Often protected from competition and subsidized by their public sector owners, state-owned infrastructure enterprises frequently employ more people than required for efficiency, pay wages and benefits that are higher than their counterparts in the private sector, and have large, unfunded pension liabilities. These factors have led to lower labor productivity and higher labor costs than private investors could accept. As a result, those affected by PPI often fear that PPI and the associated efficiency improvements will require substantial labor restructuring, both before privatization as governments cut the work force to prepare for reforms and afterward when privatized firms continue to improve productivity. Indeed, PPI-and enterprise reform in general-has often required significant labor adjustments. But workers have also gained in some situations as new investments and dynamic expansion resulted in the creation of new jobs and as productivity improvements led to similar or better terms and conditions of service.
Infrastructure firms vary greatly between countries and within a single country, but the introduction of private participation generally produces a number of changes:
When firms remain under state ownership these changes and pressures also often arise as a result of some of the following factors:
In most enterprises these forces for change should result in a continuous process of work force restructuring, but for social and political reasons the adjustment process in state-owned firms may be delayed. The introduction of PPI, which often reflects the acute need for reform, tends to serve as a catalyst for reform. The case of Argentina's railways, where employment fell from 92,000 to 18,500 after privatization, is an example of dramatic employment changes arising from the introduction of PPI (box 1.2).
There is significant variation among countries and enterprises but generally speaking three labor issues need to be tackled in the course of PPI:
Those three factors are described below.
Longer-term structural changes in the economy will also drive work force restructuring.
Containerization, a technological improvement in ocean shipping, has revolutionized maritime transportation. By handling individual pieces of general cargo loads only twice-at loading and at unloading from a container- less port labor and ship capacity are required to transport the same amount of freight.
In a review of the impacts of technology on ocean shipping, Talley (1999) reported that the increased use of containers, coupled with new cargo-handling techniques and work practices, have led to a significant decrease in the demand for port labor. Huge job losses have resulted, ranging from 40 percent to 60 percent in many countries. In the United Kingdom dock jobs fell from 80,000 in 1967 to 11,400 in 1986 and by another 44 percent between 1989 and 1992. In France work rule reforms introduced in 1992 led to employment declines of 66 percent at six major ports. In Australia waterfront reforms introduced in 1989 led to a 40 percent reduction in stevedore labor over a two-year period.
Although dock jobs dramatically declined, longshoremen unions were reluctant to accept changes and negotiated arrangements to preserve work. In some cases, work rules, gang sizes, and compensation patterns remained the same for containerized cargo as for break-bulk cargo. On the Atlantic and Gulf coasts of the United States, labor-management negotiations led to a "50-mile rule" (that reserved for unionized longshoremen all "stuffing and stripping" of containers in or near ports), guaranteed annual incomes regardless of hours actually worked, and produced agreements that required shipping lines to use union labor for their vessel calls.
In the port of Buenos Aires the combination of deregulation, competition, and privatization has led to dramatic reductions in port charges: charges for shipping containers between Argentina and northern Europe declined by 30 percent to 70 percent in less than two years. Most of the savings have come from improved labor productivity. At the port of Buenos Aires total employment fell from about 8,000 just before the reforms to 2,500 in 1994 and has remained around that level. The liberalization of operating rules drastically reduced the requirements for stevedores, which also led to higher labor productivity; the weight of cargo per nonadministrative worker rose from 800 tons in 1991 to 3,000 tons in 1995 (see Estache and Carbajo 1996).
Overstaffing has several causes, which often combine to ensure its persistence
Historically, many infrastructure companies have employed more workers than they needed to deliver services efficiently and effectively. This was because the public sector often was seen as a vehicle for creating jobs in the absence of a private sector, partly for reasons of patronage and partly for meeting developmental or social objectives. Subject to weak performance incentives and to "soft" budget constraints, public sector managers often were also able to avoid dealing with the difficult restructuring and adjustment issues that private sector managers most likely would have been forced to tackle.
As a result many infrastructure firms have excess manpower. For example, many African water utilities employ more than 10 employees per 1,000 connections, compared with a typical 2.5 to 5 employees per 1,000 elsewhere in the world (World Bank 2001a). Loss-making long-haul carrier Air India had a staff-to-aircraft ratio of 663 workers per aircraft in 1997, compared with ratios of between 170 and 340 workers in various Southeast Asian carriers: Singapore Airlines, Thai Airways, Malaysian Airlines, and Cathay Pacific (India, Disinvestment Commission 1998). In the 1960s Brazil's federal railways had a staff strength of 160,000, which came down to 42,000 before the privatization transaction began and was further reduced after privatization. In Argentina the corresponding figures for the railways fell from 92,000 to 18,600.
Excess employment results in lower labor productivity and higher labor costs than private investors might be willing to bear and thus are often a central and controversial issue in PPI. Excess employment has led to fears of labor force reductions as governments cut the work force to prepare for PPI or as new owners and operators introduce efficiency improvements and expose enterprises to greater management discipline, new technologies, and increasing competition. The fear of job losses often becomes a focus for opposition by workers and trade unions-and sometimes for popular discontent with PPI as a whole.
The terms and conditions of employment are often stipulated in a contractual relationship between the enterprise and the employees. That relationship may be set out in legislation, in standard employment terms for public service workers, in separate labor contracts for each enterprise, or in individual employment contracts. Typically, many infrastructure firms are governed by well-defined collective labor contracts, partly because the size of the enterprise demands them and partly because workers in such sectors as railways, transportation, and power were among some of the earliest groups of workers to organize into the trade unions that helped put contractual agreements in place.
There are several cases where staff levels before PPI are twice those that existed after PPI.
Labor contracts help create acceptable terms and conditions of employment, including the health, safety, or social well-being of the work force, and may have been negotiated many years previously. Some labor practices, however, may cause an enterprise to operate in less productive ways or at higher cost than is required. For instance, public sector employees are often paid better than their private sector counterparts, particularly at the lower skill levels, and often receive tangible and intangible benefits-such as job security, seniority rights, special pension arrangements, subsidized housing, health and educational services-that are not provided by private firms (Assaad 1997, Panizza 1998). All of these factors have led to a public sector wage premium in many countries (box 1.3).
A surplus of employees, accumulated over many years, often means that job losses become inevitable.
As industries and technology change and as firms are exposed to increased competition, change often becomes necessary and greater flexibility in working practices may be needed. These changes may involve market-based and merit-based remuneration systems, greater flexibility in the use and allocation of labor, and more flexible hiring and firing practices. Usually both employers and employees recognize that changes will be inevitable and so negotiation and revision is an important aspect of labor contracts. The process of gaining agreement on change may, however, be a challenge. In some cases there will be a tradition of centralized collective bargaining with one or two trade unions, but in others there will be fragmentation of work force representation across a much larger number of trade unions. In such cases the large number of unions itself often becomes a factor for consideration in revising contractual agreements.
Labor contracts can be highly effective in protecting workers, but may make it difficult for enterprises to adjust to new circumstances.
Where private infrastructure investors are entering competitive or contestable markets, they may wish to renegotiate or change some of these terms and conditions of service as part of a new employment agreement. New private owners or managers of infrastructure companies also may seek to renegotiate labor practices to meet commercial and operational performance objectives, as well as to respond to changing market demands and new technologies.
With 30,000 kilometers of track, the Argentine railroad enterprise, Ferrocarriles Argentines (FA), was the largest railroad in Latin America and the sixth largest in the world (after those in China, France, India, the former U.S.S.R., and the United States) at the time of its privatization in 1990. With 92,000 employees in 1990, FA was one of the largest employers in Argentina. FA's employees were not only unionized but also very powerful. Over time the unions intervened in all aspects of management, including staffing, internal organization, and strategy. For instance, because passenger services were more labor intensive than was freight transportation, the unions got FA to pay more attention to the former than to the latter, even though freight was relatively more profitable. They successfully resisted efforts to streamline FA's operations through consolidation and rationalization because it would make some employees redundant. From time to time the unions brought Buenos Aires to a halt by going on strike and paralyzing suburban rail service in the capital. FA's unions opposed privatization and there was no reason to think they could not veto its implementation by the Argentine government.
In most countries railroads would not have appeared on the first list of candidates for privatization, but the sector did so in Argentina because of the heavy demands it was placing on the government's out-of-control budget. Subsidies and grants received by FA made up fully 9 percent of the government's budget and 1 percent of Argentine gross domestic product. Among Argentine state enterprises, FA was the single biggest recipient of federal funds. In such a context only the privatization of giant enterprises could make a dent in the government's financial problems. Railway unions protested the government's plans and went on strike, paralyzing Buenos Aires, which coped with limited commuter rail service for 75 days. But the government held firm until the unions cut a deal with it. That deal included an agreement that redundant FA employees could be let go in exchange for one month's salary per year of service, with no maximum limit. Because the average worker had spent 20 years in FA's employ, the deal would cost the government an average of US$10,000 per worker. The World Bank helped finance this program through its structural adjustment loan. The Bank's backing assured workers that severance payments would be prompt and paid in full, unlike previous severance programs run by the Argentine government. Initial staff reductions took place through voluntary retirement programs because many of FA's employees were old. Subsequent reductions resulted from layoffs, concurrent with privatization. The company reduced its staff from 92,000 to less than 20,000 in 1997.
Source: Ramamurti 1997.
Large pension liabilities can threaten the viability of a PPI transaction.
Many infrastructure enterprises have large accumulated pension liabilities that have been promised to and earned by current workers under different pension arrangements. Many of the pension programs are operated on a largely unfunded or "pay-as-you-go" basis in which obligations are treated as a current operating expense rather than paid from reserves or asset pools to which payment is made at the time a future obligation is incurred. As a result many firms have a large liability for future benefits that are not accounted for and for which funds have not been set aside.
Unfunded pension liabilities and other pension issues can present a significant challenge for infrastructure privatization. Such liabilities, which are legally enforceable obligations, can be substantial and their settlement can become a major issue during PPI because investors may be reluctant to take over an entity until those liabilities are resolved. Voluntary departure or early retirement programs can also put a financial strain on pension plans. In Morocco, for example, the state-owned railway provided a generous pension plan with benefits paid by the railway itself. The system became financially unsustainable over the years and had to be reformed, not least because a proposed downsizing program would have made the pension plan even less sustainable (see box 5.14, module 5). There might also be legal issues involved. Attempts to tackle high pension costs and unfunded liabilities in the urban water supply in South Africa, for example, were subject to legal challenge (see box 1.8 in this module).
Those labor factors have led to fears about the potential negative effects of PPI on labor and have generated interest in developing labor programs aimed at mitigating the social impact of reform. The next section briefly describes the evidence concerning the impact of private infrastructure participation on employment.
There is no doubt that some groups of public employees are underpaid. The fact that governments have to offer very generous terms to persuade workers to leave voluntarily, however, suggests that the workers place high value on continued public employment. Even though salaries themselves may be low, the overall employment package of benefits as well as terms and conditions may be attractive to workers-and better than they might expect from the private sector. Several country studies have revealed evidence of a public sector wage premium. The following are some examples:
A good understanding of the effects of PPI on the work force is essential because the implementing 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 describes in detail the evidence of the effect of private participation on employment, labor productivity, pay and benefits, work practices, and workers' representation and rights in infrastructure enterprises. Only a brief summary of the main findings is presented here.
The evidence shows that diverse labor impacts arise from PPI:
New technologies, competition, and sector reform are drivers of work force restructuring
Private operators have strong incentives to reduce costs.
In sum, the evidence shows a wide range of experiences with respect to PPI's impact on labor, depending on the initial conditions at the country and enterprise levels. PPI can bring benefits to workers through retained jobs, higher pay, and new job creation as a result of new investments and dynamic expansion. But large employment losses can and do occur as infrastructure sectors and enterprises are reformed, regardless of whether PPI is involved.
Labor adjustments are one of the most sensitive aspects of PPI and enterprise reform. The process is not easy and there are many challenges. Because they perceive the threat of unemployment and loss of benefits, labor unions and state enterprise workers often oppose reforms and that opposition leads to actions that delay or stop governments from tackling infrastructure problems. Particularly in developing countries, these difficulties are compounded by the lack of unemployment and social welfare systems, as well as the lack of alternative jobs in the economy. In such circumstances, the costs of reform for state enterprise workers can be high, involving loss of income, uncertainty, and difficulties in job relocation. Dealing with labor issues early in the reform process can help mitigate these social costs in a manner that both protects the interests of workers and ensures that consumers gain from better delivery of critical infrastructure services.
Whatever type of reforms are adopted, experience shows that PPI can proceed smoothly if efforts are made to deal with labor issues early in the reform process. Early attention is needed to:
Broader labor market policies are important but are covered only briefly here.
Dealing with labor issues often requires actions on two parallel fronts. At a broader level, the reform of labor market and other policies may be needed to promote private sector job creation. Such reforms and the development of the private sector help facilitate labor adjustments. Although important in their own right, such reforms are covered only briefly here; a detailed discussion of such policy reforms is beyond the scope of the Toolkit. This Toolkit focuses on the parallel set of actions: the design and implementation of specific labor programs that address labor issues in PPI and infrastructure reforms. Such programs can do much to mitigate the social impacts of reform and in some circumstances can act as a catalyst for broader labor market and policy reforms.
Promoting Policies for Job Creation
The lack of alternative jobs for workers adversely affected by PPI or by enterprise reforms is a major concern in many developing countries. Many economies have been dominated by public sector enterprises and the vast resources they absorb from local banking systems have often crowded the private sector out of financial markets, slowing growth and the creation of productive jobs by the private sector. Labor market regulations-including restrictions on hiring and firing and payroll taxes that raise the cost of labor have further exacerbated the problems and led to private sector reluctance to hire permanent labor. They have also created difficulties in adjusting the labor force according to changing economic circumstances.
Labor market rigidities make it harder for workers to move into new jobs as enterprises adjust, and generally lead to:
Reforms aimed at increasing labor market flexibility and developing the private sector can, therefore, help make the restructuring process easier, enabling workers to shift more easily from one sector of the economy to another (see box 1.4). Typically, such reforms involve:
Whereas labor market reforms and other reforms associated with developing the private sector facilitate labor restructuring, they require attention at a broader level than does PPI and they are not the direct responsibility of the PPI implementing agency. Moreover, although labor market reforms ease the PPI process, they often take time. Because governments usually cannot delay PPI until labor market reforms are completed, labor restructuring strategies need to be designed in ways that take into account existing labor market constraints. In some cases these actions themselves can become a catalyst for undertaking the broader reforms.
Relatively rigid labor markets will slow the process of postreform adjustment.
The experience of two transition economies in Central Europe, Estonia and Slovenia, illustrates the consequences of different approaches to labor policies. In the early years after the fall of Communism in Central Europe, Slovenia took a highly interventionist approach with significant barriers to job termination, generous severance payments, generous support for unemployed workers, and efforts to support real wage rates. Estonia, by contrast, took a very liberal approach, with few barriers to job displacement or to new job creation and with modest severance payments, and gave little support to the unemployed and no effective wage floor. Unlike Slovenia, the government of Estonia also removed most barriers to foreign investment. These various measures led to markedly different adjustment paths and labor markets. The transition in Estonia led to a massive increase in worker flows out of some jobs and into others. Job destruction peaked at 10 percent per year in 1992 and 1993, but, with a lag of one year, job creation also surged to a 10 percent yearly rate. By 1994 the job creation rate exceeded the job destruction rate. By contrast job creation rates in Slovenia usually remained below 1 percent per year, although job destruction rates ranged from 3 percent to 8 percent.
Source: Orazem and Vodopivec 1996.
Issues of labor flexibility may arise if the PPI manager needs to negotiate changes in labor contracts.
Managers in implementing agencies can draw on the lessons of experience from many sectors and countries.
In alignment with policies aimed at creating jobs in the private sector, the development of specific labor programs as part of the PPI effort can do much to secure support and mitigate the social costs of reform. Many countries around the world already have successfully managed major labor adjustment programs as part of the PPI process and there is a substantial body of international experience from which to draw.
There is no one approach to addressing labor issues in PPI. Every country and every transaction is different. Much depends on the political, economic, and social conditions, as well as on the nature of the enterprise and the sector in which it operates. Nevertheless, several general lessons emerge from the experience:
These lessons are discussed in detail in the subsequent sections of this module. The module shows that although labor issues are complex and challenging, they need not be an obstacle to PPI. With clear objectives, careful planning, and adequate resources, labor issues can be handled effectively while implementing government policy on the future of infrastructure.
The main steps involved in developing and implementing labor programs are dealt with in the subsequent sections of this module:
