The PPI implementing agency usually does not have a completely free hand when developing options and strategies for a labor program. Labor laws and the legal status of the enterprise and its employees prior to PPI often restrict the choices that are feasible, while political considerations can strongly influence decisions on employment protection for workers in the PPI bidding process.
The strategies and options open to the implementing agency may be constrained by legislation, so an early task for the implementing agency is to review the legal framework for dealing with labor issues (summarized in table 4.4), so that:
| Legal instrument | Features |
|---|---|
| National constitution |
|
| Primary law |
|
| Secondary laws, regulations |
|
| Commercial contracts |
|
| Labor contracts and agreements |
|
| International agreements |
|
| Informal instruments |
|
Any changes in labor laws need to be appropriately sequenced with wider legislative change in support of PPI. In Mexico's rail privatization, for example, constitutional and legislative changes to permit private participation preceded guidelines on labor relations (box 4.10).
Mexico's railway privatization required changes in the legal framework from the Constitution to various regulations, several of which affected the treatment of labor in the course of restructuring and PPI.
The first step in the railway restructuring strategy was a presidential proposal and approval by Congress to modify the constitutional mandate that declared a state monopoly in railroad transportation. The next step, taken in April 1995, was to create by presidential decree a Comisión Intersecretarial de Desincorporation to be responsible for the privatization project. In May 1995 the Regulatory Law of the Railroad Service was published to establish the basic regulatory framework. It defined the mechanisms and rules for awarding the concessions, the concession period (50 years), and the regulatory framework. The law restricted foreign participation in the rail concession companies to 49 percent, but did not include any requirement to transfer the existing rail work force to the new businesses. It did, however, include a commitment to training the workers who remained in the company. In June 1995 a restructuring committee was set up to oversee the railway privatization.
In November 1995 the government issued guidelines that acknowledged the important historical role of the labor union and the workers and committed the government to respect all of their labor rights. The guidelines set out the general approach to dealing with personnel issues, but its only firm requirement binding on the concessionaires indefinitely concerned the licensing of locomotive drivers (laying down the qualifications required of drivers, their training, and examinations to which they would be subject). In addition there was a major renegotiation of the labor contract which was streamlined from 3,045 clauses to just 211. More than 1,800 clauses were eliminated and the rest introduced into bylaws
Source: Lopez-Calva 2001.
The legal review may suggest that labor laws and contracts need to be amended as in the following examples:
When Argentina privatized air and rail transport, it was necessary to change some laws to amend contracts of employment. For example, pilots, flight engineers, and cabin staff were not merely covered by the general minimum conditions of employment applicable in the public sector under the Labor Contracts Act, but also by provisions originally enacted for the Argentine Air Force concerning flight safety. Those flight safety regulations imposed limits on operating hours and guaranteed rest breaks aboard aircraft and on the ground, depending on the type of aircraft. A decree of 1994 introduced greater "flexibility" into conditions of work and employment and in this respect went along with the general trend toward reducing minimum legal standards, but maintained compliance with international standards established by the International Civil Aviation Organization. In the case of rail, collective agreements were concluded between workers' unions and the concession companies, but the air companies were more reluctant about collective bargaining and they implemented changes with little negotiation.
In both sectors, however, the outcomes were contractual changes to enable management to deploy workers more flexibly, both by extending permitted working hours and by getting rid of restrictive practices that limited the work that could be done by particular grades of workers (except insofar as international standards required tight specification, as with pilots and flight engineers).
Source: Coradetti 1999.
Laws and regulations relating to the continuity of workers' rights and benefits will also require attention. The terms and conditions of employment in some PPI enterprises are relatively high compared with those in other private sector or public sector employment. Continuation of those terms and conditions can therefore be an important issue in the PPI process. Many privatization laws are silent on labor issues and workers' rights, and effectively give freedom to the new owners to negotiate work force numbers as well as terms and conditions within the limits provided by the general labor code. Sometimes, however, workers' rights are protected as part of the privatization legislation. For example:
The Law on Privatization of Property in Turkmenistan includes a section dedicated to "Guarantees for Personnel of Enterprises Stated for Destatization and Privatization," which not only requires collective bargaining but also establishes certain property rights for employees in the enterprise. It provides that:
The legal assessment (see terms of reference for a legal review on the accompanying CD-ROM) should determine whether existing rights will be protected as an acquired right for a particular PPI arrangement. In some cases this may require legal interpretation. In civil-law countries the specific enterprise law, the labor code, the commercial code, and administrative law (government law) may have to be reviewed and a judgment may be required if there are inconsistencies among them. In common-law countries the circumstances in which such rules apply can evolve through case law. This has happened in the European Union, where litigation by unions established that acquired rights had to be transferred in the event of contracting out as well as mergers and acquisitions.
