Labor Issues in Infrastructure Reform - ISBN: 0821354701...This toolkit was made possible through...

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Labor Issues in Infrastructure Reform

A Toolkit

MODULES 2–7

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Labor Issues inInfrastructure Reform

A Toolkit

© 2004 The International Bank for Reconstruction and Development / The World Bank

All rights reserved.

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The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not neces-sarily reflect the views of the Public-Private Infrastructure Advisory Facility (PPIAF), or the Board ofExecutive Directors of the World Bank, or the governments they represent.

Neither PPIAF nor the World Bank guarantees the accuracy of the data included in this work. The bound-aries, colors, denominations, and other information shown on any map in this work do not imply any judg-ment on the part of PPIAF or the World Bank concerning the legal status of any territory or the endorse-ment or acceptance of such boundaries.

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ISBN 0-8213-5470-1

Library of Congress Cataloging-in-Publication Data

Labor issues in infrastructure reform : a toolkit / Public-Private Infrastructure Advisory Facility (PPIAF).p. cm.

Includes bibliographical references.ISBN 0-8213-5470-1

1. Public works—Management—Handbooks, manuals, etc. 2. Public contracts—Handbooks, manuals, etc. 3. Labor contract—Handbooks, manuals, etc.4. Public works—Personnel management. 5. Public works—Employees. 6. Public works—Costeffectiveness. 7. Contracting out. 8. Infrastructure (Economics) I. Public-Private Infrastructure Advisory Facility. II. World Bank.

HD3850.L23 2003352.7'7268—dc22 2003061161

MODULE 2LABOR IMPACTS OF PRIVATE PARTICIPATION IN INFRASTRUCTURE 1

Overall Trends 1Employment Impact 2

Factors in Employment Reduction 2Rail 3Ports 4Water 5Electricity 6Telecommunications 7Postal Services 8

Labor Productivity 8Pay 11Benefits 13

Pensions 13Other Benefits 14

Work Practices 14Working Conditions 14Subcontracting and Outsourcing 16Gender Impacts 16

Summary 18Additional Material (on the CD-ROM) 20Web Sites 20Other Materials and Sources 20

MODULE 3ASSESSING THE SIZE AND SCOPE OF LABOR RESTRUCTURING 25

Overview 25Staff Audits 27

Objectives 27Scope 27Collecting Personnel Data 28Collecting Information on Skills 29

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Contents

Benchmarking 33What Are Benchmarks? 33Sources of Benchmark Data 34Using Benchmark Measures 38Benchmarking Labor Costs 41

Work Force Analysis 43Objectives of Work Force Analysis 43Work Force Analysis Tools 43

Who Should Do the Assessments? 48Tools (on the CD-ROM) 50Additional Material (on the CD-ROM) 50Web Sites 50Other Material and Sources 50

MODULE 4STRATEGIES AND OPTIONS 45

Restructuring—Who Should Do It? 45Labor Restructuring by the Private Sector 45Labor Restructuring by Government 46A Mixed Approach 48

Menu of Options 48Sequencing of Options 51Soft Options 53

Payroll Management 53Enforcement of Retirement Age 54Enforcement of Disciplinary Proceedings 54Staff Transfers to Other Public Organizations 54Recruitment and Promotion Freezes 55Advantages of Soft Options 55

Workplace Restructuring 56Reducing Working Hours 56Placing Workers on Administrative Leave 56Reorganizing the Work Force 57Restructuring the Enterprise 58

Retirement and Redundancy 58Key Considerations in Developing Strategies and Options 60

Labor-Related Legislation 60Employee Status Prior to PPI 65Employment Protection in the Bidding Process 65

Strategies—A Decision Tree 68Tools (on the CD-ROM) 68Additional Material (on the CD-ROM) 68Web Sites 71Other Material and Sources 71

Contents

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MODULE 5KEY ELEMENTS OF A LABOR PROGRAM 73

Severance 73Statutory Payments 74Contractual Benefits 79Ex Gratia Severance Payments 80Adverse Selection and Targeting 88Implementation Issues 94Tools (on the CD-ROM) 98Additional MateriaL (on the CD-ROM) 99Web Sites 99Other Material and Sources 99

Pensions and PPI 99The Pension Challenge 99Types of Pension Plans 101Addressing Prior Pension Obligations 104Pensions and Labor Restructuring 111Future Pension Design 114Pensions: Implementation Steps 118Tools (on the CD-ROM) 119Additional Material (on the CD-ROM) 119Web Sites 121Other Material and Sources 121

Redeployment Support 121Design and Implementation of Redeployment Programs 124Counseling 136Job-Search Assistance 138Retraining 139Employee Enterprise 141Job-Creation Initiatives 143Tools (on the CD-ROM) 146Additional Material (on the CD-ROM) 146Web Sites 146Other Material and Sources 147

Employee Share Ownership 147Compensation Packages for Redundant Workers 148Shares as an Incentive or Reward 148Employee Share Ownership Plans 148Additional Material (on the CD-ROM) 150Web Sites 150Other Material and Sources 152

MODULE 6ENGAGING WITH STAKEHOLDERS 153

Fundamentals of Engagement 153Forms of Engagement 153

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Designing an Engagement Strategy 154Acquiring Engagement Skills 156

Communication 156Objectives 156Preparing a Communication Plan 157

Consultation 161Role of Consultation 161Methods of Consultation 162

Negotiation 163Steps in Negotiations 165

Cooperation 169Cooperation in Practice 169Circumstances that Suit Cooperation 170Tools (on the CD-ROM) 171Additional Material (on the CD-ROM) 171Web Sites 171Other Material and Sources 171

MODULE 7MONITORING AND EVALUATION OF LABOR PROGRAMS 173

Overview 173Assessing Financial Returns 174

Financial Costs—A Checklist 175Financial Benefits—A Checklist 176Financial Payback Analysis 178Discounted Cash Flow Analysis 179

Assessing Economic Returns 180Rationale 180Economic vs. Financial Costs 180

Evaluating Labor Market Programs 183Constructing the Counterfactual Analysis 183

Assessing the Impact of Redeployment 184Assessing the Effects on Workers’ Welfare 187Assessing Overall PPI Benefits 188

Monitoring Labor Programs 189Tools (on the CD-ROM) 193Additional Material (on the CD-ROM) 193Web Sites 194Other Material and Sources 194

REFERENCES 195

FIGURES2.1 Employment in Côte d’Ivoire and Burkina Faso Rail, 1980–2000 42.2 Labor Productivity in South American Rail Companies 113.1 Structure of Performance Measures for Utilities 373.2 Sample Age Profiles 40

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4.1 Restructuring Options—A Typology 524.2 An Illustration of Sequencing 534.3 Strategic Choices in Labor Adjustment—A Decision Tree 705.1 End-of-Service Benefits in Orissa, India 785.2 Core and Supplementary Elements 1275.3 Moving from Supply-Driven to Demand-Driven Training 133

BOXES2.1 Popular Perceptions of PPI 22.2 Argentina—Job Losses in the Infrastructure Sector 32.3 Employment Reductions in Brazil’s Railways 42.4 Union Perceptions of Privatization’s Impact in Ports 52.5 Employment Growth in Mexican Ports 52.6 ILO Analysis of the Labor Impact of PPI in the Telecommunications Sector 92.7 Productivity Growth in Latin American Telecoms Following PPI 102.8 Service and Productivity Improvements at Trinidad and Tobago Post 122.9 Municipalization of In-Kind Social Benefits in Russia 152.10 Changing Work Practices in Mexico Telecoms 162.12 Outsourcing in Argentine Telecoms 172.11 New Working Practices in Côte d’Ivoire Electricity 172.13 Contracting Out and Equal Opportunities in the United Kingdom 182.14 Key Factors Affecting the Labor Impact of PPI 193.1 What’s the Minimum Data Set for a Staff Audit? 243.2 Nigeria—Conducting Staff Audits in the Civil Service 263.3 Middle East Airlines—Skills Mismatch 273.4 India—Unions and Reskilling in the Telecommunications Sector 283.5 British Rail—Loss of Institutional Memory 293.6 Benchmarking Definitions 293.7 Kenya—Internal Benchmarking in Power Distribution 293.8 Generic Labor Benchmarks 303.9 Sample Labor Benchmarks by Sector 303.10 Hints and Tips for Using Benchmark Data 363.11 Brazil—Work Force Analysis in Rail Privatization 384.1 Restructuring by PPI Investors—Argentina and Guyana 464.2 Tanzania—Telecommunications Work Force Restructuring 474.3 Zambia—Redundancy for All Rail Workers 494.4 Philippines—Use of a Mixed Approach through Probationary Employment 494.5 South Africa—Phased Reform in Electricity 554.6 Jordan—Tactical Staff Transfers at Aqaba Rail 564.7 China—Administrative Leave for Workers in State-Owned Enterprises 574.8 Argentina—The Success of a Voluntary Approach 594.9 Aeromexico—Liquidation and Labor Adjustment 604.10 Mexico Rail—How the Legal Framework Changed 644.11 Argentina—International Standards, National Laws, and Labor Contracts 644.12 Turkmenistan—Privatization and Employment Rights 654.13 New Zealand Rail—Changes in Worker Status 674.14 Telecommunications—Institutional Structures and Labor Adjustment 684.15 Experiences of Using Labor Factors in PPI Bidding 69

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5.1 Mexican Railways—The Daily Integrated Salary 795.2 Brazil—Reducing Payments for Older Workers 855.3 Earnings Losses after Retrenchment 865.4 Tanzania—Severance Policies in Port Concessioning 895.5 Problems with Case-by-Case Setting of Severance—Sri Lanka and Zambia 905.6 Challenges of Selection—Guinea and Sri Lanka 935.7 Sri Lanka—Experiences of Selection through Eligibility Criteria 935.8 Chile Rail—Severance Benefits and Rehiring Rules 955.9 Content of a Severance Manual 965.10 Regularizing Casual and Stipendiary Workers in the Orissa Power Sector 975.11 Morocco Rail—An Unsustainable Pension Scheme 1015.12 Privileged Pension Rights in Central and Eastern Europe 1075.13 Accounting Standards for Defined-Benefit Plans 1085.14 Tanzania Telecom—Pension Plan Restructuring 1115.15 Japan Railway’s Recurring Pensions Challenge 1125.16 British Coal—Negotiated Pension Agreements 1145.17 South America—Working with Trustees and Pension Advisers 1205.18 Brazil Rail—Worker Surveys in a Labor Study 1255.19 Ukraine—Profiles of Displaced Coal Mine Workers 1265.20 Tanzania—“Invisible” Service Providers 1275.21 Bolivia—The Emergency Social Fund 1355.22 Job-Search Assistance—Using New Technology 1395.23 What Happens in a Job Club? 1405.24 Retraining—Chile’s Program for Mine Workers 1405.25 Malawi—Road Maintenance by Displaced Workers 1425.26 Three-Point Checklist for Successful Public Works Programs 1445.27 British Coal—Responding to Mine Closure 1455.28 Shares as Incentives in Infrastructure Privatization 1495.29 Checklist for Successful ESOPs 1516.1 OECD—Defining Government–Citizen Relationships in Policymaking 1546.2 Italy—Ministerial Change Facilitates Negotiations 1566.3 Manila Water—How a Trip to Buenos Aires Improved Understanding 1616.4 Trade Unions and Consultation 1626.5 Ghana Port Reform—Working Effectively with Unions 1636.6 Engagement Strategies in the Privatization of Sri Lanka Telecom 1646.7 South Africa Rail Restructuring—Widening the Negotiation 1656.8 South Africa Transport Sector Negotiations—A “Long and Arduous” Process 1666.9 From Confrontation to Cooperation in Indianapolis 1697.1 Indicators for Cost-Benefit Analysis 1797.2 The Importance of Control Groups—A Hypothetical Example 1837.3 Example of a Redeployment Evaluation—PROBECAT, Mexico 1867.4 Possible Cost and Benefit Indicators for Redeployment Programs 1877.5 Impact of Downsizing on PPI Prices 1917.6 Monitoring and Evaluation Defined 1927.7 Severance and Redeployment: Some Monitoring Indicators 193

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TABLES2.1 Possible Effects of Privatization on Employment in Ports 62.2 Employment Numbers and Labor Productivity in Three Latin American Cities before

and after Private Participation in the Water Sector 72.3 Argentina Restructuring of Electricity Work Force after Privatization 72.4 Employment Reductions in Brazilian Electricity Utilities 83.1 Three Dimensions of Work Force Restructuring 223.2 Some Sources of International Benchmarking Information 323.3 Regional Comparative Performance Measures 343.4 India—Changing Labor Productivity at BSNL, Selected Years 353.5 Pros and Cons of In-house and External Consultants 424.1 Labor Restructuring—By Whom and When? 504.2 Administrative Leave and Reduced Work Schedules in Countries of

the Former Soviet Union 584.3 Advantages and Disadvantages of Early Retirement, Voluntary Departure,

and Compulsory Redundancy 614.4 Labor Issues Legal Framework 634.5 Institutional Reorganization and Changes in Employee Status 665.1 Some Examples of Statutory Termination Benefits 755.2 Advantages and Disadvantages of Standard Severance Formulas 815.3 Examples of Severance Formulas and Payments 815.4 Advantages and Disadvantages of Loss-Based Formulas 875.5 Advantages and Disadvantages of Uniform and Case-by-Case Approaches to Severance 885.6 Advantages and Disadvantages of Alternative Selection Approaches 915.7 Summary of Active Labor Market Program Evaluation Results 1235.8 What Works Best When? 1295.9 Mechanisms and Incentives for Redeployment 1316.1 Outline of an Engagement Strategy 1556.2 Communications Plan Template 1586.3 Example of a Media Audit—Picking the Right Tools for the Task 1606.4 A Checklist for Negotiations with Labor 1677.1 Financial Analysis—Key Questions and Tools 1757.2 Checklist—Financial Costs of a Labor Program 1767.3 Checklist—Financial Benefits of a Labor Program 1777.4 Economic vs. Financial Costs and Benefits 1817.5 Turkey—How Workers Used Severance Compensation 1897.6 Preferred Employment Status of Redeployed Civil Servants—Ghana 1897.7 Assessing Labor Programs—A Checklist of Potential Effects on Different Stakeholders 190

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OVERALL TRENDSPPI takes place in a changing global context thataffects all businesses and national economies.There is, however, widespread concern regardingits impact on workers.

Public service workers and their unions often dis-trust PPI, fearing that it will have negative effectson employment numbers, pay, terms and condi-tions, and relationships with management. Setagainst a background in which many state-ownedenterprises have provided their staff with employ-ment security, and terms and conditions much bet-ter than those enjoyed by equivalent workers inthe private sector, such anxieties are understand-able. Moreover, there is no shortage of document-ed examples to show that these fears are wellgrounded.

Labor reductions in the enterprise are a reality, andsome workers retained in some post-PPI enterpriseshave also experienced reductions in income andbenefits, especially those with skills for which sup-ply exceeds demand. Workers and unions havetherefore generally opposed privatization, conces-sioning, contracting, and other forms of PPI. And itis not only union leaders who believe that privati-zation has had a negative impact on labor and—more broadly—on income and wealth distribution.According to a recent study, such beliefs are grow-ing and becoming more widespread (see IDB 2002and box 2.1).

Does the evidence support such perceptions? Ingeneral, yes—but much depends on the initial con-ditions. In some cases workers have gained fromprivatization because new investments and dynam-

1

Workers and unionsare anxious aboutthe effects of PPI.Popular opinionshares many ofthose sameconcerns.

2Labor Impacts of Private Participation inInfrastructure

Agood understanding of the effects of private participation in infrastruc-ture (PPI) on the work force is essential for managers in the implement-ing agency. The purpose of this module is to provide the implementing

agency with an overview of the empirical evidence about what actually happensto workers in the process of PPI. This is valuable because the implementingagency has to deal with a variety of interest groups holding a range of beliefsand perceptions about what PPI will mean for them. Belief and perception areimportant because they drive the actions and reactions of all stakeholders andaffect the political and labor relations environments. They are often informed,however, by partial, distorted, or even false evidence.

MODULE

ic expansion have resulted in new job creation atthe enterprise or sectoral level, and because pro-ductivity improvements have led to better termsand conditions of service. Moreover, workers arealso consumers and their households will benefitfrom improvements in access and services.

The review of sector impacts in subsequent sectionsof this module also indicates that PPI itself is notnecessarily the only cause of adverse impacts onlabor. Any counterfactual assessment of the impactof PPI on labor must take account of levels oflabor adjustment that would have taken place any-way, perhaps as a result of new technology orstructural change in the economy through a shift to

services. Overall, the experience of the impact ofPPI on labor is more varied and nuanced than issuggested by the stereotypes.

There are significant differences between sectors,and underfunded public service organizations haveoften been unable to provide their employees withthe capital investment and new technology toenhance their work and productivity. Many publicemployers have held back improvements in salariesand wages rather than reduce staffing and paymore to those who remain, and that practice hasoften had an adverse effect on their ability torecruit and retain key staff. Some employers havedifficulties paying salaries at all, and a few haveeven looted employees’ pension contributions.

By introducing new capital and by restructuringhuman resources PPI can improve the earnings andworking environment of many workers, albeitoften by reducing the number of people directlyemployed, at least in the short term. In addition,efficiency improvements often lead to longer-termsecurity of employment, and—in some sectors—employment expansion.

Although it is important to be aware of the poten-tial and negative impact of PPI on labor, it is noless important to be aware of the wider picture sothat costs and effects can be accurately assessedand fairly attributed. Moreover, without funda-mental enterprise reform, infrastructure serviceswill continue to deteriorate in many cases, at highcost to consumers and users.

EMPLOYMENT IMPACTJob losses are the most obvious adverse impact onlabor. This section focuses on the impact of PPI onthe number of workers employed, beginning with abrief introduction and then examining the evidencesector by sector.

Factors in Employment ReductionPrivate participation in state-owned enterprises hasa variable impact on job numbers. There are sever-

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Impact assessmentalso should takeaccount of thecounterfactual: whatwould havehappened anyway inthe absence of PPI?

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Box 2.1: Popular Perceptions of PPI

At the heart of much of the criticism is aperception that privatization has beenunfair—hurting the poor, the disenfran-

chised, and in some cases beleaguered work-ers, and benefiting the already rich, powerful,and privileged. Privatization is seen as throwinglarge numbers of people out of work or forcingthem to accept jobs with lower pay, less securi-ty, and fewer benefits; as raising the prices ofgoods and services sold; as providing opportu-nities for the enrichment of the agile and cor-rupt, and generally making the rich richer andthe poor poorer.

The complaint is that, even if privatization con-tributes to improved efficiency and financial per-formance (and some contest this as well), it hasa negative effect on the distribution of wealth,income, and political power.

The negative perception is widespread andgrowing: 63 percent of people surveyed in thespring of 2001 in 17 countries of Latin Americadisagreed or strongly disagreed with the state-ment, “The privatization of state companies hasbeen beneficial....” The extent of disagreementwas much greater than in 2000 (57 percent) or1998 (43 percent). Over 60 percent of SriLankans interviewed in 2000 opposed the priva-tization of the remaining state-owned firms. Itwould not be hard to find other expressions ofpopular dissatisfaction with privatization, of asimilar magnitude, from the transition countriesin general and Russia in particular.

Source: Birdsall and Nellis 2002, p. 2.

al reports of positive net impacts of privatizationprograms in general. In the infrastructure sector,however, PPI is seldom associated with short-termincreases in employment in the enterprises directlyaffected and is more usually associated with short-run job losses. These losses can be substantialbecause of the large size of the enterprises con-cerned and the unusually high level of labor redun-dancy in many infrastructure enterprises (box 2.2).

Many factors play an important role in determin-ing the extent, pace, and timing of employmentreductions. Although there are numerous country-and enterprise-specific circumstances, some pat-terns exist. For example, sectors such as rail andports have generally experienced higher levels ofdownsizing than have the telecommunications andwater sectors.

RailOverall, the most severe impact of PPI on employ-ment numbers has been felt in railway enterprises.There are five potential explanations for this:

1. There is increasing competition from roadoperators. As road networks have developedand improved, trucking and bus operations

have become stronger competitors for railoperations. There are now few passenger orgeneral freight railways that are not subjectto competition from road transportation.

2. Technological change has brought a shiftaway from labor-intensive operations; forexample, more efficient diesel and electrictrains, improved ticketing systems, increaseduse of freight containers, or the mechaniza-tion of operations such as track tamping.

3. Some rail companies maintained their pro-tected monopoly status for many years andwhen that was removed, profound changesin operations, costs, and staff numbers fol-lowed.

4. Rail workers (along with mine workers) aresome of the oldest and most significantgroups of organized labor. In some countries(Argentina, for example) the unions were suc-cessful in preserving high levels of employ-ment until economic crisis enabled reform.

5. Rail has been often a vehicle for job creationand patronage.

The result has been high levels of downsizing. InArgentina, where the railway was restructured intoseveral separate freight and passenger networksand concessioned in 1994 and 1995, employmentfell from around 95,000 in 1989 to approximately17,000 in 1997. (In 1960 it had been as high as200,000.) The scale of job loss associated with railPPI in Argentina is typical for Latin America. InChile, where there had already been a cut of 75percent in the railway labor force between 1973and 1990, the number was halved again in thecourse of privatization from 1990 to 1995. Brazil’sexperience was similar (see box 2.3).

In Africa, rail PPIs have also been associated withsignificant reductions in employment numbers,although not on the scale of Latin America whereoverstaffing appears to have been particularly high.Figure 2.1 shows how the work force adjustmentin the joint railway of Côte d’Ivoire and BurkinaFaso took place at the time of a major restructur-ing exercise in 1988, and then again at the time ofPPI in 1995.

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There are very fewrailways that are notexposed tocompetition fromroad transport. Thisis one factor thatspurs restructuringof the rail sector.

Some of the largestreductions inemployee numbershave occurred inSouth American railways.

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Box 2.2: Argentina—Job Losses in theInfrastructure Sector

In Argentina, a recent review of five major pri-vatization transactions (telecoms, electricity,gas, water and sanitation, and energy) found

that close to 30 percent of employees in the fiveenterprises lost their jobs by the time privatiza-tion took place. The reductions ranged from 3percent in telecoms to 72 percent in energy....Drastic employment cuts were also made inother sectors, including railways and steel. Lowproductivity and interference by labor unions inmanagement decisions had made the cost ofkeeping loss-making enterprises in the statesector so high that the government was willingto undertake the necessary employmentreforms to facilitate privatization.

Source: Kikeri 1998, p. 6.

Job losses apparently associated with PPI do, howev-er, need to be seen in the context of the sector as awhole. There have been substantial reductions evenwhere rail has remained in the public sector. InDenmark’s national rail company, for instance,employment fell by nearly 29 percent in one year,from 1996 to 1997. Moreover, focusing on the enter-prise rather than the sector can be misleading. Newjobs can be created with contractors and subcontrac-tors without showing up in the personnel numbers ofthe post-PPI companies themselves. For example, sixyears after the concessioning of Bolivia’s Eastern andAndean railroads, more than 50 percent of theemployment in the sector is provided through out-sourced contractors (see Valdez 2002).

Valdez 2002 (a case study by the Public-Private

Infrastructure Advisory Facility).

PortsThe port industry has been heavily influenced byglobal competition, technological change, and con-

tainerization. Port workers’ trade unions haveopposed port reform because both job losses, casu-alization of labor (the shift to individual temporarycontracts with less legal protection for workers),and changes in working conditions are of greatconcern (box 2.4). Whether or not the commentsmade in box 2.4 are a fair reflection of what hashappened in all ports, they are typical of the per-ceptions of union leaders in ports—and indeedother infrastructure sectors.

An International Labour Organisation (ILO) sur-vey of ports suggested that overstaffing was mostserious where there are port labor pools—a meas-ure that protects against casualization of labor—and that overstaffing was greater in operationsthan in administration. There has been a dramaticdecline in employment in such ports. For example,in the port of Buenos Aires, Argentina, the suspen-sion of the existing labor agreements led to a 50percent reduction of the number of workers. Portreforms in Australia, France, and the UnitedKingdom cut employment levels by 40 to 60 per-cent (ILO 1996).

The Public-Private Infrastructure Advisory Facility(PPIAF) Port Reform Toolkit is a comprehensivesource of information on all aspects of port reform,including labor issues.

The PIAFF Port Reform Toolkit can be downloaded

through the Internet from www.ppiaf.org.


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Job losses have alsooccurred in railwaysthat have stayed inthe public sector.

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Box 2.3: Employment Reductions in Brazil’sRailways

At the beginning of the PPI process, in1995, the main state-owned railway com-pany in Brazil, RFFSA, employed 42,000

people, down from 110,000 workers 20 yearsearlier. In preparation for the concessions thatbegan in 1996 and 1997, following RFFSA’srestructuring into six regional businesses, morethan half of those workers left, 4,000 of themthrough voluntary redundancies and 18,000through other means.

The privatization team recognized that these tar-geted reductions in labor force were by nomeans final. When all the regional areas hadbeen privatized, the organization of each systemwould probably change and would likely lead toadditional reductions in staff, changes in skillsmixes, and improved productivity.

That proved to be true. The work force washalved again, to a total of around 11,000, withina year of the start of concessions, meaning thatsince the beginning of the privatization processabout 75 percent of the jobs had been cut.

Source: Estache, Schmitt de Azevedo, and Sydenstricker2000.

0

7,000

5,000

4,000

3,000

2,000

1,000

6,000

1980 1984 1988 1992 1996 2000

Approximate number of employees

Pre-PPI labor restructuring

Labor restructuringat the time of PPI

Figure 2.1: Employment in Côte d’Ivoire and BurkinaFaso Rail, 1980–2000

Source: Martin and Micoud 1997; SITARAIL data.

• Increasing competition compels port stake-holders to assess their cost structures andlabor force. Competition is one of the prin-cipal motivating forces behind labor reformin ports. Impacts on individual ports dependon a number of factors, not simply PPIalone.

• The nature of port operations—the extentof containerization, the nature of thecargo—and the emergence of regional hubports will be one factor. In particular wherecontainerization and privatization occurabout the same time, it is difficult to distin-guish clearly which factor is responsible forjob losses.

• The national economy has an impact. Theeffect of privatization in ports, rail, andother transport services depends on overalleconomic and trade performance becausemuch traffic will be demand driven. If theeconomy stalls, so will demand for port andother transport services.

• The performance of other related logistical(rail, road terminals) and trade facilitation(customs) operations can have a profound

impact. They can influence port competi-tiveness, cargo types, and volumes—andthus employment levels.

• The nature of industrial relations is also per-tinent in assessing the impact. Effectiveunions enable employees to better defendchanges to jobs and work practices.

Many government-owned ports face these issues—often in combination—and that can affect employ-ment conditions and labor–management relation-ships in various ways (see table 2.1 and the PPIAFPort Reform Toolkit). Where the right factorscome together, however, there can be net job cre-ation in the ports sector (box 2.5).

WaterPrivate participation in water infrastructure ofteninvolves investment plans that propose rapidexpansion of the service area. This expansion helpsprotect employment numbers because any surpluscan be absorbed. Nonetheless, many state-owned


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Although job losses are common, someports have seen netincreases inemploymentfollowing reform and PPI.

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Box 2.4: Union Perceptions of Privatization’sImpact in Ports

Deregulation, privatization, flexibility andcasualization have become the magicwords and the solutions to all shortcom-

ings. They are supposed to create wealth for all,but the real and practical consequences aremass dismissal of workers, worsening of work-ing conditions and deterioration of health andsafety....

“In nearly all cases, investments in new portinfra- and superstructures coincided with down-ward pressure on working conditions andemployment in order to cut labor costs as muchas possible. Deregulation, privatization andgrowing competition are leading to this down-ward pressure and subsequently to the increas-ing use of nonunion labor, casualization of laborand flexibilisation of labor relations and workingconditions, all of which are not in the interests ofworkers” (International Transport Workers’Federation 1997, p. 9–10).

“

Box 2.5: Employment Growth in Mexican Ports

In 1993 the Mexican government passed a law that enabled reform of Mexico’s ports. Itdismantled the public agency Puertos

Mexicanos, which was responsible for all ports,and provided for the decentralization of port man-agement, the privatization of port operations, andthe encouragement of competition among ports.

One element of the reform was the transforma-tion of national collective bargaining into firm-level bargaining by the new private operators,so allowing these firms to negotiate with theirworkers according to local and business condi-tions. As a result the number of port workersemployed by the public sector was reduced, buttotal port employment by private firms is risingbecause of an increase in the activity of ports.

For example, the port of Manzanillo had 2,100workers before the reform, and at the end of1997 the number had doubled. In Veracruz, withan initial number of 6,647 employees, theincrease was not so spectacular in relativeterms, but employment had risen to 8,260.

Source: Estache, González, and Trujillo 2001

water companies have low labor productivity, andthe need to improve performance may necessitatework force reductions.

In the Czech Republic, for example, privatization ofwater supply and sewerage utilities began in 1992and within five years the number of workers in thewater supply companies had fallen by 26 percent.Similarly, in Hungary there was a 46 percent reduc-tion in staff in one water company (ILO 1999b).

Employment reductions of a similar scale andrange are associated with water PPIs in Africa,Asia, and Latin America (table 2.2). In BuenosAires the numbers of permanent employees fell byabout half to around 4,000. The consortium thatwon the concession for the service also reported,however, that it increased its indirect employmentthrough contracts associated with its infrastructureexpansion by as many as 5,000, producing a netincrease of about 10 percent (Aguas Argentinas,personal communication).

ElectricityIn the electricity sector the need for rapid invest-ment and expansion of infrastructure also reducesthe extent of job losses. Nonetheless, the ILOreported employment cuts of more than 20 percentof the work force in a number of countries.

For example, in Côte d’Ivoire employment fell by22 percent over a 5-year period following the startof a 15-year concession. The impact appears tohave fallen particularly heavily on middle manage-ment. The new management decided to “flatten”the organization by reducing the number of hierar-chical layers from 18 to 5.

As in other sectors, job losses also take place underpublic ownership, without PPI. In South Africa, forexample, there was a 40 percent reduction in thenumber of workers employed by the publiclyowned electricity utility Eskom over the six-yearperiod from 1993 to 1999.


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Expansion of thesupply network hashelped maintainemploymentnumbers in thewater sector. Evenso, 25 to 40 percentreductions inemployee numbershave been reported.

Taking account of contract workers,employment rose by10 percent in thecase of Buenos Aireswater.

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Employment effect

• Reclassification of posts

• New job patterns

• Labor retrenchment anddirect job losses

• Gender-biased employmentpolicies

• Discrimination against shopstewards and other laborrepresentatives

• Medium- and long-termemployment gains resultingfrom increased investment,growth of privatized firms,and diversification of servic-es.

Employment condition

• Greater job mobility

• Diminished guarantee oftenure and job security

• Need for retraining and skillupgrading

• Longer working hoursand/or increased workload

• Payment by resultsschemes and pay freezes

• Loss of seniority and servicegrades

• Wider wage differentials with greater incentive com-ponents

• Loss of pension rights

• Loss of social benefits (for example, housing, trans-portation, child care, healthinsurance plans)

• Abolition of the prohibitionto undertake strikes andindustrial actions.

Labor–managementrelationship

• Greater emphasis on profes-sionalism

• More discretionary power in making managementdecisions and formulatingenterprise policies

• More emphasis on strictimplementation of thosedecisions and policies

• Marginalization of unions’influence and bargainingpower

• More tedious wage bargain-ing with preferences for indi-vidual rather than collectiveagreements

• Tougher stance of manage-ment on workers’ perform-ance and work discipline

• Efficiency arguments and profit making gainimportance over socialobjectives.

Table 2.1: Possible Effects of Privatization on Employment in Ports

Source: Adapted from UNCTAD 1995.

In Latin America’s power sector the level ofemployment reductions appears to have beenlarger than elsewhere, which (as in other sectors)reflects the extent of previous overstaffing inthose countries. In Argentina the ILO has report-ed that 22 percent of the work force was cut inthe run-up to privatization and another 28 per-cent was cut over a similar period following pri-vatization (table 2.3).

A similar pattern has been seen in Brazil (table 2.4indicates the extent of reductions there). This alsoshows that work force adjustments can be substan-tial even where there is no PPI.

TelecommunicationsIn the telecommunications sector the naturalmonopoly characteristics that underpinned stateownership have largely disappeared. Technologyhas brought dynamic changes, including increasedconvergence with computing and media, while themarket has become more segmented among long-distance, data, mobile, and local telephone services,for example.

New service providers have entered the marketsince the mid-1980s, including specialist cellularoperators and Internet service providers. Therefore,although typically there has been a reduction in thenumber of workers employed by privatizedtelecommunications companies, growth in the sec-tor among new entrants has generated more jobsthan the numbers lost in the former public monop-oly enterprise.

A recent study showed that from 1990 to 1994,employment increased by an average of 21 per-cent in newly competitive telecommunications

markets in 26 Asian and Latin American coun-tries, whereas countries that retained a monopolyshowed only a 3 percent increase (Petrazzini1996a).

Petrazzini 1996.

The nature of the new jobs in telecommunica-tions—in terms of the skills, experience, and cultur-al approaches they require—has changed greatly.This means that retrenched workers from priva-tized telecommunications companies are not neces-sarily well equipped for the new jobs that havebeen created (box 2.6). A great deal of retrainingcan be required, and in some cases that challengehas been tackled in the context of PPI. In the caseof Sri Lanka Telecom, for example, none of the800 workers was retrenched but many were


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The electricity sectorhas seen substantialreductions in thework force.However, these haveoccurred both inprivatized firms andthose staying inpublic ownership.

Countries that haveliberalized andallowed new privatesector entrants haveseen significantlevels of net jobcreation in thetelecommunicationssector—on average,21 percent in newlycompetitivemarkets.

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Table 2.3: Argentina: Restructuring of ElectricityWork Force after Privatization

At time of Afterprivatization privatization Percentage

Company (1990) (1993) change

CentralCostanera 795 661 –16.8

CentralDock Sud 75 60 –20.0

Central Pedro de Mendoza 59 31 –47.5

Central Puerto 1,115 798 –28.4

Edelap 741 542 –26.8

Edenor 6,443 4,164 –35.3

Edesur 6,529 5,051 –22.6

Total 15,747 11,307 –28.4

Source: de Luca 1998b, p. 194.

Number of employees

Table 2.2: Employment Numbers and Labor Productivity in Three Latin American Cities before and after Private Participation in the Water Sector

Buenos Aires Cartagena de Indias SantiagoBefore PPI 1995 Before PPI 1995a Before PPI 1995

Operating revenues(US$ millions) 230 385 10 12 60 130

Number of employees 7,450 4,250 1,200 385 1,717 1,945

Employees per thousand connections 6.4 3.3 14.0 4.5 2.1 1.9

a. Data for six months of operation. Source: de Luca 1998b, p. 187.

retrained in new skills suited to the new technolo-gies. In India, too, a freeze on recruitment waslinked to a program of retraining in the maintelecommunications utility, Bharat Sanchar NigamLimited.

Postal ServicesA recent ILO review of employment trends inpostal services suggests that experience in postalservices varies—perhaps more than in other sec-tors. Among the main factors identified in job loss-es by the ILO are mergers and acquisitions, global-ization, changing markets, new technologies,changing fashions, and structural and regulatorychanges.

It is therefore difficult to separate the impact of thetechnologies from that of privatization and reor-ganization, but technological and related synergyeffects and increased efficiency have influenced thequantity and quality of jobs in the postal serviceand the structure of the work force (ILO 2002).

In Malaysia in 1992 the Postal ServicesDepartment was transformed into Pos Malaysia,and nearly all employees chose to transfer to thenew corporation rather than remain civil servants.Corporatization was accompanied by networkexpansion, new business, and services (advertisingmail, courier services, printing, and express post,for example), so employment increased by 20 per-cent from 1992 to 2000.

On the other hand, Tanzania experienced a 45 per-cent decline in employment from 1994 to 1999through attrition, voluntary separations, earlyretirements, and transfers, coinciding with anexpansion in franchised operations. Improved pro-ductivity, performance, and business allowed a sig-nificant expansion (20 percent) of employmentnumbers in 2000.

In Latin America and the Caribbean employmentremained stable or increased in several countries(Barbados, Brazil, Chile, Colombia, Jamaica,Mexico, Peru, and República Bolivariana deVenezuela) between 1995 and 1999, but declinedin Argentina, Costa Rica, El Salvador, Panama,and Trinidad and Tobago. In Costa Rica, nearlya quarter of total staff took voluntary retirementin 1998 following the creation of an autonomousstate postal firm, but in the following yearsrecruitment to cover new demand and serviceslargely restored employment numbers to theirprevious levels. In Argentina a program of volun-tary departures led the permanent work force tofall by 25 percent from 1996 to 1999.

LABOR PRODUCTIVITYPPI has enabled many governments to overcomelong-standing problems of low labor productivityin public services. This has been done not only(and not even always) through reducing the workforce but also through capital investment and serv-ice expansion.


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In post, as in ports andtelecommunications,the impacts of PPIare difficult to separate from those of technology andcompetition.

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Table 2.4: Employment Reductions in Brazilian Electricity Utilities

Employees Employees PercentageCompany before restructuring (year) after restructuring (year) changeCEMIGa 19,981 (1991) 14,800 (1997) –26CERJ 5,700 (1996) 2,160 (1997) –62COELBAa 7,231 (1992) 4,763 (1997) –34ESCELSA 2,500 (1994) 1,717 (1997) –30Light 10,658 (1995) 6,541 (1996) –38

Note: Data provided to ILO by the companies named.a. In these two cases the "after" figure was before PPI; in the other cases, PPI occurred between the years indicated.Source: de Luca 1998b.

All infrastructure operations can identify methodsfor measuring labor productivity and internationalbenchmarks in the infrastructure sectors that arebased on those methods. The practical use of thoselabor productivity measurements and benchmarksis less simple, however, because many circumstan-tial factors have to be taken into account.Improving labor productivity is a matter of com-bining quantitative information with qualitativejudgment in the most effective ways. Module 3addresses those issues more fully. For the purposesof this module, the issue to be stressed is that PPItypically is associated with increasing labor pro-ductivity measured in terms of output per employ-ee. This is, in part, because labor productivity tendsto be too low under state management.

Almost invariably, labor productivity measured interms of output per employee rises following PPI.In many cases, employment reductions are onemeans of driving up productivity, and in somecases they are indispensable. Increasing labor pro-ductivity does not, however, necessarily involve jobcuts, and even when it does, there are other pro-ductivity-enhancing measures to be taken as well(see box 2.7). In fact, other ways of increasinglabor productivity can be more important thanemployment reduction. Badly designed retrench-ment programs that lead to the wrong workersleaving (the adverse selection problem) or to massdemoralization can even have the effect of reducinglabor productivity.


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Box 2.6: ILO Analysis of the Labor Impact of PPI in the Telecommunications Sector

The ILO has concluded that privatizationand liberalization “have generally resultedin job losses among traditional telecommu-

nications services operators in OECD[Organisation for Economic Co-operation andDevelopment] countries, in which markets areconsidered mature, with generally satisfieddemand for basic services, and competitiveoffers of new services. Job creation in industrial-ized countries is mainly due to the emergence ofnew enterprises or services.”

However, “in low-to-middle-income countriesand those in transition, the supply of basic serv-ices has not yet reached saturation point and issometimes far below it; employment creation ishindered by lack of solvent demand (demand ingeneral is not lacking); and growth in the supplyof telecommunications services is often impededby local shortages of capital, although mobilecommunications are experiencing huge growth inmany developing countries.

“While employment has fallen and continues tofall among the main traditional operators inmature markets, this situation is clearly not truefor operators (whether privatized or not) in coun-tries continuing to construct and/or modernizetheir network.

“Thus, in the Republic of Korea, the partial priva-tization of telecommunications and the termina-tion of public employee status at the end of the

1980s did not result in staff reductions. For someyears the opposite happened while the marketunderwent considerable expansion—in the yearsfollowing privatization, the number of employeesin Korea Telecom increased by 32 percent, butfell back by 12 percent following the period1997–99, with the Asian financial crisis.

“In Mexico, the privatization of Telmex did not initself result in job cuts—following an agreementwith the trade unions there were no layoffs, andthe work force increased (on paper at least) by30 percent in the period 1997–99.”

As well as capital scarcity, many countries havealso suffered from telecommunications skillsshortages, which, says the ILO, “is often a con-sequence of lack of investment in training, or lackof basic information and communication technol-ogy (ICT) skills among potential recruits.”

As a result, foreign recruitment is a frequentoption. ”In Africa, where average teledensity isless than two telephone lines per 100 inhabitants,with most lines concentrated in urban areas, thelack of technical staff and expertise means thatICT-trained employees may well move to richercountries. Thus the principal employment preoc-cupation may be how to retain skilled staff andhow to attract new ones, rather than a need tocut employment numbers, despite budgetaryconstraints.”

Source: ILO 2002, pp. 73, 84, 89.

cent productivity increase was attributableto service expansion, with only about aquarter the result of layoffs.

• Capital investment, especially in new tech-nology, enables the same number of workersto produce more. This has been especiallysignificant in the telecommunications sector,but has been instrumental in increasing pro-ductivity across other sectors as well.

• Greater commercial orientation of enterprisemanagers: This, is however, easier in a pri-vatized environment. Public managers some-times operate under conflicting sets of objec-tives—to provide an efficient service whileemploying surplus labor for political orsocial reasons—and often have been unableto tackle productivity problems in a sus-tained way.

• Better management and faster decisionmak-ing: Again, private sector managers areoften able to make normal managementdecisions more quickly than are public sec-tor managers. Delayed decisions on spend-ing for critical repairs, small investments, ornew recruitments hinder productivity. Publicsector managers often have limited delegat-ed financial authority, suffer from publicsector liquidity shortages, and need to gainthe approval of administrators in distantcapital cities to make minor expenditures.

Of all the infrastructure sectors, railways haveexhibited some of the highest levels of productivityimprovements after PPI. This reflects the high levelof surplus labor the railways have had to carryover the years and the subsequent high levels ofwork force downsizing. A review of six rail opera-tions concluded that:

The most dramatic results of the involvementof the private sector in the concessions (or pri-vatizations) are undoubtedly the significantimprovements in labor productivity. In all butone case (Côte d’Ivoire/Burkina Faso—a 33percent improvement in five years), labor out-put per employee (expressed as the sum ofton-km plus passenger-km per employee) at


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PPI affects labor productivity in avariety of ways.

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Box 2.7: Productivity Growth in LatinAmerican Telecoms Following PPI

Ravi Ramamurti has reported “explosivegrowth” in labor productivity in utilitiesand telecommunications following privati-

zation in Latin America. It was achieved notnecessarily through cutting jobs, but oftenthrough expansion of coverage, deployment ofnew technology, and other means. Even whenemployment numbers are sharply reduced, thatis not the only factor in productivity increases.

Mexican telecoms increased the number of linesper employee by 13 percent a year in the firstthree years of privatization (which occurred in1990), compared to a decline of two percent ayear throughout the 1980s until the last twoyears before privatization when 10 percentincreases were recorded each year.

Telecoms in República Bolivariana de Venezuelaalso recorded double-digit labor productivityincreases in the first two years of privatization(beginning in 1991), and Argentina’s lines peremployee rose by 19 percent in the first threeyears after privatization (1990) compared with6.5 percent in the two years before.

Ramamurti explained how it was done: “Thedramatic increases in labor productivity resultedfrom a deliberate effort to freeze the size of thework force even as the network expanded bydouble digits. In Argentina, where workers werenot promised job security after privatization, thenew owners shed almost 50 percent of the orig-inal work force, even as they hired younger per-sons with skills in areas such as informationsystems or marketing; companies recovered theUS$15,000–$20,000 spent on severance com-pensation per employee in two years or less.”

Source: Ramamurti 1996, pp. 26–28.

Other ways in which enterprise restructuring—through PPI or public sector modernization—brings labor productivity improvements include thefollowing:

• Service expansion prompts the output sideof the output-per-employee ratio toincrease—for example, more homes are con-nected to the water supply. In Brazil’s elec-tricity sector, for example, it has been esti-mated that about three-quarters of a 10 per-

least doubled and more often tripled orquadrupled. To some extent this was a resultof traffic growth, but the greater share of theimprovement must be attached to the pro-grams which reduced the redundancy in thelabor forces of the railways (Thompson,Budin, and Estache 2001, p. 10).

Thompson, Budin, and Estache 2001.

Figure 2.2 shows traffic units per employee—thestandard measure of labor productivity in rail—insix Brazilian and two Bolivian freight concessionsbefore and after PPI.

Service expansion and capital investment form asubstantial part of the productivity increase insome cases, such as Trinidad and Tobago Post (box2.8). Another example is Côte d’Ivoire electricity,which was privatized in 1990. By 1995 labor pro-ductivity (kilowatt hours per employee) rose bynearly 25 percent. The number of consumers peremployee showed a slightly slower rate of increase,from 128 in 1990 to 156.7 in 1995, a rise of about22 percent. Over the same period the number ofworkers employed fell by less than 5 percent (ILO1999b, Plane 1998).

PAYAs with employment numbers, the impact of PPIon pay can be seen as an outcome of underlyingand historical factors rather than of PPI as such.Privatization and other forms of PPI have tendedto expose pay determination more to marketforces, but this has been offset to varying degreesby legal provisions, collective agreements, andlabor union strength. Therefore, the impact of PPIon earnings has varied in accordance with the netinfluence of these various factors.

In some sectors and grades publicly employedworkers have received higher compensation thanequivalent workers in the private sector. In thesecases competitive pressures will encourage theagencies implementing labor programs to reduce

costs and bring compensation more into line withmarket conditions. Equally, where public employ-ees have been paid too little to enable recruitmentand retention of some grades of skilled workers,market forces will push pay upwards.

Labor unions are able to take advantage of tightmarket conditions to negotiate pay and benefitincreases for the workers whose skills are in shortsupply. They also may seek to extend the sameimprovements to unskilled workers or others inless demand.

In addition to the general tendency for PPI employ-ers to relate pay more to market conditions, thereare four other trends that can result from PPIacross a range of sectors and countries:

1. The first trend is monetization of compensa-tion (pay and benefits) packages as the non-wage benefits are converted to monetaryamounts, bought out, reduced, or eliminat-ed. Private investors are reluctant to take onthe wide range of fringe benefits often foundin state-owned enterprises (especially in tran-


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Labor productivityimprovements havebeen substantial following PPI in railways. M

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Figure 2.2: Labor Productivity in South American RailCompanies

Note: The table compares the Andean and Oriental lines ofthe Bolivian railway network, and six divisions of the Brazilianfederal railways (RFFSA) system: the midwest (Ferrovia CentroAtlântica, FCA), the southeast (MRS Logistica–MRS), thesouth (Ferrovia Sul Atlântica, FSA), the Ferrovia TerezaCristinia in Tubarão, the west (Oeste), and the northeast (CiaFerroviária Nordeste).

Source: World Bank, Private Railways Operations Database.

1,000

3,000

2,000

5,000

4,000

6,000

RFFSA:FCA

RFFSA:MRS

RFFSA:FSA

RFFSA:TerezaCristina

RFFSA:Oeste

RFFSA:Nordeste

Bolivia:Andina

Bolivia:Oriental

Before concessioningAfter concessioning

System:line

Traffic units (TUs)per employee(thousands)

sition countries, where state-owned enter-prises had supplied a wide range of socialservices). In some cases pay and benefitstructures are so complex that managers canhardly assess and compare the total compen-sation that workers receive. Monetizationand restructuring of remuneration packagesare then essential, simply to make compensa-tion and pay more transparent.

2. The second trend is an increase in pay dif-ferentials, partly in response to labor marketconditions and especially to attract and pro-vide incentives in the recruitment and reten-tion of experienced and skilled techniciansand managers.

3. The third trend is the erosion of national-level collective bargaining, with a shift toenterprise-level bargaining or individual pay

determination, a trend intensified by theincreased use of subcontractors and casual-ization of labor

4. The fourth trend is the change that pay sys-tems undergo after PPI as new managersseek to relate earnings more directly to pro-ductivity performance.

In practice, the impact of these market trends canbe constrained by rigidities in the pay revisionprocess. These rigidities may be set out in laborlaws, collective bargaining agreements, or laborcontracts, some of which may predate the PPItransaction by many years.

In the utility and infrastructure companies of theformer East African Community (EAC), for exam-ple, pay and benefits were very different betweenworkers originally employed by the EAC and laterrecruits. These differentials have persisted in theyears following the dissolution of the EAC, butmore recent PPI reforms are now allowing theopportunity to revisit and harmonize pay systemsso that they are more equitable. In some Mexicanports, longshoremen who had previously been paidby the ton of cargo handled were paid by the dayafter privatization. In the electricity privatizationprocess in Pakistan, an agreement with the AllPakistan State Enterprises Workers’ ActionCommittee in 1991 provided for a 35 percentincrease in basic pay and for allowances to be paidat the new rate.

In some cases PPI has produced “two-tier” workforces in which the pay (and other conditions) ofretained workers is protected to some degree andnew employees are recruited on different terms. Anexample is Cote d’Ivoire rail, where new recruitshave lower basic wages than those retained frombefore PPI, but they also have bonuses mostlyrelated to performance. Average pay in Coted’Ivoire rail has increased following PPI, but sohave differentials; therefore, the effect on differentgrades varies greatly.

In some cases, as employment has expanded in thelonger term, the success of PPI has made payincreases above the rate of inflation affordable. Forexample:


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Changes in pay andcompensationdepend not only onprivate sectorinitiatives but alsoon labor laws andcontracts.

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Box 2.8: Service and ProductivityImprovements at Trinidad and Tobago Post

Under the 1999 Postal Act, following poorperformance by the public operator,Trinidad and Tobago Postal Corporation

(TTPost) was created, in consultation with thetrade unions. A management contract wasawarded to New Zealand Post, intended toenhance the reach of the universal service inTTPost as well as to improve revenues, profits,and customer satisfaction and reduce transittime.

According to World Bank reports TTPost has:

• Opened new, better-equipped outlets offeringimproved customer service

• Expanded home delivery to previously poorlyserved areas

• Established a wider range of products andservices (including inland courier services)and expanded their availability

• Enhanced customer satisfaction

• Improved the reliability, speed, and security ofmail delivery

• Increased revenue, productivity, and financialperformance

• Improved working conditions and staff moti-vation.

Source: ILO 2002.

• Following privatization, staff numbers in theGuyana telecommunications enterprise werecut in half, but the salaries of retainedemployees increased by 90 percent (Hinds1995).

• In Argentina the real wages and salaries ofemployees of Entel and the Buenos Aireswater concession increased by 45 percent inthe three years following privatization(Kikeri 1998).

• In Chile the new owners of the electricitycompanies (Chilgener and Enersis) increasedwages and introduced profit-sharing plans.

• In Orissa, India, retained employees in theprivatized power sector received pay increas-es as well as improved promotion opportu-nities (Ray 2001).

Ray 2001.

• Workers at Malaysia’s Port Kelang whoremained with the partly privatized compa-ny received compensation increases averag-ing 12 percent.

• In Mexico wages in a sample of privatizedfirms increased far in excess of rates else-where in the economy, with larger gains forblue-collar workers than for white-collarworkers (Kikeri 1998).

BENEFITSPublic employees often enjoy a range of nonwagebenefits that tend to be both greater in quantityand different from those that are more typical ofthe private sector. As mentioned in the pay section,PPI tends to lead to monetization of nonwage ben-efits as they are bought out. In addition, pensionarrangements and other social provisions tend tochange with PPI, and new benefits, such asemployee shares, are sometimes introduced.

PensionsMost public sector pension plans are of a defined-benefit type, usually guaranteeing the worker a

fixed percentage of final salary at retirement, aswell as a lump-sum payment. Such arrangementsalso exist in the private sector in some countries,but are on the decrease; the trend is toward pen-sion plans in which more risk is borne by the bene-ficiary and less by the employer (see module 5).

Privatization and major downsizing can have pro-found effects on the pension plans. Those workerswho are close to retirement and who are maderedundant would be entitled to immediate benefits,while the amount of contributions that flow intothe plan in the future are significantly reduced.This could seriously affect the financial viability ofthe fund. Where the private investor is required toset up a pension plan for the work force takenover, as well as for new employees, the likelihood isthat an accumulation-type plan will be establishedthat is subject to investment risks and that has lessguaranteed benefits than are provided underdefined-benefit arrangements.

Pension arrangements are often a key issue in labornegotiations in the context of PPI. A report of anILO bipartite meeting on privatization of munici-pal services (including electricity, water, publictransportation, and other infrastructure sectors)noted that privatization often “entailed a lot of dis-tress” for the workers affected:

The disappearance or reduction of pensionschemes for which new employers had littleregard represented one of the most dramaticconsequences. Even where pension schemeswere maintained, new upper limits had beenset to qualify for benefits in countries such asKenya, resulting in workers with fewer yearsof service leaving employment with no benefits(ILO 2001, p. 27).

However, the same meeting also heard that “socialdialogue would provide agreed solutions to thisdilemma in the form of provisions on early retire-ment, limited redundancy, aid to unemployedworkers, and retraining.” An example was given:

Prior to privatization of the electricity sector inHungary, the trade unions had negotiated anagreement with the Government. It wouldtransfer five percent of privatization revenue to


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Workers’ pay hasimproved following private participationin a number ofcases.

Pensions can be a major issue,especially whereenterprises haveoffered generousdefined-benefit(final salary) plans.

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a trade union managed fund in support ofworkers who left public companies in order topay the differences between pensions andsalaries in case of early retirement, and for atime to supplement unemployment fundsbeyond state provisions. Steps had also beentaken to develop tailor-made training schemes,and the results had been so positive thatHungary had become a model for other coun-tries of Central Europe (ILO 2001, p. 27).

Other examples of changes in pension arrange-ments both before and during PPI are described inmodule 5.

Other BenefitsWorkers in infrastructure enterprises may derivenot only wage income from employment but also a“social wage” composed of many elements.Housing; health care; childcare and preschool edu-cation; and sports, recreational, and cultural facili-ties have been provided. The introduction of PPImay lead to changes in these arrangements.

For example, as part of their remuneration, railwayworkers in Côte d’Ivoire were covered by a healthinsurance program. The concessionaire who wonthe contract under the railway privatization pro-gram did not wish to inherit the plan, but wasagreeable to establishing a new one. Under the lat-ter plan, the cost of contributions is sharedbetween the workers and the company, and theworkers pay a larger share than they did before.Although on paper it is a worse arrangement forthe workers, in practice the state employees’ fundshad been heavily in debt because the governmentfailed to pay its contributions. Most employees nolonger even applied to the fund for reimbursementof medical expenses. Now their entitlements aresmaller on paper but they can rely on their beinghonored.

Also in Côte d’Ivoire the electricity concessioncompany CIE set up three funds for its employees:

Firstly, there is a social fund designed to pro-vide allowances for family events. Hundreds ofworkers have benefited from it each year since

1991…. There is [also] a savings and loanfund, which offers interest-free loans over peri-ods of 12 to 15 months to workers who havesaved for at least four months. Finally there is acollective investment fund by means of whichcompulsory wage deductions finance the acqui-sition of CIE shares. The shares are kept in anaccount which remains blocked until theemployee leaves. The funds were widelyshunned at the outset because the unions sawthem as a kind of paternalistic balsam.However, the annual report for 1995 talks ofgrowing use. The savings and loan fund alonehas made 9,000 loans (Plane 1998).

The extent of the challenge has been much greaterin the “transition” (formerly centrally planned)economies and especially in one-company townsand rural areas. In Russia, for example, enterpriseswere responsible not only for a range of mandato-ry benefits, such as sick pay, maternity allowances,and paid vacations, but also for a number of in-kind benefits (for example, kindergartens andrecreational facilities). In the case of in-kind bene-fits, or “social assets” as they are known, the gen-eral policy has been to “municipalize” them. Theresults, and the impact on workers, however, havevaried greatly (box 2.9).

WORK PRACTICESThe various forms of PPI tend to result in changesto working conditions and practices. The way thisis done and the extent to which workers areinvolved in shaping new arrangements vary amongemployers, just as they do in the private sectormore generally.

Working ConditionsAs with other aspects of PPI’s effect on labor, thereare some general trends, namely:

• PPI tends to produce flatter organizations byremoving layers of middle management.

• Labor contracts tend to be simplified, oftenallowing the work force to be deployed inmore flexible ways (as in the case of Telmex,presented in box 2.10).


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Housing, education,and other in-kindfacilities were transferred tomunicipalities insome transitioncountries.

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• Pre-PPI restructuring often means disposalof noncore assets or withdrawal from non-core operations and thus the elimination oroutsourcing of some jobs.

In several sectors infrastructure companies havesought to establish greater flexibility (increaseduse of part-time work and fixed-term contracts,redeployment, and decentralization of laborrelations) and other changes in working meth-ods, employment, and industrial relations. Forpermanent staff, however, PPI often bringsgreater investment in training, as in Côted’Ivoire’s electricity concession (box 2.11) andMexico’s railways.

The impact of PPI on working hours varies.Influencing factors include labor market condi-tions, the legal framework, union strength, andattitudes. Attempts to increase labor productivitydo not necessarily entail longer hours of work—indeed, they can involve reducing hours and inten-sifying work—but hours certainly have increasedin some cases. For example, prior to the privatiza-tion of Entel, the Argentine telecommunicationscompany, the government changed the work weekfrom 35 to 40 hours. At times, however, govern-ment and the PPI partner work well together tomaintain standards of worker competence and pro-tect safety through regulation.


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PPI tends to bringmore focusedorganizations, flatterstructures, andsimpler laborcontracts. M

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The Russian privatization legislation requiredthat in-kind benefits, such as housing,health care, kindergarten, and a range of

sports, recreational, and cultural facilities, transferto the municipality (which had the discretionarypower to privatize them instead). The policy wasintended to maintain services seen as importantto social justice while it relieved entrepreneurs ofresponsibilities to which they were not suited andthat would have undermined their financial com-petitiveness. Enterprises were expected toincrease wages as a result of the savingsachieved.

In general, however, municipalities lacked thefunds to maintain the same levels of services, orin some cases to maintain them at all. This lackwas dealt with in a variety of ways. In somecases the enterprises continued to fund theservices, at least in part. In many of those casesthey did so willingly, perceiving some of theservices concerned to be a better financialoption than shedding them, in which case pres-sure for higher wages would have been corre-spondingly greater. To do this while complyingwith the legislation requiring transfer to munici-palities, some enterprises rented services backfrom the municipalities.

From 1992 to 1996, this scheme proceeded quiterapidly but with a variety of effects, and in the lat-ter part of the 1990s the difficulties that had aris-en led to increasing numbers of conflictsbetween enterprises and municipalities and aslowing down of the process of transition. Onefrequent difficulty was the decline in the scaleand quality of services because of the lack of

resources. A survey of 92 enterprises in fiveRussian cities, conducted by the EuropeanUnion’s Technical Assistance to theCommonwealth of Independent States project,revealed that workers in most of the surveyedenterprises experienced their access to housingas having declined—“markedly” in 44 percent ofcases. About half of the workers said culturalservices had declined, and about a third felt theirhealth, kindergarten, and sports services haddeteriorated. In most cases, however, enterprisessaid they had not realized savings that enabledthem to increase wages.

The principal source of these problems was thatmunicipalities did not have the resources to keepthe services going properly or even at all. At thesame time a large minority of the enterprises thathad yet to transfer the assets said they wouldprefer to keep them, and most wanted to keeprecreational, sports, and cultural facilities, in bothcases because they represented important bene-fits in lieu of wages. However, fewer enterpriseswanted to retain responsibility for health servicesand childcare services.

According to one account, “The survey showsthat, contrary to earlier expectations, municipal-ization of the social assets of the majority ofenterprises has not translated, in the current eco-nomic environment, into a significantly improvedfinancial state and higher competitiveness. Only15 percent of enterprises which divested theirsocial assets estimated the subsequent positivechanges as significant.”

Source: Vinogradova 2002, p. 197.

Box 2.9: Municipalization of In-Kind Social Benefits in Russia

Subcontracting and OutsourcingIn recent years public and private sector organiza-tions have increasingly outsourced noncore opera-tions that can be provided more cheaply or at ahigher quality by external specialists. Subcon-tracting can also be a redeployment mechanism.Subcontracts are one way for newly privatizedinfrastructure firms to reduce labor costs andchange working practices and conditions while

providing a transition for workers into new privatesector employment and retaining some access totheir specialist skills and knowledge (box 2.12).

In Côte d’Ivoire, the rail concessionaire, SITARAIL(Société Internationale de Transports Africains parRail), agreed in principle to favor companies creat-ed by retrenched former state railway workerswhen looking for subcontractors. In practice, trackmaintenance, company car fleet management, andprinting of timetables and tickets have been con-tracted out to firms set up by employees of the for-mer state rail company.

Other PPI companies in Africa have also subcon-tracted to companies set up by their own formeremployees. In Guinea’s water PPI, for example,some 250 retrenched workers were given subcon-tracts through 20 small cooperatives. The subcon-tracted workers organized into 20 small enterprisesthat took over responsibility for installing new con-nections, maintaining canals, and landscaping. Theconcession company gave them training, logisticalsupport, and initial working capital.

Sometimes, PPI leads to less rather than more sub-contracting because nontransparent agreements arecancelled:

In Côte d’Ivoire…the new Compagnie ivoiri-enne d’électricité (CIE) contracts out muchless than its predecessor, the EECI….Electricalfirms, which were often set up by members ofthe public enterprise’s staff (moonlighting),have collapsed after enjoying prosperous yearswhen the process of privatization had not yetstarted (Plane 1998; see also Plane 1999).

Gender ImpactsIn recent years among other political and socialtrends there has been increasing commitment bygovernments, employers, and unions to promoteworkplace equality between women and men. Thishas taken a variety of forms in practice, such asgovernment commitments to ending discriminationof various types and combating sexual harassment,business commitment to retaining skilled andknowledgeable workers after maternity leave, and


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The replacement ofpermanent jobs withcasual or contractwork is a majorconcern for tradeunions.

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Box 2.10: Changing Work Practices inMexico Telecoms

In general, of all the beneficiaries of a stateenterprise, workers and unions offer thefiercest resistance to privatization because

they fear losing jobs, pay, and influence. Telmexwas no exception, inasmuch as its employeeswere among the best paid in Mexico andemployment in the company had consistentlygrown faster than the size of Telmex’s networksince the government had taken control of thefirm. The telephone workers’ union (STRM)exerted a great deal of influence on the internalworkings of the company, as did unions in otherstate enterprises. The STRM recognized thatprivatization could change that influence.

President Salinas seems to have become per-sonally involved in securing the union’s supportfor privatization, presenting workers with a car-rot-and-stick offer. The carrot included a prom-ise that no existing worker would lose his or herjob as a result of privatization and that workerswould receive a stake in the privatizedfirm....The stick consisted of a veiled threat thatif the STRM did not go along with the govern-ment’s policy, Telmex would be privatized any-how, without any guarantees about the welfareof its workers....

The carrot-and-stick combination yielded threeconcessions from the union: first, the unionagreed to support the privatization of Telmexwith the safeguards promised by the govern-ment; second, it agreed to replace the STRM’s57 labor contracts with Telmex with a singlecontract for all unionized workers, along with areduction in the number of job classificationsfrom more than 500 to just 50; and third, it gavemanagement the freedom to introduce newtechnology, including the freedom to redeployworkers.

Source: Ramamurti 1996, pp. 79–80.

union campaigns for equal pay for work of equalvalue.

There is little hard evidence of the extent to whichPPI has affected women workers differently frommen, but what little there is, taken together withevidence from other sectors (see box 2.13), sug-gests that the impact often falls harder on womenthan on men, particularly in transition economieswhere female participation in the labor force ishigh. Sector impacts will vary, however. InVietnam overstaffing of state enterprises was con-centrated in male-dominated sectors, such as con-struction, mining, and transportation (Rama2001a).

Rama 2001.

In the case of telecommunications the ILO notesthat:

changes in work organization and job specifica-tion are more likely to be detrimental to womengiven that they are disproportionately represent-ed in part-time work and are therefore less visi-


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Subcontracting isnot only amechanism for workforce restructuringbut also a tool forredeployment ofdisplaced workers.

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After Côte d’Ivoire concessioned its electric-ity services to a company called CIE, themajor shareholders of which were the

French companies SAUR and EdF, the organiza-tion was flattened hierarchically by reducing thenumber of grades by half, from 18 to 9, and laterto 5. A “management by objectives” approachwas also instituted, with workers reorganized into“cost centers,” each with a defined list of tasksbut with considerable autonomy about how toachieve them. Performance was closely moni-tored in terms of achieving targets, and bonusesof between 0.75 and 1.25 times one month’ssalary could be earned. In the main, bonuseswere awarded (or not) to the groups as a whole,with a small additional incentive payment alsoavailable to individuals.

The geographic decentralization of distributionis an illustration of this effort to make individu-als responsible within their group. CIE is divid-ed into a number of full autonomous regionalboards. They in turn are subdivided into geo-graphical sectors, each managing about15,000 consumers. These sectors have greatfreedom of initiative, so they can be regardedas profit centers. By means of computerizedcomparative analyses, management can

detect immediately where gains in economicefficiency can be made. Through privatization,the whole internal organization of the firm hasbeen metamorphosed.

The arrival of the concessionaire was accom-panied by a transfer of technical and organiza-tional know-how. New work procedures codi-fying the duties of employees at their postwere introduced and helped raise the efficien-cy of the firm’s operations. In support of thisstrategy, a great deal of effort was put intotraining further the already proficient workers.

CIE also brought back in-house the training oper-ation that had previously been contracted outbecause it wanted to develop a new enterpriseculture among its staff. So it set up a trainingdivision that offers two-year courses to all Africanelectricity companies and that issues a vocation-al certificate in public utility managementapproved by the Ministry of Higher Education,plus short courses. Four years after the begin-ning of the concession, more than 2,000 CIE staffhad been through courses there, and the compa-ny’s training budget had risen to a level equiva-lent to four percent of its wage bill.

Source: Plane 1998, p. 29.

Box 2.11: New Working Practices in Côte d’Ivoire Electricity

Box 2.12: Outsourcing in ArgentineTelecoms

Telecom and Telefónica (the two compa-nies which replaced Entel) also imple-mented voluntary retirement plans, which

saw the departure of approximately 5,000 work-ers, or 10 percent of Entel’s work force….Interestingly, Telecom and Telefónica rehired aconsiderable number of those workers as con-tract employees. In this way, the companiesobtained skilled labor while reducing their costs,such as pension contributions, vacation time,health insurance, and other fringe benefits. Thismaneuver also reduced the number of unionizedemployees.”

Source: Ramammiti, 1996, p. 135.

“

ble to showcase their skills and exercise theirrights. Moreover, the main jobs that havedeclined in number in that sector—such asthose of telephone operators—were mainlydone by women. Commonly, overstaffingoccurs in administrative and clerical positions,rather than in the more technically skilledjobs…. The same obstacles that hinder theaccess of women to management positions canalso disadvantage them in downsizing…. At theindividual level, women might lack the appro-priate education, training or experience to beretained during restructuring, particularly whenmanagers are competing for fewer positions,and criteria such as seniority and “last in, firstout” considerations are used. Structural andcultural factors can also be an obstacle. Womenmanagers might not have the same professionalnetworks and personal contacts to enable them

to compete for the remaining positions.Restructuring involving flatter managementstructures often affects women workers morethan their male counterparts, with low-level andmiddle-management positions being most likelyto disappear (ILO 2002, pp. 124–5).

The ILO cites restructuring at the TanzaniaTelecommunications Company in support of itsargument, but also notes evidence of increases inthe percentage of women employed in some publicand private post and telecommunications enterpris-es, and the redeployment of women into manage-ment and customer service functions (ILO 2002).Overall there have been few empirical studies ofthe variable impact of PPI on women and men inthese sectors.

In energy and water utilities, most of the workforce tends to be male, but unions claim that joblosses still affect women disproportionately becausethey tend to be concentrated in administrative andclerical functions. New owners are more likely tointegrate such functions into their existing opera-tions after privatization to achieve economies ofscale (Belser and Rama 2001). Unions also pointout that many social protections geared towardwomen only exist because unions fought for them,so if unions are weakened then it is likely that theseprotections also will be weakened.

SUMMARYEvidence shows a diversity of labor effects resultingfrom PPI. Nonetheless some key trends and factorsaffecting outcomes in particular situations can beabstracted from the available information. Themain comments that can be made are these:

• Analysis of impacts is confounded by thewide range of factors that affect the laboradjustment at the country, sector, and enter-prise levels. Box 2.14 provides a generalizedsummary of some of those factors.

• The fact that job losses occur at the time ofPPI does not necessarily mean that PPI is thedirect, or only, factor causing those job loss-es. Significant job losses have also been


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There is littleempirical evidenceon the differentialeffects of PPI onmen and women inthe work force.

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Box 2.13: Contracting Out and EqualOpportunities in the United Kingdom

The Equal Opportunities Commission—anofficial body of the government of theUnited Kingdom—reported in March 1995

that compulsory competitive tendering (CCT)had discriminated against women because sucheffects as loss of jobs, increased reliance ontemporary and casual employment, and deterio-ration in terms and conditions of employmentaffected them disproportionately.

Results of a study of the impact of CCT in 39local authorities showed that women’s employ-ment fell by 22 percent while men’s employmentfell by 12 percent. In building cleaning and edu-cation catering—both female-dominated workforces—male employment actually increasedwhile female employment fell by 31 percent and11 percent, respectively, in the cases examined.

In building cleaning hours fell by 25 percent and“pay rates have not generally increased and insome cases have declined, particularly for part-time workers” (p. 71), while employmentdeclined by 29 percent. The most severelyaffected workers across the board were part-time women employees. Many of them had theirweekly hours of employment reduced to belowa key threshold level (16 hours) for protection ofemployment rights.

Source: Escott and Whitfield 1995.

recorded in infrastructure enterprises evenwhere there is restructuring without PPI (forexample, Eskom South Africa’s 40 percentreduction over six years).

• Higher levels of job loss can occur in theinfrastructure enterprises than in privatiza-tions in general. Reductions in the work forceof 50 percent or more have been reported.

• The greatest impact on jobs occurs in sec-tors where demand is declining because of

competition from other modes (for example,rail worldwide and fixed line telephone serv-ices in industrialized nations); sectors wheretraditions of overstaffing have suffered fol-lowing introduction of new technologies(such as port labor pools following con-tainerization); and enterprises that havebeen shielded from the need to adjust formany years.

• Fewer job losses occur in sectors wheredemand is rising rapidly (such as fixed andmobile phone services in developing coun-tries) or where there is demand for expan-sion of the network (for example, water andsanitation).

• Many of the analyses of job loss have beenlimited by their focus on the impact at theenterprise level rather than at the sectorlevel. There is little information on the neteffects on employment when taking accountof growth in other modes (for example,trucking, bus, and rail operations; mobileand data telephony as well as fixed line serv-ices); the overall trend toward outsourcingof services in the sector because outsourcedemployment is not recorded by enterprises;and expansion of ancillary services (forexample, distribution and supply chainlogistics businesses at terminals of port andrail operations).

• Employment reductions drive productivityimprovements in many sectors. Expansionof services, however, can also improve laborproductivity when employee numbersremain stable.

• Changes in work practices and worker rep-resentation are often of as great a concern totrade unions as is job loss, particularlywhere this is associated with greater use ofso-called atypical work practices (for exam-ple, casual employment and outsourcing).

• Although there is a general belief thatwomen are more adversely affected by PPI-related changes than are men, there is littleempirical evidence of a differential impact.


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Box 2.14: Key Factors Affecting the LaborImpact of PPI• The sector concerned, and especially the

nature of the market in that sector, a categorythat in turn has two key variables: whetherand to what extent the market is expanding orcontracting, and whether and to what extentthe market is competitive

• The extent to which PPI is associated withchanges in technology that significantly affectthe sector’s labor intensity

• The existing level of labor redundancy andproductivity in terms of relevant internationaland national benchmarks

• National and local labor market conditionsand social protection provisions

• The relative costs of labor and capital in theeconomy concerned

• The nature of the legal framework governinglabor issues, and whether (and how) that ischanging

• The content of existing formal agreements (forexample, labor contracts and collective bar-gaining agreements)

• Government policy regarding employmentprotection and creation

• The balance of influence between interestgroups in the labor relations environment

• The nature of the political relationshipbetween the government and the relevantlabor unions

• The attitudes and strategies of government,investors, and labor leaders

• The capacity and preparedness of govern-ment, investors, and labor in support of theirstrategies.

Additional Material (on theCD-ROM)

Belser, Patrick, and Martin Rama. 2001. “StateOwnership and Labor Redundancy: EstimatesBased on Enterprise-Level Data from Vietnam.”Policy Research Paper 2599. World Bank,Washington, D.C.

Birdsall, Nancy, and John Nellis. 2002. “Winners andLosers: Assessing the Distributional Impact ofPrivatization.” Working Paper 6. Center for GlobalDevelopment, World Bank, Washington, D.C.

Chen, Yi, and Ishac Diwan. 2000. “When theBureaucrats Move Out of Business: A Cost-BenefitAssessment of Labor Retrenchment in China.”Policy Research Working Paper 235. World Bank,Washington, D.C.

PPIAF. 2001. Port Reform Tool Kit. Module 7 (LaborIssues).Washington, D.C.: World Bank.

Rama, Martin. 2001. “The Gender Implications ofPublic Sector Downsizing: The Reform Program ofVietnam.” Policy Research Working Paper 2573.World Bank, Washington, D.C.

Web SitesILO: www.ilo.org. (Site offers a collection of papers

on privatization and restructuring that can bedownloaded at www.ilo.org/public/english/employment/ent/papers/privat/pub.htm.)

PPIAF: www.ppiaf.org. (Site provides information onother PPIAF resources and toolkits.)

PSIRU (Public Services International Research Unit):www.psiru.org. (The site publishes research on theimpact of privatization on workers and tradeunions.)

Rapid Response Unit: http://rru.worldbank.org. (Thissite is a gateway to a range of information on infra-structure, privatization, and private sector develop-ment policies.)

Other Materials and SourcesBaker, J. L. 1999. Evaluating the Poverty Impact of

Projects: A Handbook for Practitioners.Washington, D.C.: World Bank.

Corradetti, Susana. 1999. The Impact of Privatizationof Public Sector Enterprises on Labour Relationsand Conditions of Work in the Air and Land (Rail)Transport Sector. Geneva: International LabourOffice. Available at www.ilo.org.

de Luca, Loretta, ed. 1998a. Labour and SocialDimensions of Privatization and Restructuring—Public Utilities: Water, Gas, Electricity. Part I:Africa/Asia-Pacific Region. Geneva: InternationalLabour Office, Available at www.ilo.org.

——— ed. 1998b. Labour and Social Dimensions ofPrivatization and Restructuring—Public Utilities:Water, Gas, Electricity. Part II: Europe and LatinAmerica. Geneva: International Labour Office.Available at www.ilo.org.

Evans-Klock, Christine, and Alexander Samorodov.1998. “Worker Displacement: Public Policy andLabour Management Initiatives in Selected OECDCountries.” Employment and Training Paper 24.International Labour Office, Geneva. Available atwww.ilo.org.

Fallick, Bruce C. 1996. “A Review of the RecentEmpirical Literature on Displaced Workers.”Industrial and Labor Relations Review 50(1):5–16.

Galal, Ahmed, Leroy Jones, Pankaj Tandon, and IngoVogelsand. 1994. Welfare Consequences of SellingPublic Enterprises. Washington, D.C.: OxfordUniversity Press. (Main volume is out of print; sum-mary volume is still available from World BankPublications, www.worldbank.org.)

ILO (International Labour Organisation). 2002.“Report for Discussion at the Tripartite Meeting onEmployment, Employability and EqualOpportunities in the Postal andTelecommunications Services.” InternationalLabour Office, Geneva. Available at www.ilo.org.

Marges, Kees. 1999. “Privatisation of Seaports as aChallenge for Trade Unions.” InternationalTransport Workers’ Federation, London. Availableat www.itf.org.uk.

Van der Hoeven, Rolph, and Gyorgy Sziraczki. 1997.Lessons from Privatization. Labour Issues inDeveloping and Transitional Countries. Geneva:International Labour Office.


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OVERVIEWThis section outlines the rationale for a systematicassessment of the work force and introduces thekey questions that the implementing agency mustaddress.

A systematic assessment of the work force enablesthe implementing agency to:

• Determine the scope and nature of laborneeds

• Enter into more informed negotiations anddiscussions with trade unions and labor rep-resentatives

• Reduce the risk of service disruption oroperational difficulties through the loss ofskilled workers

• Improve targeting in any labor restructuringprogram

• Ensure fairness and transparency of theprocess.

The principal objective of a staffing assessment isto determine existing levels and types of staff andcompare those with what are needed. To that endthe assessment will address the following questions:

• How many staff are there in the enterprise,and how does that compare with requiredamounts based on efficiency criteria?

• How can surplus staff be identified, andwhere is it located in the enterprise?

• Are there any particular skills or categoriesof worker that are scarce?

• Will future market or operational changesplace some job skills in more demand thanothers?

• Are there particular key individuals or staffcategories who must be retained—perhaps

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3Assessing the Size and Scope of Labor Restructuring

Afirst step for the implementing agency is to assess the size and scopeof labor restructuring. This module begins with an overview of therationale for carrying out systematic staffing assessments and then

summarizes three tools that the implementing agency can use in this regard:staff audits, benchmarking, and work force analysis.

MODULE

because their experience is critical to thecontinued operation of the enterprise?

Staffing assessments are relevant in a range ofrestructuring circumstances. Work force restructur-ing has short-term (often urgent) as well as longer-term dimensions. This is illustrated in table 3.1,which characterizes three dimensions: work forcereduction, work redesign, and organizationredesign.

In many PPI programs all three dimensions areinvolved and the different tools described in thischapter can be applied to each of the dimensions.During the course of a railway PPI transaction, forexample, there may be removal of ghost workers,early retirement and voluntary departure (workforce reduction), more use of containers andstreamlining of terminal turnaround times (work

redesign), and the closure of redundant workshops(organization redesign).

There are three tools that the implementing agencycan use to address the above questions:

• Staff audits or personnel inventories

• Benchmarking

• Work force analysis.

Terms of reference for consultants to undertake a staff

scoping study

Although these are described as three different toolsand are presented in separate sections, in practicethey are closely related and often overlap. For thisreason the model terms of reference for consultants(see the CD-ROM) include all of these toolsbecause they may well be procured as a single con-


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Work forcerestructuring hasboth immediate andlonger-termdimensions.

Three assessmenttools—all closelyrelated:

• Staff audits• Benchmarking• Work force

analysis.

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Table 3.1: Three Dimensions of Work Force Restructuring

Work force reduction Work redesign Organization redesign

Focus • Headcount • Unnecessary work and • Organizational jobs structure

• Customer orientation

Timeframe • Short (one to two years) • Short to medium • Medium to long (five years and longer)

Key tools • Staff audits • Benchmarking • Work force analysis• Benchmarking • Work force analysis • Organizational reviews

Factor(s) to • People • Work • Units, levelseliminate

PPI issues • Downsizing • Management contracts • Privatization• Contracting out • Concessions• Competitive processes • Leases

Implementation • Short-term • Moderate • Extendedand payback period

Examples • Severance • New working practices • Transfer of social work • Early retirement • Redesign and simplifi- force (housing, • Layoffs cation of processes kindergarten)• Job sharing • Productivity improvement • Exit from noncore

• Renegotiated labor activitiesagreements with unions • Incentive-based pay-

ment systems• Outsourcing and con-

tracting out (employ-ee enterprise)

Source: Adapted from Cameron 1994.

tract. In combination they can guide decisionsabout levels of redundancy, avoidance of adverseselection, and other aspects of restructuring strategy.

The tools described in this section can also be use-ful when the PPI transaction is not likely to happenfor some time. Sometimes the preparation for PPIreform may take years, and during this time therewill be proposals for organizational change. Suchefforts can themselves benefit from systematicstaffing assessments and the use of proper tools.

Staffing assessments and the tools employed in thisprocess are a means to determine the potential sizeand scope of labor restructuring. The main objec-tive is to estimate the broad extent of restructuringfor planning purposes. The process should notbecome an end in itself or be viewed as a way todetermine precise needs or identify individual sur-plus employees. Such an approach can be highlytime consuming and may lead to delays not just inthe restructuring process but in PPI itself.

STAFF AUDITSStaff audits give an up-to-date analysis of the workforce and provide the basis for subsequent bench-marking and work force analyses. They also pro-vide the necessary database for accurate estimationof the costs of alternative severance and pensionsstrategies, and for the eventual disbursement ofpayments to workers.

ObjectivesA staff audit is an essential first step in assessinglabor issues in the enterprise. Staff audits help to:

• Bring personnel records up to date.

• Identify and eliminate ghost workers whoare still on the payroll. In Argentina’sSOMISA steel company, for example, theintroduction of a plant census with a photoID quickly revealed that 17 percent of thework force were shadow employees (Hess1997).

• Provide a basis for developing severance andearly retirement options and for estimatingcosts if downsizing is needed.

• Fill in critical data gaps (for example,employee age, grade, or start of service) thatmay be needed subsequently to calculateseverance payments.

• Improve the accuracy of subsequent workforce analysis.

• Establish effective record-keeping proce-dures in order to allow management to con-trol or regain control of the payroll, providemanagement with adequate human resourceinformation, and comply with labor lawsand regulations.

• Provide a basis for review of job positions,pay grades, and scales. In some enterprises,harmonization of staff terms is an essentialtask prior to the PPI transaction. This is par-ticularly the case where a new operatingcompany is to be formed, perhaps drawingstaff from civil service and public enterprisecadres.

ScopeA staff audit is a fresh review of staffing. It pro-vides up-to-date information on personnel, andtypically includes data on:

• Employee numbers, categorized by type ofemployment (precise definitions will dependon national regulations). For example, per-manent full-time and part-time employees;short-term casual, seasonal, or temporaryworkers; temporary workers engaged formany years (who may have acquired addi-tional rights); professional staff recruited onad hoc emergency terms; semipermanentworkers; contract workers; workers on dis-ciplinary suspension; workers on deputationfrom elsewhere in government; and workerson administrative leave.

• Employee numbers, categorized by opera-tional or social criteria, such as location, job

Assessing the Size and Scope of Labor Restructuring

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Up-to-date recordsof personnel andremoval of ghostworkers areimmediate benefitsof a staff audit.

All categories ofstaff need to beidentified.

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title, function, salary grade, level of educa-tion, age, gender, ethnic group, years of serv-ice, and other categories relevant to thecountry or the enterprise.

• Employee skills: Skills assessments are anintegral part of the staff audit. They are par-ticularly important in terms of maintainingservice levels and quality, and they generallyinclude assessment of individual employeefunctional or technical skills; identificationof key individuals or groups of workerswhose knowledge, experience, and institu-tional memory are critical to the effectiveoperation of the enterprise; and the identifi-cation, through some form of gap analysis,of the difference between today’s skills andcompetencies and those required for thefuture success of the enterprise.

• Employee compensation for each employee,or category of employee, including basicmonthly salary, cash and other allowances(for example, civil servants in Yemen receivea basic salary and up to 16 allowances), in-kind benefits (for example, housing, travel,and subsidized loans), and pension contribu-tions by the employer.

• Liabilities of the enterprise to the employee,which may be important information to col-lect during the staff audit, particularly inenterprises in acute financial crisis wherethere may be arrears of salaries or benefitspayable to employees, arrears of pension orsocial insurance payments attributable toemployees (both employers’ contributionand employee contribution), and arrears ofpayroll taxes due to the tax authority andother payroll deductions.

In some cases data on these financial liabilities willbe available for individual employees; in othercases, only at an aggregate level.

Collecting Personnel DataThe data set described above represents an ideallevel of information needed to fully assess the work

force, minimize adverse selection, and calculate anindividual employee’s entitlements in the event ofseverance. In the first stages of planning, however,data may not be available and the implementingagency may need to obtain some basic minimumfigures. Box 3.1 suggests a minimum data set.

Some well-managed enterprises will have up-to-date personnel records and the staff audit will berelatively easy to undertake. In many developingcountries, however, adequate information is lackingand substantial effort is needed to build a credibleand current personnel database. It will be more dif-ficult when:

• The personnel administration and humanresource management functions have beenneglected.

• Salary and benefits are complex with manydifferent components.

• Personnel records are entirely paper based,and there is no computerized informationavailable to allow data manipulation, sort-ing, and analysis.

• Personnel record-keeping has been decen-tralized, which may mean greater amounts


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There may be a biggap between today’sskills andcompetencies andthose neededtomorrow.

In some enterprisesaccurate data willbe difficult to obtain.

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Box 3.1: What’s the Minimum Data Set for aStaff Audit?

In assessing the work force, the minimuminformation that the implementing agency willneed for each employee:

• Age

• Gender

• Years of service and service start date

• Grade and/or category

• Salary

• Allowances

• Estimated arrears of salary

• Estimated arrears of pension, tax, and otherbenefits.

In the very first stages of staffing assessments,or where data are poor, averages or estimatesfor categories of employees will be needed (e.g.average salaries, estimated pension arrears,years of service for different cadres of staff).

of missing data and incorrectly maintainedrecords.

• Records have been lost through damage(deterioration, fire, conflict).

Reviewing a sample of the existing records canhelp the implementing agency determine whetherthe data are:

• Comprehensive—Are all workers included?Are records for certain workers missing?Are there lost or damaged service records?Are performance records complete? Are allthe records complete?

• Accessible—Is information easy to extract?Is it computerized? In some cases collectingspecific information may require a time-con-suming, manual review of paper records.Where there is reluctance on the part ofenterprise managers, access to records maybe deliberately delayed or made more diffi-cult.

• Accurate and up to date—Are validationsystems in place?

If records are poor, the updating of the personnelinventory is a critical and urgent first step. In suchcases the staff audit will effectively provide baselinedata against which all proposals for work forcerestructuring will be assessed.

The way that data are collected and staff audits areconducted is important, too. Effective staff auditswill be transparent, and considered by workers tohave been undertaken fairly. One way to do this isto use uniform and clear procedures. For example,when Middle East Airlines was conducting its staffaudit in preparation for privatization, standardevaluation forms and curriculum vitae formats wereprepared for each employee (see the CD-ROM foran actual example of an employee evaluation form).Another example of transparent procedures is theone adopted in Nigeria’s civil service census (box3.2).

Staff are likely to be worried and made anxious bysome aspects of the staff audit. Measures to helpworkers reduce anxiety include:

• Early, factual, and open communicationwith workers about the purpose of the staffaudit, what will happen, where, when, andhow.

• Early consultation with trade union repre-sentatives. Unions may be willing to partici-pate in the staff audit and help ensure that itis open, fair, and transparent, and therebyassuage the concerns of their members.

Records of employee performance are an impor-tant data source for the staff audit process.Where appraisal or disciplinary records areincomplete, managers are often reluctant to dis-miss staff on the basis of nonperformancebecause of the risk of noncompliance with laborlaws or regulations.

Updating personnel records is, in principle, a rela-tively straightforward task, but it may be quiteonerous, time consuming, and demanding ofresources if the PPI enterprise has a work force oftens of thousands of people spread across an entirecountry, often in remote locations. In some coun-tries, implementing agencies might learn from theexperiences (both good and bad) of conductingcivil service audits. An illustration of one approachto updating personnel records and identifyingghost workers is given in box 3.2.

Collecting Information on SkillsEven where there is overstaffing, employees are notjust a cost but an asset too. Collecting informationon their skills and capabilities will help to ensurethat the right overall skills mix is available to thepost-PPI enterprise and that critical skills are notlost.

Skills Assessments

Skills assessments extend the scope of the basicstaff audit and are particularly valuable in sectorswhere there is rapid technological change, such astelecommunications. The purpose of a skills assess-ment is to provide information that will assist theimplementing agency in identifying areas of skillshortages and avoiding problems of adverse selec-


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Standardapproaches helpimprovetransparency.

A staff audit in alarge enterprise canbe resourceintensive.

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tion where the best people might leave during thecourse of work force restructuring.

Skills assessments have three elements:

• Assessments of current skill levels and short-ages, based on current techniques and tech-nology employed by the enterprise.

• Forecasts of future skill requirements (num-ber and level), using modern technology andmanagement practices. This has a degree ofsubjectivity and requires some insight intothe types of technology that would be usedunder modernized public sector or privatesector ownership and management.

• Analysis of the gap between current andlikely required skills to identify areas of skill

surplus and skill shortage. This is an impor-tant step because a skills shortage in the cur-rent enterprise could easily become a totalsurplus if the skills are not required in thepost-PPI environment.

Identification of Critical Skills

Operations managers, responsible for maintenanceor service delivery, usually know very well whatskills are in short supply today—often much betterthan top management knows them. Senior man-agement, however, will have a better picture of theoverall direction of the enterprise—and hencefuture skill needs—so the skills audit will need theperspectives of both groups.

Sometimes critical skill surpluses and deficits arenot hard to analyze (as in box 3.3). Although some


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Skills assessmentshelp avoid adverseselection.

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Box 3.2: Nigeria—Conducting Staff Audits in the Civil Service

When the Nigerian government decidedto eliminate ghost workers from civilservice employment, it set about the

task systematically with World Bank assistance.The methodology involved questionnaires, physi-cal headcounts, preparation of comprehensivenominal rolls (staff rosters), scanned photo-graphs, and the use of file numbers to locate therelevant people, compiling actual personnel costsand calculating personnel costs based on head-counts reflected in the nominal roll. A specialinstructional guide was prepared to elicit relevantdata from the field. The guide contained a step-by-step approach required by auditors in elicitingthe necessary information. The guide also includ-ed the formats of the nominal roll and the recordsof personnel emoluments.

The staff were required to appear in groupsbefore a panel of auditors. Each personappeared with his or her employment file, whichcontained or should have contained relevantdocuments showing that he or she was a bonafide employee. The files were intended to serveas a control, and an effort was made to matchthe facts in the file with those on the completedquestionnaires.

During the interviews staff were questionedabout the facts in the file and the questionnaire inorder to authenticate the information provided.The interviews were conducted in the open so

that other staff members could corroborate theinformation supplied by the interviewee.

Staff were also all required to fill out standardforms giving:

• Personnel file number, name, gender, and des-ignation

• Qualifications

• Grade level/step, department, location

• Date of birth, state of origin

• Date of first appointment and date of confir-mation of appointment

• Date of present appointment

• Remarks

• Image file number for photo ID.

On the day of the physical headcount, whichcoincided with payday, each staff member wasasked to line up and present his or her forms,together with a photograph and employment file.The forms were then checked against the infor-mation on file and signed off by the worker’ssupervisor. Disparities and suspect submissionswere noted and the data was transferred to aspreadsheet. In addition, information on pay wasentered on to a second spreadsheet, cross-checking the forms with the departmental per-sonnel emolument cards for each staff member.

Source: International Records Management Trust 2001a.

skill issues can be predicted easily, the implement-ing agency should be cautious in such decisions. Inthe airline example in box 3.3, for example, it isconceivable that a PPI investor might be interestedin those skills to provide a new regional mainte-nance business for Boeing aircraft. Where newtechnology is to be encouraged, the existing man-agers may not have enough information about thattechnology to make the best decisions on futurestaff restructuring.

Union involvement can be useful in the case ofskills audits. Often unions are aware of the needfor reskilling of the work force and may take alead on pushing for the reskilling of their membersas part of work force restructuring. (See, for exam-ple, box 3.4.)

Skills considerations are highly relevant to workforce restructuring in PPI because poorly plannedlabor adjustment that is not skill based can leadto loss of capability within the enterprise, whichcan affect service delivery and lead to perceptionsthat PPI has failed. Even when faced with anurgent and undisputed need for downsizing, theimplementing agency will need to recognize thatworkers are also assets—and that their knowl-edge and experience may have value. Two exam-ples from the railway sector illustrate the prob-lems that occur when this knowledge is lost:Chile’s Fepasa railway (see box 5.10 in module 5)and the United Kingdom’s privatized track infra-structure (box 3.5).

Skills and knowledge can be thought of as theunderstanding gained from experience. If it isimportant in a particular PPI scheme, the imple-menting agency can encourage actions to reducethe loss of skills. The following are some of thoseactions:

• Ensuring that skills are covered in the staffaudit.

• Effective targeting and selection of workerswho are to be retained.

• Capturing of tacit knowledge, which is heldin people’s heads and often revealed inunstructured forms (memos, notes, e-mails).

• Ensuring that skilled workers are compen-sated properly so that there is an incentiveto stay.

BENCHMARKINGBenchmarking is an important mechanism foridentifying the potential for labor productivityimprovements (box 3.6). Making good compar-isons can be difficult, but there are several sourcesof information. In addition the process of bench-marking will help identify problem areas in termsof overstaffing and opportunities for improvinglabor productivity.

What Are Benchmarks?Benchmarks are fixed pieces of information thatcan be used to make comparisons with other simi-lar fixed pieces of information. Labor benchmarksare not only used as a one-off activity for workforce restructuring but also as a tool for continu-ously monitoring and improving performance andcompetitiveness. In practice it is the process ofundertaking benchmarking that generates mostbenefits because it challenges current norms.Benchmarks provide managers with comparativedata on performance and labor productivity.Although like-for-like comparisons are not alwayseasy, benchmark measures can give the implement-ing agency crude indicators of the scale of anyoverstaffing.


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Box 3.3: Middle East Airlines—SkillsMismatch

Awork force restructuring exercise formedpart of the preparation for the privatiza-tion of Middle East Airlines in 2000–01.

Of a total work force of 3,700, about 1,120 wereestimated to be surplus to requirements. Thelargest group of redundant workers was 700ground employees trained in servicing Boeingaircraft and not qualified to service Airbus air-craft, which made up all of MEA’s new fleet.

Source: Middle East Airlines.

in the ways they manage the turnaround anddispatch of aircraft or trains; administrativeprocesses, customer service response times,and staff appraisal performance will havesimilarities in all organizations.

All three types of benchmarks have their places,but a combination of measurement and processanalysis is important for effective benchmarking.Measurement identifies the performance gap, butthe discussion, debate, and working through ofprocess and operating changes provide the mecha-nism for operational managers to identifychange—including identification of the extent,location, and causes of overstaffing.

To understand the origins of labor productivity,implementing agencies will want to review a rangeof generic benchmarks (box 3.8), as well as thosespecific to the sector (box 3.9), such as:

• Number of employees per thousand connec-tions (telephones or water)


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If knowledge mightbe lost as a result ofthe PPI process, theimplementingagency canencourage today’smanagers todocument andrecord criticalinformation.

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Box 3.4: India—Unions and Reskilling in the Telecommunications Sector

Trade unions strongly opposed the corpora-tization of India’s main telecommunicationsenterprise, BSNL. The unions, however,

also worked hard to negotiate on issues of long-standing concern relating to staffing, skills, tech-nology, and the viability of the organization.

It was clear that there was overstaffing. As earlyas 1982 the Sareen Committee Report on theTelecom Sector had pointed out that in Indiathere were 104 officials per 1,000 telephones asagainst fewer than 10 per 1,000 in developedcountries. At that time the International LabourOrganisation played a significant advisory rolewith respect to preparing for work force restruc-turing, and the telecommunications trade unionfederations accepted a ban on recruitment in1984. This ban preceded the creation ofMahanagar Telephone Nigam Limited and VideshSanchar Nigam Limited (two new state-ownedfirms specializing in supply of telecommunica-tions to Delhi/Mumbai and data services, respec-tively) a few years later. Together with the vastexpansion of the sector, this ban led to animproved staffing ratio of 35 per 1,000 lines by1997. Although there was a ban on new recruit-ment, the unions had been successful in obtain-

ing the regularization of 100,000 casual and otherworkers.

The Sareen Committee had also noted a mis-match between the skills required for new tech-nology operations and those that actually exist-ed. Skill upgrading also constituted a coredemand from the federations. After theannouncement of the National Telecom Policy,the trade unions gave strike notices in August1994 and June 1995. In both those cases therewas an expression of concern about the too-early entry of the private sector and the need toupgrade skills within the public sector enterprisesto match this competition:

The trade unions in Telecom have neitheropposed its expansion nor modernization, buthave repeatedly been urging for upgrading ofskills and education of the work force whichwas recruited in a period for the type of workwhich does not exist today. We have persist-ently stressed for bringing about a change inthe work culture which cannot be automatical-ly achieved by economic improvement.(Gupta 1998, pp. 33, 34).

Sources: Interviews, relevant reports, and documents; Gupta1998.

There are three main types of benchmarks:

• Internal benchmarks: By making compar-isons within an organization, perhapsbetween different offices or time periods, itmay be possible to identify some areas forimprovement quickly and easily. An exam-ple is the approach adopted by Kenya’s elec-tricity distribution company (see box 3.7).

• Sector benchmarks: Comparisons in thesame sector provide another comparison.International or regional comparisons canbe used where the PPI enterprise is amonopoly provider in the country.

• Functional (process) benchmarks: There maybe other organizations from different sectorsbut with similar operational functions thatcan be compared. For example, gas, water,and power utilities might cooperate in bench-marking their metering or billing collectionprocedures; airlines and railways are similar


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Box 3.5: British Rail—Loss of Institutional Memory

The experience following British Rail (BR)privatization illustrates how flaws in laborrestructuring can bring the broader PPI

agenda into disrepute. The BR privatization ismuch cited in Europe as evidence that privateprofit is incompatible with public safety and serv-ice reliability. But testimony given at a publicinquiry following three fatal train crashes in thefour years after privatization suggested that aprincipal lesson the experience provides forimplementing agencies internationally is to payadequate attention to issues of work force skillsand institutional knowledge.

One former senior BR manager, Chris Green,who has since been recruited by one of the trainoperating companies to help them deal with theirproblems, told the Financial Times that the “col-lapse” of professionalism has been the “mostfundamental” consequence of privatization. Hecited contracting out and the departure of manyjunior and middle managers “with vital experi-ence” as the cause of the problems. “The netresult has been a collective loss of memory onthe basics of running a railway,” he said.(Financial Times, “Inside Track: A Pragmatist’sTrack Record,” February 14, 2001.)

The Financial Times has vividly drawn attentionto the consequences of replacing an integratedwork force and an established hierarchy withlayer upon layer of contractors and subcontrac-tors to carry out track maintenance more cheap-ly. “The first consequence was the breakdown of

the old comradeship, which used to mean thatproblems were easily spotted, repairs made, andpeople could talk to each other,” the businessnewspaper’s analysis concluded, adding:

Track workers operated in gangs and knewtheir stretch of rails like their own back gar-dens. Instead, workers became nomadic,moving to the next job with little or no localknowledge and instructions not to talk to rivalworkers except via a supervisor miles away.The second big problem was a growing lackof control over the staff and their work. Therehave been complaints of sub-contractorsrecruiting workers out of pubs to fill gaps onthe night shift (Financial Times, “RailtrackDescent into Chaos,” February 22, 2001).

The overall effect was to break “traditional bondsand practices of passing on skills and experi-ence,” the Financial Times commented, and thiswas exacerbated by the introduction of “hard-nosed commercial tensions into relationships thatoften needed to be co-operative.” “Safe workingof the network is hardly possible in such a cli-mate,” John Hurst, BR’s former organizationaldevelopment manager, told the public inquiry intothe crashes. “Merely taking steps of a technicaland operational nature, in light of any particulardisaster, will not address this underlying malaisewhich will inevitably chronically manifest itself innew disasters” (Financial Times, “Railtrack’sRocky Train Journey to Its Fifth Birthday,” May21, 2001).

Box 3.6: Benchmarking DefinitionsBenchmark: A standard or point of referenceused in measuring and judging quality or value.

Benchmarking: The process of continuouslycomparing and measuring an organizationagainst business leaders anywhere in the worldto gain information that will help the organizationtake action to improve its performance.

Box 3.7: Kenya—Internal Benchmarking inPower Distribution

For each geographic district in which itwould be distributing electricity, the KenyaPower and Lighting Corporation (KPLC)

identified its characteristics (number of con-sumers, area, length of overhead line, number ofsubstations, energy sales per customer, and soforth) and found weighted averages for differentclasses of staff (engineers, foremen, linesmen,and the like) that enabled them to compare fairlyeasily areas of different labor productivity.

• Number of employees per generatedmegawatt (MW) (for power generation)

• Number of employees per ton of freight orTEU (20-foot equivalent unit) of containershandled (ports)

Sources of Benchmark DataBenchmarking data can be obtained from interna-tional, regional, and national sources. Internationalorganizations are one source of benchmarkingdata, and increasingly make information availablefor online access through the Internet (table 3.2).

There are also growing networks of collaboratingenterprises in the infrastructure and utilities sectorsat the regional and national levels. For example, inthe water sector:

• Link to Water Utilities Partnership (WUP) Web site

• Link to Baltics benchmarking Web site


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Box 3.8: Generic Labor BenchmarksGross or net revenue per employee

Total payroll costs (all employment-relatedexpense) per employee

Total/functional labor cost as a percentage ofsales

Ratios of headcount by function(management/operations; customerservice/maintenance)

Management salaries (relative to private sectornorms)

Salary levels by function (adjusted to allow com-parisons)

Hourly wage rate (standard and overtime)

Average weekly hours per worker

Units produced per work hour (unit productivity)

Product/service line revenue per staff-hour/full-time equivalent employee

Training days per person per year

Box 3.9: Sample Labor Benchmarks by SectorAirlines

Numbers of pilots or ground staff per aircraft

Pilot hours per month

Bus

Staff per bus (drivers and mechanics)

Staff per 1,000 passenger kilometers

Electricity

Number of workers per MW generated

Number of workers per connected customer

Number of workers per MW distributed

Ports

Tons per port employee per year

Tons per gang-hour or gang-day

Tons per ship per gross and net ship-days

TEU per hour (on container terminals) and TEUper gang per day

Because of the significant variation in type ofcargo (bags, break-bulk cargo, project cargo,and so forth), port labor productivity is usuallyrelated to the cargo type and expressed on aper-day basis either as gross (overall time) ornet (time minus agreed delays such as rain andthe like).

Rail

Employees per kilometer of line

Total wages as percent of total revenues

Tons-km (freight-service kilometers) moved peremployee per year

Passenger-km (passenger-service kilometers)moved per employee per year

Traffic units (ton-km+passenger-km) per employee

Staff-hours of maintenance employees per 1,000locomotive-km

Telecommunications

Number of main lines in service (working lines)per employee

Number of employees per 1,000 main lines

Water

Staff per 1,000 water connections

Staff per 1,000 water and sewerage connections

Staff per 1,000 people served

Thousands of cubic meters of water sold peryear per employee

Kilometers of pipeline in the water supply systemper employee

Thousands of people served per employee

and usually with mechanisms for providing ameasure of confidentiality.

Using Benchmark MeasuresThe collection and analysis of relevant data (met-rics) are essential for the identification of areas ofgood or poor performance, and for the subsequentanalyses of operational processes. This sectiongives some illustrations of labor productivitybenchmarks reported in a number of infrastructuresectors, and makes suggestions on the collectionand use of benchmarking data.

Comparisons within a sector can indicate potentiallow labor productivity, as the following examplesillustrate.

Airlines sector:

• Before it was liquidated in the early 1990sthe state-owned Zambia Airways employed300 staff per plane, compared with anindustry norm of 140 at that time (Kikeri1998).

• Loss-making long-haul carrier Air India hada staff-to-aircraft ratio of 663 in 1997, com-pared with ratios between 170 and 340 invarious Southeast Asian carriers: SingaporeAirlines, Thai Airways, Malaysian Airlines,and Cathay Pacific (India, DisinvestmentCommission 1998).

• At Middle East Airlines (MEA) pilots work60 hours per month, compared with anaverage of 90 hours per month inOrganisation for Economic Co-operationand Development (OECD) countries. Themaximum number of flight hours at MEA is9 in a 24-hour period, whereas the interna-tional average is 10.5 and at some airlines itreaches 12.

Bus operations sector:

• Comparisons of the performance of statebus companies in India showed big differ-ences in labor productivity among states:staff to bus ratios varied from 6.03 in


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Regionalcollaboration canprovide excellentopportunities forbenchmarking ofmany aspects ofperformance,including laborproductivity.

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• The WUP provides a regional forum forurban utilities in Africa to share perform-ance data (see www.wupafrica.org). TheWUP has just completed a benchmarkingexercise gathering data from more than 100water utilities in Africa.

• In the Baltics a group of utilities are bench-marking against each other (see www.water.hut.fi/bench/)

• In Brazil a national agency concerned withwater sector reforms, Projeto deModernização do Setor Saneamento withinthe federal Ministry of Planning andBudgeting, has a data set on operating costsfor about 100 municipalities.

• With World Bank support the VietnamWater and Sewage Association is creating adatabase of urban water sector costs andperformance in the country through thelow-cost collection and publication of dataprovided by more than 60 provincial watercompanies (see Nguyen 2002 and bench-marking data for the 60 companies in theCD-ROM).

• Link to AFUR Web site

• Link to SAFIR Web site

Other cross-sector regulatory groups, such as theAfrican Forum for Utility Regulation (AFUR), are alsotrying to include benchmarks and indicators as part oftheir information-sharing processes (see www.world-bank.org/afur). SAFIR (the South Asia Forum forInfrastructure Regulation) also provides some compar-ative information (see www.safir.teri.res.in).

In addition to data from international organiza-tions, trade associations, regulators or associationsof regulators (such as AFUR or SAFIR), or othergroups, statistics on labor productivity may beavailable from private sector benchmarking firms.Because there is competition among private sectorfirms in infrastructure services, not all PPI enter-prises may be willing to share their methods andcommercial information. Private sector intermedi-aries can provide services in benchmarking andinterfirm comparisons, often on a cost-share basis


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Table 3.2 provides

sources of interna-

tional benchmark

data for a range of

sectors.

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Table 3.2: Some Sources of International Benchmarking Information

Sector Source

Ports United Nations Conference on Trade and Development (UNCTAD): UNCTAD’s Annual Review of Maritime Transport provides statistical data for the world’s ports (see the digital library at UNCTAD’s Web site, www.unctad.org).

Others:• Australia’s Productivity Commission undertook an international benchmarking of productivi-

ty on Australia’s ports. Results are available at the Commission’s Web site, www.pc.gov.au/research/benchmrk/wtfrnt/wtfrnt.pdf.

• The American Association of Port Authorities (whose members are 150 ports in North and South America and the Caribbean) distributes port statistics and information on labor–management relations. Information is available at www.aapa-ports.org.

Postal operations Universal Postal Union: The union provides an online database with statistics on variables, including the number of full- and part-time staff. The database is available at www.upu.int.

International Postal Corporation: This association of 22 postal operators handling 65 percent of the world’s mail undertakes some cooperative benchmarking projects, but to date none of theprojects focus on labor issues. The Web site is www.ipc.be.

Rail World Bank: A principal source of comparative data on worldwide railway performance can be found at www.worldbank.org/transport/rail/rdb/countries.htm.

Road SAFIR: Comparative analysis of bus operations in South Asia (SAFIR 2002) is available at www.safir.teri.res.in.

Telecommunications The International Telecommunications Union (ITU) (www.itu.int): • The ITU’s statistics department collects aggregate data provided by national ministries or

regulators at the country level on numbers of employees in the telecommunications sector. The ITU does not, however, hold data at operator level (although there is a database to facilitate contact with individual operators), and its statistics combine both mobile and fixed line employment.

• The human resources department of the ITU is establishing regional centers of excellence for training and staff development purposes, and has developed a computerized tool (MANPLAN) for forecasting strategic staffing and training needs.

• Regional comparative data are available in the ITU’s Africa, Asia-Pacific and Americas Telecommunications Indicators reports.

• The most recent telecommunications indicators from the ITU’s statistical database are avail-able from the ITU web site: http://www.itu.int/ITU-D/ict/publications/.

Water Asian Development Bank:• The ADB has financed two issues of the Water Utilities Data Book, which provides valuable

information on water utilities in the Asian and Pacific region. The second edition was pub-lished in 1997 (McIntosh and Yinguez) and is available for purchase from the ADB, Manila.

• The ADB has provided support for benchmarking in particular regions (e.g., the Pacific Water Benchmarking Study [Delana 2002]).

World Bank:• The Benchmarking Water and Sanitation Utilities Project has a Web site that provides core

cost and performance data: project information can be found on http://www.worldbank.org/watsan/topics/bench/wup.html.

• Although there is considerable benchmarking activity at the national level, much of the infor-mation is scattered. Information on an initiative to help utilities (and regulators) share and access data can be found at www.worldbank.org/watsan/pdf/benchmarking/pdf. Included there is a start-up kit for water utilities wishing to participate in benchmarking.

• A set of water and wastewater utility indicators is available at the Web site of the Water and Sanitation Program, www.worldbank.org.watsan/pdf/indicators.pdf.

• The annual World Bank Water Forum provides a discussion and examples of the use of per-formance benchmarking, as does the World Bank publication A Water Scorecard (Tynan and Kingdom 2002).

International Water Association (IWA): The IWA (www.iwahq.org.uk), a forum for sharing of experience among members, recently has published guidelines titled “Performance Indicators for the Water Industry” (Alegre 2000) and “Process Benchmarking in the Water Sector” (Parena, Smeets, and Troquet 2002). The IWA Foundation focuses on water issues in develop-ing countries.

Karnataka and 7.12 in Andhra Pradesh to11.55 in Madhya Pradesh and 16.08 inOrissa.

• In Sri Lanka private sector bus companiesoperate with 2 to 3 staff per bus, comparedwith 5 to 13 staff for state-owned bus com-panies (SAFIR 2002).

Rail sector:

• A World Bank study of concessioned rail-ways in seven countries showed wide varia-tions in labor productivity, measured as out-puts divided by number of employees in therail sector. The most productive U.S. rail-ways had 22 times fewer workers per trafficunit (passenger kilometers plus freight kilo-meters) than did some railways in Mexico(Thompson, Budin, and Estache 2001).

Thompson, Budin, and Estache 2001.

• Following railway privatization, PPI andrestructuring the ratio of labor cost to rev-enues fell from an average of 64.3 percentto 48.4 percent in eight case studies (mainlyfrom industrialized nations) (Kopicki andThompson 1995).

Telecommunications sector:

• In Malawi the national telecommunicationsoperator has a ratio of 16 working lines peremployee compared with a Sub-Saharan aver-age of 31 working lines (Sauti-Phiri 2002).

Selected telecommunications indicators.

Water sector:

• An analysis of data from 246 water utilities(including 123 utilities from 44 developingcountries) proposed a benchmarking target of5 or fewer staff per 1,000 connections fordeveloping-country water utilities. This targetwas based on the levels of productivity actu-ally being achieved by the top quartile ofdeveloping-country utilities within the data-base. By contrast many developing-countryutilities reported more than 20 staff per 1,000connections (Tynan and Kingdom 2002).

• Comparisons among Vietnam’s provincialwater companies show a number of opera-tors with labor productivity well below theaverage (see figure 3.1), which would justifyfurther assessment of the cause.

Making comparisons within a region can alsoprove valuable for implementing agencies that needto understand whether overstaffing is confined tojust one enterprise or is a common problem in allinfrastructure utilities. As shown in table 3.3, anassessment of the utility sector in Uruguay com-pared with other countries in the region signaledpotential problems in labor productivity in a num-ber of utility sectors. Regarding that table, twopoints are instructive:

1. Differences in productivity within a geo-graphic region can be substantial.Implementing agencies do not need to com-pare between OECD industrial countriesand developing countries to gain usefulinsights. The benchmarks and the compara-tors in this example were all classed in the1997 World Bank World DevelopmentReport as upper-middle-income countries(except the Republic of Korea, which thenwas classed as lower-middle-income)

2 There is some degree of subjectivity. Thebasis for assessing the “best performance”benchmark was based on a range of sectorand regional reports plus interviews withsector specialists for each country.

In practice, several factors make the comparison ofbenchmarks across countries and PPI operationschallenging. These factors include:

• Increased outsourcing and contracting out:Because utility and infrastructure enterprisesoutsource many of their operations, com-parisons based on units of activity per full-time, permanent employee may not providea like-for-like comparison.

• Comparability of the scope of the PPI enter-prise: Published data may report labor num-bers and productivity in operations that arecombined in some countries and separatedin others—for example, telecommunications


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and postal services; water and sewerageoperations; and power generation, transmis-sion, and distribution.

• Differences in condition of the infrastruc-ture: Some older networks have high main-tenance costs as a result of age or past inad-equacies in investment in new technologies(be it optical fiber for telecommunications,port containers, or combined-cycle powerplants).

• Extent and nature of the network: Serviceproviders in dense urban areas will havestaffing requirements that differ from thoseof rural providers. Some railways may havea markedly more benevolent topographythan others, so that track maintenance costsare lower. Different regulatory regimes mayplace different legal obligations on the levelof service provision, leading to very differentcost and staffing structures.

• Depth and quality of the data: All bench-marking data sets will benefit from greaterprecision, clear definitions, and disaggrega-tion. The more information that is availableand the more that users can be sure of therelevance of the data sets, the more trust canbe placed in them. Even so, averages can bedeceptive and can be distorted by abnormal-ly high or low performance.

• Misuse and abuse of benchmarks: Laborbenchmarking statistics can be misused andused to exaggerate or understate the needfor downsizing. For example, simply settinglabor adjustment targets to match interna-tional best practice levels can be dangerousif it does not take account of the particularconditions bearing on the enterprise.Furthermore, data can be manipulated (forexample, by excluding temporary or second-ed workers) to suggest that staffing levelsare not particularly high.

• Age of the data and the fast-changing natureof the work force: Almost by definition, abenchmark will be out of date the day it ispublished. One year’s best practice can soontranslate into next year’s average perform-ance so it is essential to ascertain the daterelevancy of the data. Old data are still valu-able, however, because they allow trends tobe identified, thus enabling the implement-ing agency to assess whether productivityand efficiency gains are accelerating or stag-nating. One example of changing productiv-ity is that of Bharat Sanchar Nigam Limited(BSNL), the main state-owned telecommuni-cations operator in India. As the number ofsubscribers has risen, staff numbers haveremained constant and labor productivityhas risen steadily (table 3.4).


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Table 3.3: Regional Comparative Performance Measures

“Bestperformance”

Argentina (and (private reasonable

Sector Uruguay sector) Brazil Mexico Chile benchmark)

Telecommunications 88 155 121 174 153 294(main lines (Korea, per employee) Rep. of)

Electricity (customers 102 280 177 208 285 285 per employee) (in 1995) (Chile)

Water and sanitation 8 3 5.2 4 2.1 1.8 (employees per (Malaysia)1,000 connections)

Source: World Bank 1997a.

• Policy and structural reforms in the sector:Productivity benchmarks also change as aresult of liberalization, new entrants into thesector, and new technologies. For example, aprivate sector operator and new entrant intotelecommunications in India, TataTeleservices, has about seven employees per1,000 subscribers for the fixed services itprovides in Andhra Pradesh (albeit usingradio for the local loop)—approximatelyhalf the ratio achieved in 2000 by the for-mer monopoly, BSNL. In general, as infra-structure companies are exposed to competi-tion and new investment is increasing, thework force in benchmark comparatorschanges from year to year as a result ofincreased demand for very experiencedmanagers and senior specialists with com-mercial, financial, and information technol-ogy skills; fewer unskilled workers but moreworkers with technical skills and experiencein newer technologies (especially in sectorssuch as telecommunications); and feweradministrative and clerical jobs, but morecustomer service facilities.

In summary, the key to choosing and using bench-marks for labor adjustment is in selecting opera-tions and measures that are as comparable as pos-sible. The development of regional, national, andinternational benchmarking and information-shar-

ing groups is likely to improve the availability,quality, and relevance of data. Comparative bench-marking provides valuable information on poten-tial levels of overstaffing, even if it is best used incombination with other analyses. (See box 3.10 fora list of suggestions for making the best use ofbenchmarking data.)

Benchmarking Labor CostsGiven the difficulties in comparing labor productiv-ity in terms of output per employee, one alternativeapproach is to focus more on benchmarks involv-ing output per unit cost of labor or labor costs as aproportion of total operating costs.

In the rail sector, even comparisons of partial laborproductivity measures are difficult because of differ-ences in topography, traffic mix, technology, level ofpast investment, international trade disruptions,industrial geography, and so on. Basic measures suchas ton-kilometers, passenger-kilometers, locomotive-kilometers, revenue ton–kilometers are, more oftenthan not, estimates based on tons of freight or pas-sengers multiplied by average length of haul or trip.The difficulty in calculating passenger-kilometer esti-mates is particularly great on railways with manyurban commuters. Combined measures such as traf-fic units per employee (ton-kilometer+passenger-kilo-meter) suffer from similar problems.


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There are significantdifferences in laborproductivitybetween the “best”and the “worst”groups in developingcountries.

The increasing useof contracting outmakes it difficult tocompare laborproductivity basedon full-timeemployee numbers.

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Table 3.4: India—Changing Labor Productivity at BSNL, Selected Years

Subscribers Employees Employees per Subscribers Year (millions) (thousands) 1,000 subscribers per employee

1981 2.15 289 134.45 7.44

1991 5.07 375 73.90 13.52

1995 9.80 419 42.78 23.39

1996 11.98 421 35.14 28.46

1997 14.54 429 29.50 33.89

1998 17.80 425 23.87 41.88

1999 21.59 424 19.64 50.92

2000 26.51 421 15.88 62.97

Source: Reports issued by BSNL.

Examining staff costs (wages plus benefits) as apercentage of total operating revenue reveals that,in a number of railways, staff costs alone exceedtotal revenues from users and are often the largestsingle cost category. This may be a better way toevaluate labor productivity than using a ratio ofstaff to traffic units (passenger kilometers plusfreight kilometers) because it factors in differencesbetween labor unit costs in different countries,which might be a reason for some railways legiti-mately being more labor intensive than others.

In some sectors labor costs are relatively low as aproportion of operating costs or capital costs. In ananalysis of 77 electricity-generating plants in 28industrial and developing countries, the averageshares of cost were 10 percent for lubricating oiland materials and 13 percent for labor, but 48 per-cent for fuel and 29 percent for capital (Diewertand Nakamura 1999, based on a 1993 data set.)

Figure 3.1 provides a simplified performance struc-ture for a generic utility and shows that labor costsare only one part of the overall cost structure.

In a few cases the PPI investor may not be veryconcerned about staff numbers, perhaps because

there is little overstaffing or because low wagesmake labor a small proportion of overall costs.

More commonly, however, overstaffing means lowlabor productivity and high staffing costs. Lowwages do not necessarily mean relatively low staffcosts. In their analysis of 246 water utilities, Tynanand Kingdom (2002) found large differences with-in developing countries. Average staff costs as aproportion of total operating costs were 39 percentin developing-country utilities compared with 29percent in industrialized-country utilities.

Even where labor productivity is poor, other fac-tors play a part. For example, high water tariffs inConakry, Guinea, were only partly the result oflow labor productivity (by regional standards).High debt-servicing costs, considerable amounts ofbad debt, low collection rates, and a high percent-age of expatriate staff were other factors (Brookand Smith 2001). (That is why some governmentsand firms prefer to measure “total factor produc-tivity” as a more accurate guide than rawoutput/input ratios on numbers or costs of work-ers; see, for example, Cowie and Riddington 1996and Economic Commission for Europe 2002.)


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Labor productivity“norms” maychange quickly,especially followingthe introduction ofcompetition or rapidgrowth in demandfor services.

Benchmarks changeconstantly astechnologies andwork practiceschange.

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Box 3.10: Hints and Tips for Using Benchmark Data• Be ruthless in data quality; cross-check any-

thing that looks suspicious. Erroneous outlierscan greatly distort comparisons.

• Ensure that definitions are clear—particularly inrelation to full-time equivalent employees, cat-egories of staff employed, and the scope ofthe comparisons—in order to help ensure gen-uine like-for-like comparisons.

• Don’t rely on just one measure because thiscan give a distorted picture. In the water sec-tor, for example, staff per 1,000 connectionsmay be inappropriate if some utilities havelarge numbers of shared (multiple-user) con-nections. In that case staff per 1,000 users andlabor costs as a proportion of operating costswill be useful additional measures.

• Wherever possible visit benchmark organiza-tions. Talk to the people who compiled thedata.

• When starting up, historic data series are use-ful because they show trends and help spoterroneous data and trends.

• Use local or international consultants to sup-port the work, but keep it as simple as possi-ble. Avoid too many and too complex meas-ures.

• Involve people, especially operational man-agers. Exchange ideas at provincial, national,and regional seminars.

• Although the short-term goal may be to collectinformation to help in immediate downsizing,valuable information can be obtained for thePPI bidding and transaction process (whichmay take two to four years). Where regulatorsare being established, the information also pro-vides them with a baseline. Data improve overtime, so “sell” benchmarking to PPI enterprisemanagers as an investment.

WORK FORCE ANALYSISWork force analyses build on staff audits to ana-lyze and forecast the structure of the work forceand then match that structure to the requirementsof the infrastructure enterprise.

Objectives of Work Force AnalysisWork force analysis comprises a set of tools thatprovides a bridge between the details of staffaudits, benchmarking, and the wider organizationdesign issues. Those tools, however, still provideonly part of the information needed for detailedassessments of downsizing requirements and meth-ods of selection.

Work force analysis is very similar to a humanresource planning exercise, but in this context it is

focused on the information needed for work forcerestructuring in preparation for PPI. Detailed workforce analysis is particularly useful when a largeenterprise is being broken up into new operatingunits, as illustrated by Brazil Railways in box 3.11.The purpose of work force analysis is to identifystaffing requirements at the unit or operationallevel, and it will help managers in the implement-ing agency and the enterprise to:

• Identify the levels and types of staff neededfor future requirements in operating units

• Make more informed decisions on transfersbetween units and the organization of sever-ance schemes

• Avoid the loss of critical skills (adverse selec-tion).


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“Per employee”labor benchmarkscan becomplemented bybenchmarks thatuse labor costsrather than staffnumber.

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per unit ofoutput

Material costper unit of

output

Contractorcost per unit

of output

Maintenancecost per unit

of output

Nonrevenuecosts

(system losses)(percent)

Average ageof

receivables

Bills paid(percent)

Operatingcost per unit

of output

Commercialand network

efficiency

Total costper unit of

output

Capital costs per unit of

output

CCD per unitof output

Return oncapital per unit

of output

Interest costper unit of

output

Figure 3.1: Structure of Performance Measures for Utilities

Note: CCD = capital cost depreciation.Source: Webb and Ehrhardt 1998.

Work Force Analysis ToolsThis section summarizes some tools that can beused by managers of the enterprise or the imple-menting agency to better understand the structureand composition of the work force.

Tool 1: Staff Audit and BenchmarkConsolidation

The information gathered from staff audits andbenchmarking is a critical baseline for conductingwork force analysis. It is essential that this infor-mation is disseminated and shared by all enterprisemanagers who will be involved in work forceanalysis so that they have a common understand-ing of staff data. Rigorous debate and discussionon the staff audit and benchmarking data can thenbe a powerful catalyst for prompting managers toreview current staffing assumptions and norms.

Tool 2: Functional Review of the Organization

Work force analysis must be informed by a widerorganizational perspective. This may be providedby a corporate plan, a reform plan, or governmentpolicy, although in some cases such documentsmay not exist or may be too vague to be helpful. Inthose cases one of the most basic tools is a func-tional review of operating units. This review can beundertaken by managers themselves or be facilitat-ed by consultants, and it can draw on the knowl-edge of the work force. Workers—and unions—may have perspectives and answers that arebeyond the institutional knowledge of managementor consultants.

Functional reviews challenge the existing organiza-tional structure and norms by asking somestraightforward but difficult questions:


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Low wages indeveloping countriesdo not mean thatstaff costs are low.

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Box 3.11: Brazil—Work Force Analysis in Rail Privatization

Following unsuccessful attempts to restruc-ture Brazil’s federal railway, RFFSA, underthe public umbrella, the government includ-

ed RFFSA in the National Privatization Programin 1992. Implementing the proposed privatizationplan required some degree of reduction inRFFSA’s employment. Although RFFSA hadalready made significant progress in reducing itsemployee headcount, the company’s labor pro-ductivity continued to be low. RFFSA hadreduced its total staff from about 110,000 in 1975to about 42,000 in May 1995. That reduction ledto a substantial increase in labor productivity—from 250,000 to almost 1 million net ton-kilome-ters per employee. That level of labor productivitycontinued to be insufficient, however, when com-pared not only with similar North American com-panies but also with recently restructured andprivatized railways in Argentina and Chile.

The strategy to deal with the excess labor had tobe subtle. There were significant differences inlabor productivity across RFFSA’s regions anduniform cuts across the board would not makesense.

The solution was to come up with new costreduction plans for each of the six regional areasto be privatized, based on new operational pro-

cedures, with redundant activities identified byjob categories. This was essentially a very metic-ulous job that required a very detailed studybased on the best international practice. Theredundancy estimates were to be conservative toavoid second-guessing what the concessionairewould actually need and avoid forcing the con-cessionaire to have to rehire “fired” workers ashad been the case in Argentina and the UnitedKingdom. In addition, there had to be enoughstaff remaining at the company at the time oftransfer to the private operator to avoid interrup-tions in service. To ensure that, a detailed analy-sis was conducted by the regional managers toassess both the staffing needs for each functionand the number of excess workers. By the endof this analysis, RFFSA’s management had rea-sonable estimates of the staff reduction needs ineach regional area. In May 1995 this process ledto an employment reduction target number of20,000 workers. Between May and September1995, almost 2,000 workers voluntarily decidedto leave the company, so that by the time thefirst concession was announced in September1995 the new reduction target number was18,047.


• Is this activity needed at all? In the case of a(loss-making) state bus company, whichcompeted in a range of sectors (urban, rural,and intercity), the growth of a highly com-petitive, privately operated bus sector meantthat there was little continuing rationale orneed for a public service within urbanroutes.

• Should the enterprise be undertaking thisactivity? In the first phase of restructuring ofArgentina’s national oil company,Yacimientos Petroliferos Fiscales (YPF),many nonstrategic assets that YPF hadamassed over the years were sold throughunrestricted bids, including aircraft, schools,hospitals, and obsolete refineries (Grosseand Yañes 1998). In Russia and Chinamany infrastructure enterprises maintainedlarge social assets (housing, kindergartens,vacation rest houses) that subsequently weretransferred to local government or were pri-vatized.

• If the activity is still needed, is the enterprisereally the best provider of this function?Maintenance of locomotives, aircraft, powerpylons, and vehicles; employee transporta-tion services; catering services—these are allactivities that infrastructure companies havecontracted out to specialist companies.

• If this is a critical activity, are the scale andscope of operations appropriate? For exam-ple, following the break-up of the formerEast African Community (EAC), KenyaAirways and Kenya Railways inheritedworkshops and other facilities (and staff)designed to service all three countries of theEAC. Although some of these units were nolonger needed, they (and their staffs) wereretained for many years.

Those questions are simple but getting the answersmay be difficult. They also may be highly con-tentious and fiercely debated. Nonetheless, func-tional reviews are critical because they can exposewhole activities, units, or operations that areredundant. These noncore activities are potentialcandidates for work force reduction.

In grossly overstaffed enterprises, functional analy-sis can be implemented as a zero-based approach.Argentina’s national oil company, YPF, was so over-staffed that the company and its consultants “decid-ed to eliminate all positions and start from a cleanslate while building the new organization frame”(Grosse and Yañes 1998, p. 57). (The organizationshrank from about 52,000 employees to fewer than6,000; 50,000 employees left with generous sever-ance packages, and 3,500 new staff were hired).

There are many other approaches to organization-al review, but functional analysis is one that close-ly relates to the wider reform agendas of many PPIplans.

Tool 3: Ratio Analysis of Staff Data

Data from the staff audit can enable detailed analy-sis, such as that undertaken by Brazil’s federal rail-way (box 3.11). Staffing ratios can be used asinternal benchmarks to compare regions, units, oroperations. Types of ratio analysis are:

• Trend analysis, which considers past ratios(for example, the ratio of managers tocharge hands to unskilled workers), andprojects those forward, perhaps with revisedassumptions.

• Staff turnover, which is computed as thenumber of employees leaving in a yeardivided by the average number of employeesin the same year multiplied by 100.

• Length of service analysis, which may beimportant in relation to the eligibility rulesfor severance and pensions (see module 5).

• Cohort analysis, which identifies the sur-vival rate of particular groups or cohorts ofworkers. This can be particularly importantwhere there has been an element of earlierrestructuring, and where certain cohorts areparticularly important (for example, engi-neers with bachelor’s degrees or airlinemaintenance staff trained on particular air-craft). The survival rate is the proportion ofemployees engaged during a defined periodwho remain after so many months or years.If 50 staff were trained in telecommunica-


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Work force analysisis a staffingplanning activityfocused onoperational units inthe context of workforce restructuring.

A sharedunderstanding ofstaff audit andbenchmark findingsis an essentialstarting point.

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tions engineering and only 20 remain inservice after two years, the survival rate is40 percent.

As with benchmarking, it is the process of examin-ing, reviewing, and challenging staffing ratios thatcan yield the most benefits.

Tool 4: Productivity Reviews

Determining the number of staff needed to under-take a particular task is, in theory, just a simpleformula:

(Number of tasks ×

time required per task)=

Time available per

Number of employees employee per year

required

This formula, however, does not take into accountnew technologies, alternative working methods,skills levels, work rate, and the impact of con-straints on labor productivity. It is usually not suffi-cient to rely on such analysis alone because it doesnot challenge managers to find new ways ofimproving labor productivity.

In some enterprises the combination of governmentregulations, accumulated work force numbers, and“custom and practice” may have created well-established but now inappropriate labor productiv-ity norms. These can be tackled through:

• The combination of good staff audit dataand benchmarks

• Revisiting labor norms through a zero-basedapproach to labor budgets, linked wherenecessary to new work study assessments

• Experimental or pilot contracting out oftasks to the private sector

• Experimental or pilot investment in newequipment (in cases where labor productivityis low as a result of inadequate investment).

Tool 5: Age Profiles

Age profiles help predict the structure of the workforce over time and the numbers of staff leaving ortaking early retirement. There are three basic ele-ments to such profiles:

1. Present staff resources

2. Natural attrition (for example, normalretirements, long-term sickness, death inservice, maternity, and job change)

3. Future restructuring or recruitment plans.

An illustration of age profiling is shown in figure3.2. Age profile analyses will be particularly impor-tant if there have been recruitment surges or freezesthat have distorted the “normal” age profile of thework force.

Mechanisms for preparing age profiles will varyfrom enterprise to enterprise but the underlyingcalculations are variants of factors such as presentstrength, expected new recruitment, average rate,and forecast strength over the next few years (see


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Functional reviewsask tough questions,but can reveal wholeunits or activitiesthat are no longerrequired.

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Present age structureNumber of employees

Years of age

Years of age

Number of employees

Number of employees

05

10152025303540

Numbers likely in 5 years

05

10152025303540

20–29 30–34 35–39 40–44 45–49 50–54 55+

Numbers likely in 10 years

05

10152025303540

20–29 30–34 – – –49 50–54 55+

20–29 30–34 35–39 40–44 45–49 50–54 55+

Figure 3.2: Sample Age Profiles

the CD-ROM for an actual example of such calcu-lations). The implementing agency can ask enter-prise human resource managers to use such profilesto calculate the impact of hiring freezes or the rateof loss of key skill sets. Those calculations can beinformed by ratio analyses, such as labor turnoverrates, length of service, and cohort analyses.

Age profile approaches can also be disaggregatedto assess particular groups of workers, perhaps bygender, particular skills sets, or particular locations.

Tool 6: Supply Forecasting

Work force analysis will not only inform theprocess of downsizing. In many cases enterprisesneed to both retrench and recruit at the same time.Many public enterprises have both a surplus ofunskilled staff and a deficit in key technical, com-mercial, or managerial skills (often because theyare unable to pay enough to recruit high-qualitystaff). Forecasting the supply of staff, by category,will be particularly valuable where there areknown skill shortages (for example, financial skills,or skills in electronic engineering in a telecommuni-cations enterprise) or where there is evidence of dif-ficulty in recruitment or high levels of out-migra-tion, HIV/AIDS, or other factors.

Supply forecasts will be informed by the skillsassessments component of the skills audit.Forecasts will draw on information such as:

• Analyses of local or regional employmentservice (labor exchange) data, job advertise-ments, wage rates, and interviews with otherenterprises.

• National- or state-level labor force surveysand statistics.

• Data on supply restrictions arising from leg-islation, collective bargaining agreements(job demarcation, work force numbers) andunion membership.

• Analysis of the hiring practices of other rele-vant private sector employers.

• Relative pay scales of public sector and pri-vate sector employers.

• The availability of in-house staff capable ofbeing retrained. If there is uncertainty, aninternal advertisement for “expressions ofinterest” can determine the likely responseand caliber of the applicants.

To facilitate any subsequent downsizing, these sup-ply forecasts should be matched against categoriesof workers (grade, level, function, and cohort) toidentify any group(s) that should or should not beselected for downsizing.

WHO SHOULD DO THE ASSESSMENTS?Who should undertake the tasks of staff auditing,benchmarking, and work force analysis? This sec-tion considers the implementing agency’s options inundertaking those tasks.

Commonly, the work can be done by:

• In-house staff from the enterprise.

• Other government advisers. Some govern-ments have well-established staffing andplanning units that undertake staffingassessments of both government depart-ments and state-owned enterprises.

• External consultants, either from the privatesector or from management training andsimilar institutions that provide consultingservices.

Table 3.5 summarizes the strengths and weaknessesof each group. Particularly where the quality ofdata is poor, both data collection and analysis canbe demanding of time and expertise. In such cir-cumstances a combination of resources, such as in-house staff and consultants, may be the bestoption.

It may be difficult for the implementing agency tofind expertise within government to conduct fullyobjective staff assessments. This is particularly thecase where staffing levels in the enterprise arebased on old (public sector) standards and normsand do not take account of the impact of new tech-nologies and work practices, or where there has


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Ratio analysis canimprove managers’understandings ofthe source ofoverstaffing and thedifferences betweenoperational units.

In largeinfrastructureorganizations, laborproductivity reviewscan build onbenchmark data.

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been little other experience with the improvementsin labor productivity that usually follow privateparticipation.

External consultants can be one source of expertisealthough their costs may be higher than in-houseand government resources. Even so, investment inhigh-quality staffing assessments is likely to beworthwhile. The assessments will help the imple-menting agency when consulting and negotiatingwith workers and unions. They will also form partof the overall due-diligence assessment for the PPItransaction. The issue therefore is not so much oneof cost but of providing sufficiently accurate andreliable information to enable all parties—govern-ment and PPI investor—to properly assess thelabor issues related to the transaction.

Whether the work is done using government orprivate sector resources, the terms of reference willbe the same and should aim to gather enoughinformation to meet the objectives above. TheToolkit CD-ROM provides terms of reference for ascoping study.

Terms of reference for consultants to undertake a

staff scoping study.

Tools (on the CD-ROM)Model terms of reference for a scoping study (staffaudits, benchmarking, work force analysis)

Table of information sources for international bench-marking


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Pilot programs thattest contracting-outarrangements canreveal the potentialto improve laborproductivity.

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Table 3.5: Pros and Cons of In-house and External Consultants

Source ofexpertise Pros Cons

In-house team • Has good access to data and • May be biased or lack independencefrom PPI individuals • May be reluctant to make recommendations enterprise • Has good understanding of that risk careers of colleagues

the business and the sector • May lack availability or sufficient time to con-duct the work in-house

• May lack skills if in-house human resources function has been administrative rather than strategic

Internal • If linked to strong reforming central • May lack authority (look for evidence in the government unit (e.g., office of the president or impact of previous reports)advisers prime minister), may have strong • May have limited international experience

authority• Bring understanding of detailed

problems that arise in other govern-ment departments or state-owned enterprises

External • Are independent • Reluctant enterprise managers can block consultants • Can transfer experience of the access to data

effects in other enterprises and • Will be more costly organizations that have introduced • National consultants may lack knowledge of private participation nationally or sector reforms outside the countryinternationally • International consultants may lack local

• May be specialists in the field of understandingwork force assessments

• May have methodologies for conducting staff audits

• Can provide specific training (e.g., in setting up a benchmarking program)

Additional Material (on the CD-ROM)

Estache, Antonio, Jose Antonio Schmitt de Azevedo,and Evelyn Sydenstricker. 2000. “LaborRedundancy, Retraining and Outplacement duringPrivatization: The Experience of Brazil’s FederalRailway.” Policy Research Working PaperWPS2460. World Bank, Washington, D.C.

Tynan, Nicola, and William Kingdom. 2002. “AWater Scorecard.” Viewpoint Note 242. WorldBank, Washington, D.C.

Web SitesBureau of Labor Statistics, United States:

http://www.bls.gov/. (This site provides publicaccess to a wide range of labor statistics and inter-national comparisons.)

International Telecommunications Union (ITU):www.itu.int. (The ITU TelecommunicationsIndicators Database provides data sets on perform-ance measures of telecommunications operatorsworldwide, including staffing.)

World Bank “Shrinking Smartly”:www.worldbank.org/research/projects/downsize/.(This site is a clearinghouse for researchers, devel-opment practitioners, and government officials con-cerned about the difficulties encountered in down-sizing a large public sector.)

Other Material and SourcesBartram, Sharon, and Brenda Gibson. 1997. Training

Needs Analysis: A Resource for Analyzing TrainingNeeds, Selecting Training Strategies and DevelopingTraining Plans. Gower, Aldershot. (A manual ontraining needs analysis with guidance notes and 22example formats and instruments.)

Burke, Ronald J., and Cary L. Cooper. 2000. TheOrganization in Crisis: Downsizing, Restructuringand Privatization. Oxford, U.K.: BlackwellPublishers Ltd. (This is a collection of articles onorganizational change in industrial countries,including impacts on workers and the organization.The main audience comprises organizational devel-opment specialists and researchers.)

Economic Commission for Europe. 2002.Productivity in Rail Transport Note by theSecretariat. Working Party on Rail Transport, Fifty-Sixth Session, October 16–18. Inland TransportCommittee, United Nations Economic and SocialCouncil, Economic Commission for Europe. (Thissession includes a review of labor benchmarks inthe rail sector, drawing on international experience.Available at www.unece.org/trans.)

Galbraith, Jay R. 2002. Designing Organizations: AnExecutive Guide to Strategy Structure and Process.San Francisco: Jossey-Bass. (A well-known text onorganization design, which can help inform func-tional analysis and organizational restructuring.)

Kanawaty, George, ed. 1992. Introduction to WorkStudy. Geneva: International Labour Office.(Describes the basic techniques of work study, par-ticularly for manufacturing and process tasks, andoffice work.)


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• Who should undertake labor restructur-ing—government or investors?

• What range of options are available fordealing with restructuring?

• How should these options be sequenced?

• What legal and contractual issues mightconstrain the choice of strategies andoptions?

RESTRUCTURING—WHO SHOULD DO IT?The primary strategic decision is whether the gov-ernment or the private sector should undertakelabor restructuring. There is no one right approachand countries have followed different strategies,depending on the timetable and urgency of the pri-vate participation in infrastructure (PPI) as well ason the nature of labor issues at the enterprise level.There are three options:

• Leaving labor restructuring to the privatesector—that is, following PPI

• Leaving labor restructuring to the govern-ment—that is, before PPI

• Taking a mixed approach.

Labor Restructuring by the Private SectorIn theory arguments can be made that laborrestructuring is best left to the new privateinvestors who:

• Are better equipped than the government tojudge the level and kind of skills needed andto implement a process that minimizesadverse selection.

• Have greater incentives to minimize sever-ance costs. Rama (1997) noted that sever-ance packages can be more generous whendesigned by government.

Examples of PPI arrangements where labor restruc-turing was investor-led are Argentina’s gas trans-mission and distribution company and GuyanaTelecommunications Corporation (box 4.1). This

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The new investorwill have the bestknowledge of whichskills, people, andcapabilities will beneeded in the future.

4Strategiesand Options

This module considers the following strategic issues and analyzesavailable restructuring options. Among the key strategic questionsare these:

MODULE

strategy is most likely to work in situations withmodest initial levels of overstaffing, a high-growthsector (for example, telecommunications), nosevere labor opposition to reform, and locationswith effective job markets into which displacedworkers can move.

Labor Restructuring by GovernmentAlthough restructuring led by the private sector isthe preferred route, there are four scenarios inwhich government will likely need to be involvedin labor adjustment:

1. In sectors where overstaffing is severe andopposition to PPI from the public and from

unions and labor is strong, and privateinvestors may be wary of taking on thepolitical burden of carrying out large-scalework force adjustments.

2. Where there are legal and other restrictionson the investor’s ability to implement laboradjustment, either through labor laws orcollective bargaining agreements. In Indiaand Sri Lanka, for example, labor lawsmake it costly, time consuming, and cum-bersome for the private sector to retrenchstaff (Basu, Fields, and Debgupta 1996;Fiszbein 1992; and Salih 2000).

3. Where labor restructuring costs are veryhigh. In cases where investors take on sur-


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There are fourcircumstanceswhere governmentinvolvement in laboradjustment can behelpful.

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Box 4.1: Restructuring by PPI Investors—Argentina and GuyanaArgentina: Gas del Estado

When Argentina’s natural gas transmission anddistribution company, Gas del Estado, was priva-tized in 1993, the work force of 10,273 was notreduced. The enterprise was broken up into 10new companies, employees were allocated toeach company, and employee restructuring wasleft to the new owners of these companies. ByDecember 1993 the work force in the companieshad been reduced by 32 percent to a total of6,958. Workers who were retained benefited fromshares, salary increases, and performance-relat-ed pay.

Guyana Telecommunications Corporation

In June 1991 an international investor paidUS$16.5 million for 80 percent of the shares ofthe Guyana Telecommunications Corporation. Itwas recognized that the company had to trim itsstaff to reduce overstaffing and cut costs. Afterprivatization the company embarked on anaction plan to assess the human resourcesneeds of the organization, especially thoserequired to implement its expansion plan suc-cessfully.

The action plan was executed in two phases, thefirst of which was introduced immediately afterprivatization. It lasted 3 months and involved thefollowing activities:

• Analyzing the existing organization by review-ing methods, procedures, policies, and jobduties and descriptions with senior manage-ment

• Reviewing personnel files and interviewing andassessing the capabilities and needs of exist-ing employees

• Reviewing administrative tools, including com-puter hardware and software

• Initiating discussions with union representa-tives and keeping them informed of plans andactions.

The second phase (3 to 12 months) involved:

• Continuing discussions with the union

• Reorganizing and reassigning personnel wherenecessary

• Introducing new administration policies wherenecessary

• Beginning recruitment of Guyanese nationalsabroad

• Determining training needs associated withintroducing new equipment

• Revising salaries, job grades, and job titles

• Identifying surplus personnel.

The result of this restructuring exercise was areduction in the work force from approximately1,100 to 600 employees. A key to the success ofthis significant cut was the package offered to allemployees. The package consisted of a salaryincrease of about 90 percent for those who wereretained and compensation equivalent to 22months’ salary for those who were let go

Sources: Hinds 1995, Shaikh 1996.

plus labor they discount the sale priceaccordingly—and a low sale price may bepolitically difficult for government to accept.

4. Where there is future uncertainty about gov-ernment’s policy and stance on public sectorlabor issues—for example, if there are signif-icant arrears of wages to workers, unfundedpension liabilities, or investor concern thatgovernment might change the rules or lawson retrenchment or restructuring after thePPI transaction has been completed.

In any of those cases, only government action maybe able to unblock potential labor problems quick-ly and avoid delays in PPI.

Where PPI plans are still in the making, governmentcan take steps to reduce the work force through avariety of options, including natural attrition, afreeze on recruitment, the phasing out of pensionerworkers, removal of ghost workers, voluntarydepartures, and compulsory redundancy. The priva-tization of telecommunications in Tanzania is oneexample (box 4.2) where work force reduction took

Strategies and Options

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Box 4.2: Tanzania—Telecommunications Work Force Restructuring

The government of Tanzania decided in1996 to include utilities in the list of state-owned enterprises to be considered for

privatization. The Tanzania TelecommunicationsCompany Ltd. (TTCL) was then selected as thefirst of the utility state-owned enterprises to bedivested.

In June 1997 TTCL had some 96,000 lines con-nected to its network, with annual growth of 3.4percent and a waiting list of 84,000 lines. Thecompany employed just over 4,688 workers in1998. Between June 1998 and October 1999TTCL reduced the number of employees to3,720, mainly through attrition, restrictions onnew employment, and early retirement.

In 1998 a firm of consultants, which wasengaged to audit TTCL, recommended a furtherstaff reduction of 1,659 employees. The compa-ny decided against forced reduction and insteadtook the route of a soft option that involved acontinued program of attrition, restrictions onnew employment except for prospective employ-ees with critical skills, early retirement, and volun-tary redundancies. The voluntary departure pack-age was negotiated through the Communicationand Transport Union and essentially provided for6 months’ pay for up to 6 years of employment,18 months’ pay for 6 to 10 years, 24 months’ payfor 10 to 25 years, and 30 months’ pay for up toand above 25 years.

The TTCL divestiture program was expected totake two years beginning in 1998. Privatizationwould involve the sale of new shares, giving theinvestor a 35 percent equity stake as well asmanagement control. TTCL’s teledensity was lessthan 0.04 percent, and government policy calledfor an increase to 6 percent by 2020. The result

was that the expansion program was initiatedsimultaneously with the privatization program. Themarket for mobile phones was also liberalized,and three mobile licenses were issued in 1998.

In implementing the program to reduce staffing inpreparation for privatization, noncore activitieswere first unbundled from the core business. Theprogram of expansion also allowed for someworkers to be redeployed in the constructiondivision. The net effect was that the companyretrenched only 802 workers and most of theseemployees were severed through the plan nego-tiated with the unions. Slimming down the workforce occurred over three years without large-scale, one-time severance resulting in vast num-bers leaving the company at any one time.Because there was no termination of largegroups at any time, the program did not attractnegative criticism from the press or politicians.

The new strategic investor continued the expan-sion program that was established in the salesagreement based on the roll-out obligation of800,000 lines within four years. The companywas able to improve its labor productivity signifi-cantly while preparing for privatization withoutmost of the negative consequences associatedwith utility labor retrenchment programs.

The expansion of the mobile operators (fivemobile licenses issued by 2001, including one toTTCL) resulted in more than 300,000 mobile con-nections by December 2001. Many of the work-ers leaving TTCL were able to find alternativeemployment with the new mobile operators,which illustrates also that labor retrenchment iseasier in industries going through technologicalchanges and rapid expansion.

Source: Parastatal Sector Reform Commission, Tanzania.

place over a three-year period under governmentownership prior to privatization. Another exampleof preprivatization work force restructuring is thatof Eskom, South Africa’s electricity utility (whichwill be discussed in another context in box 4.6).

Although government has an important role toplay in these cases, there are also some risks associ-ated with government management of labor adjust-ment. Those risks include the following:

• Because government managers (includingthose in the implementing agency) are notbest placed to predict future staffing require-ments, the wrong people may be selected.That in turn may lead to subsequent rehir-ing of retrenched workers.

• Overly generous severance payments negoti-ated with workers and unions may smoothover industrial relations in the short term,but may create precedents that are unsus-tainable for future restructuring of otherenterprises or for the incoming PPI investor.

• If there is no political will or consensus, gov-ernment managers may not be able to movedecisively and so delay work force restruc-turing and PPI itself.

• Reluctant factions within governments mayuse labor restructuring as an excuse to delayPPI.

Government-led work force restructuring usuallydeals only with part of the work force, but thereare occasional examples where governments havedecided to make all workers redundant and settleall labor liabilities prior to PPI. That was the casein the concessioning of Malawi’s railway and ofZambia’s rail sector (see box 4.3).

A Mixed ApproachA mixed approach by which both government andthe PPI investor are involved can help overcomethe problems of leaving restructuring entirely to thegovernment or to the private sector. In such anapproach work force restructuring is implementedin phases:

1. Government first deals with an initialrestructuring of the accumulated work forcesurplus before the PPI transaction is started,and sets up a social safety net or redeploy-ment program.

2. The PPI investor then acquires managementcontrol and is given freedom to fine-tunestaffing levels after the PPI transaction.

This shared approach offers the additional advan-tage of reduced cost to the government becausethe incoming investor may pay for further adjust-ments. In the shared approach both the govern-ment and the investor contribute to the costs andthe decisionmaking involved in work force restruc-turing.

An example of a mixed approach is Argentina’srail privatization, in which most of the 70,000-worker reduction was undertaken as part of theprivatization process. Part of the reduction was pri-vately financed, however, by the operators of theSan Martin and Urquiza concessions. They beganoperations with a combined work force of 2,700(compared with the previous public enterprise[Ferrocarriles Argentines] total of 8,800) butreduced that force even further to 1,700 at a pri-vate cost of US$10 million (Ramamurti 1997).

Another example is that of the Manila water con-cession, which provided early retirement to under-take a preconcessioning reduction followed by aprobationary period of employment (see box 4.4).That mix allowed the new operator time to makeits own assessments of the employees and protectthe interests of employees.

Table 4.1 summarizes the advantages and disad-vantages of the main choices on labor restructuringresponsibility. Irrespective of who undertakes workforce restructuring in preparation for PPI, laboradjustment will be a continuing process, not a one-time event.

MENU OF OPTIONSThis section presents a typology of labor adjust-ment (or work force structuring) options. There are


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A shared approachprovides benefitswhere governmentdeals with a largepart of the surpluswork force beforePPI, and the investoris able to fine-tunethe process post-PPI.

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Box 4.3: Zambia—Redundancy for All Rail Workers

When the Zambia Privatization Agency(ZPA) and the Zambia RailwaysCorporation (ZRC) considered strate-

gies for labor adjustment as part of a plan to pri-vatize the operations of the railway, a combina-tion of factors indicated that all 1,650 of its work-ers would receive redundancy payments—eventhose who kept their jobs. Those factors were:

• An exceptionally generous retrenchment pack-age, negotiated previously with the RailwayWorkers Union of Zambia, which included aseverance package of 3.2 months of salary peryear of service plus resettlement and a free-hold title on a farming plot (typically 5 hectares)for resettlement on land allocated for farmingby a previous government.

• Labor laws that gave every worker in an enter-prise transferred to a new employer the right torequest that all terminal benefits be paid(including pensions and negotiated severance)and then to leave the enterprise. These lawsalso provided that any workers who transferredshould receive terms and benefits no less gen-erous than their current employment contract.

• Worker suspicion of the employment securityoffered by both private operators and govern-ment, given well-publicized bankruptcies ofprivatized firms. This meant that the trend inZambia was for workers to readily accept vol-untary or compulsory redundancy (especiallywhen the packages were generous).

• ZRC’s financial circumstances. ZRC was inarrears in paying both employees’ andemployers’ contributions to the workers’ pen-sion fund.

Those circumstances meant that almost all work-ers were likely to leave the company rather thanjoin the new operator, who would start with noexperienced staff. Government decided to con-sider offering redundancy to all workers, butthere was a financing problem with that idea:government could not afford the costs ofretrenching 1,650 workers, although it couldfinance the retrenchment of the 650 or so work-ers estimated to be in immediate surplus (that is,the new operator was likely to require only about1,000 workers). ZRC and ZPA commissioned aconsultancy to meet with trade unions and helpdevelop the options. This consultation processled to a revised plan that all workers be offeredretrenchment as follows:

• 650 or so workers to receive a full and immedi-ate package of retrenchment benefits, and losethe right to return to work in the enterprise.

• The remaining 1,000 workers to receive the fullretrenchment package paid over three yearsfrom a portion of the concession fees that thePPI investor placed in a trust fund specificallyfor that purpose, with benefits protected fromerosion as a result of inflation.

Source: Zambia Privatization Agency, Zambia RailwaysCorporation.

Box 4.4: Philippines—Use of a Mixed Approach through Probationary Employment

Overstaffing at the MetropolitanWaterworks and Sewerage System(MWSS) in Manila was addressed in two

phases. Prior to privatization MWSS implement-ed an early retirement program that was used byabout one-third of the work force. The remainingemployees were absorbed by the concession-aire with a six-month probationary employmentperiod. After that period the employees becamepermanent or were separated. The concession-aire ended up with a regularized work force of4,300 employees, equal to slightly more thanhalf of the preprivatized work force. Of the totalnumber of retrenched employees, only 100 or sowere involuntarily separated. The process was

facilitated by an attractive voluntary retirementprogram, the main components of which addedup to payments that were significantly more thanthey would have received if they were to haveretired on the standard government retirementpackage. Training and work opportunities(including outsourcing) were provided for thosewho left the company. All rounds of separationwere designed to be equivalent to each other.The estimated cost of the early retirement pack-ages was P1.1 billion, or about US$44 million.Labor productivity improved significantly as aresult of the privatization.

Source: Dumol 2000.


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Table 4.1: Labor Restructuring—By Whom and When?

Responsibility Advantages Disadvantages

Government:The implementing • May be essential if there is a large • Can lead to adverse selection agency or government accumulated staffing surplus problemstakes responsibility for • Demonstrates government’s • Government managers may negotiate labor work force commitment to sector reform too-generous deals with labor in their restructuring before • Increases the likelihood of anxiety for smooth industrial relationsthe PPI transaction. attracting good investors and • It is the most costly option for govern-

obtaining a good price for PPI ment, which bears all of the costs.• Enables government to implement • Can deter investors if linked to “no

change in labor laws and collective subsequent retrenchment by the PPI bargaining agreements investor” clauses or clauses that

• Can be fast, if there is the political reduce labor flexibilitywill and support • Most politically risky—bad image of

• Facilitates a uniform government governmentpolicy toward labor adjustment in all public enterprises

PPI investor:All labor restructuring • In theory, gives the best labor • Unattractive for investors where there takes place after PPI efficiency gains because investors is a history of difficult labor relations transaction. are best placed to know future and no proven track record of work

staffing and skill needs and the force restructuringmatch between labor and capital • Can create a bad image for the pri-investment vate sector, which will be contrary to

• Minimizes adverse selection policy for governments with a desire because the future employer to encourage private sector develop-does all the selection ment

• Reduces political risk for govern- • Appears least costly for government, ment—crudely put, the PPI although in practice the PPI investor investor can be “blamed” for will discount the price to meet these downsizing costs

Shared approach:Some pre-PPI work • Allows separation of pre- and • More likely to yield a case-by-case force restructuring post-PPI responsibilities. For negotiated approach, which in undertaken by example, government can retain practice can lead to bad precedent government, with responsibility for pension liabilities setting and government the rest left to the arising before the PPI contract. guaranteesprivate sector after • Allows government to deal with • More demanding of managers in the PPI. the bulk of the accumulated implementing agency who will need

surplus and then allows the PPI more commercial understanding of investor to fine-tune the likely investor requirements, particu-selection of workers larly if unions and government are

• Ownership of the challenge of negotiating on post-PPI termswork force restructuring is shared • More complex negotiations may delay by government and the PPI PPI processinvestor

• Some reduction in the risk of adverse selection, compared with government-only restructuring.

many ways to restructure the work force. This sec-tion first reviews the different options and thenoutlines how they might be used in combination aspart of a comprehensive labor program.

Early retirement, voluntary departure, and compul-sory redundancy are the most commonly usedoptions for labor adjustment. There is, however, awide range of options that can be used by theimplementing agency. The options are not mutuallyexclusive; in practice the options can be used insequence or combined with one another.

Broadly, the options can be divided into threegroups, as shown in figure 4.1:

1. So-called soft options, which do not intro-duce new elements of incentive or compul-sion, but rely on existing and therefore non-controversial workplace regulations.

2. Options that involve restructuring of theworkplace. Some will be voluntary whereasothers, such as closure of noncore units,may be seen by workers as involuntarychange, especially if there has been littleconsultation.

3. Retirement and redundancy through volun-tary departure options or compulsory means.Voluntary options provide incentives for peo-ple to leave, either through early retirementor severance packages. Acceptance is notforced (although in cases where a worker’sfuture prospects are very poor, workers mayfeel that they have had little choice).Compulsory redundancy options force work-ers to leave without asking for their consent.

Although not strictly a labor-restructuring tool,employee share ownership (see module 5) is amechanism that may be used in conjunction withlabor restructuring. It can be used in three ways:

1. As an incentive or reward package forworkers, particularly those who will remainin the work force.

2. As the basis for management employee buy-outs or employee buyouts of units of theenterprise.

3. As a form of compensation to displacedworkers whereby they receive shares insteadof cash. As part of a compensation package,however, share transfers are probably bestviewed as a supplement to, rather than asubstitute for, severance or early retirement.

SEQUENCING OF OPTIONSIn planning a labor program, the implementingagency needs to take into account the sequencing ofdifferent options, and the right timing and sequenc-ing can be critical to achieving a successful outcome.

As the examples of South Africa and Tanzania(boxes 4.2 and 4.6) illustrate, major PPI reformsoften take time to implement. In such circum-stances the implementing agency can start with softoptions, progress through voluntary programs, andadopt compulsory redundancy if necessary. Figure4.2 illustrates such a progression.

Although this Toolkit focuses on work forcerestructuring prior to PPI, the sequencing ofoptions can extend into the post-PPI period. Forexample, in the mixed approach adopted in Brazil’sfederal railway reform the sequencing of activitieswas planned in three phases:

• Phase 1: voluntary reduction by governmentthrough early retirement and voluntarydeparture, which were offered only to select-ed job categories.

• Phase 2: compulsory redundancy of employ-ees with unnecessary activities, through aninvoluntary severance package equivalent to80 percent of that paid to employees whovoluntarily left RFFSA.

• Phase 3: post-PPI redundancy undertaken bythe concessionaires. The terms of the contractprovided that the concessionaire had to paythe same terms as for the phase 2 pre-PPIinvoluntary departure for any staff who weremade redundant within one year (Estache,Schmitt de Azevedo, and Sydenstricker 2000).

Estache, Schmitt de Azevedo, andSydenstricker (2000) present a case study oflabor adjustment in Brazil’s rail sector.


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Three groups ofoptions:

• Soft options• Workplace

restructuring• Retirement and

redundancy.

Where PPI is noturgent, a sequencedlabor programstarting with softoptions andcontinuing over anumber of years canbe envisaged.

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In the event, the concessionaire was able toquickly identify the number of phase 2involuntary redundancies that were needed,and labor restructuring was completedbefore privatization.

The sequencing outlined in figure 4.2 may only beappropriate where reforms are not seen as urgent.This in turn will depend on the level of over-

staffing, the political context for reform, theurgency of PPI investment, and government’s over-all strategy for private participation in infrastruc-ture. Where the need for infrastructure sectorreform and investment is urgent, it will be neces-sary to bring forward early retirement and volun-tary departure so that these are implemented at thesame time as are soft options.


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Remove ghost workersRemove ghost pensionersRemove ghost benefits

Managepayroll

Enforceexisting rules

Transfer staff

Stretching work

Reorganizing the work force

Retirement andredundancy

Workplacerestructuring

Softoptions

Work forcerestructuringmechanisms

Early retirement

Permanentadministrative leave

Retirement with an early pension

Uniform packageTargeted packagesUniform packageTargeted packages

Retirement with pension atpensionable age

Unpaid

Partially paidFully paid

Voluntary redundancy

Compulsory redundancy

Restructuring thestate-ownedenterprise

Enforce limits on workforce strengths

Phase out pensioner laborRetire workers of retirement ageDiscipline/fire absentee workers

Return government deputees

Do not replace retired workersEnforce a hiring freeze

Job sharing

Shedding noncore businessesContracting out noncore activities

Reduced work hours andtrainingMultiskilling

Reducing work hoursSabbatical, unpaid time off,voluntary leave of absenceTemporary administrative leave(temporary or rotated layoffs)

Transfer “social” work force to municipal

and local governments

Figure 4.1: Restructuring Options—A Typology

The speed at which the implementing agency canmove in the early stages, however, is often con-strained by:

• Lack of readily available resources to resolveissues (for example, to hire specialists toreview pensions, to conduct staff audits, orto design an effective redeployment pro-gram)

• The need to comply with laws, labor con-tracts, and collective bargaining agreements

• Lack of good information to answer keyquestions on the scope of labor adjustmentto be identified. (How many staff are thereactually? How many are in surplus? Whichskills are most critical? Are there pensionsand salary arrears?)

• Lack of financing for meeting the costs ofimplementing retirement and redundancyoptions (covered in Module 5 in more detail).

SOFT OPTIONSSoft options aim to restructure the labor forcethrough the reinforcement of current work regula-tions. Options include payroll management,enforcement of retirement age, enforcement of dis-ciplinary actions, staff transfers, and freezes onrecruitment and promotions. These options can bea starting point to address overstaffing and canlead to substantial labor force reductions, withoutcreating social or political controversy or unrest.

Payroll ManagementRemoving ghost workers, absentee employees, andghost pensioners is usually an immediate and non-controversial step toward downsizing. At the enter-prise level, however, obstruction can occur wherepayrolls have been inflated by corrupt and “well-connected” senior and middle managers. In thosecircumstances the manager in the implementing


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Voluntaryredundancy

Sequence

Optionsandmechanisms

Numberofdisplacedworkers

Downsizing Follow-upPreparation Implementsoft measures

Policyand legalreview

Remove ghost andabsentee workers

Workplace restructuring

Disciplinarycases

Staff audits

Skill audits

Benchmarks

Work forceanalyses

Pensionsreview

• Monitoring

• Evaluation

• Review impactson laborproductivityand financialperformance

• Review/adjustlaborbenchmarks

Earlyretirement

Natural attrition and normal retirement

Ghost workers, ghost pensioners, disciplinary cases

Early retirement

Voluntary redundancy

Compulsory redundancy

Years

Compulsoryredundancy

Secure legalchanges and

programfinancing

Workplace restructuring

Redeployment

Figre 4.2: An Illustration of Sequencing

agency may need high-level support within govern-ment for his or her actions. Often, however, themere lack of control has enabled the growth ofghost workers, and introducing a staff audit (seemodule 5) may be enough to yield significanteffects. A plant census undertaken at the steelmaker SOMISA in Argentina required photobadges for all workers. Reported employment lev-els of 14,500 employees quickly fell to 12,000 asshadow employees were eliminated (Hess 1997). InTanzania’s civil service, a national census foundthat 16,000 (5 percent) of the entire payroll of350,000 were ghost workers (InternationalRecords Management Trust 2001b).

Enforcement of Retirement AgeEnforcing the retirement age can lead to substantialreductions in some work forces by:

• Phasing out workers who are already overthe retirement age

• Requiring workers to retire when they reachpensionable age.

Prior to transition in Hungary, about 20 percent ofpensioners were active in the labor market.Privatized firms subsequently reduced these num-bers, which fell to 9 percent by 1992, as the com-panies restricted the employment of workers whohad reached pensionable age (Szeman 1994).

Enforcement of DisciplinaryProceedingsMany work forces have a small proportion of staffwho are being investigated on disciplinary grounds.Some of these cases can linger for months and yearswhile workers are suspended and on full salary orstill working. If voluntary departure or compulsoryredundancies are to be implemented, it is importantthat these cases are tackled first. This implies:

• Greater management attention to complet-ing these cases

• Engagement of additional resources (forexample, lawyers and arbitration specialists)

to help the implementing agencies undertakedisciplinary action in a fair and transparentmanner.

To accelerate the departure of employees subjectto disciplinary proceedings, some PPI enterpriseshave developed special voluntary departure pack-age. For example, Eskom, South Africa’s powerutility, developed a special package for employeeswho had received formal disciplinary warningsand who chose to resign following amicable dis-cussions (box 4.5).

Staff Transfers to Other PublicOrganizationsOne restructuring option is to transfer surplus stafffrom an infrastructure enterprise to another publicsector organization (for example, a ministry,department, agency, or state-owned enterprise[SOE]). Transfers can let the PPI transaction pro-ceed quickly with a much-reduced work force.

The principal argument against such tactical stafftransfers is that they can merely shift an overstaffingproblem from one part of the public service sectorto another. In most cases governments will avoidsuch transfers unless there are genuine vacancieselsewhere in the public service. Occasionally, how-ever, transfers have been used as a mechanism forquickly enabling urgently needed PPIs and invest-ments. One example is Jordan’s Aqaba Rail conces-sion (see box 4.6), which shows both the opportu-nity and the problems of tactical transfers.

Some infrastructure companies have workers whoare government civil servants on deputation. Aproportion of those workers might be transferredback in their original department, or elsewhere.This is an option, however, that will be unaccept-able for many governments. If the civil service isoverstaffed, simply transferring surplus workersfrom the SOE sector back into the civil service isnot helpful for wider efforts to reform the civilservice. Even if one particular PPI scheme only hasa few workers who have retained their civil servicestatus, a transfer program for those few may set anunwanted precedent.


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Tactical transferscan unblock difficultlabor problems, butthey risk merelytransferring thesurplus labor fromone publicorganization toanother.

Even if there are fewemployees on civilservice deputation inone PPI enterprise,they may create aprecedent for otherstate-ownedenterprises thatgovernment wouldrather avoid.

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Recruitment and Promotion FreezesRecruitment and promotion freezes are alwaystemporary in nature. Even if the freeze lasts a num-ber of years, at some stage new staff must be hiredand merit-based promotion reinstated. The imple-menting agency and the enterprise manager can atleast halt increases in staff numbers through:

• Freezes on the hiring of permanent, tempo-rary, or contract staff

• Selective abolition of vacant posts

• Elimination of guaranteed entry to the pub-lic service infrastructure company on com-pletion of training programs

• Suspension of automatic advancement sys-tems

• Suspension of the automatic replacement ofstaff who retire normally.

Advantages of Soft OptionsSoft measures are particularly relevant if the man-ager in the implementing agency has some timebefore PPI and there is little urgency. Such meas-ures offer:

• A relatively easy mechanism to implement,in political and managerial terms.

• A way to signal government’s intentions totackle work force restructuring in a mannerthat can provide space for dialogue withunions, workers, and other stakeholders.

• A way to achieve progress even in very diffi-cult circumstances. Where government orthe PPI enterprise managers have effectivelylost control over staffing and payroll, rein-troducing basic staff audits and enforcingnormal human resource management canhelp start the process of labor adjustment.


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All recruitmentfreezes aretemporary innature—they haveto end eventually.

Soft measures havebenefits for theimplementingagency. They allowthe implementingagency to takeaction even indifficultcircumstances.

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Box 4.5: South Africa—Phased Reform in Electricity

Eskom is South Africa’s state-owned elec-tricity company. Government’s overall poli-cy is to restructure the sector and encour-

age competition by (a) creating contestable mar-kets for power generation and allowing thephased entry of private power generation, (b) separating generation from distribution andrestructuring distribution and supply into a num-ber of regional electricity distributors, and (c) introducing a regulatory framework.

Government’s policy is to avoid retrenchment ofworkers in state enterprises wherever possible,and the reforms and proposals for PPI have beena key target for opposition by the labor unions.Nonetheless the pre-PPI restructuring of Eskomhas resulted in a 40 percent reduction of thework force, from 65,000 to 39,000, over the lastsix years. This was achieved through a mixture ofnatural attrition and four different packages ofvoluntary departure:

• Most generous in terms of benefits is a volun-tary separation package available to employ-ees when the restructuring of an element ofthe company is imminent.

• A less generous severance package, known asthe “surplus package,” is available in circum-stances where the restructured unit is beingimplemented and surplus positions have beenidentified.

• A third package is available to individualemployees whose performance has been thesubject of review and who have been requiredto take a six-month performance enhancementprogram under which specific requirements arestipulated and appropriate training is provided.When an individual employee fails to satisfythe requirements of the program or choosesduring the program to leave the company, this“volunteers’ package” is made available.About 6 of every 10 employees who take thistraining program do so successfully, that is,they remain with the company.

• The fourth package, known as the “discipli-nary package,” is provided when an employ-ee, following the initiation of a disciplinaryprocess entailing formal warnings, counseling,and so forth, chooses to resign after amicablediscussions.

Source: International Labour Organisation 1999a.

• A test of political commitment. If vested inter-ests make it impossible for government to takethese easy first steps, implementing harderoptions will not have much chance of success.

WORKPLACE RESTRUCTURINGChanges in the nature and structure of work are alsouseful tools for the implementing agency. They canenable control or reduction of staff costs while main-taining the work force largely intact until such timeas the new PPI investor can select the staff needed.

Reducing Working HoursReduced working hours can cut salary coststhrough various approaches, including:

• Reduced work schedules for individualemployees

• Reductions in shifts (for example, movingfrom three to two shifts)

• Rotation of employees on temporary admin-istrative leave (this is one meaning of theterm “layoff”)

• Operation of plant on reduced schedule (forexample, three-day work weeks)

• Job sharing.

Those are typically short-lived measures, best suit-ed to situations where managers can expect a turn-around in demand for staff. Those approacheswere used, for example, by the airline and airportsindustries during the sharp downturn in demandfor air travel in late 2001.

Placing Workers on AdministrativeLeaveEmployees placed on administrative leave (“fur-lough”) remain formally employed with the estab-lishment but do not report to work. For profes-sional staff, administrative leave may include peri-ods of sabbatical or training. Administrative leave


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Box 4.6: Jordan—Tactical Staff Transfers at Aqaba Rail

The government of Jordan has embarked onan economic reform program that includesPPI. Loss of jobs is a concern, however, in

an economy with relatively high levels of unem-ployment. This is particularly the case in the rela-tively poorer southern part of the kingdom wherethe Aqaba Railway Corporation (ARC) operates.

ARC was formed in 1972 to carry phosphaterock from the Jordan Phosphate Mines Company(JPMC) mines at El Abiad and El Hassa to theexport facility at the main port of Aqaba. ARChad been operating with significant losses forseveral years, and its overemployment was sub-stantial. As production was shifting from existingmines to the newer phosphate mine at El-Sheidiyeh over the medium to long term, ARCwas consequently faced with the need for invest-ment to handle the enhanced production at theEl-Sheidiyeh facility.

After extended discussions concerning the fate ofARC’s 1,300 employees, the decision was madeto extend a 25-year concession agreement leas-ing ARC assets to an international consortium.

The consortium has agreed to retain 500 workersfrom the existing ARC staff to be deployed in theupgrade and repair of the existing rolling stockand track. The government of Jordan has com-mitted itself to employing the remaining 800employees, with 150 employees going to othergovernment agencies and 650 transferring to thenew JPMC operation at El-Sheidiyeh.

If the government of Jordan had not solved thelabor redundancy issue, privatization would nothave been achievable. Essentially the approachhas been to privatize first, to bring in investment,and to solve the employment issue later. TheARC project will result in an overall investment ofUS$120 million in railway infrastructure and willpaving the way for a separate $600 million jointventure currently under progress between JPMCand an international fertilizer producer to transferphosphoric acid from the El-Sheidiyeh facilitythrough the port of Aqaba. Overstaffing, however,remains to be tackled as JPMC is prepared forprivatization.

Sources: Government of Jordan 1996–99; Jordan Times 1999.

can be unpaid or partially or fully paid, dependingon labor laws and labor agreements.

Administrative leave has been used in a number ofcountries. For example, in Argentina’s major infra-structure privatizations some workers were senthome with 50 percent of their salaries (Kikeri1998, p. 6). By far the most extensive use ofadministrative leave, however, has been in the stateenterprise and newly privatized sectors in China(box 4.7) and the countries of the former SovietUnion (FSU). An International LabourOrganisation (ILO) survey of several countries ofthe FSU found that 30 to 80 percent of privatizedenterprises made use of administrative leave, as did60 percent of enterprises in China (see table 4.2).The survey observed that:

In the context of the FSU countries, adminis-trative leaves are fairly costless to employers,reducing wage bills without the burden of sev-erance payments, while providing an easy wayto increase labor should conditions warrant.The disadvantage to workers is (at best)reduced income, but with the advantage, overdisplacement, of retaining rights to certainservices or benefits provided by their employ-ers. The most important of these rights may beadding work months to pension eligibility(Evans-Clock and Samorodov 1998, p. 68).

Administrative leave was also used to cope withthe high levels of unemployment that arose inRussia, where the number of people employed haddecreased from 73.8 million in 1991 to 65.4 mil-lion at the end of June 1997. At that time approxi-mately 4 million workers were on administrativeleave (Prokopenko 2000).

Administrative leave can provide workers withsome form of social assistance until retirement,thus removing them from the enterprise work forcebut not placing them on a possibly overloadedpension system. This approach has been used inPoland (coal sector restructuring) and in Spain(steel and shipbuilding sectors). In Spain the pro-grams were funded through an EmploymentProtection Fund, which provided (a) workersunder 55 with three years of benefits equivalent to

80 percent of their gross pay, (b) workers of 55and older with 80 percent of gross pay up to theage of 60, and (c) workers 60 and older with 75percent of gross pay up to the age of 65 (Campa1996).

Reorganizing the Work ForceA key change in human resources managementover the last two decades has been the shift fromasking “how many people do we need to do thejob?” to asking “what is the best way to get thework done?” In other words there is a shift fromfocus on inputs (how many workers) to outputs(products or services). This shift has had a pro-found effect on the structure of the work force inmany organizations, including infrastructure enter-prises. Work force reorganization includes:

• Replacement of a single permanent cadre ofworkers with a mixture of core employees(permanent), close employees (temporary,


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In China and theformer Soviet Union,economywideadjustment hasplaced severalmillion workers onadministrative leave.

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Box 4.7: China—Administrative Leave forWorkers in State-Owned Enterprises

In response to surplus employment in publicenterprises in China, in the early 1990s therewas a new policy: Xiagong. This form of

administrative leave allows state-owned enter-prise (SOE) workers to remain at home and stillbe regarded as employees (zhigong) of the SOE.The government does not then considerXiagong to be unemployment, and Xiagongworkers retain the right to company-ownedhousing and eligibility for social and medicalbenefits. The number of workers in this categoryrose from 3 million (1993) to 9 and 12 million in1996 and 1997, respectively.

It is the responsibility of the individual SOEs toprovide compensation for these workers, andthe expectation is that a regular cash allowanceof up to 70 percent of the original wage will bepaid. In practice, however, because there is nogovernment regulation, allowances vary andmany workers receive nothing. Xiagong workersare also encouraged to seek alternative employ-ment.

Sources: Cao, Qian, and Weingast 1999; Rawski 1998.

part-time, retained, and seasonal), and periph-eral workers (casual workers, contractors)

• Greater use of outsourced contractors

• Removal or reduction of formal job demar-cations, retraining within the enterprise, andgreater multiskilling of the work force

• More innovation in forms of employmentcontract (twilight shifts, job sharing)

• Greater use of technology to facilitatechanged work practices (remote meteringand customer billing systems, customer-sup-port call centers).

These measures may not have a large impact onwork force numbers. Their importance lies, howev-er, in the challenge of creating a more flexible butadequately represented and protected work force.

Restructuring the EnterpriseEnterprise restructuring may lead to posts becom-ing redundant as a result of the closure, disposal,or transfer of:

• Noncore activities: Some infrastructure oper-ations have been not only vertically integrat-ed but almost fully self-sustaining. Railways,

for example, would have the capability forundertaking all repairs in-house. Such dis-posals are frequently associated with publicsector reform and privatization, but they arealso a normal activity in the private sector(see Dranikoff, Koller, and Schneider 2002).

• “Social” units: Public enterprises in the FSUand China commonly provided an extensiverange of social services, particularly inhealth and education. Similarly, IndianRailways has a large medical service.

Historically these activities have been necessary tokeep the PPI enterprise running effectively. Functionalreviews may identify benefits to the enterprise if theseactivities are abolished, transferred to other govern-ment agencies, spun off, privatized, or contracted out(sometimes to redundant employees).

RETIREMENT ANDREDUNDANCYIf soft options or workplace restructuring optionsare not enough, voluntary departures, compulsoryredundancy, or both may be needed. Given highlevels of overstaffing, most PPI schemes will needto turn to these options.


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New ways ofworking, sometimescalled “atypical”work, are becomingmore typical.

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Table 4.2: Administrative Leave and Reduced Work Schedules in Countries of the Former SovietUnion

Country Administrative leave Reduced work schedulesPercentage of Percentage of establishments employees

Percentage of Percentage of placing workers placed on establishments placing employees on reduced reduced

workers on leave placed on leavea schedules schedulesa

Armenia 40.2 18.5 24.6 8.7

China 63.1 4.8 — —

Georgia 43.0 37.5 10.1 5.3

Kyrgyzstan 79.7 37.4 28.0 28.8

Russia 30.1 13.0 19.3 16.8

Ukraine 43.8 15.6 32.5 12.3

— Not available.a. Percentage of all workers in surveys placed on leave or given reduced work hours during some period in the preceding year.Data on work time were not collected for China. Data relate to the period 1994–96.Source: Evans-Clock and Samorodov 1998.

Voluntary departure arrangements are the mostwidely used mechanism for reducing the size of thework force and arguably are the most politicallyand socially acceptable largely because of their vol-untary nature. A voluntary departure programinvites workers to vacate their posts in exchangefor a certain compensation package. The compen-sation may be a cash payment alone or it could bein the form of enhanced pension rights, shares inthe new private enterprise, or other emoluments,plus a cash payment. The amount of compensationshould act as an inducement to voluntary behaviorand therefore is typically more generous than astatutory settlement payable under any nationallabor laws. Other benefits may also be included inthe voluntary departure package (for example,retained rights to medical or housing benefits).

Voluntary programs often include an early retire-ment component. In such a program, workerscease work before the normal retirement age andreceive a partial or full pension (see module 5 formore). Early retirement is usually a voluntaryoption, but it can be compulsory if the retirementage is reduced for all workers

Public-Private Infrastructure Advisory Facility case

studies:

• Valdez 2002 (Bolivia)

• López-Calva 2001 (Mexico)

• Ray 2001 (Orissa).

Most implementing agencies have used voluntaryrather than compulsory departure as the core oftheir labor restructuring program (see, for example,the cases of Bolivia rail, Mexico railways, Orissapower distribution, and Brazil railways on theToolkit CD-ROM). There are many reasons forthis:

• Political benefits: It is usually better for gov-ernment if redundancies can be limited tovoluntary redundancies because it demon-strates that there has been limited coercionof the work force (see box 4.8).

• Fairness: A voluntary departure package isan indicator that government is treatingworkers fairly, which will in turn help

smooth subsequent labor programs andSOE reforms.

• Speed: Voluntary departure programs,almost by definition, provide a better sever-ance package than the minimum statutorybenefit. Where compulsory redundancy ispolitically difficult, the enhanced benefit isan incentive for workers to leave relativelyquickly and in larger numbers.

