy. In these circumstances it is possible to transfer responsibility for restructuring to the private sector.
But in infrastructure enterprises with high levels of overstaffing and difficult labor relations, leaving restructuring entirely to private investors may not be a viable option. Attempts to do so can put the PPI transaction at risk. Where political and labor opposition to PPI are high, private investors are wary of taking on the political burden of carrying out large-scale layoffs and thus are reluctant to bid. Moreover, when investors have to absorb large labor liabilities they discount the sale price accordingly, leading to lower sale revenues and potential public allegations that assets are being sold cheaply. Alternatively, they may demand government subsidies to cover the cost of the liabilities, thus subverting one of the original goals of PPI. Leaving largescale restructuring to the new private investors may also create social problems, particularly where weak severance laws and social safety nets reduce welfare protection for workers.
For the above reasons, labor restructuring in large, troubled infrastructure enterprises is often seen as a government responsibility, on the grounds that government involvement is needed to:
The strategy of leaving restructuring to the government has been adopted in a number of cases. In Argentina, for example, where surplus staff and strong unions were major sources of inefficiencies, the railway and energy enterprises undertook major employment cuts prior to PPI. The railway company reduced employment by close to 80,000 over several years. Similarly, in Brazil more than 18,000 of the nearly 40,000 railway workers were retired or became redundant before the systems were concessioned. Prior restructuring was undertaken not just to improve the prospects for sale but also to overcome labor opposition and ensure that the social consequences of layoffs were properly addressed.
Government-led labor restructuring has its own risks and disadvantages, however, particularly in terms of cost and adverse selection. Governments can be more generous than the private sector in setting compensation payments, leading to overpayment and issues of cost and sustainability of severance payments. Moreover, poor targeting techniques can lead to the loss of the better, most skilled, and most valuable workers during the course of labor restructuring. In the worst cases, workers who took the packages have been rehired, which has created incentives for the best and most skilled workers to accept severance (knowing that they can be employed or rehired easily) and led to the inefficient use of scarce public funds. The section on severance in module 5 treats these issues in greater detail.
To minimize the risks of overpayment and adverse selection, some governments have stayed away from a direct role in restructuring and have adopted more of a mixed approach. In some cases they have made the policy decision to grant private investors full flexibility to select the work force from the existing pool of workers according to need, while the government assumes responsibility for developing the labor program beforehand and for dealing with residual workers. Such an approach was used in Argentina's gas company, where employee restructuring was left to the new private investors who were allowed to select employees and the government provided incentives and a social safety net for displaced workers.
In other cases both government and investors have played a role in implementation: part of the restructuring has been done by the government prior to PPI, targeted at obvious areas of surplus, and part of the restructuring has been done by the PPI investor who is given full flexibility to further adjust staffing levels after assuming management control. Such an approach was adopted in the privatization of Argentina's telecommunications and energy companies, and in the case of Manila Water in the Philippines. In these cases prior to privatization the government established the severance and social safety net program, which was used for both phases of restructuring, and the cost of downsizing was shared by government and the private investor.
Whichever approach is used, the key is for government to clearly define the labor program before PPI so as to assure workers that their interests are taken into account and to clarify for investors the labor liabilities involved. Developing the labor program in advance and letting the new managers handle the actual restructuring process helps with the political viability of the process, while it avoids problems of adverse selection and sustainability of severance packages.
Table 4.1 in module 4 summarizes the pros and cons of the three approaches. When issues of timing and sequencing are dealt with, the next step is for governments to examine the range of restructuring options and to decide which ones can be suitably applied under existing circumstances.
Work force downsizing and CEO replacement are measures that tend to raise privatization prices.
A range of options is available for dealing with large-scale labor restructuring. The options can be divided into three broad groups:
Several factors influence the choice of options, including the extent and level of labor surplus, existing labor legislation, and the role of unions. Moreover, these restructuring options are not mutually exclusive; in practice they can be used in sequence or combined with one another:
The choice of strategies and options open to the implementing agency is often constrained by existing legislation. An early task is to review the legal framework for dealing with labor issues to see what is possible and what is not. Sometimes changes in the legal framework may be needed. Where such changes are difficult to carry out, the implementing agency may select options (such as soft measures or voluntary departures) that comply with existing legal requirements and so avoid the risk of legal challenges in court.
Thus, the choice of which approaches to use will depend on the existing circumstances at the enterprise and country levels, in particular: