Public employees often enjoy a range of nonwage benefits that tend to be both greater in quantity and different from those that are more typical of the private sector. As mentioned in the pay section, PPI tends to lead to monetization of nonwage benefits as they are bought out. In addition, pension arrangements and other social provisions tend to change with PPI, and new benefits, such as employee shares, are sometimes introduced.
Most public sector pension plans are of a defined-benefit type, usually guaranteeing the worker a fixed percentage of final salary at retirement, as well as a lump-sum payment. Such arrangements also exist in the private sector in some countries, but are on the decrease; the trend is toward pension plans in which more risk is borne by the beneficiary and less by the employer (see module 5).
Privatization and major downsizing can have profound effects on the pension plans. Those workers who are close to retirement and who are made redundant would be entitled to immediate benefits, while the amount of contributions that flow into the plan in the future are significantly reduced. This could seriously affect the financial viability of the fund. Where the private investor is required to set up a pension plan for the work force taken over, as well as for new employees, the likelihood is that an accumulation-type plan will be established that is subject to investment risks and that has less guaranteed benefits than are provided under defined-benefit arrangements.
Pensions can be a major issue, especially where enterprises have offered generous defined-benefit (final salary) plans.
Housing, education, and other in-kind facilities were transferred to municipalities in some transition countries.
Pension arrangements are often a key issue in labor negotiations in the context of PPI. A report of an ILO bipartite meeting on privatization of municipal services (including electricity, water, public transportation, and other infrastructure sectors) noted that privatization often "entailed a lot of distress" for the workers affected:
The disappearance or reduction of pension schemes for which new employers had little regard represented one of the most dramatic consequences. Even where pension schemes were maintained, new upper limits had been set to qualify for benefits in countries such as Kenya, resulting in workers with fewer years of service leaving employment with no benefits (ILO 2001, p. 27).
However, the same meeting also heard that "social dialogue would provide agreed solutions to this dilemma in the form of provisions on early retirement, limited redundancy, aid to unemployed workers, and retraining." An example was given:
Prior to privatization of the electricity sector in Hungary, the trade unions had negotiated an agreement with the Government. It would transfer five percent of privatization revenue to a trade union managed fund in support of workers who left public companies in order to pay the differences between pensions and salaries in case of early retirement, and for a time to supplement unemployment funds beyond state provisions. Steps had also been taken to develop tailor-made training schemes, and the results had been so positive that Hungary had become a model for other countries of Central Europe (ILO 2001, p. 27).
Other examples of changes in pension arrangements both before and during PPI are described in module 5.
Workers in infrastructure enterprises may derive not only wage income from employment but also a "social wage" composed of many elements. Housing; health care; childcare and preschool education; and sports, recreational, and cultural facilities have been provided. The introduction of PPI may lead to changes in these arrangements.
For example, as part of their remuneration, railway workers in Côte d'Ivoire were covered by a health insurance program. The concessionaire who won the contract under the railway privatization program did not wish to inherit the plan, but was agreeable to establishing a new one. Under the latter plan, the cost of contributions is shared between the workers and the company, and the workers pay a larger share than they did before. Although on paper it is a worse arrangement for the workers, in practice the state employees' funds had been heavily in debt because the government failed to pay its contributions. Most employees no longer even applied to the fund for reimbursement of medical expenses. Now their entitlements are smaller on paper but they can rely on their being honored.
Also in Côte d'Ivoire the electricity concession company CIE set up three funds for its employees:
Firstly, there is a social fund designed to provide allowances for family events. Hundreds of workers have benefited from it each year since 1991.... There is [also] a savings and loan fund, which offers interest-free loans over periods of 12 to 15 months to workers who have saved for at least four months. Finally there is a collective investment fund by means of which compulsory wage deductions finance the acquisition of CIE shares. The shares are kept in an account which remains blocked until the employee leaves. The funds were widely shunned at the outset because the unions saw them as a kind of paternalistic balsam. However, the annual report for 1995 talks of growing use. The savings and loan fund alone has made 9,000 loans (Plane 1998).
The extent of the challenge has been much greater in the "transition" (formerly centrally planned) economies and especially in one-company towns and rural areas. In Russia, for example, enterprises were responsible not only for a range of mandatory benefits, such as sick pay, maternity allowances, and paid vacations, but also for a number of in-kind benefits (for example, kindergartens and recreational facilities). In the case of in-kind benefits, or "social assets" as they are known, the general policy has been to "municipalize" them. The results, and the impact on workers, however, have varied greatly (box 2.9).
PPI tends to bring more focused organizations, flatter structures, and simpler labor contracts.
The Russian privatization legislation required that in-kind benefits, such as housing, health care, kindergarten, and a range of sports, recreational, and cultural facilities, transfer to the municipality (which had the discretionary power to privatize them instead). The policy was intended to maintain services seen as important to social justice while it relieved entrepreneurs of responsibilities to which they were not suited and that would have undermined their financial competitiveness. Enterprises were expected to increase wages as a result of the savings achieved.
In general, however, municipalities lacked the funds to maintain the same levels of services, or in some cases to maintain them at all. This lack was dealt with in a variety of ways. In some cases the enterprises continued to fund the services, at least in part. In many of those cases they did so willingly, perceiving some of the services concerned to be a better financial option than shedding them, in which case pressure for higher wages would have been correspondingly greater. To do this while complying with the legislation requiring transfer to municipalities, some enterprises rented services back from the municipalities.
From 1992 to 1996, this scheme proceeded quite rapidly but with a variety of effects, and in the latter part of the 1990s the difficulties that had arisen led to increasing numbers of conflicts between enterprises and municipalities and a slowing down of the process of transition. One frequent difficulty was the decline in the scale and quality of services because of the lack of resources. A survey of 92 enterprises in five Russian cities, conducted by the European Union's Technical Assistance to the Commonwealth of Independent States project, revealed that workers in most of the surveyed enterprises experienced their access to housing as having declined–"markedly" in 44 percent of cases. About half of the workers said cultural services had declined, and about a third felt their health, kindergarten, and sports services had deteriorated. In most cases, however, enterprises said they had not realized savings that enabled them to increase wages.
The principal source of these problems was that municipalities did not have the resources to keep the services going properly or even at all. At the same time a large minority of the enterprises that had yet to transfer the assets said they would prefer to keep them, and most wanted to keep recreational, sports, and cultural facilities, in both cases because they represented important benefits in lieu of wages. However, fewer enterprises wanted to retain responsibility for health services and childcare services.
According to one account, "The survey shows that, contrary to earlier expectations, municipalization of the social assets of the majority of enterprises has not translated, in the current economic environment, into a significantly improved financial state and higher competitiveness. Only 15 percent of enterprises which divested their social assets estimated the subsequent positive changes as significant."
Source: Vinogradova 2002, p. 197.