Labor Toolkit

Labor Reform and Related Social Issues


An effective workforce rationalization plan must be built on accurate and relevant information and must consider the full range of rationalization alternatives, not just dismissals.

The design of a port labor rationalization plan and program is one the most important phases of the overall port reform process. To be designed correctly, the plan and associated programs should be based on detailed, reliable information on the port enterprise, the workforce, and local markets. In this respect, it is useful to review the lessons learned from previous government labor rationalization programs.

Before developing a rationalization plan, the labor reform task force should assemble the following information:

In developing a realistic labor rationalization plan, appraising the local labor market situation and conditions will be as important as assessing the specific enterprise being restructured.

Displaced workers will need to be reintegrated into local and regional markets. To facilitate their reentry, the labor reform task force will have to gather information about and carefully consider the following factors:

This information should be available to all parties affected by port reform because it will become the basis on which many decisions will be made.

Alternatives to Dismissals

Too often, labor rationalization has been equated to wholesale dismissals. Labor forces can be rationalized in a number of ways, however, and the immediate dismissal of employees is not always necessary. In a climate of cooperation and mutual respect, labor and management have been able to implement agreements involving flexible work arrangements that preserve jobs or reduce the workforce through means other than involuntary dismissals. Some of these arrangements and measures include:

Each of these alternatives merits careful consideration in the development of a labor rationalization plan. Box 12 describes one company’s approach to labor rationalization.

Elements of a Staff Retrenchment Program

Measures such as the flexible work arrangements described above may prove insufficient to attain workforce reductions needed to make the port enterprise commercially feasible or attractive to new investors. In such cases, policy makers have to adopt other measures. A staff retrenchment program is an option that permits governments to reduce large numbers of workers in an operationally rational and socially responsible manner. To be viable, this kind of solution should be the result of negotiations with trade unions or workforce representatives. Such programs typically include various measures aimed at cushioning the adverse affects workers may suffer as a result of dislocations.

The main components of a staff retrenchment program normally include:

Pitfalls in Designing and Implementing Severance Packages

Retrenchment efforts involving significant staff reductions often face considerable political opposition. As noted above, to overcome opposition and to fairly treat public employees who lose their jobs, governments often offer severance pay to those workers forced to leave public employment. But problems in the design and implementation of these compensation schemes often reduce their efficiency and may not achieve their objectives.

Potential problems include:

How do ports accurately measure the portion of the labor force that is excessive? Typically, a government- or state-owned enterprise, allowed to restructure on its own, may cut more workers than is socially optimal, particularly if the cost of downsizing is borne by another agency. When wages are higher in the public sector than in the private sector, governments tend to overestimate redundancies. Cuts are also exaggerated when employment in a given government agency affects the earnings of those it does not employ; for instance, in communities where the government agency being reformed is the primary source of direct and indirect employment. However, agencies tend to underestimate the number of necessary redundancies when heavily subsidized by the general budget. Although each port’s situation is unique, applying certain rules of thumb can help ports and governments identify where they may be overstaffed or where their productivity significantly trails other ports. Box 13 identifies a number of these benchmarks.

From a financial point of view, shrinking bloated governments appears to be a very profitable undertaking, even when employees get substantial severance pay. Practice shows that if employees are given two to three years of salary to leave, for example, then in a mere two years the money spent is recovered through cost savings and productivity improvements. However, research has found that governments must take care to avoid losing the best employees, so as not to have to rehire them later.

Ironically, severance packages often have the adverse effect of inducing the most productive people to leave. Quite often, the best public employees have to be rehired, an expensive way of getting back to “square one.” World Bank research has found substantial rehiring in about a quarter of the surveyed retrenchment programs. What, then, are the best mechanisms for shedding redundant public sector workers? If severance packages are offered to induce voluntary departures, how should they be designed to minimize the total cost? And are there ways to structure such packages to induce to least productive employees to depart while encouraging to most valuable employees to stay?

Too often, severance pay is offered indiscriminately, without an overall plan for continued operations. Some public sector employees take the package, others stay, and only later do governments know which personnel and skills remain. The sequence should be reversed, first identifying the services to be cut or transferred to the private sector; second, identifying the specific overstaffed jobs; and meanwhile enforcing work hours and attendance recordkeeping to chase away “ghost” workers. Only then should those specifically targeted to leave be offered a severance package.

Tailoring severance packages to observable characteristics, such as age, education, number of dependents and the like, may substantially reduce the costs of downsizing. Care must be taken, however, not to discriminate against particular categories of personnel in a manner contrary to human rights and labor law.

Usually, the packages involve a multiple of the separated worker’s current salary in the public sector, the multiple being related to seniority. But these packages tend to overcompensate the people who accept them. World Bank research estimates overcompensation in selected countries at about 20 percent.

To keep the best employees, the research findings suggest developing a menu of alternatives to the standard severance package. For instance, public employees could be given the following choices: (a) keep their jobs; (b) leave and get severance pay; or (c) keep their jobs, but with a higher salary and on a fixed term contract. This last option would help retain the more productive public employees who have good outside alternatives and are not afraid of losing their jobs. Without the third option, those employees would tend to take the severance pay and leave.

Box 14 depicts a decision tree that can help port reformers carefully think through the process of workforce rationalization.

Rationalizing the Workforce: When and By Whom?

Workforce rationalization can take place at a number of points along the path to port reform and, depending on when it takes place, can be implemented by either the government or by the private sector. There are pros and cons to each of the various approaches.

Prereform Rationalization

Having the government initiate workforce rationalization prior to reforming other elements of port ownership and operation in most cases has several advantages:

At the same time, having the government initiate workforce rationalization prior to reforming other elements of port ownership and operation can have drawbacks, including:

Postreform Rationalization

Delaying workforce rationalization until after other port reforms have been implemented also has strengths and drawbacks.

On the positive side, delaying workforce rationalization until after other port reforms have been implemented means that decisions in this area will be made by private sector concessionaires and investors who are efficiency minded and profit oriented. This, in turn, suggests that their decisions about workforce restructuring will be more attuned to operating needs and customer demands.

On the negative side, forcing the new concessionaires and investors to implement workforce reform can significantly increase the uncertainty and risk associated with the reform initiative. This, in turn, can scare away potential bidders and result in a lower concession or selling price for the government. In addition, port labor might be inclined to pursue work actions against a private employer more readily than against a government employer. Indeed, in some countries it is illegal for public employees to engage in work stoppages and other disruptive work actions.

In cases where overstaffing is not an issue and significant downsizing is not required, it is generally preferable for the new operator and investor to assume the task of rationalizing the workforce. This situation would be unlikely to occur in seaports, however, especially those in developing countries. Indeed, seaports have served for many years as natural shelters to avert unemployment and as a source of political patronage for various public administrations.

Thus, the question for policy makers is: What is the maximum number of workers the prospective concessionaire can be asked to employ without undermining the entire port reform initiative? If too many workers are imposed on the new concessionaire, the business proposition will be less attractive. As a result, few competing bids may be submitted and the sales price or the concession fee most probably will be significantly discounted.

A new terminal operator typically prefers to have the freedom to determine the firm’s required number of staff and skill mix. The government will normally have an interest in the new terminal operator absorbing the highest possible number of workers. In many instances a compromise is reached between the two, but the new terminal operator should be given the option to further adjust the workforce size and composition, which may lead to further dislocations postreform.

For example, in Argentina in 1991, concessionaires of the five terminals at Puerto Nuevo, Buenos Aires, were required to employ 1,350 workers from the public agencies previously operating at the port, or to negotiate an equivalent number of redundancy agreements. The number of workers assigned to each concessionaire was based on the business plan submitted in the bid. For example, 130 workers were assigned to Terminal Five, but most of them were offered and accepted severance packages only a few months after the new firm started operating. Out of the 218 workers assigned to Terminal Three, 119 of them were offered and accepted severance packages. Of the 900 workers assigned to Terminals One and Two, in May 1999, only 419 remained with the firm. Severance payments ranged from $15,000–$20,000 per worker.

The terminal operators at the Port of Buenos Aires preferred the compensated dismissal option to retaining an oversupply of workers. This was due in part to the distorting gaps in wages and length of vacation among workers performing the same tasks. Because of their longer length of service, former public sector workers were entitled to higher salaries and extended periods of vacation compared to new private sector hires. In addition, at an average age of 50 years, most of the transferred public sector workers were “worn out” as a result of having worked in the old port under difficult and, in some cases, hazardous working conditions.

Who Should Pay for the Expenses of Port Labor Rationalization?

The expenses associated with downsizing could amount to millions of dollars depending on the number of workers, levels of set compensation, and safety net components such as training and outplacement assistance. Many countries have recognized the convenience of reducing the workforce prior to private sector participation in state-owned enterprises, but offsetting the expenses related to labor reduction has been a difficult task for many governments, especially in view of pressing budgetary constraints.

For the government of Mozambique, for example, the staff rationalization component, which included staff reductions of approximately 14,000, pension fund payments, staff redeployment, and social mitigation as part of the Mozambique Rail and Port Restructuring Project in 1999 was estimated to cost the government $50 million. Compensation paid to workers laid off in Chilean ports as a result of the deregulation of dock labor in 1981 amounted to a total of $30 million. Payments per worker averaged $14,300 and ranged between $10,000 and $200,000. In 1991, the government of Colombia provided $50 million to compensate 8,000 Colombian dock workers for the loss of acquired rights. The restructuring of Venezuelan ports in 1991 led to the layoff of 10,279 dock workers and 2,000 officials in the National Ports Institute. All received double compensation from the government of Venezuela, amounting to $182 million overall, or $14,822 per person.

When considering whether and how to pay such sums, governments have to contrast these expenditures with the broader long-term goals of port reform, which are to make ports more efficient and cost effective in support of the overall economy. Therefore governments, as former employers, and the private sector, as new employers, both have an important role to play in the financing of the expenses associated with port labor reductions. Actually, it could also be possible, in view of the benefits to be expected from a quick resolution of the issue, to ask port customers (shipping lines, for instance) to contribute to the modernization costs through a temporary levy on tariffs.


How To Use The Toolkit


Framework for Port Reform

The Evolution of Ports in a Competitive World

Alternative Port Management Structures and Ownership Models

Legal Tools for Port Reform

Financial Implications of Port Reform

Port Regulation:
Overseeing the Economic Public Interest in Ports

Labor Reform and Related Social Issues

Context for Labor Reform

Key Labor Issues

Labor Involvement in Port Reform

Organizing to Address Labor Reform: A Task Force Approach

The Institutional Framework for Labor Reform

Developing the Workforce Rationalization Plan

International Support for Labor Adjustment

Postreform Labor Management Relations

Annex I and II

Implementing Port Reform


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