The CD-ROM that accompanies this Toolkit contains:
Employees' status, benefits, and employment contracts change as the legal basis of the PPI organization changes from departmental enterprise, public corporation, joint stock company, and then into a private company.
During their preparation for PPI, infrastructure organizations are often subject to fundamental institutional changes that affect the status of employees, as described in table 4.5. A typical first change is when a departmental enterprise is transformed into a state-owned corporation, often through a specific act. Workers cease to be civil servants but remain public sector employees. Although there are usually greater freedoms than in the civil service, benefits and human resources policies often remain linked to those of the civil service and there is only limited delegation of employment policies to the corporation. Another change is the legal transformation (corporatization) of a statutory corporation to a joint stock company in which the government's role changes to that of a shareholder and the company is governed by the laws regulating private companies. Although human resources policies still retain public sector characteristics, labor contracts and pay structures become more flexible, with greater autonomy at the enterprise level. The major change in PPI is the move from public to private ownership where workers cease to be public sector employees.
| Type of PPI entity | Departmental enterprise | State-owned corporation | State-owned company (wholly owned) | Private company |
|---|---|---|---|---|
| Relevant institutional legislation | Civil service regulations or civil service law | Act of parliament establishing statutory corporation | Joint stock company with 100 percent of shares owned by the state; subject to normal company laws and corporate code (including bankruptcy) | Joint stock company; subject to normal company laws and corporate code (including bankruptcy) |
| Employee status | Civil servant | Public sector employee | Public sector employee | Private employee |
New Zealand rail is a good illustration of an infrastructure company in which the institutional organization has changed over time, paralleled by changes in employee status (box 4.13).
The status of workers in the New Zealand rail sector has changed several times. In 1982 New Zealand Rail was converted from a departmental enterprise where workers had civil servant status to a statutory corporation (New Zealand Rail Corporation [NZRC]) where workers were public servants. Subsequently the entity was again changed when it was converted from a statutory corporation in 1990 to a public limited liability company (where staff continued to be public servants). Finally, in 1993 New Zealand Rail Ltd. shares were sold to private interests. The employees' status then changed from public sector employee to private sector employee. There also were changes in the labor contracts. Until 1986 employees of NZRC continued to be guided by the central civil service conditions of employment. In 1987 NZRC came under the legislation applicable to SOEs that made NZRC independently responsible for bargaining over its own labor relations contract. The key changes were:
Nevertheless the contract as a public servant up to 1992 still retained many aspects of the state sector model in respect to hours of work, overtime payments, and penalty payments. Following privatization in 1993, however, under the Employment Contract Act, New Zealand Rail Ltd. as a privately owned company was able to make further changes to the labor contract:
A lump-sum payment was also made to those workers who lost out from the changes to the overtime, penalty, and allowance payments.
Source: Kopicki and Thompson 1995.
These changes are important for the PPI process. It will be clear to most parties that corporatization in particular is a possible preparation for private participation. Any changes in employee status, pay, benefits, and conditions that are agreed to as part of the broader institutional change while the enterprise is still publicly owned are likely to be preserved throughout the process to PPI. Trade unions are aware of this, and the implementing agency should be prepared to face tough negotiations and industrial action prior to PPI itself. Two examples from the telecommunications sector are summarized in box 4.14.
France Telecom–Preprivatization Institutional Changes
Before 1991 France Telecom was a central government, autonomous, public law enterprise. In preparation for privatization, France Telecom had to be transformed to a joint stock company.
The change of status from a civil servant of France Telecom to an employee under the general labor code regime and the fear of layoffs related to privatization became stumbling blocks to the privatization, resulting in strong opposition and a number of union strikes. The government had to enter into negotiation with the unions, and at each stage of the negotiation additional concessions were made, including guaranteeing the benefits of civil service status and a commitment that the company would remain 51 percent state owned.