• Control of rehiring: Governments anddonors alike are wary of creating a “revolv-ing-door” situation where they finance thecosts of severance for workers but thenrehire those same workers. One problemwith compulsory retrenchment throughstatutory procedures is that governmentmay be legally unable to prohibit the rehir-ing of workers. In contrast, the voluntarydeparture offer is usually a bilateral contractbetween employer (government) andemployee, and so enables government toinclude clauses prohibiting the employeefrom working again for government or thepost-PPI enterprise.

• Getting around restrictive legislation:Compulsory redundancy procedures may be


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Voluntaryredundancy is themost widely usedmechanism forreducing work forcenumbers ininfrastructurecompanies.

There are somecompelling reasonsfor voluntary ratherthan compulsoryredundancy.

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Box 4.8: Argentina—The Success of aVoluntary Approach

In November of 1990, Argentina began restruc-turing its Public Administration and PublicEnterprises. Voluntary exit programs were

implemented to downsize companies. In 1991and 1992 there were 28,300 and 56,000 retire-ments respectively. These programs cost $1 bil-lion financed out of treasury funds, loans fromthe World Bank and the Inter-AmericanDevelopment Bank, and from the proceeds ofthe privatization…. Such a massive program ofstate employment reduction has not been with-out opposition. The weakness and infrequencyof this opposition, however, is remarkable. Andwhile clearly many factors have contributed tothis...the absence of opposition to the stateemployment reduction was clearly also due toits purely voluntary nature” (Robbins 1996, pp.6, 7).

“

determined by legislation, with statutoryprocedures, or within collective bargainingagreements or labor contracts. Governmentsmay want to use voluntary departure toavoid compulsory redundancy procedures ifthose procedures set out mandatory andextended timetables for implementing com-pulsory redundancy or provide for court-based challenges—all of which could delaylabor adjustment by several months, or ifthey require particular selection processes(for example, a last-in/first-out selectionprocess might be mandated, even though thestaff audit might show a need to retainyounger workers with different skills).

For all these reasons, voluntary departure pro-grams generally have been adopted to ensure asmoother, faster process of work force restructur-ing with less risk of confrontation with unions orworkers.

Compulsory redundancy may be the selected routewhen:

• The enterprise is liquidated. This has beenthe case with a number of airlines, includingAeromexico (box 4.9).

• Governments make a policy decision to payonly the statutory minimum, either becauseof acute financial difficulties or an in-princi-ple objection to “privileged” SOE employeesreceiving further benefits from government.

• Certain geographic or functional units areclosed.

• Compulsory redundancy follows offers ofvoluntary departure, and insufficient work-ers have volunteered.

Compulsory redundancy is best achieved throughclear objectives, open communication, and trans-parent and fair processes. The amount of statutorypayment will be determined by labor laws or laborcontracts.

Early retirement, voluntary departure, and compul-sory redundancy each have their advantages anddisadvantages for the implementing agency, assummarized in table 4.3.

KEY CONSIDERATIONS INDEVELOPING STRATEGIES AND OPTIONSThe PPI implementing agency usually does nothave a completely free hand when developingoptions and strategies for a labor program. Laborlaws and the legal status of the enterprise and itsemployees prior to PPI often restrict the choicesthat are feasible, while political considerations canstrongly influence decisions on employment protec-tion for workers in the PPI bidding process.

Labor-Related LegislationThe strategies and options open to the implement-ing agency may be constrained by legislation, so an


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In a few casescompulsoryredundancy may bethe only route ormay be agovernment policydecision.

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Box 4.9: Aeromexico—Liquidation andLabor Adjustment

One of two Mexican state-owned airlines,Aeromexico (Aeronaves de Mexico), hadonly 3 profitable years over the 30 years

prior to its privatization, and the governmenthad thought that it would be unable to sell themoney-loser. But when 7,250 of the airlinesground workers went out on strike in early 1988,the government seized the opportunity to exit. Itdeclared the company bankrupt, terminated alllabor contracts, and sold the company as anasset sale. Compensation to workers was paidby Aeronaves, and it was the creditors ofAeronaves who effectively bore the cost of sev-erance because on average they received onlyabout 70 percent of their claims against thecompany. Tandon (1995) has suggested thatsome of the better post-privatization perform-ance of Aeromexico compared with that of theother state-owned airline (Mexicana) arose fromlabor adjustment issues—specifically:

• Mexicana had been unable to matchAeromexico’s aggressive campaign toimprove service quality (which someobservers felt reflected Mexicana’s inability todeal with the unreformed labor unions).

• The investors in Mexicana had needed tofund severance costs themselves—over 100billion (old) pesos in 1992 alone.

Source: Tandon 1995.


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Table 4.3: Advantages and Disadvantages of Early Retirement, Voluntary Departure, andCompulsory Redundancy

Early retirement Voluntary departure Compulsory redundancy

Advantages• Reduces immediate costs,

particularly if pensions are deferred

• May be the most acceptable option for workers or unions, particularly if the pension scheme is a defined-benefit plan

• Shifts financing problems to pension fund or future governments (an “advantage” for today’s government, but one that creates a long-term fiscal liability)

Disadvantages• Produces uncertain longer-

term financial costs for government because returns from government pension funds are uncertain

• May lead to loss of the most skilled or experienced workers if early retirement lowers the retirement age

• Pension funds may be unwilling or unable to provide early retirement benefits quickly because of problems of administrative capacity or lack of liquidity

• A substantial increase in pensioners might tip the pension plan into a finan-cially unsustainable position

• Government’s options may be limited by the terms of pension fund rules.

• May need negotiation with pension fund trustees or the supervisory board, and so there is potential for delay in the PPI transaction

Advantages• Makes a clean break with

employees—no continuing gov-ernment commitments

• Can be structured as a one-time payment with predictablefinancial costs (and usually aquick payback)

• Is relatively simple to negotiateand implement

• Gives the implementing agencyand government flexibility indesigning the package

• Is a bilateral contract withemployees that often avoidsboth the legislative proceduresand collective bargaining agree-ment relating to compulsoryredundancy

• Is politically acceptablebecause it is voluntary

• Permits the government torequire that anyone selectingvoluntary departure agrees notto work again for the publicsector, or for the PPI enterprise,and so reduces the “revolving-door” problem.

Disadvantages• Has high immediate costs,

especially because these planstend to be generous

• Demands that particular care begiven to the selection process;generous plans can lead to arapid exodus of the best work-ers

Advantages• Makes a clean break with employ-

ees—no continuing governmentcommitments

• Can be structured as a one-timepayment with predictable financialcosts (and usually a quick pay-back)

• Is likely to be the lowest-costoption if the statutory minimumpayment is made to workers

• Produces few adverse selectionproblems; workers will be selectedfor compulsory redundancy

Disadvantages• Is the most politically difficult to

implement• Needs a formal and strictly imple-

mented process if it is to be seenas a fair and unbiased process

• May have to comply with any col-lective bargaining agreements withtrade unions on which processesto follow in the case of compulso-ry redundancy

• Consultation and negotiationprocess can lead to long delays

• Legislation may prevent the imple-menting agency from imposing ano-rehiring clause on compulsoryretrenched workers, thereby open-ing a “revolving door”

early task for the implementing agency is to reviewthe legal framework for dealing with labor issues(summarized in table 4.4), so that:

• Strategies and options can be designed with-in the legal framework.

• The need for any new legislation or amend-ments is recognized early.

• Labor issues can be appropriately sequencedwith or incorporated into other legislationneeded for the PPI arrangement.

• Legal issues do not delay PPI.

Any changes in labor laws need to be appropriate-ly sequenced with wider legislative change in sup-port of PPI. In Mexico’s rail privatization, forexample, constitutional and legislative changes topermit private participation preceded guidelines onlabor relations (box 4.10).

The legal review may suggest that labor laws andcontracts need to be amended as in the followingexamples:

• The Algerian government enacted signifi-cant changes to its legislation on redundan-cy and severance in the mid-1990s. Itimplemented a package of severance payplus a new unemployment insurance planthat spread the costs of redundancy overtime. The legal requirement for unionapproval of layoffs was eliminated(Ruppert 1999).

• In Tanzania arrangements for the transfer ofthe labor force were included in new rail-way legislation that provided for overall sec-tor restructuring, private participation, andestablishment of an independent regulatorfor the sector.

• New laws to enable modernization andrestructuring of the ports sectors, whichincluded changes to the work force rights,were adopted in Brazil and Mexico.

• In Argentina, the PPI program was enactedentirely through presidential decrees, but arange of international standards, nationallaws, and collective bargaining agreements

had to be amended for dealing with laboradjustment (box 4.11).

Laws and regulations relating to the continuity ofworkers’ rights and benefits will also require atten-tion. The terms and conditions of employment insome PPI enterprises are relatively high comparedwith those in other private sector or public sectoremployment. Continuation of those terms and con-ditions can therefore be an important issue in thePPI process. Many privatization laws are silent onlabor issues and workers’ rights, and effectivelygive freedom to the new owners to negotiate workforce numbers as well as terms and conditionswithin the limits provided by the general laborcode. Sometimes, however, workers’ rights are pro-tected as part of the privatization legislation. Forexample:

• In Turkmenistan the privatization lawensures that transferred workers have thesame rights as other workers to participatein employee ownership (box 4.12).

• In Malaysia new private owners are notallowed to modify the employees’ terms ofservice for a period of five years followingprivatization, including redundancy of theemployee.

• Nepal’s Privatization Act (1994) providedfor continuity of employment and of theterms of employment for workers trans-ferred to the private sector. In practice thishas been adopted in all privatizations inNepal.

• In Tanzania new sector-specific legislationassociated with the restructuring and con-cessioning of the railway provided for thetransfer of staff and for their rights whenthe state corporation was restructured into acompany. The article provides for:

– Continuity of terms and conditions

– Continuity of service period, which wasdeemed to be continuous from firstemployment in the corporation to end ofservice in the company.

– Continuity of pension contributions incases in which the pension plan was


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Table 4.4: Labor Issues Legal Framework

Legalinstrument Features

National • As well as providing the framework within which laws are made, changed, and interpreted, constitution some national constitutions also contain specific provisions relevant to labor issues in PPI.

For example, the South African Constitution guarantees the rights to form, join, and partici-pate in labor unions and to collective bargaining.

Primary • In some cases PPI itself will require change to primary legislation; and other legislation law might also cover the way in which PPI would be carried out, especially in relation to

employment rights.• Relevant laws can include not only those relating directly to employment, such as a labor

code, but also those relating to public service provision and regulation, health and safety protection, and civil rights in such areas as nondiscrimination against women and minorities.

• In some jurisdictions, to a degree dependent on constitutional arrangements in the country concerned, laws and rules made at the subnational level by provincial authorities and even at the municipal level are as important as national laws.

Secondary • In some cases governments have been able to develop PPI programs through decrees or laws, other instruments of secondary legislation, normally (depending on the constitution) using regulations powers provided under primary legislation, and these instruments can apply to labor issues.

• Regulatory arrangements—the powers handed by government to regulators whose inde-pendence might be safeguarded by law—can have direct and indirect effects on labor issues in PPI.

Commercial • Existing contracts with suppliers, intermediaries, or others might have implications for PPI contracts plan employment and the structure of PPI bidding documents.

• Some contractual arrangements with workers, such as those enshrined in pension fund rules, can also have implications for labor and can either determine parameters within which change takes place or require revision.

Labor • The scope and legal status of labor agreements will vary in accordance with the statutory contracts framework in which they exist. At the very least they are likely to cover the processes and and consultative mechanisms by which agreements are renegotiated, should that be necessary. agreements • Some might be underpinned in a labor code, for example, whereas others might be based

on general contract law.• The precise form of legal instruments defining relations with labor and management vary—

memoranda of understanding, collective bargaining agreements, and management agree-ments are among the forms—and each might require distinct procedures of review and revision.

International • Several ILO conventions and recommendations are relevant to PPI. Particularly noteworthy agreements are those relating to the termination of employment (Convention 158), and the ILO’s “core

labor standards” that now have the support of a wide consensus of international institutions and governments.

• In some sectors, such as airways, there are also international standards affecting terms of employment, so pilots, for example, do not work excessive numbers of hours that are incompatible with safety.

• International institutions and trade and investment agreements—such as those of the World Trade Organization, the European Union, and the North American Free Trade Agreement—also significantly affect the legal environment. There may be both direct impacts (where such agreements have social and labor clauses) and indirect impacts (where agreements on, say, procurement have implications for employment conditions and criteria in PPI bid-ding documents).

Informal • Government policy statements on labor, PPI, or privatization are relevant because govern-instruments ment agencies will usually want to comply with those policies.

• Protocols and even “soft” legal instruments, such as codes of practice, can be significant. They require compliance or change and the procedures associated with them are typically underwritten in more formal legislation, meaning that due process is not just an ethical but potentially also a legal matter.

• “Custom and practice” or precedent can also have legal force because acquired rights can result and failure to observe precedent can be open to judicial challenge as being unfair or discriminatory.

• Informal instruments can operate at every level from the workplace to the international scene. An example of the latter is the Organisation for Economic Co-operation and Development’s guidelines for multinationals (OECD 2002).

transferred to the company from thecorporation.

The legal assessment (see terms of reference for alegal review on the accompanying CD-ROM)should determine whether existing rights will beprotected as an acquired right for a particular PPIarrangement. In some cases this may require legalinterpretation. In civil-law countries the specific

enterprise law, the labor code, the commercialcode, and administrative law (government law)may have to be reviewed and a judgment may berequired if there are inconsistencies among them.In common-law countries the circumstances inwhich such rules apply can evolve through caselaw. This has happened in the European Union,where litigation by unions established that


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Box 4.10: Mexico Rail—How the Legal Framework Changed

Mexico’s railway privatization requiredchanges in the legal framework from theConstitution to various regulations, sev-

eral of which affected the treatment of labor inthe course of restructuring and PPI.

The first step in the railway restructuring strategywas a presidential proposal and approval byCongress to modify the constitutional mandatethat declared a state monopoly in railroad trans-portation. The next step, taken in April 1995, wasto create by presidential decree a ComisiónIntersecretarial de Desincorporation to beresponsible for the privatization project. In May1995 the Regulatory Law of the Railroad Servicewas published to establish the basic regulatoryframework. It defined the mechanisms and rulesfor awarding the concessions, the concessionperiod (50 years), and the regulatory framework.The law restricted foreign participation in the railconcession companies to 49 percent, but did notinclude any requirement to transfer the existing

rail work force to the new businesses. It did,however, include a commitment to training theworkers who remained in the company. In June1995 a restructuring committee was set up tooversee the railway privatization.

In November 1995 the government issued guide-lines that acknowledged the important historicalrole of the labor union and the workers and com-mitted the government to respect all of their laborrights. The guidelines set out the generalapproach to dealing with personnel issues, butits only firm requirement binding on the conces-sionaires indefinitely concerned the licensing oflocomotive drivers (laying down the qualificationsrequired of drivers, their training, and examina-tions to which they would be subject). In additionthere was a major renegotiation of the labor con-tract which was streamlined from 3,045 clausesto just 211. More than 1,800 clauses were elimi-nated and the rest introduced into bylaws

Source: Lopez-Calva 2001.

Box 4.11: Argentina—International Standards, National Laws, and Labor Contracts

When Argentina privatized air and railtransport, it was necessary to changesome laws to amend contracts of

employment. For example, pilots, flight engineers,and cabin staff were not merely covered by thegeneral minimum conditions of employment appli-cable in the public sector under the LaborContracts Act, but also by provisions originallyenacted for the Argentine Air Force concerningflight safety. Those flight safety regulationsimposed limits on operating hours and guaranteedrest breaks aboard aircraft and on the ground,depending on the type of aircraft. A decree of1994 introduced greater “flexibility” into conditionsof work and employment and in this respect wentalong with the general trend toward reducing mini-mum legal standards, but maintained compliance

with international standards established by theInternational Civil Aviation Organization. In thecase of rail, collective agreements were concludedbetween workers’ unions and the concessioncompanies, but the air companies were morereluctant about collective bargaining and theyimplemented changes with little negotiation.

In both sectors, however, the outcomes werecontractual changes to enable management todeploy workers more flexibly, both by extendingpermitted working hours and by getting rid ofrestrictive practices that limited the work thatcould be done by particular grades of workers(except insofar as international standardsrequired tight specification, as with pilots andflight engineers).

Source: Coradetti 1999.

acquired rights had to be transferred in the event ofcontracting out as well as mergers and acquisitions.

The CD-ROM that accompanies this Toolkit contains:

• Terms of reference

• Legal checklist

• Terms of reference for a review of labor laws as a

basis for engaging a legal specialist or consultant to

undertake the legal review

• A legal checklist and notes, which further elaborates

on the range of laws, agreements, and conventions

that may need to be checked.

Employee Status Prior to PPIDuring their preparation for PPI, infrastructureorganizations are often subject to fundamental

institutional changes that affect the status ofemployees, as described in table 4.5. A typical firstchange is when a departmental enterprise is trans-formed into a state-owned corporation, oftenthrough a specific act. Workers cease to be civil ser-vants but remain public sector employees.Although there are usually greater freedoms thanin the civil service, benefits and human resourcespolicies often remain linked to those of the civilservice and there is only limited delegation ofemployment policies to the corporation. Anotherchange is the legal transformation (corporatization)of a statutory corporation to a joint stock compa-ny in which the government’s role changes to thatof a shareholder and the company is governed bythe laws regulating private companies. Althoughhuman resources policies still retain public sectorcharacteristics, labor contracts and pay structuresbecome more flexible, with greater autonomy atthe enterprise level. The major change in PPI is themove from public to private ownership whereworkers cease to be public sector employees.

New Zealand rail is a good illustration of an infra-structure company in which the institutionalorganization has changed over time, paralleled bychanges in employee status (box 4.13).

These changes are important for the PPI process. Itwill be clear to most parties that corporatization inparticular is a possible preparation for private par-ticipation. Any changes in employee status, pay,benefits, and conditions that are agreed to as partof the broader institutional change while the enter-prise is still publicly owned are likely to be pre-served throughout the process to PPI. Trade unionsare aware of this, and the implementing agencyshould be prepared to face tough negotiations andindustrial action prior to PPI itself. Two examplesfrom the telecommunications sector are summa-rized in box 4.14.

Employment Protection in theBidding ProcessTwo questions that frequently arise are whether toinclude employment conditions in PPI bids, andwhat types of conditions should be included.


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Employees’ status,benefits, andemploymentcontracts change asthe legal basis of thePPI organizationchanges fromdepartmentalenterprise, publiccorporation, jointstock company, andthen into a privatecompany.

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Box 4.12: Turkmenistan—Privatization andEmployment Rights

The Law on Privatization of Property inTurkmenistan includes a section dedicat-ed to “Guarantees for Personnel of

Enterprises Stated for Destatization andPrivatization,” which not only requires collectivebargaining but also establishes certain propertyrights for employees in the enterprise. It pro-vides that:

1. The labor relations between the personnel ofenterprises who have undergone destatizationand privatization and the new owners of theenterprises will be regulated by existing laborlaws of Turkmenistan with consideration forthe provisions of this section. The new ownerwill negotiate a new collective contract withthe trade-union organizations at the enterprisewithin six months after the transfer of owner-ship rights. Until this contract has beensigned, all of the provisions of the earlier col-lective agreement must be observed.

2. The collective contract will be negotiated atall enterprises and acquire the rights of a legalentity, regardless of the form of ownership.The placement of released personnel in newjobs and other social guarantees will besecured in accord with the employment lawsof Turkmenistan.

Should the PPI bidding process include employ-ment guarantees by the investor, and should theevaluation of the winning bidder take into accountlabor-related criteria, such as the bidder’s proposalsfor future work force restructuring?

The implementing agency can choose to set noemployment criteria or conditions in the biddingdocuments, giving maximum flexibility to the pri-vate partner to manage labor issues. Alternatively,employment criteria or conditions can be includedin the bidding process to protect employment andworkers’ rights, as in the following examples:

• Including labor requirements as part of bidevaluation criteria, such as the number ofemployees to be retained. Investor selectionwill then be based, in part, on bidders’response to those criteria.

• Imposing mandatory and specific labor con-ditions that must be complied with in theproposals submitted by all prospective bid-ders. Labor conditions may include obliga-tions on:

– Periods of guaranteed employment,where investors promise to maintainoverall staffing at a certain minimumlevel for a defined period.

– Implementation of redundancy pro-grams. Normally these take the form of“no compulsory redundancies for x


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Change of employeestatus and termsand conditions willrequire negotiationwith trade unionsand workers’representatives.

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Table 4.5: Institutional Reorganization and Changes in Employee Status

State-ownedType of Departmental State-owned company

PPI entity enterprise corporation (wholly owned) Private company

Relevant Civil service Act of parliament Joint stock company Joint stock compa-institutional regulations or establishing statu- with 100 percent of ny; subject to nor-legislation civil service law tory corporation shares owned by the mal company laws

state; subject to and corporate code normal company laws (including bank-and corporate code ruptcy)(including bankruptcy)

Employee Civil servant Public sector Public sector Private employeestatus employee employee

years.” For example, in Benin there wasa standard “five-year no layoff” clause inprivatization contracts (Campbell-Whiteand Bhatia 1998). There are normally norestrictions on investors offering a pro-gram of voluntary departure.

– The minimum severance benefits thatworkers can receive if there are compul-sory redundancies or voluntary depar-tures following PPI.

– Continuity of terms and conditions ofservice, which require the investor to pro-vide the same or better levels.

– Workers’ right to participate in shareownership programs (module 5).

Bid conditions are usually more transparent thanevaluation criteria. But although conditions andcriteria are attractive from a political and socialstandpoint, the implementing agency often will rec-ognize that they are not appropriate for the follow-ing reasons:

• Practicality and feasibility of enforcement: Ifgovernment is unable to enforce bid condi-tions or investor compliance with promisedapproaches to labor management, condi-tions or criteria are ineffective tools. InMozambique and Zambia, for example,labor guarantees at privatization were notkept (Campbell-White and Bhatia 1998).

• Suitability of employment guarantees:Employment guarantees work where surpluslevels are modest and in high-growth sectorswhere excess labor can be absorbed throughattrition and expansion. But they may notbe a solution for public services or enterpris-es with severe overstaffing.

• Impact on transparency of the bid selectionprocess: The more complex the technicalevaluation criteria, the greater the chancethat the scoring is subjective and nontrans-parent. In Argentina, initial experiences withrail concessions led to dropping the laborcriterion from the technical evaluation inlater rounds (box 4.15).

• Difficulty of comparing bids when bidderssubmit different labor treatment plans, as


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Although thepreparation ofbidding documentsis an activity late inthe PPI process, it isessential to considerbidding conditions ina strategic way atan early stage.

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Box 4.13: New Zealand Rail—Changes in Worker Status

The status of workers in the New Zealandrail sector has changed several times. In1982 New Zealand Rail was converted from

a departmental enterprise where workers hadcivil servant status to a statutory corporation(New Zealand Rail Corporation [NZRC]) whereworkers were public servants. Subsequently theentity was again changed when it was convertedfrom a statutory corporation in 1990 to a publiclimited liability company (where staff continued tobe public servants). Finally, in 1993 New ZealandRail Ltd. shares were sold to private interests.The employees’ status then changed from publicsector employee to private sector employee.

There also were changes in the labor contracts.Until 1986 employees of NZRC continued to beguided by the central civil service conditions ofemployment. In 1987 NZRC came under the leg-islation applicable to SOEs that made NZRCindependently responsible for bargaining over itsown labor relations contract. The key changeswere:

• Simplification of the collective labor-government agreement and removal of artifi-cial distinctions among job categories

• Removal of the state service seniority andappeals system for the appointments andpromotions process

• Removal of senior management from thecollective bargaining agreements to individ-

ual contracts with incentive-based perform-ance measures

• Simplification of the allowance structure andan increase in the base pay to absorb someof the allowances as well as the introductionof incentive-based compensation to most ofthe white-collar employees.

Nevertheless the contract as a public servant upto 1992 still retained many aspects of the statesector model in respect to hours of work, over-time payments, and penalty payments. Followingprivatization in 1993, however, under theEmployment Contract Act, New Zealand Rail Ltd.as a privately owned company was able to makefurther changes to the labor contract:

• More flexible working hours, including over-time after 80 hours each fortnight instead ofafter eight hours per day

• Fewer penalties on work outside the con-ventional eight-hour day Monday to Friday

• Change from one collective contract to fivecontracts

• No weekend or night work penalty pay-ments for new employees.

A lump-sum payment was also made to thoseworkers who lost out from the changes to theovertime, penalty, and allowance payments.

Source: Kopicki and Thompson 1995.

the United States wastewater example illus-trates (box 4.15).

The following guidelines on the use of labor crite-ria and conditions in the bidding process helpaddress the tradeoffs between political/social desir-ability and efficiency:

• Use labor conditions rather than labor crite-ria because conditions are more transparent,and allow like-for-like comparison of bids.Variant (alternative) proposals are still possi-ble, which means that innovative proposalsstill may be captured.

• Set reasonable conditions so that they donot hinder flexibility. For example, providetransitional employment guarantees ratherthan longer-term ones, avoid prohibitingvoluntary retirements, and specify condi-

tions that are likely to enhance value andperformance, such as minimum annualinvestments in training.

• If setting labor criteria for bid evaluation,define the rules clearly—both to bidders andevaluators—to make the evaluation processas objective as possible and to avoid manip-ulation (for example, by counting part-timeworkers as full-time ones), and ensure trans-parency in publishing the results.

STRATEGIES—A DECISION TREEFigure 4.3 provides a decision tree to help imple-menting agencies develop the overall strategy forlabor restructuring and assess when and how labor

restructuring should take place, taking intoaccount circumstances at both the country andenterprise levels.

Tools (on the CD-ROM)Terms of reference for a legal review

Labor law checklist and notes

Note on employee share ownership programs in PPI.


Clarke, George. 2001. “Thirsting for Efficiency.”Paper presented at the Regional Conference on the


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Allowing bidders tosubmit alternativeideas on thetreatment of labormakes it difficult tocompare like withlike.

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Box 4.14: Telecommunications—Institutional Structures and Labor AdjustmentFrance Telecom—Preprivatization InstitutionalChanges

Before 1991 France Telecom was a central gov-ernment, autonomous, public law enterprise. Inpreparation for privatization, France Telecom hadto be transformed to a joint stock company.

The change of status from a civil servant ofFrance Telecom to an employee under the gener-al labor code regime and the fear of layoffs relat-ed to privatization became stumbling blocks tothe privatization, resulting in strong oppositionand a number of union strikes. The governmenthad to enter into negotiation with the unions, andat each stage of the negotiation additional con-cessions were made, including guaranteeing thebenefits of civil service status and a commitmentthat the company would remain 51 percent stateowned.

India Telecom—Labor Challenge toCorporatization

In 1999 the departmental enterprise providingtelecommunications services in India, theDepartment of Telecom Services (DTS), was pre-pared for corporatization. The corporatization ofDTS was strongly and consistently opposed bythe officers and workers of DTS (about 360,000total). A nationwide strike took place inSeptember 2000. The strike’s impact was wide-spread: It received strong media coverage anddrew support from other central governmentunions. It disrupted telecom services severely

throughout India for nearly a week—all telephonelines, cellular, mobile, and Internet services coun-trywide, and all manually operated telephone andtelegraph services were affected.

The strike was ended with the government hav-ing remained firm on the need for restructuring ofthe sector and the need to privatize. In October2000 DTS was corporatized and converted toBharat Sanchar Nigam Limited (BSNL), a newwholly state-owned company registered underthe Companies Act.

However, several concessions had been made tounions and workers, the most important of whichwere:

• Maintenance of the staff’s long-term pensionbenefits, which government guaranteed tomeet from a consolidated central fund(although this funding mechanism was subse-quently disputed)

• Maintenance of all terms and conditions andstaff benefits

• Regularization of about 8,000 quasi-permanentand temporary staff, including providing themwith pension benefits

• An immediate salary increase of 1,000 rupeesper worker, plus recognition of improved payscales and increments

• Free telephone connection for all employees,plus reduced call costs.

Sources: Guislain 1997; Adam Smith Institute, unpublished data.


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The decision treehelps guideimplementingagencies throughthe strategicdecisions for laboradjustment.

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Reform of the Water Supply and Sanitation Sectorin Africa, “Enhancing Public-Private Partnership inthe Context of the Africa Vision for Water (2025).”Kampala, Uganda.

Estache, Antonio, Jose Antonio Schmitt de Azevedo,and Evelyn Sydenstricker. 2000. “LaborRedundancy, Retraining, and Outplacement during

Privatization: The Experience of Brazil’s FederalRailway.” Policy Research Working PaperWPS2460. World Bank, Washington, D.C.

Rama, Martin. 1999. Public Sector Downsizing: AnIntroduction. The World Bank Economic Review13(1):1–22.

Box 4.15: Experiences of Using Labor Factors in PPI BiddingArgentina Rail

In the mid-1990s the government of Argentinarestructured its railway into separate freight andpassenger train networks, which were conces-sioned. The six freight concessions were issuedfirst, and the bidding mechanism reflected bothpolitical compromises on employment andinvestment requirements. Bids for the freight net-works were evaluated on the net present value(NPV) of the canon (annual concession fee) to bepaid to the government, as well as on staffinglevels, the quality of the business and investmentplans, the proposed track access fee for intercitytrains, and the share of Argentine interest in theconsortium. The bidding process for freight con-cessions was perceived to be too complex andlacked transparency, however. The bid evaluationcriteria were simplified in the subsequent issuingof passenger concessions. Those bidding docu-ments defined the minimum services to be pro-vided and a capital investment program, and bid-ding was based on the lowest level of govern-ment payment. Other criteria, including labor,were dropped.

United States—Municipal WastewaterTreatment

In 1996, intending to privatize its wastewatertreatment service, the city of Buffalo, New York,invited proposals from three bidders and requiredthem to set out what they would do with theexisting labor force if they won the concession.Each company made a different offer.

One stated that the company “is committed toemploying existing staff and making significantinvestment in the greater advancement of eachof its team members.” The company also under-took to extend the one-year no-layoffs pledgerequired by the city to five years, improving pro-ductivity instead through “our innovativeapproach to providing service level enhance-ments, and through ‘insourcing’ of minor capital

improvements work, major corrective repairs andother services currently ‘outsourced’ by theboard.” In addition the company proposed toimplement an extensive training program onprocess control, maintenance, safety, warehous-ing, purchasing, and cost control measures. Theymade no promises, however, about union recog-nition, bargaining rights, or maintenance of paylevels.

A second bidder also proposed a comprehensiveprogram of employee training and developmentand promised to maintain employment and termsof employment at then-current levels throughoutthe period of their five-year plan as a result of aplanned extensive meter installation program.While promising to meet all the financial costs ofthese commitments, the company’s submissiondeclared its assumption that all employees withmore than 25 years of service, and therefore ableto retire under the terms of the municipality’spension arrangements, would be enabled to takeearly retirement.

The third submission anticipated retrenchments,stating that it would seek to eliminate “no layoff”language in existing labor contracts in the courseof negotiating terms and conditions with theunion, which it undertook to recognize as itsworkers’ bargaining agent. The company alsosaid it would budget for a 3 percent payincrease, maintain medical payments for up to 18months, provide training even for redundantemployees, and offer other benefits.

In addition to the difficulties of comparing thebids, the city noted that the more commitmentson employment made within the submission, thehigher their proposed charge for the contract tothe city, so that the city itself was faced with thecost of the tradeoff.

Sources: Thompson and Budin, 1997; documents providedby AFSCME, the U.S. public employees’ union.


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Are

pol

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71

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Web SitesILO. 2000. “Termination of Employment Digest.”

Geneva: International Labour Office. (Available fordownload from the ILO web site: www.ilo.org. Fora summary of national laws on statutory termina-tion, see the following area on the ILO Web site:www.ilo.org/public/english/dialogue/ifpdial/publ/publ_emp.htm.)

ICFTU: www.icftu.org.

ILO ILOLEX: www.ilo.org/ilolex/english/index.htm.(Site provides access to ILO conventions.)

ILO NATLEX:www.ilo.org/dyn/natlex/natlex_browse.home. (Site provides access to 55,000 national laws onlabor.)

World Bank “Shrinking Smartly”:www.worldbank.org/research/projects/downsize/.(Site is a clearinghouse for researchers, developmentpractitioners, and government officials concernedabout the difficulties encountered in downsizing alarge public sector. Several papers on downsizingstrategies are available for download.)

PPIAF: www.ppiaf.org. (Site features other PPIAFresources and tool kits.)

Rapid Response: rru.worldbank.org.

World Bank Social Protection:www1.worldbank.org/sp/. (This site provides accessto the online version of the World Bank CoreLabor Standards Toolkit, labor markets pages.)

Other Material and SourcesAeberhard, Jane Hodges. 2001. “Comparative Study

of Contents of Civil Service Statutes.” InternationalLabour Office, Geneva. (Provides a commentary ondifferent approaches to labor issues in civil servicestatutes worldwide, including termination ofemployment. Available for downloading atwww.ilo.org.)

National Performance Review. 1997. Serving theAmerican Public: Best Practices in Downsizing.

Washington, D.C. (This publication summarizesfindings of a benchmarking study on best practicesin downsizing in North American public and pri-vate sector institutions. Seehttp://safetynet.doleta.gov/comon/downsize.pdf.)

OECD Guidelines for Multinationals Enterprises:Global Instruments for Corporate Responsibility.2001 edition (see www.oecd.org). The OECDguidelines for multinational enterprises are recom-mendations on responsible business conductaddressed by governments to multinational enter-prises operating in or from the countries thatadhere to the Guidelines (the OECD members plusArgentina, Brazil, and Chile). The chapter onemployment and industrial relations is one of themost detailed and comprehensive of the instrument,and deals with:

• Respect for core labor standards (freedom ofassociation and collective bargaining, abolition ofchild and forced labor, nondiscrimination inemployment and occupation)

• The preconditions for enabling effective negotia-tions and consultations between employers andemployees and their representatives

• The provision of information to employees andtheir representatives

• The observation of adequate employment andindustrial relations standards, particularly in thearea of occupational safety and health

• Recruitment by enterprises of local personnel andprovision of adequate levels of training to them

• Provision of reasonable notice to representativesof employees in cases of major changes in busi-ness operations

• Unfair influence on bona fide negotiationsthrough transfers of operating units and/oremployees to or from other countries

• The selection of management representativesendowed with the appropriate decisionmakingauthority for collective negotiations.

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1. Severance payments

2. Pension payments

3. Retraining and redeployment support

4. Employee share ownership schemes.

Each of these components is discussed in depth inthe following sections. At the end of each section isa list of the contents of the CD-ROM that accom-panies this Toolkit, a list of pertinent Web sites,and a list of additional relevant materials andsources.

SEVERANCESeverance payments are an important source oftemporary income for surplus workers and theyneed to be designed and put in place early in therestructuring process. Because they are potentiallycostly for governments, it is important to designthem well. This section of the module providesguidance on how to design severance plans, how to

assess payment levels, and how to avoid somecommon implementation problems.

The design of severance packages must begin earlyin the labor program because it is a critical factorin the success of the program. An early start willprovide time to assess all of the options. There is,however, no “cookbook” recipe or formula fordetermining severance payments.

Severance packages typically include some or all ofthe following components:

• Statutory end-of-service payments, the levelsof which are set out in national or state leg-islation and over which there is no discre-tion (without legislative change)

• Compensation for enterprise-level benefits,which are payments to retrenched workersfor benefits to which they are entitledaccording to the rules for each enterprise oras part of a formal collective bargainingagreement

73

A severancepackage has anumber of elements.Each element maybe governed bydifferent legislation,regulations, rules, oragreements.

5Key Elementsof a Labor Program

When the broad strategy and options for labor restructuring havebeen determined, the next step is to develop the main elementsof the labor program. Specific approaches to restructuring are

bound to vary among countries and enterprises, depending on local circum-stances. But labor programs typically include four main components:

MODULE

• Ex gratia severance payments over andabove statutory minimums, which form partof a voluntary departure agreement withworkers.

Statutory PaymentsStatutory termination payments are the minimumpayments that any terminated worker must receiveaccording to national or state legislation. Thesepayments must be made whether employees leavethrough voluntary departure, early retirementterms, or compulsory redundancy.

The relevant laws and regulations vary amongcountries, but typically the main elements of statu-tory payments are:

• Notice period, or payments in lieu of notice

• Statutory termination benefits

• Gratuity benefits

• Pension benefits

• Earned leave

• Payment of salary or wages in arrears.

Notice Payments

National labor legislation often provides for anotice period prior to redundancy, typically rang-ing from one to three months and sometimeslonger. In many cases there is the option to providesalary in lieu of the notice period. This enablesmanagers to ask employees to leave the workplaceimmediately—an option with the following advan-tages:

• It avoids having retrenched employeesworking alongside their retained colleagues,which could lead to tension in the work-place.

• It enables managers to move quickly aheadwith training and development for retainedstaff.

• It reduces the potential for theft, poor serv-ice, or sabotage by employees being let go.

Statutory Termination Benefits

Statutory termination benefits vary considerablyamong countries, as table 5.1 indicates. Benefitstypically are based on a formula linked to years ofservice. Often workers must have completed a min-imum period of 6 to 12 months of employment tobe eligible for these benefits. The InternationalLabour Organisation’s “Termination ofEmployment Digest” is an online resource thatdetails national legislation and statutory severancepayments and packages worldwide.

The ILO Web site offers access to comparative data

on statutory termination benefits: www.ilo.org.

Gratuities

A gratuity is a benefit paid at termination of serviceto an employee reaching the date of superannuationor on retirement, resignation, death, or disablement.Some countries have primary legislation setting outthe basis for statutory gratuity payments, in addi-tion to other statutory termination benefits. In othercases enterprise-level rules may set the terms of gra-tuity or supplement the legislation.

Pensions

Pension entitlements are a substantial and impor-tant element of a worker’s severance package, andthey are covered extensively later in this module.

Earned Leave

Some public sector or enterprise terms and condi-tions provide that termination benefits can includepayment in lieu of earned (accrued) leave. Forexample, in Orissa, India, permanent employeesare awarded “earned” leave at a rate of 15 daysper year of service. If a worker takes no earnedleave during the course 20 years of service, his orher earned leave could total 300 days (15 × 20). Atretirement any unused earned leave can be convert-ed to cash, subject to a maximum amount of eightmonths of salary. In Orissa the payment of unusedleave at the end of service is a nonstatutory pay-


74

Statutory paymentscan be an importantpart of the overallseverance package.

Statutorytermination benefitsrepresent theminimum amountsthat all retrenchedworkers mustreceive.

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Key Elements of a Labor Program

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Table 5.1: Some Examples of Statutory Termination Benefits

Economy Notice period Termination benefit Other features Information source

Cambodia Sliding scale For workers with Workers on fixed-term con- ILO 2000from 7 days more than 1 year tracts (rather than indefinite (minimum) to of service: 2 employment) are entitled to 3 months for weeks’ wages per a severance payment as workers with year of service, up agreed in the labor contract, more than to a maximum of but not less than 5 percent 10 years of 6 months’ wages of the total wages paid dur-service ing the length of the contract

China 30 days; notice Generally 1 month Trade unions, workers, and ILO 2000is compulsory a year labor administration must

be consulted

Estonia (1) 2 months 3 to 4 months of No other liabilities on firms Orazem and salary, depending Vodopivec 1996on service period

Estonia (2) 2 to 8 months of Venesaar 1995wages

Hong Kong, As contract of After 2 years’ For collective dismissals ILO 2000China employment, service at capped there are no legislative (Special unless fewer rate per year of requirements for notice, Autonomous than 7 days; two-thirds of last consultation, prior Region) a legal mini- salary or authorization from a

mum of 1 HK$22,500, which- judicial or administrative month ever is lower body, or any other restric-

tions in relation to proposed redundancies

India 1 month’s 15 days’ wages Workers with more than ILO 2000notice per year of service, 5 years of service also

for workers with at are entitled to gratuity least 1 year’s paymentsservice

Indonesia Termination 1 month per year General requirement to ILO 2000requires prior up to a maximum avoid redundancy approval by of 5 years wherever possiblethe labor administrationand consul-tation with trade unions

Kazakhstan 2 months 3 months of Code of Laws on salary Labor of the

Kazakh SSR (as amended to 1994)

Democratic 30 days’ Minimum of 30 Legal requirements to ILO 2000Republic notice days a year establish fair and rational of Korea standards for selection of

redundant employees, and to consult with trade unions

(Table continues on the following page.)


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Table 5.1 (continued)


Malaysia 4 to 8 weeks, 4 weeks for 10 Last-in/first-out selection ILO 2000depending on days for the first has been imposed by length of year, 15 days for courtsservice 2 to 5 years, and

30 days per year for periods in excess of 5 years

Nepal 1 month 30 days per year Last-in/first-out, plus: Labor Act 1992of service, plus • Non-Nepali nationals must gratuity and other be retrenched first, even statutory benefits if they have not been

employed last• Workers and employees

who are absent for a long period as a result of poor health must be retrenched first

The Approval to 1 month a year if ILO 2000Philippines terminate is dismissed as a

required result of new technology; 1.5 months if dismissed as a result of enter-prise closure or attempts to reduce losses

Singapore As employment None but that ILO 2000contract, other- determined under wise statutory collective minima of agreements1–4 weeks

Slovenia 6 months 1 month’s salary Firms are responsible for Orazem and (24 months per year of service taking steps to retrain or Vodopivec 1996prior to 1991) reassign workers

Sri Lanka 1 month, but Labor commis- Labor commissioner ILO 2000must report to sioner determines has absolute discretion commissioner entitlements but to approve applications

her guidance on for redundancy criteria given to employers is to pay 2 to 3 months’ salary per year of service or full salary for the remaining period up to retirement, whichever is less, subject to a maximum of 50 months’ salary


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Taiwan, 1 month 2 months’ salary for China the first 15 years of

service, 1 month of salary for the re-maining years; maximum of 45 months’ salary

Uruguay 1 month’s current www.embassy.org/salary for each year uruguayor fraction worked, up to a maximum of 6 months’ salary

República Up to 3 1 month of “normal “Normal” salary for Coil and Rice Bolivariana months, salary” for each severance is defined as 1997de depending on year of service; this basic salary plus all fixed Venezuela seniority is doubled, how- regular payments and

ever, if the employee allowances and any is terminated with- profit-sharing payments, out just cause. In all brought to a monthly addition, the em- basisployee receives any undistributed,accumulated inter-est in his or her severance indem-nity account.

Vietnam 45 days for Generally, one-half ILO 2000workers with of a month’s salary an indefinite per year of service employment as severance contract allowance, plus

1 months’ salary per year of service as loss of employ-ment allowance

ment, but it is defined in the service rules and regu-lations of individual enterprises. The courts therehave enforced the eligibility of retrenched employ-ees for these payments so enterprises have had littlediscretion in their payment.

Arrears of Salary and Benefits

There is usually no legal or ethical disagreementthat displaced workers should receive any salary or

other benefits that are due them. Those arrears,however, can be substantial if financial problemshave led enterprises to defer payments for somemonths or years. Arrears may comprise:

• Unpaid salaries

• Unpaid salary increases, cost-of-livingadjustments, or scale revisions

• Unpaid allowances or allowance increases

• Unpaid pension fund contributions (both

employees’ and employers’ contributions).

Arrears can present practical challenges for theagency that is implementing the privatization of theinfrastructure sector, among them:

• Identification of the level of arrears:Implementing agencies may be unaware ofor may underestimate the extent of arrears.Enterprise managers also might have under-estimated, hidden, or not reported the scaleof the arrears problem. If large arrears comeas a surprise late in the restructuringprocess, there may be a problem in findingfunds to meet them at short notice.

• Additional time delays: Resolving the prob-lem of how to finance unexpected arrearscan take the time and attention of the imple-menting agency. Disputes with unions caneasily arise over arrears. Calculating netarrears can also introduce further complexityand delay. For example, one bus companyallowed its staff to keep a portion of passen-ger receipts in lieu of wages, and the registerof these “informal” salaries needed to be rec-onciled before arrears could be finalized.

Arrears are a particular worry for ministries offinance and for donors. Rescuing enterprise man-agers from the problem of arrears may causegreater arrears problems in the future because (a)the rescue signals that government has taken a softapproach to the budgets of SOEs, and (b) if enter-prise managers believe that the overstaffing prob-lem ultimately will be dealt with through a gener-ous government severance program (at the time ofprivatization or before), they have little incentive totackle overstaffing and to make the hard laboradjustment decisions that are needed on a day-to-day basis.

Statutory payments, together with contractual ben-efits (described below), can represent a substantialproportion of the overall payments to workers inboth middle- and low-income countries. For exam-ple, in the privatization program in Taiwan, China,the total severance package for a typical middle-ranked employee with 15 years of service is pro-portioned as follows: statutory payments (70 per-

cent), compensation for cessation of pension (14percent), and ex gratia severance (16 percent)(Chang 2002, pp.11–15). In Brazil, federal railemployees who took voluntary departure termsreceived an average of about US$8,000 in ex gratiaseverance and US$10,000 in legal entitlements. InIndia, too, workers in Orissa who accepted thegovernment’s voluntary retirement scheme (VRS)received a significant proportion of benefits fromstatutory and contractual benefits—particularlyworkers with fewer years of service (figure 5.1).

