The primary strategic decision is whether the government or the private sector should undertake labor restructuring. There is no one right approach and countries have followed different strategies, depending on the timetable and urgency of the private participation in infrastructure (PPI) as well as on the nature of labor issues at the enterprise level. There are three options:
In theory arguments can be made that labor restructuring is best left to the new private investors who:
Examples of PPI arrangements where labor restructuring was investor-led are Argentina's gas transmission and distribution company and Guyana Telecommunications Corporation (box 4.1). This strategy is most likely to work in situations with modest initial levels of overstaffing, a high-growth sector (for example, telecommunications), no severe labor opposition to reform, and locations with effective job markets into which displaced workers can move.
Argentina: Gas del Estado
When Argentina's natural gas transmission and distribution company, Gas del Estado, was privatized in 1993, the work force of 10,273 was not reduced. The enterprise was broken up into 10 new companies, employees were allocated to each company, and employee restructuring was left to the new owners of these companies. By December 1993 the work force in the companies had been reduced by 32 percent to a total of 6,958. Workers who were retained benefited from shares, salary increases, and performance-related pay.
Guyana Telecommunications Corporation
In June 1991 an international investor paid US$16.5 million for 80 percent of the shares of the Guyana Telecommunications Corporation. It was recognized that the company had to trim its staff to reduce overstaffing and cut costs. After privatization the company embarked on an action plan to assess the human resources needs of the organization, especially those required to implement its expansion plan successfully.
The action plan was executed in two phases, the first of which was introduced immediately after privatization. It lasted 3 months and involved the following activities:
The second phase (3 to 12 months) involved:
The result of this restructuring exercise was a reduction in the work force from approximately 1,100 to 600 employees. A key to the success of this significant cut was the package offered to all employees. The package consisted of a salary increase of about 90 percent for those who were retained and compensation equivalent to 22 months' salary for those who were let go.
Sources: Hinds 1995, Shaikh 1996.
There are four circumstances where government involvement in labor adjustment can be helpful.
Although restructuring led by the private sector is the preferred route, there are four scenarios in which government will likely need to be involved in labor adjustment:
In any of those cases, only government action may be able to unblock potential labor problems quickly and avoid delays in PPI.
A shared approach provides benefits where government deals with a large part of the surplus work force before PPI, and the investor is able to fine-tune the process post- PPI.
Where PPI plans are still in the making, government can take steps to reduce the work force through a variety of options, including natural attrition, a freeze on recruitment, the phasing out of pensioner workers, removal of ghost workers, voluntary departures, and compulsory redundancy. The privatization of telecommunications in Tanzania is one example (box 4.2) where work force reduction took place over a three-year period under government ownership prior to privatization. Another example of preprivatization work force restructuring is that of Eskom, South Africa's electricity utility (which will be discussed in another context in box 4.6).
The government of Tanzania decided in 1996 to include utilities in the list of stateowned enterprises to be considered for privatization. The Tanzania Telecommunications Company Ltd. (TTCL) was then selected as the first of the utility state-owned enterprises to be divested.
In June 1997 TTCL had some 96,000 lines connected to its network, with annual growth of 3.4 percent and a waiting list of 84,000 lines. The company employed just over 4,688 workers in 1998. Between June 1998 and October 1999 TTCL reduced the number of employees to 3,720, mainly through attrition, restrictions on new employment, and early retirement.
In 1998 a firm of consultants, which was engaged to audit TTCL, recommended a further staff reduction of 1,659 employees. The company decided against forced reduction and instead took the route of a soft option that involved a continued program of attrition, restrictions on new employment except for prospective employees with critical skills, early retirement, and voluntary redundancies. The voluntary departure package was negotiated through the Communication and Transport Union and essentially provided for 6 months' pay for up to 6 years of employment, 18 months' pay for 6 to 10 years, 24 months' pay for 10 to 25 years, and 30 months' pay for up to and above 25 years.
The TTCL divestiture program was expected to take two years beginning in 1998. Privatization would involve the sale of new shares, giving the investor a 35 percent equity stake as well as management control. TTCL's teledensity was less than 0.04 percent, and government policy called for an increase to 6 percent by 2020. The result was that the expansion program was initiated simultaneously with the privatization program. The market for mobile phones was also liberalized, and three mobile licenses were issued in 1998.
In implementing the program to reduce staffing in preparation for privatization, noncore activities were first unbundled from the core business. The program of expansion also allowed for some workers to be redeployed in the construction division. The net effect was that the company retrenched only 802 workers and most of these employees were severed through the plan negotiated with the unions. Slimming down the work force occurred over three years without largescale, one-time severance resulting in vast numbers leaving the company at any one time. Because there was no termination of large groups at any time, the program did not attract negative criticism from the press or politicians.