India Telecom–Labor Challenge to Corporatization
In 1999 the departmental enterprise providing telecommunications services in India, the Department of Telecom Services (DTS), was prepared for corporatization. The corporatization of DTS was strongly and consistently opposed by the officers and workers of DTS (about 360,000 total). A nationwide strike took place in September 2000. The strike's impact was widespread: It received strong media coverage and drew support from other central government unions. It disrupted telecom services severely throughout India for nearly a week–all telephone lines, cellular, mobile, and Internet services countrywide, and all manually operated telephone and telegraph services were affected.
The strike was ended with the government having remained firm on the need for restructuring of the sector and the need to privatize. In October 2000 DTS was corporatized and converted to Bharat Sanchar Nigam Limited (BSNL), a new wholly state-owned company registered under the Companies Act.
However, several concessions had been made to unions and workers, the most important of which were:
Sources: Guislain 1997; Adam Smith Institute, unpublished data.
Change of employee status and terms and conditions will require negotiation with trade unions and workers' representatives.
Two questions that frequently arise are whether to include employment conditions in PPI bids, and what types of conditions should be included. Should the PPI bidding process include employment guarantees by the investor, and should the evaluation of the winning bidder take into account labor-related criteria, such as the bidder's proposals for future work force restructuring?
The implementing agency can choose to set no employment criteria or conditions in the bidding documents, giving maximum flexibility to the private partner to manage labor issues. Alternatively, employment criteria or conditions can be included in the bidding process to protect employment and workers' rights, as in the following examples:
Bid conditions are usually more transparent than evaluation criteria. But although conditions and criteria are attractive from a political and social standpoint, the implementing agency often will recognize that they are not appropriate for the following reasons:
Although the preparation of bidding documents is an activity late in the PPI process, it is essential to consider bidding conditions in a strategic way at an early stage.
Argentina Rail
In the mid-1990s the government of Argentina restructured its railway into separate freight and passenger train networks, which were concessioned. The six freight concessions were issued first, and the bidding mechanism reflected both political compromises on employment and investment requirements. Bids for the freight networks were evaluated on the net present value (NPV) of the canon (annual concession fee) to be paid to the government, as well as on staffing levels, the quality of the business and investment plans, the proposed track access fee for intercity trains, and the share of Argentine interest in the consortium. The bidding process for freight concessions was perceived to be too complex and lacked transparency, however. The bid evaluation criteria were simplified in the subsequent issuing of passenger concessions. Those bidding documents defined the minimum services to be provided and a capital investment program, and bidding was based on the lowest level of government payment. Other criteria, including labor, were dropped.
United States–Municipal Wastewater Treatment
In 1996, intending to privatize its wastewater treatment service, the city of Buffalo, New York, invited proposals from three bidders and required them to set out what they would do with the existing labor force if they won the concession. Each company made a different offer.
One stated that the company "is committed to employing existing staff and making significant investment in the greater advancement of each of its team members." The company also undertook to extend the one-year no-layoffs pledge required by the city to five years, improving productivity instead through "our innovative approach to providing service level enhancements, and through 'insourcing' of minor capital improvements work, major corrective repairs and other services currently 'outsourced' by the board." In addition the company proposed to implement an extensive training program on process control, maintenance, safety, warehousing, purchasing, and cost control measures. They made no promises, however, about union recognition, bargaining rights, or maintenance of pay levels.
A second bidder also proposed a comprehensive program of employee training and development and promised to maintain employment and terms of employment at then-current levels throughout the period of their five-year plan as a result of a planned extensive meter installation program. While promising to meet all the financial costs of these commitments, the company's submission declared its assumption that all employees with more than 25 years of service, and therefore able to retire under the terms of the municipality's pension arrangements, would be enabled to take early retirement.
The third submission anticipated retrenchments, stating that it would seek to eliminate "no layoff" language in existing labor contracts in the course of negotiating terms and conditions with the union, which it undertook to recognize as its workers' bargaining agent. The company also said it would budget for a 3 percent pay increase, maintain medical payments for up to 18 months, provide training even for redundant employees, and offer other benefits. In addition to the difficulties of comparing the bids, the city noted that the more commitments on employment made within the submission, the higher their proposed charge for the contract to the city, so that the city itself was faced with the cost of the tradeoff.
Sources: Thompson and Budin, 1997; documents provided by AFSCME, the U.S. public employees' union.
The following guidelines on the use of labor criteria and conditions in the bidding process help address the tradeoffs between political/social desirability and efficiency:
Allowing bidders to submit alternative ideas on the treatment of labor makes it difficult to compare like with like.