Statutory termination benefits are usually paidfrom the current resources of the enterprise.Employers simply make the payment out of cur-rent operating expenses when workers reach aspecified age or leave the enterprise. Generallythere is no method of accounting for these liabili-ties, even though they can represent a substantialfuture commitment of an enterprise’s resources.Consequently, severance programs can representone of the most difficult problems in a PPI transac-tion, because they are legally enforceable obliga-tions that can have dramatic cash flow and solven-cy consequences during labor restructuring.

In Latin America, however, some countries requireworkers to contribute to an individual accountinto which some percentage of their salary is paidon a regular basis. In the event of separation—vol-untary or compulsory—workers can withdrawmonies from these accounts. Any surplus at retire-


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Large arrears cancome as a financialsurprise to theimplementingagency. Dealing withthem can delay theprocess and presentgovernments anddonors alike withsome tough policydecisions.

Moral hazard is aconcern for thoseasked to financearrears.

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0

20,000

40,000

60,000

80,000

100,000

120,000

0–15 16–20 21–25 26–31

Years of service

Amount in rupees

VRS amount Gratuity Earned leave

Figure 5.1: End-of-Service Benefits in Orissa, India

Source: Adam Smith Institute, unpublished data, 2000.

ment can be used toward the worker’s pensionprovision. This approach is effectively a severanceprogram funded through forced savings by work-ers themselves, and similar in some ways to theprovident funds described in the pensions sectionof this module. Brazil has had a program of thistype for more than three decades, where displacedworkers can use their individual FGTS (FundoGarantia por Tempo de Servicio) accounts. In the1990s Colombia replaced its severance pay pro-gram with fully funded accounts of this type (deFerranti and others 2000).

Contractual BenefitsMany enterprises provide a range of benefits,including medical, transportation, housing, food,and other allowances. These benefits are often setout in the administrative rules or regulations foreach public enterprise or in collective agreementsor labor contracts. The implementing agency willrisk industrial unrest and legal challenges onbreach of contract grounds if agreed benefits arenot provided. Unlike statutory payments, however,the implementing agency does, in theory, have theoption to negotiate these payments.

At separation, workers will usually have to becompensated for these contractual benefits as partof the overall severance package through one oftwo mechanisms:

1. Estimation of the value of each benefit foreach worker

2. Conversion of allowances into a single nom-inal salary (as described in the case ofMexico railways [box 5.1]), which is thenadopted as the worker’s deemed salary in aseverance formula.

In Nepal public enterprises set their own rules andregulations for treating such nonsalary benefits asmedical coverage, housing, loans, and foodallowances at termination. These allowances havevaried greatly, and the government found that it hadto engage accountants and consulting firms to under-take detailed assessments for each enterprise in orderto estimate the costs of labor adjustment for its pub-lic enterprises. In Uganda the rules on terminationpayments vary among enterprises. Some include stan-dard allowances received with pay as a basis for cal-culating terminal benefits; others do not include theseallowances but do provide formulas that compensatefor them (Campbell-White and Bhatia 1998).


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Enterprise benefitsare defined by theadministrative rulesand regulations ofthe enterprise. M

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Box 5.1: Mexican Railways—The Daily Integrated Salary

At the Mexican National Railroad Company(Ferrocarriles Nacionales de México,FNM), salary for the purposes of the sev-

erance scheme was identified as the “daily inte-grated salary.” It was calculated by adding themonthly amount of the base salary to theamounts of a wide range of enterprise benefitsand dividing by 30 days of the month. Here is alist of the potential factors in that equation:

• Base salary

• Savings fund (monthly equivalent)

• Christmas bonus (monthly equivalent)

• Payment for vacations

• Special bonus for housing rental

• Special bonus for transportation

• Payment for basic bundle of goods

• Payment for educational support of children

• Incentive payment for attendance and punc-tuality

• Incentive payment for productivity

• Incentive payment for training

• Tenure bonus

• Performance bonus

• Support for automobile fuel

This formula was used to calculate the salary thatapplied both for workers eligible for an enhancedearly retirement plan (with different retirement agesfor men and women), and for those workers whowere not eligible for retirement but offered insteada severance plan. Depending on their daily inte-grated salary, age, tenure, and gender, workersreceived, on average, between US$10,000 andUS$25,000 as a severance payment (based on theaverage exchange rate in 2000).

Source: López-Calva 2002.

Contractual benefits can be complex. The laborcontract for workers in the Mexican national rail-way (Ferrocarriles Nacionales de México [FNM])contained more than 3,000 clauses. In such casesrenegotiation and simplification of the labor con-tract and payment rules are effectively essentialprior actions to privatization and may include sim-plification of the rules on compensation for the lossof benefits for redundant workers. In Mexico atemporary contract was agreed to during therestructuring process for FNM—one that simpli-fied the contract to 211 clauses. Following the pri-vate investment in infrastructure (PPI), the newrailway operators negotiated separate labor con-tracts (López-Calva 2001).

López-Calva 2001 (a PPIAF case study).

Housing is often an important benefit that needsseparate treatment. Two issues must be addressedin this regard:

• The immediate treatment of displacedworkers living in enterprise-provided hous-ing: The usual arrangement is to allowworkers to continue to live in the housingfor a specified period after termination,sometimes with reduced rents. For example,Tanzania Telecommunications CorporationLtd. allowed workers a six-month rent-freeperiod in which to find alternative accom-modations. Brazil’s railway, RFFSA, allowedseparated workers to stay in their housingfor one year.

• The disposal of housing that is no longerneeded: Options include sale of the houses,with employees possibly offered the right offirst refusal or a discount on the market saleprice; transfer of houses to local or munici-pal governments (a practice that has beencommon in transition economies); andtransfer of houses to a government propertyagency that continues to collect rent andmanages the disposal of the government’sproperty portfolio in a structured waydesigned to maximize revenues.

Allowances for travel to home may be part of thenormal statutory, enterprise, or contractual benefits

or may be provided as a special ex gratia end-of-serv-ice benefit for workers. Either (capped) reimbursablecosts or, more commonly, a defined allowance is paidtoward the costs of transportation to a designatedhome location for the employee and his or her familyand for the transfer of household furniture and pos-sessions. The designated home location is often thelocation recorded in the employee’s service record atthe date of joining the PPI enterprise. Theseallowances are most relevant where there are tradi-tions of migration to work or where ethnic groupor family links to the home area are important.

Ex Gratia Severance PaymentsEx gratia severance payments are often provided aspart of the overall severance package. Particularly incountries where the need to reward or placate laboris strong and social safety nets are lacking, as well asin countries where labor legislation prohibits out-right layoffs, governments have resorted to promot-ing voluntary departures by offering severance pay-ments that exceed legally mandated requirements.

Developing Severance Formulas

Worldwide, in both private firms and in govern-ment, the most common approach for defining sev-erance payments is a formula based on a multipleof years of service and salary. Such formulas areeasy for managers to use and are widespread inboth the public and private sectors. Table 5.2describes some advantages and disadvantages ofthe standard formula.

The formula for severance payments has variedwidely among countries and, within countries,among enterprises in different sectors, dependingon legal and contractual obligations and thestrength of labor unions. Examples of formulasused and the resulting payments in a range ofinfrastructure enterprises in developing countriesare presented in table 5.3.

Additional data tables summarizing the key features

of public sector and state enterprise severance pro-

grams worldwide.


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Many governmentshave chosen to treathousing as anoncore asset andto sell it. Workersmay have firstrefusal or receivediscounted prices.

Ex gratia paymentsare at the core oflump-sumseverancepackages.

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Table 5.2: Advantages and Disadvantages of Standard Severance Formulas

Advantages Disadvantages

• Relatively simple to understand, communicate, • Can be imported easily. Managers in a hurry may and implement sometimes simply copy formulas from another

• Attractive to unions because they can negotiate country or enterprise. a formula for a class of workers • Can substitute for analysis of actual needs

• Attractive to government because it can set a single formula as part of a uniform approach

Table 5.3: Examples of Severance Formulas and Payments

Economy/ Key features of Source for enterprise voluntary departure Other features further details

Argentina: Post-PPI voluntary retirement under- Workers who left under Shaikh 1996Buenos Aires taken by the concessionaire voluntary retirement received Water and approximately US$10,000 Sewerage in severance

Argentina Severance package is approximately In 1992 workers received Shaikh 1996Electricity 10 percent greater than the statutory approximately US$10,000

termination package in severance.

Argentina Rail 1 month per year of service, Approximate cost in 1990 of Ramamurti with no cap US$10,000 per worker 1997

Bolivia Rail 3 monthly wages plus an equivalent The amount offered was the Valdez of 1 wage per year of work for those same as statutory payments; 2002with more than 5 years of service, Bolivian capitalization program plus statutory unemployment benefits had made a policy decision to

implement a uniform scheme for all enterprises; no incentive for workers who voluntarily retired

Brazil: Workers with 4 to 10 years of service, Those who left voluntarily Carneiro São Paulo 1 month’s salary per year of service; gained a cash bonus of 33 and Gill Railway workers with 10 to 20 years of service, percent of monthly salary 1997

2 months’ salary; and workers with up per year of service; average to 25 years of service, 2.5 months’ total package received per salaries; workers also receive 180 perworker was estimated cent of the accumulated funds in their at R$29,870FGTS accounts (a compulsory employee severance indemnity fund, to which all employees in Brazil contribute 8 percent of their basic salaries each month)

Brazil:Rio Grande 60 percent of a month’s salary per Average package per worker Carneiro do Sul State year of service, but capped at 15 was R$41,900 and Gill Electricity months’ salary; additional incentive 1997Company for workers near retirement age is



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Table 5.3 (continued)Economy/ Key features of Source for enterprise voluntary departure Other features further details

10 percent of all remaining wages up to the date of retirement; workers also receive 140 percent of the funds in their FGTS accounts

Brazil: 50 percent of a month’s salary per year Carneiro São Paulo of service for those with less than 10 and Gill Electricity years’ service; 40 percent if more than 1997Company 10 years of service; no cap; workers

also receive 140 percent of the funds in their FGTS accounts

Brazil 4 to 12 months of salary, depending Only workers with more than Estache, Federal on years of service, increasing for 6 years of service were eligible; SchmittRailway workers with 6 to 25 years of service workers were allowed to keep de Azevedo,

and decreasing for older workers with their use of housing for up to and more than 25 years of service; workers 12 months and pension pay- Syden-who delayed accepting voluntary ments were continued for stricker departure and were made redundant 12 months; average payment 2000during the period 1 year after privatiza- to workers was about tion received 80 percent of these US$8,000, plus US$18,000 benefits of statutory benefits

Guyana Severance package equivalent to 22 Hinds 1995Telephone months of salaryandTelegraph Company

India: 1.5 months of salary per year of Three times better than Kouamé Federal service, or 15 days’ salary for each statutory termination benefits 1997VRS year until retirement at age 58, of 15 days’ salary per year Scheme whichever is less, plus statutory of service(1993–95) benefits

India: 1.5 months’ salary for each year Ray 2001Orissa State of service, or 30 days’ salary for each Electricity year until normal retirement date, Board whichever is less, plus statutory

benefits

Mexico 4 months of salary plus 30 days for Salary was a daily integrated López-Calva Federal each year of service; part-time salary, which included base 2001Railway workers receive 3 months of salary salary plus 12 other allowance (FNM) plus 20 days of salary for each year elements; workers typically

of service received between US$10,000 and US$25,000 in severance. An enhanced pension package was also provided, funded in part from privatization proceeds.

Pakistan: Based on plan for industrial plant Evidence of adverse selection Kot Addu privatization in Pakistan; voluntary (the most productive Power departure package of 4 months’ workers leaving). Average Plant basic salary per year of service, costs in 1990–93 were

plus gratuity of 1 month’s basic about US$3,000, but costs

Table 5.3 (continued)Economy/ Key features of Source for enterprise voluntary departure Other features further details

salary per year of service (the “4+1” at some industrial plants Kouamé rule); officer cadre staff had a less- rose to US$10,000 1997generous package of 2 months’ after 1993salary per year of service plus gratuity (the “2+1 rule”)

The Severance package based on years Typical package for Cruz 2001Philippines: of service, using an “adjusted worker with 20 years Manila monthly pay” to take into account of service totaled about Waterworks various allowances (this was US$15,400, roughly twice and around 30 percent higher than basic the standard government Sewerage pay); workers with less than 20 package of termination System years’ service receive 1.5 months benefits

per year of service; those with 20 to 30 years of service receive 2 months’ salary; and those with more than 30 years of service receive 2.5 months of salary.

Taiwan, Severance payment of 6 months Applicable to all employees Chang 2002China of salary in addition to statutory retrenched at privatization (Privatization payments. or laid off within 5 years Law) after privatization

Vietnam Severance pay of 1 month per year Workers can obtain 6 Government (Decree of service (minimum 2 months); months’ training at of Vietnam 41/2002 on additional compensation of 1 month vocational training centers; 2002policy for per year of service; lump sum of workers who are 5 years redundant VND 5 million; continued salary for short of the pension age workers 6 months searching for job. have the right to continue in SOEs) paying 15 percent of salary

to social insurance in order to qualify for pension and death gratuity benefits


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In some cases an established uniform formula mayalready be in place, in which case the key decisionsalready will have been made. Where the formula isnot considered sufficient or where there is no for-mula in place, a new formula may have to bedeveloped.

At the absolute lower limit, workers must receivethe statutory minimum set out in the law. In prac-tice, however, earlier precedents might set a defacto floor for negotiations. The absolute upperlimit would be to place a worker on permanentadministrative leave with full salary. Although thatpractice is uncommon, more often the practicalupper limit is again that set by previously agreed

precedents, even if those precedents are in differentsectors and under different circumstances.

Spreadsheet tool for analysis of severance options.

In setting a level of severance for voluntary depar-ture programs, the attractiveness of the package toworkers has to be balanced with its affordabilityfor the government. If the payment is too low,workers may not volunteer to leave, and that canthreaten or delay the overall objective—a success-fully completed PPI transaction. Low levels of sev-erance are sometimes combined with a degree ofcoercion (for example, threats of compulsoryredundancy, unit closure, or wage arrears). Suchcoercion will engender adversarial relationships

with workers, unions, and government, and candamage the political credibility of PPI. If the pay-ment is too high—that is, more than workerswould actually need as sufficient compensation forthe loss of employment—the government may notbe able to pay it, and it may lead to excessive num-bers of workers leaving the enterprise, includingthe best workers.

In practice, developing severance formulas is morelikely to produce overpayment than underpaymentfor several reasons:

• Political impact: Except in the face of seri-ous financial crisis, relatively generous sever-ance payments are politically attractive.

• High levels of compensation: Salaries andbenefits are often higher in the public sectorthan in the private sector (for example, seeBales and Rama 2002, Bhorat and Liou2002, Panizza 1999, and box 1.1 in module1 of this volume).Where program designersrecognize a public sector wage premiumthey can reason that relatively generous sev-erance awards are necessary if workers areto leave voluntarily.

• Bias by plan designers in favor of generouspackages: This bias can occur for two rea-sons. First, designers may become too closeto the concerns of workers or to the con-cerns of enterprise managers (for example,how to make downsizing go as smoothly aspossible), and align themselves—perhapsunconsciously—with those interests ratherthan the interests of either public financemanagers or society as a whole. Second, byerring on the side of generosity, plan design-ers can help ensure that the program is a“success”—an example of self-serving biasin their decisionmaking.

• Availability of donor funds: Although recur-rent expenditures, including salaries, may betightly controlled (subject to a hard budgetconstraint), donor funds for enterpriserestructuring may be readily available. Thatcombination of circumstances can encour-age overpayment.


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Overpayment iscommon in publiclyfinanced severanceschemes.

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• Ability to transfer costs to the taxpayer:Governments can agree to generous terms(which makes difficult negotiations withunions easier) and then transfer the cost ofthat generosity to future taxpayers, as in SriLanka (Salih 2000).

• Use of precedents: Where other organiza-tions have made generous payments (for anyof the reasons outlined above), plan design-ers are likely to make the same mistake,either by meeting previous precedents orsimply copying the earlier formula in thename of uniformity.

Where generous and unaffordable precedents havebeen set, choices must be made between usingthose precedents or negotiating new severance for-mulas. The choice will depend on the degree ofpolitical support for implementation, the costsimposed by the precedents, and the degree of con-cern for provision of a social safety net for dis-placed workers. A cost-benefit analysis of thefinancial and economic effects of the variousoptions (see module 7) can inform this decision.

In designing severance levels there are various waysto achieve a balance between attractiveness andaffordability, and those ways are discussed next.

Setting Minimum and Maximum LevelsA minimum severance level, or a floor, can be setat some point above the statutory minimum termi-nation benefit. A floor can be a useful tool fordemonstrating that the severance package is fairand benefits everyone, including lower-paid staff.

A maximum severance payment, or a cap, also canbe set. One of the main potential criticisms of sev-erance plans, especially generous ones, is that high-est-paid workers or managers can obtain excep-tionally high payments. A cap is a simple measureto prevent such criticism, and can be expressed inabsolute money terms or in months of pay. Forexample, the government of Madhya PradeshVRS-98 placed a monetary cap of Rs. (rupees)500,000 on payments to workers.

Establishing Preretirement RulesOn its own, a simple straight-line formula (salary ×

years of service) would give maximum payments tothe oldest workers in each cadre of employees. Justbefore retirement they would have the maximumpayment. This is clearly a potential source of influ-ence in employees’ behavior: it encourages employ-ees to stay on so that they receive higher compen-sation amounts, and it discourages earlier volun-tary departure. Some empirical formulas attempt tooffset this by including an element that reducespayments as the retirement age approaches (see, forexample, box 5.2).

Another approach to the preretirement period is tomake workers who are past a specified age andwithin a few years of normal retirement ineligiblefor voluntary departure. This can improve efficien-cy because workers approaching retirement clearlyhave the least expectation of loss. If, however, thereis a sharp cutoff, again distortionary effects canarise. For example, if a plan is introduced in whichworkers with fewer than five years until retirementare ineligible for voluntary departure, there will bea very high uptake of the option to leave by work-ers approaching cutoff point as well as a degree ofdissatisfaction and inequity for workers who fortiming reasons just miss the newly introduced ben-efits.

Adopting Loss-Based FormulasAn alternative approach to the standard way ofsetting severance amounts, based on labor econom-

ics and econometric methods, has been pilot-testedby the World Bank in Guinea-Bissau, Madagascar,and Tanzania, and has been described by Chongand Rama (2000). This approach (which is dis-cussed in greater detail in module 7) recognizesthat workers’ total incomes often will fall followingseparation or retrenchment (box 5.3), and itattempts to assess the level of severance that shouldbe paid to offset those earnings losses. The follow-ing bullet points summarize the key features of thisapproach:

Chong and Rama (2000) described the application of

a loss-based approach in Guinea-Bissau.

• Although the output from this approach todesigning a severance package is a formula,it is one that takes account of the factorsthat influence individuals’ likelihood of gain-ing income after severance. For example, ifbetter-educated workers are more likely toreturn to higher-paid employment after sep-aration, the formula will reduce their sever-ance payment. If women workers are morelikely to have difficulty in finding a job, theformula will increase their severance pay-ment.

• The formula uses objective data, such asnational household survey data, surveys ofliving standards, or labor force surveys, togenerate an econometric earnings functionfor private sector workers. By comparingincomes and benefits of similar workers inthe formal (or informal) labor market, esti-mates of the likely earnings losses can bemade.

• The losses recognized include earnings lostwhile a worker searches for another job;permanent loss of earnings that arisesbecause a worker transfers to the privatesector (remember, many public sector work-ers earn a premium wage); estimated lossesof tangible benefits (for example, trans-portation to work, food and housing subsi-dies, and medical benefits); and estimatedlosses of intangible benefits (for example,job security, flexible working times, oppor-


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Loss-basedformulas have amore rational basisand address themajor weaknessesof empirical “rule-of-thumb”approaches.

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Box 5.2: Brazil—Reducing Payments forOlder Workers

In Brazil’s federal railway privatization, workerswith 6 years of service received 4 months ofsalary, and for every additional year of service

that amount was increased by a factor of1.0595 for each of the 19 increments up to 25years of service. Workers with 25 years of serv-ice therefore received 12 months of salary as anex gratia voluntary departure payment. Forworkers with 25 to 30 years of service, pay-ments decreased by a factor of 0.8705, so thata worker with 30 years of service received 6months of salary as voluntary departure pay-ment.


tunity for bribes, access to equipment, andfacilities for private use).

Table 5.4 summarizes the advantages and disad-vantages of loss-based formulas. They can deliverthe fairest levels of severance payment for individu-als. Furthermore, by careful targeting they canreduce the costs of the severance program for gov-ernment and avoid adverse selection. Estimates ofthe level of costs savings realized from tailored for-mula compared with savings realized from anempirical formula are 31 percent for SOEs inEgypt (Assaad 1999) and around 20 percent in thecase of the Central Bank of Ecuador (Rama andMacIssac 1996, 1999).

But there also can be some difficulties in adoptinga loss-based approach:

• Loss-based formulas are likely to be less rel-evant where there are existing and well-established precedents for severance formu-las. Any change is likely to require substan-tial effort and to involve negotiations withunions, approval by ministers, and parlia-mentary debate.

• Delays incurred as a result of designing andnegotiating complex severance formulasmight threaten the pace of the overall PPI

program. A delay in implementation while anew approach and formula are being devel-oped and negotiated could also wipe outany potential cost savings from adoptingthis approach.

• Data requirements are substantial and theprocess can be time consuming if enterprisepersonnel records are poor or if there is littleinformation on nonwage benefits or on thelikely postseverance livelihoods and incomesof workers.

Like other severance formulas, loss-based formulaswill need to be understood by unions and workersand be discussed during the consultation process:

If appropriate compensation is needed to makethe workers accept the prospect of downsizing,it is very likely that the package will have to benegotiated with the public sector trade unions.In that case the final compensation packagemay not be the cheapest one, or the fairest one,but rather a compromise shaped by the bar-gaining power of all the players involved. Fromthis perspective the [loss-based approach]should not be seen as an example of “mindlesssocial engineering,” but rather as a tool tointroduce some economic rationality into deli-cate political negotiations. While the approach


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Box 5.3: Earnings Losses after Retrenchment

There are no tracer studies of the long-termimpact of retrenchment on workers indeveloping countries. In industrial coun-

tries, however, the evidence is that earnings loss-es have been both large and persistent. Reviewsby Fallick (1996) and Kletzer (1998) on displacedworkers in North America indicate persistentearnings losses of between 10 and 25 percent ofpredisplacement earnings up to 10 years afterdisplacement.

In Turkey earnings after reemployment amongpetrochemical and cement workers displacedduring privatization were 57 percent and 61 per-cent, respectively, of their earnings prior to layoff.Most workers also lost a range of nonwage ben-efits (Tansel 1996).

In Ghana follow-up assessments of the earningsof civil servants showed a 48 percent fall after

severance, although workers who found wageemployment had a much smaller reduction inincome. Note, however, that although:

under current economic conditions, manyretrenched workers can expect their lifetimeearning stream to be appreciably lower.... weare persuaded that the difference in earningsbefore and after redeployment reflects theloss of a rent associated with civil serviceemployment.... What the employees have lost,then, is a privileged post that, one can argue,they should not have held in the first place.Their gain in getting a civil service job was theGhanaian taxpayer’s loss, and vice-versa forthe post-redeployment loss in earnings(Alderman, Canagarajah, and Younger 1996,p. 285).

could certainly be refined, it represents animprovement compared to the ad hoc way inwhich these negotiations are usually carried out(Chong and Rama 2000, p. 26).

Whatever approach is selected, severance paymentsin early retirement, voluntary departure, and com-pulsory redundancy schemes can be structured toprovide time-based incentives for workers to leaveearly.

More generous packages for voluntary departurethan for compulsory redundancy are the norm.During Brazil’s railway reforms, workers wereclearly informed that any compulsory retireeswould receive only 80 percent of the package givento those who took voluntarily departure benefits(Estache, Schmitt de Azevedo, and Sydenstricker2000). In Turkey the privatization law offered 30percent more to employees who volunteered forearly retirement (Tansel 1996). Early applicantbonuses can be offered. In the 1992 BritishTelecommunications downsizing plan, early appli-cants received an incentive payment.

Estache, Schmitt de Azevedo, and Sydenstricker 2000

Choosing a Uniform or a Case-by-CaseApproach

For government the decision whether to negotiateseverance on a case-by-case basis for each enter-


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prise or to adopt a uniform severance plan for allpublic enterprises is a critical preliminary decision.Table 5.5 presents the advantages and disadvan-tages of each approach.

A case-by-case approach to severance, where pay-ments are negotiated at the enterprise level, hasarisen when there is a cautious, incrementalapproach to PPI and when, in the absence of anyoverall labor policy or guidelines, labor restructur-ing is dealt with at the transaction level. In somecases enterprises are also governed by their ownlabor rules or labor contracts, thus leading to acase-by-case approach. In others, a case-by-caseapproach has been adopted to ensure flexibilitybased on the individual circumstances of the com-pany. Some governments, for example, have treat-ed profitable and unprofitable enterprises different-ly, allowing profitable ones to pay higher levels ofseverance out of their own resources. That was thecase in India and also in Tanzania when the gov-ernment opted to concession port services and con-tainer terminal operation (box 5.4).

Although a case-by-case approach can provideflexibility, it can also create unwanted precedents.Each new award raises the minimum severancelevel for the next negotiations, and there is aratchet effect that ensures increasing levels of sev-erance. Such approaches can also fuel distrust inthe process and bring the wider PPI program intodisrepute, thereby threatening its sustainability

Table 5.4: Advantages and Disadvantages of Loss-Based Formulas

Advantages over empirical formulas Disadvantages over empirical formulas

• Tailors the package to compensate individual • Is subject to legislation or existing labor con-employees so that the compensation that each tracts that may preclude different (discriminative) employee receives is more fair—those who treatment of workers according to factors such stand to lose most will receive the most as age, gender, ethnicity, and location

• Reduces the risk of overpayment, which has • Potentially adds time to the work force restruc-plagued severance programs worldwide turing process because of the need to locate

specialist skills, conduct econometric analyses, and persuade policymakers and unions

• Has not yet been implemented beyond pilot (proposed) plans

• Has a formula whose derivation is difficult to explain to policymakers and unions when seek-ing their support

(see box 5.5). Moreover, trade unions oftenoppose differentiation between enterprises on thegrounds that (a) there should be equality of treat-ment for all workers in SOEs and (b) the financialdistress of loss-making enterprises can be attrib-uted to government mismanagement and there-fore it is unfair to penalize employees.

Given the potential problems of a case-by-caseapproach, there are advantages to adopting uni-form severance guidelines that, with some measureof flexibility to take into account enterprise circum-stances, are applied to all enterprises (table 5.5).


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Uniform guidelines can be perceived to provide fairand equal treatment for all workers and helpensure some measure of predictability in theprocess.

Adverse Selection and TargetingA major issue in many severance programs is howto avoid adverse selection and rehiring of the bestworkers. Better targeting and selection of workershelp avoid these problems.

Table 5.5: Advantages and Disadvantages of Uniform and Case-by-Case Approaches to Severance

Approach Advantages Disadvantages

Uniform • Treats all workers more equally •Needs good analysis of long-term downstream • Has a more transparent process costs to avoid danger of government initially setting • Reduces information asymmetry too-generous limits overall (especially if the first

between government and programs are small PPI transactions with low num-unions—both know what the bers of affected workers)deal is •Prohibits introduction of loss-based formulas tai-

• Has predictable costs for lored to each enterpriseseverance in future years

• Facilitates central (ministry of finance) oversight and control over public spending on severance

Case-by- • Gives most discretion to •Signals to workers and unions that the level of sev-case government in setting severance erance is—in principle—always negotiable

payments in each enterprise •Encourages bidding up of severance payments (a • Allows the tailoring of payments ratchet effect) and sets a precedent for other PPI

to each work force and—in transactionstheory—the potential to deliver •Favors workers in enterprises with the most power-the lowest-cost programs for ful unions, the most influential leaders, or the great-government (in practice, that est potential to inflict economic damage through occurs only if government is strikes or industrial actionpolitically very strong) • Is less transparent

•Leads to unpredictable costs for work force restructuring

•Provides an opportunity for confrontational negotia-tion on both sides

• Is only effective if there is a strong government that is robust in the face of vested interests and case-by-case lobbying

•Makes monitoring and control of commitments more difficult if deal making is delegated to enter-prise managers

Adverse Selection

In many severance schemes there are concernsabout adverse selection: that is, there is concernthat the program will lead to the departure of thebest workers and thereby result in the loss of criti-cal skills and in the subsequent rehiring of workerswho have received public money for severance.This section of the module provides some guide-lines for addressing these concerns and making sev-erance more efficient.


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When an ex gratia severance payment is offeredequally to all workers, it is usually selected by themost skilled and most capable employees. Thoseemployees, who can easily find alternative employ-ment elsewhere in the economy and who believethey have a bright future outside the enterprise, areprecisely the people that the restructured enterprisewould most want to retain. Overpayment of sever-ance in public enterprises further contributes toadverse selection. In Argentina, for example, earlyrailway retirees were among the most productive

Box 5.4: Tanzania—Severance Policies in Port Concessioning

In 1996 the government of Tanzania decided toinvite private sector participation in the deliveryof port services in Tanzania. They also invited

private sector participation in the container termi-nal operation of the Tanzania Harbours Authority(THA) in the form of a 10-year operating lease.THA was one of the few SOEs in Tanzania with ahistory of sustained profits, and these profitsresulted from its monopoly position and becausefees to shipping companies were set in U.S. dol-lars. THA as a whole employed 3,500 workers; ofthat number 500 were directly associated withthe container terminal business.

During the privatization of the container terminalthe problem of how to handle severance came tothe fore. Earlier proposals by the World Bank hadsuggested that government declare a consistentpolicy on severance. Government had decided,however, to retain its existing policy, which pro-vided that:

• Where an SOE was taking a loss, was unableto fund severance costs from profits, and hadto rely on the central government budget tomake severance payments, only the statutoryminimum severance obligations were to bemet by government.

• Where the SOE was able to fund severancepayments from profits, it could be permitted topay an ex gratia sum beyond the statutoryminimum.

In pursuing a program for severance of surplusstaff, THA decided to offer an ex gratia paymentin addition to statutory minimum obligations.Three problems immediately surfaced:

1. Although the number of workers involved andthe financial cost were small in absoluteterms, whatever was agreed would set aprecedent for the other 3,000 THA workers

(because the remaining THA operations werealso listed for PPI).

2. The workers in the other utilities and infrastruc-ture industries would use the case of the con-tainer terminal as a precedent. They wouldargue that the source of funding was unimpor-tant and that the issue was one of equity.

3. There was a question of selection. The newoperator (Tanzania Industrial Container TerminalServices Ltd. [TICTS]) was allowed to selectfrom the 500 employees those whose servicesit wished to retain. The question arose whetherto pay only those who were not selected forreemployment or to retrench all 500 containerterminal workers. Again, the workers andunions would take the decision as a precedent.

The government decided that all 500 container ter-minal workers would be retrenched and paid thestatutory dues and that those workers who werenot reemployed would benefit also from the ex gra-tia payment. Those employees who declined reem-ployment lost their rights to the ex gratia pay-ment—a policy intended to avoid the problem ofemployees with critical skills declining employment,benefiting from the ex gratia, and later beingrehired by TICTS because their skills were critical.The ex gratia payments amounted to about 12months’ pay in addition to statutory payments.

The outcome is that the government hasresolved labor issues in the PPI transaction of thecontainer terminal. It also has avoided potentialindustrial unrest among other THA workers (whowere watching and now expect similar treat-ment). However, the wider problem of inconsis-tency in the treatment of some 21,000 workers inother utilities and infrastructure remains.

Source: Parastatal Sector Reform Commission, Tanzania;Adam Smith Institute.

employees, whereas many unproductive workersstayed, which led to production problems andshutdowns on various lines. In Pakistan, overlygenerous severance plans reportedly encouragedthe most productive workers to leave.


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Adverse selection isa common challengein work forcerestructuring.

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Enterprise managers are concerned about thepotential problem of losing their best people andtheir knowledge, particularly during periods oftransition to new management and new workingmethods. For PPI investors, however, the transi-tional challenges of taking over management aremore acute because it is vital to avoid disruptionsin essential infrastructure services and to keepoperations and equipment going until new equip-ment and systems have been set up.

Approaches to Selection and Targeting

Mechanisms to better target severance paymentsare the principal solution to the problem of adverseselection. If there is an across-the-board offer withno targeting or selection, anyone who volunteersfor severance is automatically able to receive it,although perhaps on a first-come/first-served basisand perhaps with a cap on the number of workerswho can take the offer. This approach is most like-ly to lead to adverse selection.

Better selection or targeting can be achieved in anumber of ways, whether undertaken before PPIby government or after PPI by the new investor.Table 5.6 summarizes the advantages and disad-vantages of alternative approaches to selection.(Note, however, that in some cases, the implement-ing agency or the investor may have little choice ofselection tools if these are mandated in a collectivebargaining agreement.)

Establishing selection procedures is therefore a crit-ical management task in any labor program.Attention to detail and a commitment to enforceselection are essential. The following sections elab-orate on the main tools for better selection and tar-geting: active management selection, managementveto, and selection by cadre.

Active Management SelectionThe data sets and tools used for staff audits (seemodule 3) can help managers in the active selectionof staff and cadres for retrenchment. Those toolsinclude:

Box 5.5: Problems with Case-by-CaseSetting of Severance—Sri Lanka andZambiaSri Lanka: Upward Revisions of Ad HocSeverance Payments

Average ex gratia severance payments in SriLanka’s privatization program rose from 17.5months of salary in 1987 to 53 months in 1997.By the time that Lanka Lohan (a steel company)was privatized in 1997, the package was con-sidered so attractive that all workers applied toleave the firm, a clear sign that the package wasovercompensating them. The increases tookplace because of strengthening trade union bar-gaining power, and the “ad hoc and lackadaisi-cal manner in which labor issues were handled”(p. 190). In Sri Lanka, severance packages cus-tomized on a case-by-case basis for eachenterprise proved to be downwardly rigid andconfusing to the parties involved and theyencouraged rent-seeking behavior and hostilityto privatization. Another outcome was that gov-ernment was no longer able to easily afford torestructure labor before privatization.

Source: Salih 2000.

Zambia: Disparity in End-of-Service BenefitsFuels a Distrust of Privatization

The United Bus Company of Zambia was insol-vent and was forced into liquidation. Under theapplicable bankruptcy law, employees wereentitled to 200 kwacha (equivalent to US$0.30)as preferred creditors for the legal minimumend-of-service benefit; for any additionalamount they ranked as ordinary creditors inaccordance with their contract terms of employ-ment. In contrast, a cleaning worker who leftZambia Telecommunications after working therefor only two years reportedly received a pay-ment of 2 million kwacha (US$3,000). Suchegregious disparities between the legal andcontractual minimums for end-of-service bene-fits can create opposition to privatization anddelay transactions.

Source: World Bank 1996e; quoted in Campbell-White andBhatia 1998.

• Staff and skills audits, which help identifycritical skill sets that must be retained or arein short supply

• Individual appraisal or assessment records,based on the normal performance appraisalreview on internal competency assessments


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Personnel recordsare a first source ofdata, but humanresourcesdepartments oftenlack skilledprofessionals andadequate record-keeping.

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tests (that is, tests of the ability to do specifictasks), or on a special skill audit

• Education and qualifications records, whichcan lead to poor selection when used alonebecause they neglect the questions of tacitknowledge and institutional memory

Table 5.6: Advantages and Disadvantages of Alternative Selection Approaches

Selectionapproach Advantages Disadvantages

No targeting • Has simple rules—either available •Has maximum risk of adverse selection(volunteers) to all or on a first-come/first- •Effectively uses no selection tool at all

served basis until all available funds are committed

• Suits circumstances with weak PPI enterprise managers

Last-in/ • Has simple rules—either available •Has significant risk of adverse selectionfirst-out to all or on a first-come/first- • Is a crude mechanism for selection selection served basis until all available

funds are committed• Can be used to substitute for

management decisionmaking in circumstances with weak PPI enterprise managers or weak human resources and appraisal systems

• Can be perceived as fair• Is sometimes mandated in

legislation

Active Has a lowered risk of adverse • Is demanding of managers (although staff and skills management selection audits can provide some independent assess-selection ments)

•Needs to be handled in a transparent manner to avoid accusations of bias

• Is the slowest process, needs reasonable person-nel records

Management Has a lowered risk of adverse • Is demanding of managers (although staff and skills veto selection audits can provide some independent assessments)

•Can easily lead to accusations of unfair treatment from the best workers

•Needs to be handled in a transparent manner to avoid accusations of bias

Selection Can deliver a relatively low risk •Uses a relatively crude selection toolby cadre, of adverse selection, depending •Does not identify the best or worst workers within a location, or on the structure of the work cadre or locationoperating force and the quality of the • Is open to abuse (e.g., by prior transfers of unit staff audit individuals)


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• Training records, and evidence of employeeresponse to training

• Assessment based on the comments ofsupervisors and managers, including assess-ments of employees’ willingness and flexibil-ity to undertake a range of work, as well astheir job histories (which offer evidence ofincreasing levels of responsibility) and theirpossession of transferable skills

• Attendance records, which detail unautho-rized leave and medical absences (whetheruncertified, self-certified, or certified by adoctor)

• Special interviews and tests specifically forselection prior to severance can supplementother data or fill in the gaps where anemployee’s records are poor or missing ifthey are undertaken in an objective mannerand if they probe and test for relevant skillsand competencies.

The primary problem in management selection isthat many worker traits are unobservable. Put sim-ply, it is hard for the designer of a severance pro-gram to design selection criteria that distinguishbetween the productive and the unproductiveworker on the basis of written records alone.Reliance on only one test may be unwise, as wasfound in Guinea and Sri Lanka (see box 5.6).

Using a range of the above tools is wise, and canhelp assure workers and unions that the process isbeing carried out in a fair and transparent manner.Selection tools will be most effective where aneffective appraisal system is already in place,together with competent and professional humanresources management.

Veto by ManagementGiving managers the right to reject applications onan individual basis is another option. In practicethis is a difficult route for many managers becausethey have to be prepared to reject applications forvoluntary departure from their best workers. Thetask is made easier if:

• Relationships between managers and staffare sound, and program communications

have not raised the expectation that thedeparture package is available automaticallyto all workers. Consider this approach, forexample:

Deselection of certain potential [voluntarydeparture] applicants was done by per-sonally calling those employees and per-suading them not to apply since theirfuture in the company was bright (Ray2001).

Ray 2001 (a PPIAF case study).

• All parties have reasonable expectations thatprospects in the company will improve afterPPI (this will depend in part on the sector).

• Managers are prepared with plans for futuresalary structure and performance-basedincentives to encourage workers to stay.

Selection by CadreSelection can be imposed through eligibility restric-tions, which only allow certain groups of workersto participate in a voluntary departure plan. Thecriteria for selection may be related to age, years ofservice, cadre, grade, operating unit, or location:

• Age or years of service eligibility criteria:Some severance packages are only open toworkers with a minimum period of years ofservice. This will discourage younger work-ers from taking voluntary departure, and isrational where a shift in the age or experi-ence mix is an explicit objective. A problemcan arise where mandated last-in/first-outrules combine with minimum eligibility rulesto selectively disadvantage newer workers.The approach also may not be appropriate iflarge numbers of workers have recently beentaken onto the permanent rolls (for example,as a result of negotiations with trade unionsto regularize temporary workers).

• Cadre: If there is overstaffing in particularcadres, tiers, or grades, the plan may beoffered only to those groups.

• Operating unit or location: Voluntary depar-ture may be offered only to workers in par-ticular units (for example, a construction or

maintenance unit) or in an operating divi-sion that is particularly overstaffed or that isbeing closed or outsourced.

As with other selection tools, selection through eli-gibility criteria requires commitment from govern-ment, as was found to be true in Sri Lanka (seebox 5.7).

The alternative selection approaches discussedabove and outlined in table 5.6 are not mutuallyexclusive and can be used in a mix. To illustrate,there could be no selection for unskilled cadreswho are all surplus workers or for all workers in aregional unit to be closed, but active selection bymanagement of all other cadres.

Prohibition on Rehiring

The revolving-door syndrome (where workers arerehired after receiving severance) is indicative of apoorly managed labor program. Many severanceschemes therefore set out explicit rules prohibitingrehiring. These are worth having, given the poten-tial political and financial cost of such rehiring.Enforcement is difficult, however, and such restric-tions usually can only reduce, not eliminate, therisk of rehiring previously separated workers.

Before they receive their severance benefits employ-ees are usually required to sign a commitment notto return to work in the same enterprise. Thedesign of any restrictions on rehiring will varyamong countries and circumstances, but all shouldaddress the following aspects:


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• The time period for restrictions: Are work-ers barred forever or just for a certain peri-od (one year, five years)?

• The scope of the restriction: In the publicsector, drawing reasonable reemploymentboundaries can be difficult because of theintricacies of government. For example, ifan employee is laid off from a state-owned

Box 5.6: Challenges of Selection—Guinea and Sri LankaGuinea: Selection of Water Utility Workers inConakry

The process of workers to transfer to new watercompanies was conducted through a series ofobjective tests (initially managed by the WorldBank) that were “supplemented” with recommen-dations from former managers at the former utili-ty—the DEG. The subjective evaluations raisedserious concerns about objectivity (Ménard andClarke 2000).

Sri Lanka: Worker Selection Processes duringPrivatization

“It was difficult to screen the high-quality workersfrom the low-quality workers. Even where examswere held for this purpose, those workers whowanted to leave the firm [through a voluntarydeparture scheme] performed in the exam verypoorly” (Salih 2000, p. 193.)

Box 5.7: Sri Lanka—Experiences ofSelection through Eligibility Criteria

Even when tiers of surplus labour wereidentified before putting VRS into opera-tion, some workers maintained that this

was discriminatory and that the option of volun-tary retirement should be extended to all work-ers. However, the main opposition to targetingtiers for retrenchment came from workers whowere not targeted. Opposition came from themore skilled grades of workers who felt theycould obtain windfall gains through the compen-sation packages, since they could find alterna-tive jobs without much difficulty. Hence, identify-ing tiers of redundancy labour for voluntaryretirement was eventually dropped and across-the-board voluntary retirement was applied. Thisis why the problem of adverse selection (betterworkers leaving) was common in Sri Lanka’svoluntary retirement process.... Even whereworkers of an identified tier were subject toVRS, the problem of adverse selection could notbe altogether avoided because the better work-ers within the tier opted to leave” (Salih 2000, p.193).

“

telecommunications company, can he or shework again for that same company or itslegal successors (post-PPI)? For other publicenterprises? For other local, state, or federalgovernment bodies? For subcontractorsengaged by the PPI enterprise following pri-vatization?

• Penalties to workers for breaking the termsand conditions: These may be strengthenedby including obligations to repay severancemonies or lose the tax privileges associatedwith severance if workers are subsequentlyfound to be rehired.

• Mechanisms of enforcement and legislation:These can present practical difficulties inmonitoring and enforcement, and legal chal-lenges in countries where the labor law doesnot permit restrictions on recruitment.

• Restrictions on the use of funds: Somedonors have rules that restrict the use oftheir funds. For example, World Bank loanscannot be used to finance the severance ofworkers who leave and subsequently arerehired either in another part of governmentor in the same company after privatization.(See the discussion of financing arrange-ments in module 1.)

• The views of PPI investors: These viewsshould be sought wherever possible. Someplans mandate that workers cannot workagain for the same enterprises, but do notrestrict workers from working for the newprivatized company. This was the case inBrazil’s railway privatization (Estache,Schmitt de Azevedo, and Sydenstricker2000). Elsewhere, however, investors havesuffered from voluntary departure schemesthat have prohibited workers from beingemployed by the subsequent PPI company.(See the example of Chile’s railway, Fepasa,in box 5.8.)

Implementation IssuesThree main implementation issues arise in sever-ance programs: (1) the definition of severance pro-


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Governments canask workers to signa no-returnagreement prior toreceiving severance,but it can be difficultto enforcerestrictions onrehiring withingovernment.

Enterprise benefitscan be complex andtime consuming.Detailed manualsmay be needed todefine exactly howenterprise-levelbenefits will betreated duringseverance.

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cedures, (2) payment options and procedures, and(3) monitoring and evaluation arrangements. Thissection covers the first two items; the third item isdiscussed in module 7.