The new strategic investor continued the expansion program that was established in the sales agreement based on the roll-out obligation of 800,000 lines within four years. The company was able to improve its labor productivity significantly while preparing for privatization without most of the negative consequences associated with utility labor retrenchment programs.
The expansion of the mobile operators (five mobile licenses issued by 2001, including one to TTCL) resulted in more than 300,000 mobile connections by December 2001. Many of the workers leaving TTCL were able to find alternative employment with the new mobile operators, which illustrates also that labor retrenchment is easier in industries going through technological changes and rapid expansion.
Source: Parastatal Sector Reform Commission, Tanzania.
Although government has an important role to play in these cases, there are also some risks associated with government management of labor adjustment. Those risks include the following:
Government-led work force restructuring usually deals only with part of the work force, but there are occasional examples where governments have decided to make all workers redundant and settle all labor liabilities prior to PPI. That was the case in the concessioning of Malawi's railway and of Zambia's rail sector (see box 4.3).
When the Zambia Privatization Agency (ZPA) and the Zambia Railways Corporation (ZRC) considered strategies for labor adjustment as part of a plan to privatize the operations of the railway, a combination of factors indicated that all 1,650 of its workers would receive redundancy payments–even those who kept their jobs. Those factors were:
Those circumstances meant that almost all workers were likely to leave the company rather than join the new operator, who would start with no experienced staff. Government decided to consider offering redundancy to all workers, but there was a financing problem with that idea: government could not afford the costs of retrenching 1,650 workers, although it could finance the retrenchment of the 650 or so workers estimated to be in immediate surplus (that is, the new operator was likely to require only about 1,000 workers). ZRC and ZPA commissioned a consultancy to meet with trade unions and help develop the options. This consultation process led to a revised plan that all workers be offered retrenchment as follows:
Source: Zambia Privatization Agency, Zambia Railways Corporation.
A mixed approach by which both government and the PPI investor are involved can help overcome the problems of leaving restructuring entirely to the government or to the private sector. In such an approach work force restructuring is implemented in phases:
This shared approach offers the additional advantage of reduced cost to the government because the incoming investor may pay for further adjustments. In the shared approach both the government and the investor contribute to the costs and the decisionmaking involved in work force restructuring.
An example of a mixed approach is Argentina's rail privatization, in which most of the 70,000- worker reduction was undertaken as part of the privatization process. Part of the reduction was privately financed, however, by the operators of the San Martin and Urquiza concessions. They began operations with a combined work force of 2,700 (compared with the previous public enterprise [Ferrocarriles Argentines] total of 8,800) but reduced that force even further to 1,700 at a private cost of US$10 million (Ramamurti 1997).
Another example is that of the Manila water concession, which provided early retirement to undertake a preconcessioning reduction followed by a probationary period of employment (see box 4.4). That mix allowed the new operator time to make its own assessments of the employees and protect the interests of employees.
Table 4.1 summarizes the advantages and disadvantages of the main choices on labor restructuring responsibility. Irrespective of who undertakes work force restructuring in preparation for PPI, labor adjustment will be a continuing process, not a onetime event.
Overstaffing at the Metropolitan Waterworks and Sewerage System (MWSS) in Manila was addressed in two phases. Prior to privatization MWSS implemented an early retirement program that was used by about one-third of the work force. The remaining employees were absorbed by the concessionaire with a six-month probationary employment period. After that period the employees became permanent or were separated. The concessionaire ended up with a regularized work force of 4,300 employees, equal to slightly more than half of the preprivatized work force. Of the total number of retrenched employees, only 100 or so were involuntarily separated. The process was facilitated by an attractive voluntary retirement program, the main components of which added up to payments that were significantly more than they would have received if they were to have retired on the standard government retirement package. Training and work opportunities (including outsourcing) were provided for those who left the company. All rounds of separation were designed to be equivalent to each other. The estimated cost of the early retirement packages was P1.1 billion, or about US$44 million. Labor productivity improved significantly as a result of the privatization.
Source: Dumol 2000.
| Responsibility | Advantages | Disadvantages |
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| Government: The implementing agency or government takes responsibility for labor work force restructuring before the PPI transaction. |
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| PPI investor: All labor restructuring takes place after PPI transaction. |
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| Shared approach: Some pre-PPI work force restructuring undertaken by government, with the rest left to the private sector after PPI. |
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