Severance Procedures

Well-documented redundancy and severance proce-dures can improve the quality and transparency ofseverance and can avoid the potential for disputeand opposition during implementation, which inturn may create delays. The advantages of havingclearly established procedures are that (a) there is acommon understanding on the terms, conditions,and definitions applicable to severance; (b) theprospect of redundancy has been raised and dis-cussed (in some PPI utilities, the culture may still beone of “jobs for life”); and (c) there are clearguidelines for conducting severance activities (suchas calculation of amounts owed to each worker ordisbursement procedures).

Severance procedures should be set out in a policystatement or in regulations at the government orenterprise level, and usually are agreed to by gov-ernment and worker representatives before restruc-turing starts. The CD-ROM accompanying thisToolkit provides an outline of a general redundan-cy policy and an example of a redundancy policyfrom a privatized freight railway.

Outline of a redundancy policy.

Redundancy policy for a privatized railway.

In addition to establishing procedures, govern-ments can develop a manual for the entire sever-ance process. The typical content of such a manualis set out in box 5.9.

Severance procedures generally cover the followingareas:

• Eligibility criteria: Sometimes legislation orlabor contracts will only provide for full-time or permanent employees as eligible forseverance. The implementing agency willneed to ensure that the treatment of other

categories of workers is properly defined,including:

– Temporary, daily paid, seasonal, intermit-tent, or part-time workers: Unions willoften want to make casual workers per-manent as part of the preprivatizationrestructuring and thus make them eligiblefor severance, as was the case in India’stelephone and power sectors (see box 4.8and box 5.10). If, however, it is clearfrom staff audits that there are largeamounts of surplus workers in these cate-gories, it may be preferable to make spe-cial severance provisions to compensateworkers for their losses, provide a socialsafety net, and secure support (see box


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5.10, for example). In practice, given theoften very low wages of this group, theincremental cost to government of includ-ing temporary workers within a severanceprogram may be small relative to the ben-efits of doing so. Such calculations willhave to be done on a case-by-case basis.

– Probationary staff, apprentices, and con-tracted workers are often excluded fromseverance plans. The rights of thesegroups depend much on national or statelegislation, which can affect the design ofthe severance package.

– Officers and managers: Senior staff(defined by grade or by salary) may be

Box 5.8: Chile Rail—Severance Benefits and Rehiring Rules

When a PPI investor, Unirail LLC, paidUS$31 million to buy a 51 percentstake in Fepasa, a privatized rail line in

Chile that the government was putting up forsale, difficulties arose almost immediately. Theexisting public railway employees had little incen-tive to stay with the new company because thegovernment was offering them generous pen-sions to retire immediately. Almost all of themdid. Soon the new owners were left with virtuallyno skilled staff. “This was a really difficult thingfor us at all levels,” recalls Larry McCaffrey, presi-dent of Unirail. “Why they did it, we don’t know”(Moline 2000, p. 4).

In 1991 the Chilean Parliament adopted a lawoffering severance terms to workers who had leftEFE, the state railroad. There were two main cir-cumstances:

1. Employees separated from EFE having 25years of employment, of which at least 10were with EFE, received a salary each monthequal to 1/30th of their monthly salary for eachyear of service, up to a maximum of 30 years,which is the point of retirement. Thus, a workerwith 25 years’ experience would receive 25/30of his last month’s salary for the following 5years, and then he would receive his normalretirement pension. A condition of the abovebenefit, however, was that the employee couldnot work for EFE or for concessionaires of EFE(such as Fepasa) during the period of the ben-efit. The intention of this policy was to avoid

the state in effect paying twice for the sameemployee.

2. Employees of EFE who did not meet therequirements for the above benefit (and there-fore were not subject to the rehiring restric-tions) would receive a reduced benefit equal to50 percent of their monthly salary for a periodof months equal to half the number of years ofservice plus one. Therefore, a person with 23years of service would receive 50 percent ofsalary for 13 months. The great majority ofEFE’s employees did not have 25 years ofservice and thus this benefit applied to most ofthe 2,200 available employees, from whichFepasa needed about 400.

Neither of these benefits applied to the seniorpeople who were paid more than $1,800 permonth and who were free to choose what theywanted.

The principal problem for the PPI investor wasthat the primary people it wished to hire were theolder drivers and electricians with more than 25years of service because of their experience andtheir work ethic. Those people, however, did notaccept the work because they had a significantfinancial incentive to stay away. This greatly hurtFepasa at the time of start-up of operationsbecause the most valuable workers were notavailable to the concessionaire.

Source: Moline 2000; Unirail LLC, personal communication.

excluded from a severance package,given their higher salary and benefits lev-els. For example, in the concessioning ofChile rail, senior staff earning overUS$1,800 a month were not eligible forearly retirement benefits (see box 5.8).

• Definition of salary:

– Many if not most plans define basicsalary as the base for calculating sever-ance payments.

– A combined salary and benefits definitionis another approach. In the case ofMexico rail (box 5.1), the “daily inte-


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grated salary” made up of 14 differentelements was used both for severance payand for early retirement packages.

– In Chile retirement benefits are calculatedon the basis of a “worker’s referencesalary,” which is calculated as the annu-alized salary over the last five years ofemployment.

• Definition of years of service: In practice thisneeds to take account of issues such as:

– Will prior service in another organizationbe taken into account?

Box 5.9: Content of a Severance Manual

What should be included in a severancemanual? Circumstances will differ butthe procedures could include the fol-

lowing material:

• Full definitions of all key terms.

• A description of the timetable for labor adjust-ment. This will include descriptions of anyenterprise restructuring activities (for example,closure of operating units, depots, or work-shops), levels and scope of downsizing, phas-ing, and timetable.

• A standard format or spreadsheet for calculat-ing the amounts due for every worker. This willbe based on an agreed formula.

• Detailed definitions of the calculation of sever-ance benefits—statutory and contractual. Thiswill supplement the paper format or spread-sheet because calculating the value of thecontractual (enterprise) benefits andallowances, in particular, can be challenging.There may be different schedules and eligibilityrules for different groups of workers. And ifthose benefits are not well defined, if enter-prise human resources management has beenweak, or if data are missing, then in practicethe interpretation of the rules may have beenand continue to be subject to considerablediscretion. One unit manager may apply rulesdifferently than another, and similar workerscan receive different severance amounts.

• A standard submission format to the decisionbody for release of funds. Normally, approvalfor the release and transfer of funds for sever-ance will require review by the ministry of

finance or by a committee involving represen-tation from the ministry of finance. The stan-dard format aims to ensure that all costs arecaptured, including statutory payments, enter-prise dues, ex gratia severance payments,arrears of salary, arrears of pension contribu-tions, other allowances, and other costs arisingfrom the restructuring. If a noncore activity isbeing sold, closed, or liquidated, there will beother costs to the ministry of finance, such asthose associated with salaries of core staff(security and accounting staff often need to beretained), as well as valuation, privatization, orliquidation costs.

• A standard letter of agreement between the PPIenterprise manager and the government. Thiswill outline the role of the PPI enterprise man-ager, as well as public finance arrangements.

• A standard letter that all workers sign whenaccepting voluntary departure. This will includetheir acceptance of any restrictions on rehiring,and verify their recognition of any tax or socialinsurance consequences.

• Terms of reference for the engagement ofaccountants and auditors to help implement aprogram.

• A standard format for the disbursement of pay-ments to workers. This format should providefor the signatures of the workers to acknowl-edge receipt, as well as countersignatures bywitnesses (such as independent accountantsor auditors).

• Standard formats for tax purposes as appropri-ate for the national tax regime.

– How are part-years calculated?

– Will service as a temporary workercount?

– Will service as an unregularized tempo-rary worker count?

– What about apprenticeship or probation-ary periods and interruptions to service(such as times of military service)?

• Constraints on reemployment.

• Treatment of other benefits (loans, medicalinsurance, and so forth).

• Treatment of housing occupied by theworkers.


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• Taxation: Treatment of severance pay variesamong countries, with many countries treat-ing severance pay as tax free, and some(such as Malawi) treating it as a taxablebenefit.

Payment Options and Procedures

The implementing agency must decide how to payseverance to workers. Early retirement benefits arenormally paid from the pension plan. For sever-ance, the main options are to:

• Provide severance in a single payment.Many governments favor this approachbecause (a) employees tend to prefer lump-sum payments, (b) it is administratively sim-pler, (c) it provides a clean break, and (d) itavoids an impression of continuing govern-ment obligations toward the displacedworker. There are risks that a proportion ofworkers can very quickly dispose of lump-sum payments on consumption. Clearly,some cultural specifics in certain countriesmay predispose those workers more towardconsumption than in other countries—forexample, because of the social status of cost-ly weddings or funerals.

• Provide severance as a salary continuation.In Chile’s rail sector most workers received50 percent of their salary for a period equalto half the number of years of service plusone (see box 5.10). In a 1,000-response sur-vey of severance practices in the UnitedStates, where severance is typically one ortwo weeks per year of service, 47 percent oforganizations implemented severance pay-ment through continuation of the salary(Lee Hecht Harrison 2001); a similar per-centage (46 percent) used lump-sumapproaches and some offered workers achoice between the two methods.

• Provide severance over a defined period. Forexample, when the Uganda RailwaysCorporation retrenched 1,300 staff in 1997,severance benefits were paid over a three-year period (Murungi 2002).

Box 5.10: Regularizing Casual andStipendiary Workers in the Orissa PowerSector

Public sector enterprises can engage largenumbers of workers on ad hoc or occa-sional terms. In the Orissa State Electricity

Board, for example, 5,336 semiskilled workers,engaged for extended periods as daily paid“nominal muster roll” workers, were regularizedas part of the preprivatization restructuring ofOSEB. Their remuneration then rose from Rs. 30per day to about Rs, 3,500 per month. Similarlysome 250 so-called stipendiary engineers hadbeen employed by OSEB through emergencyrecruitment procedures, but they lacked anyservice benefits other than a fixed stipend.Following corporatization of OSEB, most ofthese engineers were regularized and made per-manent employees of the successor compa-ny—the Grid Corporation of Orissa .

Although these groups were relatively weakstakeholders, their regularization helped create astrong positive impression regarding the reformprocess, and helped to back up the stancetaken by the government of Orissa that powersector reforms would not lead to compulsoryretrenchment. These workers could have beenretrenched but, according to one former chair-man/managing director, “possibly with such abeginning we would not have been able to carryon with the reforms” (p. 24).

Source: Ray 2001.

• Provide all severance as an annuity. This isunlikely to be acceptable to workers if theyhave some pension arrangements or if theyhad the choice between early retirement anda lump-sum payment.

• Allow workers to freely choose among alump-sum amount, staged payments, and anannuity.

Workers’ preferences for these different options willvary among countries. Preferences can be determinedthrough well-designed and statistically valid surveysrepresenting all of the work force (all ages, all cadres,and both genders), perhaps as part of the prelayoffworker surveys (described later in this module in thesection on redeployment programs). Factors thatinfluence workers’ preferences are likely to include:

• Inflation: Workers may want to quickly con-vert a lump sum into a tangible asset, suchas housing, and may reject phased paymentsif there is a history of high inflation in theeconomy.

• Degree of uncertainty about the future, bothpersonal and economywide.

• Potential for small business: If workers (or,perhaps, their spouses) can see income-earn-ing opportunities, they may favor the oppor-tunity to invest lump-sum amounts of theirseverance compensation in establishing anew microenterprise or small business.

Accurate and prompt payments of severance arecritical. Workers who are paid incorrectly or lateare treated unfairly and can create public dissatis-faction with the process. Moreover, in the absenceof clear payment procedures there is a risk that sev-erance monies will be captured by fraudulent peo-ple or that there is wide disparity in implementa-tion among different units of the enterprise.

Therefore, the job of the manager in the implement-ing agency is to ensure that the right worker receivesthe right amount, at the right time, with no surpris-es. This generally involves the following steps:

• Carrying out pre-audits of the proposedfunds disbursement system, preferably with


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the help of the government accounting orauditing staff: This can help ensure thatprocesses are consistent with national publicfinance accountability regulations and withthe requirements of any donors involved,defended from potential fraud, and able toprovide an adequate subsequent audit trail.

• Hiring accountants to provide implementa-tion capacity: Accurate calculation and veri-fication of worker payments can be a time-consuming task in large-scale programs. Ifrecords are not computerized it might take30 minutes to check each application. If2,000 workers are to be retrenched, it wouldbe equivalent to 125 person-days, withoutallowing for travel times and delays resultingfrom missing information, unclear rules, andother anomalies. Where internal resourcesare limited this task can be contracted out tonational firms of accountants or to otherprofessional firms of auditors or consultants.Some guidelines for this process include thefollowing: have a panel of accountants todraw from, emphasize the need for inde-pendence of the accountants, do not letenterprises select their own accountants, andmake the accountants also responsible forthe accuracy of the payment process.

• Developing computerized information tech-nology systems that enable rapid analysis ofworker dues: In the privatization of Brazil’sRFFSA, each RFFSA office was equippedwith software that gave information on allthe incentives offered to each worker and asimulation of the benefits each would obtain(Estache, Schmitt de Azevedo, andSydenstricker 2000).

• Monitoring payments: The scope of work ofany subcontracted accountants and auditorscan include supervision of the actual handoverof payments to workers (see module 7).

Tools (on the CD-ROM)Sample severance spreadsheet

Outline of a redundancy policy

Sample redundancy policy (EWS Freight Railway)

Terms of reference for a severance consultant


Carneiro, Francisco G., and Indermit S. Gill. 1997.“Effectiveness and Financial Costing of VoluntarySeparation Programs in Brazil: 1995–1997.”Economic Notes 25, World Bank, CountryDepartment, Latin America Region. Washington,D.C.

Estache, Antonio, Jose Antonio Schmitt de Azevedo,and Evelyn Sydenstricker. 2000. “LaborRedundancy, Retraining, and Outplacement duringPrivatization: The Experience of Brazil’s FederalRailway.” Policy Research Working PaperWPS2460. World Bank, Washington, D.C.

de Ferranti, David, Guillermo E. Perry, Indermit S.Gill, and Francisco H. G. Ferreira. 2000. “HelpingWorkers Deal with the Risk of Unemployment.”Chapter 6 in Securing Our Future in a GlobalEconomy. Latin American and Caribbean Studies.Washington, D.C.: World Bank. (Provides anoverview of income support programs that havebeen used in Latin America, including severancepay, public works programs, training programs,and unemployment insurance.)

Gupta, Sanjeev, Christian Schiller, and Henry Ma.1999. “Privatization, Social Impact, and SocialSafety Nets.” Working Paper 99/68. InternationalMonetary Fund, Washington, D.C.

Web SitesInternational Labour Organisation: www.ilo.org.

(Several papers on labor issues in the context of pri-vatization and enterprise restructuring.)

PSIRU (Public Services International Research Unit):www.psiru.org. (A research unit that receives corefunding from Public Services International [PSI], theglobal confederation of public service trade unions.It conducts research on public services, privatiza-tion, and globalization, particularly in the water,energy, waste management, and healthcare sectors.)

World Bank. “Shrinking Smartly”:www.worldbank.org/research/projects/downsize/.(Site is a clearinghouse for researchers, developmentpractitioners, and government officials concerned


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about the difficulties encountered in downsizing alarge public sector.)

Other Material and SourcesFiszbein, Ariel. 1992. “Labor Retrenchment and

Redundancy Compensation in State-OwnedEnterprises: The Case of Sri Lanka.” InternalDiscussion Paper 121. World Bank, South AsiaRegion. Washington, D.C.

ILO (International Labor Organisation). 2000.Termination of Employment Digest. Geneva:International Labour Office. )For updates, see alsothe following area on the ILO website:www.ib.org/public.english/dialogue/ifpdial/publ/publ_empt.htm.)

Lee, Barbara. 1991. “Should Employee ParticipationBe Part of Privatization?” Research and ExternalAffairs Working Paper 664. World Bank,Washington, D.C.

Starcher, George. No date. “Socially ResponsibleEnterprise Restructuring. A Joint Working Paper ofthe International Labour Organisation and theEuropean Bahá’í Business Forum.” InternationalLabour Office, Geneva. Available at www.ilo.org.

PENSIONS AND PPIThis section identifies the key pension challenges fac-ing the implementing agency and provides a briefintroduction to pension plans for implementingagencies that may lack pension expertise.

The Pension ChallengeImplementing agencies face several challenges relat-ed to pensions. First, dealing with the accumulatedliability of pension benefits that have already beenpromised and earned by current workers often isessential to determining whether privatization isfeasible. Accumulated pension obligations maytake a variety of forms, some of which may not bereadily apparent in the financial records and state-ments of an infrastructure enterprise. Workers inpotential PPI enterprises quite often are enrolled inthe pension plans of civil servants or participate inthe so-called provident funds established to provide

some mechanism for mandatory retirement savingsfor salaried or formal sector workers.

In other cases special supplementary arrangementshave been created to provide additional benefits toworkers in industries of strategic significance (suchas transportation, defense, and law enforcement),for workers in difficult or dangerous occupations,or for workers in highly skilled or high-pay indus-tries. These benefits may be in the form of supple-ments to existing public social security programs orspecial-purpose pension arrangements to providebenefits to workers in a particular enterprise orindustry. Both are often operated on a largelyunfunded or “pay-as-you-go” (PAYGO) basis inwhich obligations are treated as a current operat-ing expense rather than paid from reserves or assetpools to which payment is made at the time afuture obligation is incurred.

This generally leads to circumstances in which, onan economic if not legal basis, there is a large lia-bility for future benefits that are not accounted forand for which funds have not been set aside. Whenworkers are covered by special-purpose pensionarrangements, they can be legally enforceable obli-gations. When they participate in public or civilservants’ programs—although these may functionon a PAYGO basis, they are likely to perceiveaccrued pensions as implicit obligations that mustbe settled when an entity is privatized.

Accrued pension liabilities typically are not fully (ifat all) reflected in financial statements. These obli-gations, often referred to as arrears or unfundedpension liabilities, can be substantial. In industrieswith declining labor forces or aging worker popu-lations, past pension obligations may be the singlelargest liability when properly measured and mayrepresent a multiple of the market value of an enti-ty. For these reasons PPI investors may be reluctantto take over an entity until they are assured thataccrued pension obligations are fully resolved.

Second, pensions are a central concern as well asan effective tool in restructuring a labor forcethrough downsizing. Providing early retirementprograms or establishing arrangements in whichworkers can retain or access some of the value of


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their accumulated pension benefits is commonlyused to provide incentives for voluntary depar-tures or to achieve work force reductions in theleast disruptive or controversial manner. Thesestrategies have significant financial implicationsand may have substantial political and social poli-cy consequences so they must be carefully devel-oped with consideration for their objectives andcosts. (Those considerations are discussed later inthis module.)

Finally, designing the pension program to meet thefuture needs of a privatized entity is a key elementof its viability as a going concern. In nearly all cir-cumstances, including those in even the most fullydeveloped economies, access to a reliable means ofsaving for retirement and providing old-age incomesecurity are crucial aspects of attracting and retain-ing high-value added labor. Workers in key man-agement positions or with particularly valuableskills may be attracted to PPI candidates solely onthe basis of the access they provide to reliable pen-sion programs. This is especially true in developingor transition economies in which there are fewcompeting alternatives available.

The way in which pension programs are structuredin anticipation of or following privatizationinevitably involves tradeoffs between controllingcosts and providing sufficiently generous benefitsto recruit and retain an appropriate work force.Available is a range of choices in the design of apension program that will need to be carefully con-sidered in the context of the type of workersrequired, the consequences of the choices made, theusefulness of the choices as a labor managementtool, and the pattern and level of associated costs.

Some types of pensions are very effective in attract-ing younger, educated workers, often those withhighly valued and marketable technical skills.Other types are more effective in retaining olderworkers or key management staff. Some pensionarrangements have lower or more predictablecosts, whereas others enable sponsors to constraincash outlays in early years but may involve greateruncertainty about their long-run expense. Thesechoices and tradeoffs are essential to the value andviability of a privatization candidate and are dis-

cussed further below. (See also the case of Moroccorail presented in box 5.11.)

Types of Pension PlansPensions are essentially collective arrangementsdesigned to provide income for people no longerable to work because of age. In nontraditional soci-eties or in industrial economies in which the multi-generational household is no longer the norm, pen-sions provide a means for the elderly population tosurvive. Pensions can be organized and run by gov-ernment and public institutions, by private firms,or by a combination of both.

Pensions may be organized as contractual savingsin which a worker builds up assets or credits thatare returned in a variety of forms as income fol-lowing retirement or through the redistribution ofincome from active to retired populations. Pensionsare typically afforded tax privileges under whichincome taxes on the value of payments or contri-butions are deferred until the time they are receivedas retirement benefits. This “consumption tax”treatment often has significant fiscal consequences


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The first challenge isto meet pensionobligations that havebeen promised andearned by currentworkers.

The secondchallenge is to usepensions as aneffective tool forlabor restructuringthrough earlyretirement.

The third challengeis to design pensionplans for the post-PPI enterprise.

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and may be the single largest tax privilege in manycountries.

Although there is a wide variation in their specificdesign, there are two basic types of pensions. Theolder and more traditional pensions are those thatpromise workers a level of income for the rest oftheir lives after they reach a specified retirementage. These generally establish a benefit level basedon a formula that takes into account wages earnedand years of employment covered under the plan.These are broadly termed defined-benefit plans andinclude the majority of the public social securitysystems, civil servants’ pension plans, and manyolder occupational plans. Some defined-benefitplans try to set aside sufficient funds to pay thebenefits by estimating their future value at the timethey are earned and are therefore called fundedplans. Others—commonly public social securityand civil servants’ plans—pay benefits out of cur-rent receipts and are called unfunded arrange-ments.

Glossary of pension terms

Box 5.11: Morocco Rail—An Unsustainable Pension Scheme

In 1996 the government of the Kingdom ofMorocco approached the World Bank for sup-port for the restructuring of the state-owned

railway, Office National des Chemins de Fer(ONCF). A key element of the restructuring wasthe conversion of the enterprise from a publiccorporation to a joint stock company. Althoughthe ratio of staff costs to traffic revenue was bet-ter than that of most European railways at thetime, it was still too high to ensure a sustainablefinancial position for ONCF, especially in the faceof stiffer road competition. Labor costs were tobe brought down to about 30 percent of operat-ing revenues; this would involve a reduction inpersonnel from 13,800 in 1995 to 10,000 in 2000.

Corporatization would not be possible, however,without changing the pension arrangements. TheONCF pension plan was an internal fund, morefavorable than the common system applied to pri-vate enterprises, with pension benefits paiddirectly by ONCF. Retirees were paid their rightsdirectly from the yearly staff and employer’s con-

tributions plus a variable amount paid by ONCFto match the deficit. The system placed a majorburden on ONCF finances. The high cost of thepensions was the result of very generous arrange-ments. The plan rules set the normal retirementage at 55 years (50 for drivers, compared with 60years in the national retirement fund), and offeredproportional early retirement after 21 years ofservice, an annual contribution rate of 2.5 percent,a high reference wage, wage-based indexing, andsupplementary allowances and reversion of pen-sion rights for family members. These benefitswere unsustainable and would require an annualcontribution rate of 50 percent if it were even toachieve a real financial yield of zero percent.Measures to change ONCF’s pension systemwere urgently needed because the downsizingprogram, plus a staff age profile leading to steadi-ly increased retirements (the number or retireesincreased by about 200 annually), would makethe plan even less tenable.

Source: World Bank 1996d.

Other pensions essentially provide a savingsaccount for each individual in which contributionsfrom the worker (and often the employer) accumu-late. The value of these contributions and the earn-ings from their investment accumulate in theseindividual accounts. On reaching a specified age,or sometimes under other conditions such as sepa-ration from employment, the worker becomes enti-tled to the value of the account. In these arrange-ments there is no promise of a benefit level; all thatis promised is the commitment to maintain theaccount. The benefit received is directly linked tothe value of contributions made, so these are gener-ally called defined-contribution plans.

The observation is often made that in defined-ben-efit arrangements the sponsor incurs all of the risksof unanticipated changes in investment returns orfrom miscalculations about the amount of timeworkers will live after retirement, whereas indefined-contribution arrangements these risks fallprimarily on the individual worker. This principleis central when considering any restructuring ofpensions in the privatization process.

Any type of pension can be organized on a nation-al basis, by a single enterprise, or by a group ofrelated employers. Pensions can be organized andadministered by public or private institutions or bya combination of both. Workers in infrastructureenterprises may be covered by any of these types ofpensions operated by either type of institution orthrough a combination of arrangements.

Some of the more prevalent types of pensionarrangements are:

• National pension plans: Some countrieshave established government-run socialsecurity programs that generally cover allworkers in the so-called formal sector—those who are receiving money wages.Coverage is typically limited to this groupbecause it is only through wage records thattaxes and contributions can be collected andbenefit levels can reliably be set, although inmany circumstances this relationship is tenu-ous at best. In developing economies only asmall fraction of the total population may


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Two basic types ofpensions:

• Defined-benefitplans, where therisk lies with thesponsor

• Defined-contributionplans, where therisk lies with theemployee.

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be covered—typically including infrastruc-ture workers.

National pension schemes are typicallyoperated primarily on a PAYGO basis andconsequently have large unfunded and quiteoften untenable levels of future benefits.These arrangements can range from modestin scope to very generous (from those thatseek to replace half of a worker’s income tothose designed to replace nearly all of aworker’s income, even if that is not feasibleover the long term). Infrastructure workers,especially in strategic or dangerous indus-tries, may be afforded special privileges inthese plans that provide higher incomereplacement rates or retirement at a youngerage. Compensating workers for the loss ofthese special privileges can be very compli-cated and expensive and thus represents oneof the more difficult pension problems inprivatization. Public plans facing financingshortfalls may also seek payments to coverthese future commitments if they are to bemaintained—an expense that can be amajor issue in privatization.

• Civil servants’ pension plans: Many coun-tries without national schemes or those withmodest benefit levels have established spe-cial pension programs for civil servants.These are often designed to provide nearlyfull income replacement, often at youngretirement ages, to compensate for the pre-sumed lower pay levels of civil servants orto retain members within the career civilservice. Regardless of whether either of thesemotivations is necessary, the tradition ofhigh pension levels for civil servants is main-tained in many developing countries. Theyare nearly always defined-benefit plans,although this is slowly changing. They maybe operated in conjunction with a nationalplan or they may move covered workersinto a separate arrangement.

Infrastructure workers are often included inthese arrangements and may perceive them-selves as having forgone a significant por-

tion of their potential wages or otheremployment opportunities in the expecta-tion of future high pension levels. This mayor may not comport with reality, however,because with civil servants more broadly theexpectations and perceptions will be keyissues in any labor restructuring. Civil ser-vants’ plans commonly are operated on anunfunded or partially funded basis.

As with national plans, these plans may nothave aligned required contributions with theneeds of long-term solvency and thus mayrepresent an indirect source of subsidy forinfrastructure entities. This not only distortsthe measurement of actual compensationcosts on an ongoing basis but may lead todemands for a very high payment to settlepreviously accrued but unfunded obligationswhen an employer tries to withdraw fromthe plan upon privatization.

• Provident funds: Former colonial powers,particularly the British, established a partic-ular type of savings institution known asprovident funds, and these remain commonin many developing nations in South Asiaand Africa. These are defined-contributionarrangements in which an account is estab-lished for each participant and the contribu-tion of a specified portion of wages ismandatory. Contributions often must bemade by employers as well.

Typically the funds are invested in safe butlow-yielding assets, usually debt instrumentsof the government. Participants are oftenpermitted to borrow the funds for specifiedpurposes—the purchase of housing is acommon example—and are entitled toreceive the total amount that has built up intheir accounts when they reach a specifiedage. In some instances provision is made toconvert the account balance into a lifetimeannuity.

Although provident funds are primarilyestablished as retirement savings vehicles,they are often used for a far broader rangeof purposes. Workers often deplete the full


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value of these savings to pay for relatives’funerals, weddings, or education expensesor they are permitted to withdraw fundswhen leaving a job before retirement age.Because they are purely defined-contributionin nature and therefore, by definition, fullyfunded, these types of pension arrangementspose fewer problems of past liabilities orfuture commitment during PPI. They can, infact, be a type of vehicle that essentially pro-vides a source of severance pay to mitigatethe short-term consequences of laborrestructuring.

• Occupational or employer-sponsored privatepensions: The least common but in somerespects most problematic type of pensionslikely to be encountered in a privatizationinitiative is occupational plans. These arespecial pension arrangements that have beenestablished to cover workers in specificenterprises, sometimes called single-employ-er plans, or a group of related employers ormembers of a trade union, sometimes calledmultiemployer plans. Occupational pensionscan be the only source of pension coveragein circumstances where there is no nationalpension program or where employees in cer-tain industries are excluded from otherarrangements. They also can be integratedinto other plans, usually designed to providesupplementary benefits where incomereplacement rates are low or to provide forearlier retirement ages. Traditionally thesetypes of pensions have been of the defined-benefit type; however, there is a recent trendtoward defined-contribution plans.

Occupational pensions are extremely diversein form. They impose particular problemsfor implementing agencies because mostdeveloping countries have not establishedany sort of comprehensive rules or require-ments for their establishment or operation.This can result in circumstances in whichthe benefits promised are not clearly speci-fied, and that leads to considerable contro-versy about their settlement. Workers maybe led to expectations about their pensions

that are considerably at odds with the termsof the arrangement or the resources avail-able.

Most significantly, occupational plans oftenresult in substantial future financial commit-ments that have not been measured oraccounted for in a reliable fashion and thathave no funding set aside to ensure they canbe met. These problems are especially pro-nounced for defined-benefit arrangements,but may also occur when defined-contribu-tion plans must be funded or when thefunding is not segregated from the sponsor’sother financial arrangements. They do, how-ever, afford opportunities for using pensionsto manage labor restructuring or to provideincentives to manage a work force, as dis-cussed in subsequent sections.

Addressing Prior PensionObligationsThis section examines the issues and choices thatmust be addressed in assessing the feasibility of pri-vatization and in resolving the existing pensionobligations during implementation.

Measuring Existing Obligations

Pensions essentially involve the commitment by anemployer to provide resources intended to be con-verted to income following the retirement of cov-ered workers. This commitment can be as simpleas an obligation to forward a specified portion of aworker’s pay to an individual savings account (forexample, to a defined-contribution plan or provi-dent fund) or the far more complex responsibilityto fund and administer a program that will providea monthly payment to replace a specified portionof a worker’s final salary for the remainder of theworker’s life (a defined-benefit plan based on finalsalary). In many circumstances the cost of theseobligations represents the single largest long-termfinancial obligation of an enterprise. How this obli-gation is addressed will be a key determinant of themarket value of an enterprise and will be critical to


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its long-term viability. There are several stepsinvolved:

Step one: The first step in this process is to obtain acomprehensive understanding of all of the potentialpension commitments that currently exist. Pensionsare an integral aspect of labor negotiations and workforce management. Although this is typically a for-mal process, perceptions and expectations are oftenas important as formal legal agreements. Care mustbe taken to be as thorough as possible in obtaining afull picture of the existing pension system.

Pension agreements may be contained in formsranging from national laws covering all workers,collectively bargained agreements between workersand trade unions, formal plans outlined in legaldocuments executed by an employer, and informalagreements or acknowledged practices by anemployer. Many countries do not have well-devel-oped labor codes or pension regulatory regimesthat establish standards for pensions. The extent towhich any of these obligations is binding willdepend on the laws and traditions applicable toindividual circumstances. It is likely that someimportant practices and expectations will not bewell documented.

At a minimum the relevant national laws and doc-uments describing schemes for civil servants, provi-dent funds, or any employer-specific arrangementswill have to be obtained and carefully reviewed toassess the extent of an employer’s pension obliga-tions. It is generally advisable to consult with offi-cials of government-operated pension schemes,employee representatives, and any staff responsiblefor an enterprise’s human resources or personnelfunctions to identify any undocumented agree-ments or practices that are relevant. A thoroughfamiliarization with any regulatory requirementshaving a specific focus on funding requirements,vesting rules (requirements for the irrevocable rightto benefits when certain conditions are met), andprocedures for the resolution of benefit disputes isadvisable. This process should result in a completeinventory of potential pension obligations.

Step two: The second and likely far more difficultstep will be to develop reliable measures of the

scope and cost of existing pension obligations. Thisstep can be divided into two components: (1) thevalue of pension obligations accrued to date (some-times called the accumulated liability or theaccrued-benefit obligation) and (2) an estimation ofthe future and magnitude of pension obligations(variously referred to as the periodic costs or projected-benefit obligations, among other terms).

If the pension obligations are solely defined as con-tribution in nature, valuing the commitments todate may be as simple as determining the value ofthe various accounts and making judgments aboutthe potential expense of fulfilling the contributionformulas in the future. These expenses usually canbe readily expressed as either a fixed amount perperiod, usually a month or year, or as a percentageof wages.

The most critical aspects of the process for defined-contribution plans usually will be to determine theextent to which contributions to individualaccounts have actually been made as promised andto identify the extent to which assets shown inaccount balances are actually present. This processnearly always will require engaging the services of areliable financial accountant to conduct a thoroughaudit of the records of accounts to verify that (a)the accounts have been maintained properly and (b)that the assets are present as required or indicated.

Common problems likely to be encountered aresponsors who delayed forwarding required contri-butions or who substituted promissory notes orother “paper” obligations (perhaps even “shares”of the enterprise) for cash contributions. This isespecially common when enterprises face problemsraising working capital or other liquidity issues sothat particular attention should be given underthese circumstances.

An additional challenge will be to determine thatthe value of the assets held in accounts is accurate-ly represented. Investments may be shown at theirpurchase price or some type of “book value,”which may not indicate their current value. Inmany circumstances the accepted accounting treat-ment may require these approaches, so particularattention to valuation methods will be needed to


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obtain an accurate assessment. Considerable futureproblems can result when the actual value or the“market value” of assets is at odds with the valueshown in workers’ or a pension fund accounts,even if it is consistent with applicable financialaccounting practices that may require assets to becarried at their purchase price until actually sold. Itis very important to understand potential differ-ences and obtain a current value in these circum-stances where the actual value may be less, espe-cially if there is a possible obligation of the pensionsponsor to compensate for any shortfall.

Some countries may have established periodic auditrequirements for pension funds. Unless there is anextremely strong system of auditor quality assur-ance and such an audit has been done very recent-ly, it is generally advisable not to rely on an exist-ing audit for these purposes. Even the most devel-oped systems with strong compliance measuresexperience significant problems with the timely for-warding of pension contributions and the reliabili-ty of their financial statements. When enterprisesface cash flow problems or when managers facesignificant uncertainty about their future employ-ment contracts, pools of assets in pension fundsoften are among the most vulnerable to fraud,theft, or other manipulation. A recent and inde-pendent financial audit is therefore essential innearly all circumstances.

Another common challenge in evaluating defined-contribution plans is the assessment of severance-type arrangements or other contingent future liabil-ities. Provisions providing one-time payments onthe attainment of a specified age or on the termina-tion of employment may be incorporated into pen-sion plans, contained in national laws, included inindividual employment contracts, or simply a mat-ter of tradition and expectations. The latter espe-cially may be an issue among senior managers. Thecost of these provisions can be of equal or some-times greater value than the regular contributionrequirements and should be included in any assess-ment of future expected costs.

The process for defined-benefit plans is partly par-allel because it also includes a similar need toobtain a reliable accounting and valuation of any

funds that have been set aside for pension purpos-es, thus imposing a similar need to undertake areliable audit. In addition to this, however, is per-haps the most difficult and challenging aspect ofdealing with pension issues—valuing the accumu-lated and future liabilities.

Almost without exception this requires the servicesof a professional actuary with experience specificto pension schemes. This is a process with twomajor elements: (1) obtaining very specific infor-mation about the employment history, wages, anddemographics of the group of workers covered bythe pension plan; and (2) arriving at reasonableassumptions regarding future patterns of employ-ment, investment returns, and the life expectanciesof the covered workers. The valuation of defined-benefit liabilities, because they often extenddecades into the future, is highly sensitive to theaccuracy of the underlying information andassumptions, thus perhaps making the develop-ment of these assumptions the most importantaspect of the process.

Professional help is often needed for a pension review.

The CD-ROM contains terms of reference for a pen-

sion consultant or actuary.

Countries with a long experience of defined-benefitpensions may have standards of practice or legalrequirements for many of these factors. However,these are unlikely to exist in developing economies.Standards from other countries, because they arebased on specific experience with investmentreturns and life expectancies among other key fac-tors, generally are not transferable. Often a startingpoint for these assumptions can be derived fromfactors used by national pension systems, but in theend an assessment of reasonableness on a case-by-case basis will be needed. In most cases the judg-ment of a professional actuary will have to berelied on for these determinations. If there is not anestablished and reliable actuarial profession in acountry—which is often the case—the magnitudeof the costs and associated future financial risksmay make incurring the expense of engaging theservices of an established international firm a pru-dent course of action.


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Step three: In order to fully and accurately assessthe current status of pensions, estimates are alsoneeded of the value of supplemental or contingentbenefits. These benefits basically are additions tothe regular benefits paid at normal retirement ageand will typically include severance arrangements,provisions for which allow pensions to be paid atan age prior to the regular retirement age oftentriggered by labor force reductions, and additionalbenefits paid to workers in dangerous or difficultoccupations. Because they often are not formalobligations until some future event occurs, thesekinds of benefits frequently are not included in theaccounting for pension obligations. They may,however, be legally enforceable and may representa substantial portion of the current pension obliga-tions (for example, privilege pensions in Centraland Eastern Europe—see box 5.12). Special caremust be taken to identify all of these obligations inthe initial inventory of pensions and to estimate thefuture magnitude of their costs. Assigning someprobability of these benefits being paid and deriv-ing a measure of the current liability are oftenmajor parts of the work of an actuarial evaluation.

Determining the Funding Status

Assessing the status of current obligations will yieldtwo key measures of the overall financial status ofpensions. The first of these measures is oftenreferred to as the accumulated- or accrued-benefitobligation. This is essentially a measure of the cur-rent value of funds set aside or previously paid ascontributions in relation to the expected value ofthe pension benefits promised. This amount caneither be expressed as a percentage or other ratio oras a net value. Pensions with a negative ratio ofassets (or aggregate contributions) to future benefitobligations are commonly referred to as underfund-ed or are said to have pension arrears. Althoughthere are international moves to improve the qualityof pension disclosure in financial accounts (see box5.13), many enterprises in developing and transitioneconomies will lack good information on their pen-sions. The scale of pension obligations and prob-lems of underfunding may therefore not be fullyapparent until revealed in the PPI process.

Whether a pension is part of a national or civil ser-vants’ system operated on a PAYGO basis or cov-ers only the workers in a single enterprise, thefunding status must be evaluated carefully. The col-lection of contributions from public enterprises isoften lax and there may be substantial amounts ofpast contributions owed that are not accuratelyaccounted for. Few countries have well-developedrequirements for the prefunding of defined-benefitplans, and even when these are present the assump-tions used for determining the required level ofassets may be considerably at odds with reality.


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Funding shortfalls also can be present in somedefined-contribution arrangements where the fairvalue for the assets is less than the value of accounts.Severance payments or informal obligations arerarely funded in advance. When done properly, afull measure of the accrued funding status presents afull measure of the financial obligation the enterpriseis likely to have to resolve at some point and oftencan be a major aspect of the evaluation of the futuredemand on cash flows as well as overall financialsolvency. The measure of the accrued funding statusis likely to be the single most important number

Box 5.12: Privileged Pension Rights in Central and Eastern Europe

In some countries, particularly the transitioneconomies, public sector employees were usu-ally given “pension privileges.” These privileges

could be enhanced retirement benefits, retire-ment at an earlier age than private sector work-ers, or a combination of both. Privileged pen-sions were widespread in these countries. Forexample, in Ukraine more than 25 percent ofpensioners are younger than the minimum retire-ment age because they were able to retire earlyunder privileged arrangements.

Privileged pensions are granted for one of twomain reasons: to compensate for the lowerwages paid to employees and to compensate forthe special type of work that the employee does.A typical example of the first category is white-collar civil servants; the second category wouldbe typified by airline pilots or coal miners.

Most transition countries are reforming their pen-sion systems with three typical outcomes forprivileged pensions:

1. Abolition, with compensation to workers in theform of higher wages that could be invested involuntary schemes

2. A requirement that workers who receive privi-leged pensions have these as a condition oftheir employment, and that by choosing towork in the sector, they agree to participate ina voluntary plan

3. Greater transparency of the financial transfersneeded to meet privileged pension obligationsin those countries or industries where someform of continued public subsidy has beenproposed (for example, in Ukraine’s coal-min-ing sector).

Hungary

The government effectively abolished all privi-leged pensions when the country introduced itsnew state pension system in 1999, with the com-pensation being a pension payment to a voluntaryscheme. So a PPI investor in Hungary would onlyhave to decide whether it would maintain the levelof voluntary contributions that the governmentwas currently paying. Although this is relativelyeasy, there are other issues. For example, workerswho are civil servants can withdraw their benefitsfrom a voluntary plan tax free. Naturally theywould be reluctant to give this privilege up, and aprospective employer may have to negotiate thecontinuation of this arrangement when PPI occursor possibly have to increase the contribution rateto maintain the after-tax benefit. For both theimplementing agency and the PPI investor, how-ever, this is preferable to negotiating the totalpackage with workers and unions.

Russia

The implementing agency and the investor facesome complex legislation relating to pension privi-leges. The situation is complicated by how longthe employee was working in the privileged pen-sion position but, generally speaking, employershave to make an additional contribution to com-pensate for the loss of pension privileges. Theamount of contribution is subject to negotiationand the vehicle for the payment is likewise compli-cated. It is possible to pay contributions in lieu ofpension privileges either to the Russian pensionplan or into a licensed voluntary pension plan. Thelaw gives the choice of plan to the employer, but anew PPI investor is likely to be under some pres-sure to establish a voluntary pension plan in orderto receive the privileged pension contributions.

derived from an evaluation of pensions and it pro-vides the basis for the key strategic decisions dis-cussed in the following sections.

The second element of the funding status is thedevelopment of a measure of future or projectedpension-benefit obligations. This element provides ameasure of the expected levels of future costs thatwould be incurred to maintain the existing pensions.There are two potential aspects of this. First, most ofa projected obligation will comprise the costs associ-ated with additional periods of employment by thecovered workers. These costs will include the contri-butions required for defined-contribution plans andPAYGO systems or the additional years of workthat will factor into the benefit formulas of definedarrangements. It is extremely helpful to distinguishbetween the various contributing factors for the pro-jection (that is, employment patterns, mortalityexpectations, and the like) as it is developed becausethese factors will specify the costs and savings ofalternative pension strategies.


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A second element, usually much smaller, is the pro-jected increase in wages or salaries that would raisethe ultimate level of benefits even if no additionalyears of work were covered under the arrange-ments. Although it adds complexity, it is helpful todistinguish between the two elements because theywill enable a more precise evaluation of the costs ofoptions for addressing future pensions, as discussedin subsequent sections. Although it should be calcu-lated separately, this second component is usuallycombined with the accumulated liability to derivethe funding status.

Resolving Existing Pension Obligations

PPI investors will be extremely wary of becominginvolved in circumstances where large financialobligations for previously promised pension bene-fits are present or may arise in the future. Thismakes the evaluation of the status of pensions asoutlined above an essential early task in the PPI

Box 5.13: Accounting Standards for Defined-Benefit Plans

The international accounting standards (IAS19) for pension benefits, introduced in 1999by the International Accounting Standards

Board, require that contributions in a defined-contribution plan be recognized as expenses. Incontrast, the standards for defined-benefit planshave become more stringent, aiming to fullyexpose pension liabilities, and state that:

• Current service cost should be recognized asan expense.

• All companies must use the projected unitcredit method (an accrued-benefit method) tomeasure their pension expense and pensionobligation.

• Projected-benefit methods may not be used.

• The discount rate is the interest rate on high-quality corporate bonds of maturity compara-ble to plan obligations.

• Plan assets and reimbursement rights must bemeasured at fair value.

• Defined-benefit obligations should be present-ed net of plan assets.

• Reimbursement rights should be presented asa separate asset.

• A net pension asset on the balance sheet maynot exceed the present value of availablerefunds plus the available reduction in futurecontributions resulting from a plan surplus.

• If the net cumulative unrecognized actuarialgains and losses exceed the greater of (a) 10percent of the present value of the plan obliga-tion and (b) 10 percent of the fair value of planassets, that excess must be amortized over aperiod not longer than the estimated averageworking lives remaining for employees partici-pating in the plan. Faster amortization, includ-ing immediate income recognition for all actu-arial gains and losses, is permitted if an enter-prise follows a consistent and systematic poli-cy.

• Past service cost should be recognized overthe average period until the amended benefitsbecome vested.

• The effect of termination, curtailment, or settle-ment should be recognized when the eventoccurs.

Source: International Accounting Standards Board Web site:http://www.iasb.org/) “IAS 19: Employee Benefits.”

planning process. Evidence that all prior pensionobligations are fully addressed, either throughpaid-up contributions or assets set aside that aresufficient to cover their anticipated value, will sub-stantially diminish investors’ actual or perceivedrisks, thereby removing a significant barrier to pri-vatization. Conversely, the presence of unfunded orsignificant future obligations requires the develop-ment of a strategy to address them. There are threepotential types of strategic approaches with manyvariations and combinations possible:

1. Renegotiate or modify the past pension obli-gation to bring the liability to a manageablelevel

2. Freeze or “ring-fence” the past obligation andestablish a means either to set aside funds tomeet the obligation or to transfer the obliga-tion and associated risk to another entity

3. Establish a viable approach to resolve thepast liability by setting aside assets or sched-uling the payment of contributions inarrears on a schedule that is sustainable forthe enterprise as a going concern.

Reduce Accrued Pension ObligationsThe lowest-cost approach to resolving past pensionliabilities obviously is to reduce the magnitude ofthe liability. The viability of this approach is likelyto be determined by a combination of legal con-straints and the assessment of potential conse-quences to labor or government relationships. Thesimplest method obviously is to renounce any obli-gation or commitment to previously earned pen-sions or to the portion of those that are in arrearsor unfunded.

The capacity to do so will be determined by thelegal constraints, which should be an integral partof the inventory of pensions discussed above. Priorpension obligations can be reduced through a ret-rospective modification of the benefit formulas,including steps such as:

• Reducing the proportion of wages replacedfor each year of covered work

• Increasing the age at which retirement ispermitted


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• Increasing vesting periods (the period of par-ticipation in the pension system after whichbenefit rights are irrevocable)

• Terminating the pension and discontinuingany past benefits (in extreme circumstances).

The implementing agency should, however, recog-nize that some of these steps may be explicitly pro-hibited by law or may be vulnerable to a challengeunder commercial or labor codes.

The advisability of such approaches is likely to bedetermined by the impact on labor relations andthe extent to which government agencies adminis-tering national or civil servants’ plans are willing topermit entities to withdraw workers from partici-pation and eliminate any future liability for contri-butions that are in arrears. Workers in public infra-structure entities, especially those included in civilservants’ schemes, are likely to represent powerfulpolitical constituencies and strongly resist suchsteps. Public pension schemes operating on aPAYGO basis and experiencing both short- andlong-term financing problems also are likely tooppose such approaches.

Freeze Past ObligationsAn intermediate approach to addressing past obli-gations is to freeze the existing obligation at its cur-rent level and take steps to address it in a mannerthat is viable for the future. In this approach thepast pension obligations are honored, but addition-al benefits do not continue to accrue or they accrueat a different level or in a form more affordable oraligned with the anticipated needs of the future.The separation of accrued and projected compo-nents during the evaluation of liabilities shouldprovide a basis for judgments about the potentialcost reductions of such an approach. This decisionis closely associated with the determination of anappropriate prospective pension arrangementbecause closing down existing pensions in thismanner has consequences for the future design.

Alternatives for resolving liabilities include develop-ment of a schedule for amortizing any shortfallover a period that matches a projected future fund-ing stream, paying lump-sum settlements to affect-ed workers in exchange for the settlement of the

obligation, “laying off” the liability through a con-tract with a life annuity provider or in some caseseven permitting a public entity to take over thepension obligation in exchange for an agreed-onfee or future series of payments. In cases wherethere is considerable uncertainty regarding thecapacity of an enterprise to fulfill future obligationsand remain a viable concern, workers may be will-ing to accept one-time cash payments of lesserpresent value than the benefits they forgo in thesettlement of future pension rights.

This process can be considerably complicatedwhen a guarantee of pension benefits has been pro-vided by a government agency or when there is anattempt to withdraw from a civil servants’ or otherpublicly managed defined-benefit plan that may beoperated on a PAYGO basis. In these cases a nego-tiated settlement of future liabilities that is well inexcess of the value of contributions to date may berequired.

Fully Fund Any Shortfall or ArrearsThe least controversial and disruptive, as well asthe most direct, method of resolving existing pen-sion obligations is simply to pay their full cost on apresent-value basis. If this is financially viable anddesirable it may be accomplished in a variety ofways:

1. The government budget: For example, theGerman government agreed to contributeUS$1.25 billion into a new private pensionplan in order to allow withdrawal from thepublic pension plan by Lufthansa Airlines.That amount would provide half of the cap-ital needed in a new plan to meet the exist-ing obligations; the airline would finance theother half (Guislain 1997, p. 78). Morecommonly, where governments take onresponsibility for payments under existingplans, the obligation may be paid from theexisting PAYGO system (for example, forearly retirees in state-managed, defined-ben-efit plans).

2. Proceeds from the sale of assets belonging tothe enterprise: These assets may be rolledinto a separate fund that combines existing


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There are threeapproaches toresolving unfundedpension liabilities.

There are fivesources of financeto meet anyshortfalls in existingpension obligations.

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past liabilities and the obligations fromfuture ones. Examples of the separation andisolation of pension assets and liabilities areprovided by the cases of TanzaniaTelecommunications Company (box 5.14),Japanese National Railways (box 5.15), andSouth American mines.

3. Privatization proceeds: Some countries havefirst sequenced the sale of valuable enterpris-es to build up adequate funds to finance thelabor adjustment, including pension costs.Proceeds can either be monetary transfers,or—as in the Bolivian capitalization pro-gram (see box 1.9 in module 1)—transfersof government shareholdings in publicenterprises into private pension plans. If thePPI investor is willing to take on pension lia-bilities, but at a reduced purchase price, thatdiscount is effectively the same as the for-gone privatization proceeds.

4. Donor loans and grants: Large sectorreform and structural adjustment lendingprograms are a potential source. For exam-ple, World Bank loans financed severancepackages for redundant workers, includingpension liabilities payments, in the restruc-turing of the Polish and Brazilian rail sectorsand the privatization of Togo’s telecommu-nications sector.

5. Rescheduled liabilities that are paid laterfrom the profits of the PPI enterprise: InRomania the privatization of the Sidex steelfactory involved negotiations among gov-ernment, investor, and unions on therestructuring of arrears of social taxes—including pension contributions—that hadaccrued. Sometimes, this rescheduling mayinclude the negotiated write-off of somedebts, or the use of debt instruments by gov-ernment (government bonds and securities)or by the PPI enterprises (corporate bonds).An example is the Moroccan RailwaysCorporation, which agreed with the govern-ment of the Kingdom of Morocco to financeunfunded pension provisions by issuingbonds over a five-year period.

Some PPI programs have created special funds tofinance the costs of retirement. In the privatizationof Mexico’s national railway, a trust fund was setup to finance the retirement benefits of those work-ers who retired prior to privatization. This fundwas negotiated between government and the laborunion, and included part of the privatization pro-


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ceeds and public funds from fiscal sources. Thecompany transferred the pension liabilities to thefederal government (López-Calva 2001).

López-Calva 2001 (a PPIAF case study).

Pensions and Labor RestructuringThis section discusses how pensions can be used inlabor restructuring because such adjustment isoften a major part of any process of privatization.

The implementing agency may face difficult pensionissues and negotiations with workers and unionsduring work force restructuring. Pensions can oftenrepresent a large portion of the compensation pack-age for workers in these enterprises, especially ifworkers are enrolled in generous industry-specificor civil servant defined-benefit plans. Pensionarrangements can also be adjusted to provide incen-tives for workers to leave employment voluntarilyor used to cushion the impact on those who may beseparated involuntarily. Various approaches withmany feasible combinations are possible for inte-grating pensions into a labor restructuring strategy.These approaches can be considered in the contextof two major categories: early retirement programsand voluntary departure incentives.

Early Retirement Programs

The least disruptive and contentious way torestructure a work force is to induce voluntaryearly retirement. Whether this is practical is a ques-tion of cost and of targeting the availability toredundant workers while retaining those who areessential to a going concern. Whether the benefitsare enough to induce employees to volunteer forearly retirement will depend on the type of planoffered (defined-benefit or accumulation), the levelsof benefits promised, the vesting arrangements,participant eligibility, and other rules of the pro-gram—as well as employees’ assessment of alterna-tive employment options.

Early retirement can be structured in three mainways—by providing:

Box 5.14: Tanzania Telecom—Pension PlanRestructuring

In 1998 Tanzania’s privatization agency, theParastatal Sector Reform Commission (PSRC)embarked on the privatization of Tanzania

Telecommunications Company Ltd. (TTCL). Aninitial review revealed four pension plans inwhich employees were enrolled, and significantunfunded pension obligations that arose prima-rily from the East African Postal andTelecommunication Pension Fund (EAP&TPF) ofthe former East African Community (EAC).These liabilities presented a major problem,threatening to derail the privatization. They hadbeen transferred to TTCL when EAP&T wasseparated into telecommunications and postaloperations in 1994.

The government agreed that the privatizedTTCL should transfer its employees to a newaccumulation plan(s) and that unfunded liabili-ties would be removed from TTCL’s balancesheet. To facilitate this, a new company calledSimu 2000 Ltd. was created. It took over TTCL’sunfunded pension liabilities and was required toensure that the future pension obligations fromthese older pension plans are met. Simu 2000Ltd. took over existing EAP&TPF assets plusnoncore TTCL assets, in exchange for also tak-ing over future pension liabilities.

Simu Ltd. was mandated to establish a smallmanagement team of no more than five employ-ees, and to arrange for the sale of some of theassets and the transfer of proceeds to theNational Social Security Fund (NSSF). TheNSSF invested the proceeds and paid a fee of7.5 percent of the total sum invested. Simu2000 Ltd. was required to meet the monthlypayment of pensions to the existing ex-EAP&Tpensioners, and an initial advance was providedby the PSRC to cover this cost for three monthsand the initial administrative cost of setting upSimu 2000 Ltd.

Source: Parastatal Sector Reform Commission, Tanzania;Adam Smith Institute.

1. An immediate but reduced pension

2. An immediate but enhanced pension tocompensate in part for the lost opportunityto earn future benefits

3. A normal pension beginning at retirementage, perhaps with some lump sum at thetime of early retirement.

Each of these three options is considered below.

With the first option, the worker who retires earlyreceives an immediate pension payment but at areduced level. A typical adjustment that is “actuari-ally fair” is to provide the same benefit formula foreach year of service but then to reduce it by 5 per-cent for each year below the normal retirementage. Smaller percentage reductions may provide asimilar equivalence if life expectancies are lower, asis often the case in developing countries. Care must


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be taken, however, to ensure that the longevity fac-tor used is consistent with the characteristics of theaffected workers, who may differ from the broaderpopulation. The estimation of an appropriate offsetshould be a relatively straightforward calculationfor an actuary who has completed the evaluationof defined-benefit plans as discussed in previoussections. Pensions may remain at a reduced leveluntil the worker reaches normal retirement age, orthey may remain at a reduced level until death. Analternative approach that can be combined withadjustments in the benefit level to achieve lowerinitial reductions (and thereby strengthen incen-tives) is to eliminate or constrain the indexing ofbenefits until normal retirement age.

Statutory provisions may apply, too. For example,under Egyptian social security regulations workerswho are aged 50 or above can receive a retirement

Box 5.15: Japan Railway’s Recurring Pensions Challenge

Over the protests of the seven directdescendants of the former JapaneseNational Railways, the Diet [Japan’s par-

liament] approved legislation in October 1998[for] a 60-year plan to pay off the ¥27.8 trillion($205.9 billion at ¥135 = $1.00) worth of debt thatremains from JNR’s 1987 privatization. AlthoughTokyo will shoulder most of the debt, the sevenrail companies created from the now-defunctgovernment railroad will be forced to take on¥180 billion ($1.3 billion) worth of unfunded pen-sion liabilities owed to former JNR workers nowemployed by them. The repayment plan hascaught the attention of American shareholders ofthree of the Japan Railway firms as well as someU.S. legislators.

At the time JNR was privatized in 1987, it had¥37.1 trillion ($274.8 billion) worth of red ink on itsbooks. The seven companies that took over JNR’spassenger and freight rail operations agreed toassume ¥14.5 trillion ($107.4 billion) of the debt,while the rest—¥22.6 trillion ($167.4 billion)—wastransferred to a new company, JNR SettlementCorp. JNR Settlement was supposed to whittledown the debt by selling off JNR assets, especial-ly prime real estate holdings. The company alsoheld all shares of the seven JR operating compa-nies and so benefited when the three strongest—East Japan Railway Co., West Japan Railway Co.,

and Central Japan Railway Co.—publicly listedtheir shares during the past two years. Because offalling real estate prices and other factors, JNRSettlement not only has been unable to reduce itshanded-down debt but has seen it grow to nearly¥28 trillion ($207.4 billion).

The ¥4.3 trillion ($31.9 billion) in pension liabilitieswill be taken over by a new company, JapanRailway Construction Public Corp., which, inturn, will derive income from selling JNRSettlement’s real estate assets, offering moreshares of JR companies to the public and forcingJR Group firms to pay ¥180 billion ($1.3 billion) ofthe cost.

The JR companies feel that Tokyo is being unfairin forcing them to pay an extra share of the pen-sion liabilities. When their private pension planswere absorbed into the government’s pensionsystem in April 1997, the administrators of thepublic plan said that the JR Group’s pensionscheme was under funded by ¥940 billion ($7 bil-lion). JNR Settlement agreed to absorb ¥770 bil-lion ($5.7 billion) of the liability, and the sevenoperating firms took on the remaining ¥170 billion($1.3 billion). The septet now says that the Tokyogovernment is reneging on the deal by makingthem pay another ¥180 billion ($1.3 billion).”

Source: Choy 1998, pp. 6–7.

“

pension if they retire early. However, the pension isreduced significantly from what they would receiveif they retired at age 60 (the normal retirementage). The amount of reduction is determined by acomplicated formula that distinguishes betweenbasic and variable components of wage. The lossof benefits amounts to 66 percent of full benefitsfor retirement at age 50, 57 percent at age 53, and40 percent at age 57 (Assaad 1999, p. 141).

The second option is a pension that is availableimmediately and enhanced to cover the opportuni-ty cost of forfeited future benefits. With thisoption, the enhancements may take the form ofcrediting the employee with more years of servicethan have been worked (added years) or of givingan additional lump sum to purchase an annuity foran extra pension benefit (the lump sum may belinked to years of service or to years remaininguntil normal retirement age).

Although such enhancements create a powerfulincentive for early retirement, their costs must becarefully evaluated. What may appear to be smalladditions to credited years of service can have largeconsequences for the funding status that will needto be paid in the future.

With the third option for early retirement, paymentof the regular benefits begins when the worker whohas taken early retirement reaches normal retire-ment age, but there may be a lump-sum incentivepayment at the time of early retirement. At Brazil’sRFFSA, for example, the company continued topay the employer’s and employees’ contributions tothe national social insurance system for workerswho took early retirement (for a maximum of fiveyears, or until the worker reached age 55). In addi-tion, the worker received six months’ salary duringthe first six months after early retirement.

There are several cases where governments havebeen so generous in their pension arrangementsthat the plans led either to excessive long-term lia-bilities on government or to the departure of toomany staff through early retirement. Essentiallythese are cases where the implementing agencieshave solved their immediate problem by transfer-ring the financial obligations either to the new


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owner or to a future government. Examplesinclude Sri Lanka Telecom (Salih 2000), Chile Rail,and a similar case in Australia’s rail sector wheretoo many employees took early retirement and hadto be rehired later under contract.

Incentives for Voluntary Departure

Even where severance payments are the core ele-ment of voluntary departure plans, some compen-sation for past pension contributions may also benecessary. This can be a lump-sum payment or anobligation to pay a pension in the future, or a mixof the two. In general, the objective is to makeplans as simple as possible, although complexitiesmay arise if there are several classes of employees,different pension schemes, and different incentivesrequired for different groups of workers.

An alternative to providing early retirement thatmay better target incentives to specific groups ofworkers or may entail lower costs is to makeretroactive changes to eligibility and vesting rules.These rules, which are often very specific to thepension plan, can significantly affect the incentivesand motivations for workers accepting early retire-ment or voluntary departure.

Eligibility rules can be based on age or based onyears of contribution or service. For example, onlyworkers over the age of 60 may be eligible toretire, or only workers who have a minimum of 20years of contribution to the pension plan can quali-fy for early retirement.

Work force restructuring can result in amendmentsto the rules of the plan. In the case of PPI in Côted’Ivoire rail, negotiations with unions resulted inthe years of work required for pension eligibilitybeing reduced from 20 to 15 years. This enabled alarger portion of the work force to depart or beseparated while still preserving the right to futurebenefits without the expense of paying out immedi-ate benefits.

Vesting rules in pension plans are often based onyears of service; for example, until workers haveaccrued five years of service they cannot receive full

benefits. Like eligibility rules, vesting rules and con-ventions can influence workers’ decisions and theirwillingness to adopt early retirement. Althoughthere is a trend to more immediate vesting, manyplans still have long vesting periods. Vesting rulescan act as a disincentive to workers leaving volun-tarily.

The vesting arrangements may also need to be con-sidered as part of the total compensation package.For example, if the principle to be used in downsiz-ing is last-in/first-out, the redundancy package mayhave to take account of forgone pension contribu-tions because the affected employees are unlikely tohave fully vested benefits.

The details of these rules can significantly affectworkers’ benefits. For example, in the electricityrestructuring and privatization in Orissa, India, theformer Orissa State Electricity Board (OSEB)included employees who had been deputed fromgovernment service. As for the Grid Corporationof Orissa (GRIDCO), when the board was unbun-dled and restructured into generation, transmissionand distribution companies, the eligibility ruleswere less beneficial for these deputees than forOSEB employees. Specifically, OSEB employeeshad their years of service in OSEB carried over tocount toward a GRIDCO pension, whereas formergovernment employees had to have worked for 10years within GRIDCO before becoming eligible fora GRIDCO pension (Ray 2001).

Future Pension DesignA successful privatization will usually requirerestructuring the pension scheme to take accountof the different concerns of workers, investors, andgovernment and to align the new pension arrange-ments with the long-term requirements of a priva-tized enterprise. This section sets out the key con-siderations and potential alternatives in designingand implementing pension arrangements, includingconsideration of incentives to attract and retainworkers, the level and pattern (cash flow) ofexpenses, and strategies for funding and invest-ment.


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Implementingagencies shouldavoid the temptationto offer generousbenefits today.

Eligibility andvesting rules requirecareful scrutiny.

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Whatever options are chosen for resolving existingpension liabilities, the pension scheme will be animportant aspect of the operation of the restruc-tured entity. Should the implementing agency setterms for future pension schemes, which wouldbecome a condition of the PPI contract? In general,that should be avoided as far as possible, and thePPI investor should have discretion to determinepensions arrangements within statutory require-ments. The way in which pensions are restructuredwill affect how investors value an enterprise andassess its long-term viability. Providing investorswith the widest array of choices and flexibility willtherefore greatly enhance the attractiveness of anentity for privatization.

The extent to which this is possible will depend,however, on the nature and difficulty of negotia-tions among the work force, trade unions, andgovernment. The Lufthansa Airlines pensionreview, for example, required agreement betweenthe government and the company; and whenBritish Coal was privatized, bidders were requiredto accept a new pension plan (see box 5.16).

If the implementing agency is negotiating a futurepension plan, it is essential to consider carefullysuch issues as the following:

Box 5.16: British Coal—Negotiated PensionAgreements

When the United Kingdom privatized itscoal industry, past benefits accrued(and the consequential liabilities for

funding) remained the responsibility of the gov-ernment. Investors bidding for the coal mineswere, however, required to participate in a newpension arrangement that had been negotiatedpreviously between the government and stake-holders, including the employees (trade unions).This was an accumulation plan but the investorshad no say over the contribution rate. The newplan was only open to retained workers whohad been members of the old (closed) defined-benefit schemes. New employees engaged bythe investor after privatization were able to par-ticipate in a third, completely new, plan that theemployer established.

Source: Adam Smith Institute, personal communication;DTI 1993.

• Legal compliance: The plan should be con-sistent with legislation. For example, somecountries require that one contribution rateapply to all participants in order to qualifyfor specific tax benefits, and some do notpermit the employee contribution to exceedthat of the employer.

• Plan viability: Legislation may provide thatstaff transfers to a new employer after priva-tization should be on “no less generous”terms and conditions. That may present achallenge for PPI if it leads to demands, forexample, that PPI investors provide or main-tain financially unsustainable pensionarrangements. Other matters such asdeemed length of service are also impor-tant—in this case because of its effect onworkers’ pension rights and benefits.

• Plan type and contribution rate: Most PPIinvestors (but few trade unions) would wantto see new plans structured as defined-con-tribution rather than defined-benefitarrangements because defined-contributionplans make financial risk borne by the spon-sor more readily determinable and pre-dictable. The decision about plan type willdepend on the joint assessment of financialrisk and labor incentives as discussed below.Depending on the prevailing employmentconditions in the country, an employer con-tribution rate of 5 to 10 percent of averagewages should be sufficient to provide a gen-erous plan by the standards of a developingor transition economy. A further 5 percentcontributed by the employee should general-ly replace a significant portion of wages forlong-term workers with a typical lifeexpectancy of 10 to 15 years after retire-ment.

• Consistency with other plans and nationalsystems: Care must be taken to ensure thatany prospective pension arrangement doesnot set unwelcome precedents for otherpublic sector schemes or enterprises. Willthe plan lead to accelerating demandsamong workers in similar industries? Is it


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consistent with the purposes and scope of apending or anticipated reform of a nationalpension system?

Work Force Management and Incentives

Pensions are generally the largest element of com-pensation arrangements beyond the payment ofwages and salaries. Although the average cost willbe between 5 percent and 15 percent of a totalcompensation package, depending on the nature ofthe pension design and age of the worker, pensioncosts easily can exceed the wage bill for certainworkers. That makes the design of the pensionprogram on a going-forward basis a major issue inwork force management.

There are essentially two main issues here: (1) thenature of the pension and (2) the level of benefitsor generosity. Contemplating the replacement of anexisting pension program will need to take intoconsideration both the potential effects of a changein expectations and an objective assessment of thefuture needs of the organization. Concerns aboutretaining key workers or limiting the adverseeffects of difficult labor negotiations may signifi-cantly limit the movement toward what might oth-erwise be an appropriate design.

The basic decision of benefit design is the choicebetween a defined-contribution and a defined-ben-efit system. This is a question of matching theattributes of design to the requirements of theenterprise and the work force. Some of the keycharacteristics of each type are listed below.

Defined-contribution plan:• Value is proportional to wages, with no dif-

ferentiation by age.

• Is highly portable; workers take accountswith them.

• Offers greater flexibility in payout timingand options.

• Is easily transparent; workers can readilydetermine value.

• Financial risk is held by the worker.

Defined-benefit plan:• Relative value of benefit usually increases

with age.

• Has potentially large costs for early leavers.

• Offers little access to benefits before retire-ment.

• Value is hard to measure.

• Offers less financial risk for workers.

These characteristics make each type of pensionappropriate for different work force managementobjectives.

Defined-contribution plan: • Is attractive to younger workers with short

tenure expectations

• Is effective in attracting scarce skills inmobile labor markets

• Is more effective in wage-competitive mar-kets

• Has greater association with risk takers.

Defined-benefit plan: • Is an effective retention tool for older work-

ers and senior managers

• Is an effective means of protecting invest-ments in training

• Is less attractive to young workers withhighly marketable skills

• Is less conducive to competition in compen-sation

• Is associated with stability and risk aversion.

There are various potential combinations of thetwo basic designs that can merge aspects of any ofthose characteristics. One approach that is gainingacceptance in a variety of settings is a hybriddesign in which workers are credited with a fixedamount in an individual account that accumulateswith investment earnings during the working years.At an established retirement age, this account isconverted into a monthly benefit. These types ofarrangements may enable an enterprise to achievemany of the advantages of a defined-contributionpension in attracting workers and providing signifi-


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cant incentives to retain valued workers who are intheir high-productivity later years of employment.The most important point is to recognize that nei-ther model has any particular inherent advantagebut rather a set of characteristics that should bealigned with anticipated needs.

Anticipated Expenses and Cash Flow

The two models also impose differing financialaspects that must be consistent with the objectivesand constraints of the ongoing enterprise. In theaggregate, if the generosity of the pension is thesame, both models should entail a similar presentvalue of costs. The timing and pattern of costs,however, may be significantly different. The capaci-ty of an enterprise to meet the cash flow demandsof the short term may be an extremely importantconsideration in selecting a pension design.

Defined-contribution pensions involve constant andpredictable cash flow demands. With workers’accounts usually credited with actual investmentearnings, sponsors are not exposed to volatility infinancial markets. Defined-benefit pensions involvethe sponsor committing to a future expense thatmay vary significantly, depending on employmentpatterns or the earnings on any assets set aside tofund the plan. Although this arrangement maydefer cash flow demands to a later date, thosedemands are typically far more volatile in their costand cash flow requirements. If there is a require-ment or effort to prefund these demands, poorinvestment performance may impose future expenseshocks and changes in assumed interest rates maymake annual funding requirements extremelyvolatile. The differences are as follows.

Defined-contribution plan: • Has level annual expenses

• Is predictable as a proportion of the wagebill

• Has early and constant cash flow demands

• Offers low risk to the sponsor.

Defined-benefit plan: • Has variable expense and cash flow

• Potentially defers the cost to later years

• Has exposure to financial market and inter-est rate risk

• Has potential to produce future cash flowshocks.

Funding and Investments

Decisions will also have to be made regarding astrategy to fund future pension benefits. In a fewcases strategy may be dictated by law, although inmost circumstances involving privatization there isnot likely to be a legal and regulatory frameworkfor pensions that imposes significant requirements.Defined-contribution pensions generally involvepayment of the full pension expense during theperiod in which the commitment is made.Individual accounts should be established for eachparticipating worker, and sponsors will have totake a significant responsibility to ensure theintegrity of the funds through oversight and peri-odic auditing.

The most challenging issues are likely to be deci-sions about the investment of the funds, whetherthese decisions are to be made by the sponsor orwhether a limited menu of choices will be providedto workers individually. In nearly all circumstancesthe level of development of capital markets and thelack of financial literacy among workers willrequire that any assets be held in very safe, profes-sionally managed portfolios that are professionallymanaged. In countries that have developed a sys-tem of licensed pension funds as part of a broaderreform (as will be discussed in the following sec-tion) this should be a relatively simple choice. Inother circumstances, sponsoring entities will likelyneed to choose an asset manager and establishportfolio limits.

Defined-benefit pensions, however, require farmore complex decisions. The sponsor will have todecide the extent to which there is a capacity to setaside funds in advance. Funding defined-benefitpensions on a PAYGO basis may move expenseand cash flow patterns into the future but canexpose sponsors to untenable risks in circum-


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stances where the benefit formulas create rapidlyaccelerating or volatile pension expenses. Factorssuch as unanticipated patterns in wage growth,inflation, or the future need to restructure the workforce may create large and unexpected pensioncosts. It is therefore advisable for the sponsor of adefined-benefit arrangement to estimate pensionexpenses as they accrue (using the services of a pro-fessional actuary) and to fund them on an ongoingbasis. These actions will prevent the build-up ofunsustainable liabilities that can drive otherwiseprofitable enterprises into insolvency if not proper-ly managed.

Funding for future pension expenses should be sep-arated from the other activities of the sponsor andmanaged in accordance with a predetermined anddisciplined investment strategy. This result is bestaccomplished through the services of professionalasset managers but will necessitate the formulationof a general strategy. Developing this strategy isusually an area in which engaging the services ofcompetent consultants is advisable. A well-formu-lated investment strategy can mean the differencebetween a successful pension restructuring and onethat exposes the enterprise to enormous financialrisks in the future. Success in this regard is nearlyalways a process of balancing expense againstpotential risks.

Some common strategic approaches involve thefollowing:

• Intermediated financial products: In circum-stances where there is a reasonably well-developed market, all of the financial risk ofa defined-benefit pension can be managedthrough the purchase of investment prod-ucts. This strategy will increase the cost butremove risk by purchasing intermediatedproducts such as investments with fixedreturns or, if available, a series of annuitycontracts in which an insurance companyagrees to pay out benefits in return for apreset fee.

• Government-issued or -guaranteed bonds:Government debt is generally safe but pro-vides very low returns. Investment of pen-

sion funds in government debt is often riskfree and politically desirable, but it will dolittle to diminish costs over the long run.

• Asset-liability matching: Pension funds com-monly try to manage risks by purchasinginvestments whose value moves oppositeany changes in liabilities. This strategy issometimes called “immunization” or “dura-tion matching.” It is a process that recog-nizes that the value of defined-benefit obli-gations is very sensitive to interest rates andseeks to purchase investments such as long-term bonds that will increase in value as aresult of the same factors that mightincrease the level of future liabilities. Thesetypes of approaches are complex to admin-ister but can significantly limit future expo-sure.

Pensions: Implementation StepsThis section outlines key implementation steps forpensions in PPI. There are three main steps:

1. Making information available to bidders

2. Ensuring adequate funds and administrativecapacity

3. Obtaining technical support.

Making Pension Information Available toBidders

The data room is a managed facility provided dur-ing the PPI transaction for bidders to examine sup-plementary, bulky, or detailed information. Biddingdocuments or the data room should provide infor-mation on:

• Relevant laws and collective bargainingagreements

• Details of existing pension plans, includingplan rules; certificates of asset propertytitles; asset valuations; estimates of unfund-ed liabilities, including key assumptions; andestimates of arrears


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Defined-benefitplans present agreater challengethan do defined-contribution plans.

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• Any restatement of net pension assets andliabilities in the accounts of the infrastruc-ture enterprise, adjusted if appropriate tobring them into line with internationalaccounting standards

• Proposed pension system reforms

• The obligations of the PPI investor underthe country’s labor code and related legisla-tion, as well as any specific pension planrules.

Ensuring Adequate Funds and Administrative Capacity

Large-scale early retirement programs can presenta challenge for pension plan administrators. First,finance must be found to meet any gaps in the planfunds. Potential sources of finance are essentiallysimilar to those outlined in module 1 of theToolkit. Second, the administrative capacity toprocess the applications or to manage a new pen-sion scheme must be considered. For example:

• In Brazil’s railway privatization, the earlyretirement process allowed a period of sixmonths in which the workers’ net salarycontinued to be paid while the appropriatepaperwork was being processed by theNational Social Security Agency (INSS). Ifpayment was not ready within the six-month period, the railway company wouldcontinue to pay the net salary, but in theform of an interest-free loan to be reim-bursed by the retired employee after the dateof his or her actual retirement (Estache,Schmitt de Azevedo, and Sydenstricker2000).

• In Mozambique workers in the port andrailway company were members of the pen-sion system for public sector employees.Workers to be transferred to the new privatesector concession managers were to havetheir pensions immediately transferred to theINSS plan, but this did not happen becausethe public sector pension system was insol-vent. Without the transfer of funds the INSS

could not enroll workers and the new pri-vate concessionaires could not contributethe employers’ share. The backlog of casesreached 4,000 workers.

• In India, the Pension Trust Fund for Orissa’selectricity sector was split among the fourprivatized distribution companies and thetransmission company. There were, howev-er, significant delays in establishing the dis-tribution company trust funds, “due to theinability of the unions/associations to electthe employee’s representatives” (Ray 2001,p. 33).

Together with the specialist consultant, the imple-menting agency will need to take the followingactions:

• Consult with the relevant pension authori-ties to identify what is realistically possiblein terms of payment processes. To reachaccurate conclusions, the agency will haveto assess the need for specialist inputs frompension consultants, identify specific deci-sions required from government or trustees,assess the available administrative capacityto handle large numbers of early retirementprograms, identify secure payment arrange-ments, and develop procedures to verify thatcorrect payments are made to the correctemployees.

• Consider whether some type of technicalassistance or training investment may benecessary for new trustees or supervisoryboard members.

Obtaining Technical Support

Throughout the pension process the implementingagency will benefit from the recruitment of inde-pendent pension or actuarial advice for three rea-sons:

1. Assessment and valuation of the pensionscheme: This enables the implementingagency to alert ministers and other decision-makers to the fiscal impact of any decisions


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on pensions and to the potential impact onproceeds from PPI.

2. Help in negotiations with trustees, workers,and other stakeholders.

3. Opportunity to give investors as much infor-mation as possible in bidding documentsand data room: This will help PPI investorsconduct their own due diligence of pensionissues more quickly.

Box 5.17 gives one illustration of how actuarialadvisers need to work with the infrastructure enter-prise, pension plan trustees, and the implementingagency. The CD-ROM that accompanies thisToolkit provides outline terms of reference for theengagement of a specialist consultant for a specificPPI transaction. It also offers a job description anddraft advertisement for the position of long-termpension adviser who might support a PPI officethrough a number of PPI transactions.

Terms of reference

Job description for a long-term pension adviser.

Tools (on the CD-ROM)Terms of reference for a pension review

Glossary of pension terms

Frequently asked questions about pensions

Job description for a long-term pension adviser


de Ferranti, David, Guillermo E. Perry, Indermit S.Gill, and Francisco H. G. Ferreira. 2000. “HelpingWorkers Deal with the Risk of Unemployment.”Chapter 6 in Securing Our Future in a GlobalEconomy. Latin American and Caribbean Studies.Washington, D.C.: World Bank. (Provides anoverview of income support programs that havebeen used in Latin America, including severancepay, public works programs, training programs,and unemployment insurance.)

Ray, Pranabesh. 2001. “HR Issues in PrivateParticipation in Infrastructure: A Case Study of


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Box 5.17: South America—Working with Trustees and Pension AdvisersDescription of the Pension Problems

In one South American country, employees intwo mining companies and the mines holdingcompany contributed to one pension plan. Theprivatization strategy was to offer the mines sep-arately and close the holding company, and anearly question was whether there needed to beseparate pension plans. The pension schemeactuaries advised that there were cost benefits tocontinuing with one shared pension plan, includ-ing lower actuarial, audit, and trustee fees,although they recognized that company controlof pension plans was important and any cross-subsidization was undesirable. Cross-subsidiza-tion could arise not only through one firm havingproblems with pension contributions but alsowith differing age and gender profiles and withdifferent earnings levels and retirement agesbetween the two companies.

Significant practical problems emerged in trying toassess the pension plan’s assets and liabilities.One of the fund’s major investment assets, a prop-erty investment, would be difficult to sell.Moreover, the pension trustees had not perfectedtitle to this property. When actuarial adviserslooked at liabilities, they found that they could notvalue the current pension liability because thecompany had failed to provide the data onemployees necessary to carry out the valuation.Moreover, the previous valuation six years earlierrecorded a significant liability, and the mine com-panies’ actuaries had then recommended anincrease in pension contributions, which the com-panies had not implemented. According to thepension plan, this represented a liability of thecompany although it was not recorded as such inthe company’s accounts. In addition to these twoliabilities, the increasingly poor financial position ofthe mines had resulted in their inability to pay pen-sion payroll contributions to the pension adminis-trators, which represented a further liability.

The unions wanted employees to be paid fullredundancy payments before privatization, butalso wanted all pension rights transferred and notliquidated. The pension plan rules, however, indi-cated that only the trustees could make thisdecision—not unions or the government—andthat employees also had the choice of optingout.

Inflation had eroded the value of many pensions,which had been reasonable when first awarded,

and many pensioners were now below thenational poverty line. Fear of criticism arisingfrom such payments might deter an internationalinvestor from taking over the pension program.

How the Problems Were Resolved

Earlier privatizations in the country had tackledpensions through pension scheme liquidation ornegotiated handover (such as the transfer of anexisting plan to an insurance company) thatoccurred at the same time the new investors cre-ated a new pension plan. Under liquidation,existing pensioners received an annuity, whereasothers received lump-sum payouts calculated bythe actuaries or deferred pensions. For the min-ing companies, however, the problems of sellinga major asset—the commercial property—madeliquidation an unattractive option.

On the advice of the actuaries, the governmentchose not to create three separate pension plansbut to establish a notional separation thatremoved any cross-subsidization while enablingthe plan to continue owning assets in common.The title of the pension scheme to the commer-cial property was undisputed and government—working with trustees—took steps to perfect thetitle.

The actuaries advised that the existing pensionprovisions, particularly for those on very low pen-sions, could be ring-fenced and responsibility forpayment transferred to an insurance company,although this would result in workers losing med-ical benefits that were then being paid by thecompany.

The government engaged additional financial andaccounting help to identify missing personneldata required by the actuaries, who then updatedthe valuation. In its information memorandum forinvestors the government stated that both thebacklog of payments to the pension scheme andthe increases recommended by the actuarieswere company liabilities that investors were totake on, but that any actuarial deficit (that is, theuncertain financial liabilities) would be settled bygovernment through future contributions or set-tled with the investor at the time of payment.

The government made available the services ofthe pension scheme actuary to prospective bid-ders who required clarification on pension liabili-ties during the bidding period.

Source: Adam Smith Institute, personal communication.


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Orissa Power Reforms.” PPIAF case study. WorldBank, Washington, D.C. (Includes discussion of thetreatment of pension issues in one PPI transac-tion—electricity reform in Orissa.)

Sin, Yvonne. 2003. “Pension Reform OptionsSimulation Tool Kit—PROST.” World Bank,Washington, D.C. (A presentation introducing theWorld Bank’s PROST methodology; helpful to illus-trate the inputs that are needed to review very largeor national pension systems.)

Web sitesRapid Response: http://rru.worldbank.org. (The site is

a gateway to a range of information on infrastrucu-ture, privatization, and private sector developmentpolicies.)

World Bank: www.worldbank.org. (Use the site’ssearch engine to locate information about pensionsand specialist sources of information.)

World Bank Institute (WBI):www.worldbank.org/wbi/. (The WBI is the trainingarm of the World Bank and provides courses on—among other topics—pension reform. For example,see: www.worldbank.org/wbi/pensions/courses/february2003/presentations.html.)

Other Material and SourcesBateman, Hazel, Geoffrey Kingston, and John Pigott.

2001. Forced Savings: Mandating PrivateRetirement Incomes. Cambridge: CambridgeUniversity Press. (A general introduction to pensionpolicies.)

OECD (Organisation for Economic Co-operation andDevelopment). 1999. Privatisation, Capital MarketDevelopment and Pension Systems Reform.Proceedings of the OECD Advisory Group onPrivatisation, Thirteenth Plenary Session. September21–22. Paris. (Various papers, see www.oecd.org.)

Vives, Antonio. 1999. “Pension Funds inInfrastructure: Regulations and InstrumentDesign.” Technical Study IFM–119. Inter-AmericanDevelopment Bank, Washington, D.C. (Considersthe potential for pension funds to contribute toinfrastructure development)

REDEPLOYMENT SUPPORTRedeployment support aims to help displacedworkers reenter the job market or become self-employed. Redeployment programs are politicallyand socially valuable, providing a tangible demon-stration of government’s commitment to helpingworkers. But program design and implementationhas to be considered carefully to ensure the cost-effectiveness and efficiency of such programs.

Redeployment support aims to facilitate restructur-ing of the enterprise, the sector, or the economyand to shorten and alleviate the period of unem-ployment and income loss experienced by dis-placed workers. It is an active rather than passivelabor market policy response. This section summa-rizes the key types of redeployment support andthe broad lessons emerging from internationalexperience.

The main types of redeployment support are:

• Prelayoff advice and counseling, which—inaddition to advice on separation and onservices and support open to the displacedworker—may include elements of trauma,financial, and life counseling.

• Job-search assistance, which can includeplacement help (employment intermedia-tion) to match workers with opportunitiesin the job market, time off for job searchprior to termination of employment, andhelp in building skills and confidence to finda new job (interview skills, personal skillassessment, writing job applications, jobclubs).

• Training, which may include retraining andskill upgrading so that displaced workerscan find new paid employment elsewhere,and training in small business, microenter-prise, or livelihoods to help them create self-employment and incomes.

• Employee enterprise, through which theresources and facilities of the PPI enterpriseare used to create jobs for displaced workersby contracting out services needed by theenterprise to newly separated workers or by

setting up a range of facilities from simpleworkspaces to more sophisticated businessincubators.

• Efforts to create jobs by looking to localgovernment, nongovernmental organiza-tions (NGOs), and community self-helpgroups, alone or in coalition, to developemployment opportunities at a local level.These can include large-scale, labor-intensivepublic works programs, local communityactivities, or small enterprise developmentprojects.

How have redeployment programs worked inpractice? The evidence shows mixed results.Reviews of retraining and other active labor mar-ket programs (mainly in the industrial countries ofthe OECD) found limited impacts (Dar and Gill1995, 1998; Dar and Tzannatos 1999; Fay 1996).These findings are summarized in table 5.7. Theevaluations revealed that retraining programs weregenerally no more effective than job-search help inincreasing either reemployment probabilities orpostintervention earnings, and they were betweentwo and four times more expensive than job-searchassistance.

Although many evaluations have focused onOECD experiences, the few evaluations of activelabor market programs in developing countriesalso show mixed results, given the capacity, fund-ing, and infrastructure constraints that manydeveloping countries face. For example, Mexico’sPROBECAT program, which was enrolling half amillion workers a year, may have had no effect onthe employability of trainees (Wodon andMinowa 2001). Similarly, Tanzania’s redeploy-ment program for more than 60,000 retrenchedcivil servants had no effect on employability,although the combination of counseling andtraining helped improve subsequent earnings(Blomquist 2002).

Wodon and Minowa 2001.

Redeployment programs, however, play an impor-tant political and social role in the labor restructur-ing process. When designed properly they can alsobe economically beneficial in moving unproductive


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workers to more productive sectors of the econo-my. The experience provides several general lessonsin developing such programs:

• Implementing agencies should avoid over-selling the programs, especially where jobsare scarce. In such cases, economic andlabor market policies that generate sustain-able economic growth and job creation arekey in offering the best long-term prospectsfor displaced workers.

• Although national programs have hadmixed results, there are opportunities for theimplementing agency to design and imple-ment more targeted redeployment programsthat tackle the specific needs of workersfrom the PPI enterprise or scheme.Examples include rail privatization inPoland, where redeployment and retrainingwere integral components of the labor pro-gram.

Link to the Web site on Polish rail reform:

www.transport.most.org.pl/

railways/prod03.htm.

• Setting up a redeployment program takestime and is institutionally intensive. An eval-uation of Brazil’s federal railway redeploy-ment program noted that the main problemscame from underestimating the time it wasgoing to take to agree on the strategy toimplement the training and the outplacementprograms (Estache, Schmitt de Azevedo, andSydenstricker 2000). One outcome was thatthe training program was not put in placeuntil some months after workers were sepa-rated, and many workers had already movedon. Early interventions are beneficial toworkers. Experience in industrial and transi-tion countries indicates that displaced work-ers are better help while they are stillemployed than after they have been unem-ployed for several months (Hansen 2001).

• Appropriate incentives for participants andservice providers are important. Makingtraining more demand-driven through theuse of vouchers and other such mechanisms

is one way to improve the effectiveness ofthe programs. Another is encouraging theinvolvement of NGOs and private providersthrough the use of performance-based con-tracts for the delivery of services.

Many developing countries face challenges in put-ting in place effective redeployment programs. Inmany countries training is still supplied by state-


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Evaluations of large,active labor marketprograms conductedin OECD countrieshave shown mixedresults.

There are limits towhat can beachieved byredeploymentalone—economicpolicies thatgenerate sustainableeconomic growthwill offer the bestprospects fordisplaced workers inthe medium term.

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run agencies that lack resources, market orienta-tion, and institutional capacity. Private sector train-ing providers are few or weak. Moreover, employ-ees themselves often have little faith that trainingwill improve skills and help them find alternativejob opportunities, particularly when unemploy-ment is high. All of those factors need to be takeninto account in the design and implementation ofredeployment programs.

Table 5.7: Summary of Active Labor Market Program Evaluation Results

Program Appears to help Comments

Job-search assistance/ Adult unemployed workers Relatively more cost-effective than other labor employment services generally when economic market interventions (such as training), mainly (19 evaluations) conditions are improving; because of the lower cost; youth usually do not

women may benefit more benefit; difficulty lies in deciding who needs help in order to minimize dead-weight loss.

Training of long-term Women and other disad- No more effective than job-search assistance in unemployed workers vantaged groups increasing reemployment probabilities and post-(28 evaluations) intervention earnings, and is 2 to 4 times more

costly.

Retraining in the Little positive impact— No more effective than job-search assistance and case of mass layoffs mainly when economy is significantly more expensive; rate of return on (12 evaluations) doing better these programs is usually negative.

Training for youth No positive impact Employment and earnings prospects are not (7 evaluations) improved as a result of the training; taking costs

into account, the real rate of return of these pro-grams is negative.

Employment/wage Long-term unemployed High dead-weight and substitution effects; impact subsidies workers by providing a analysis shows treatment group does not do well (22 evaluations) means of entry into the compared with control; sometimes used by firms

labor force as a permanent subsidy program.

Public works Severely disadvantaged Long-term employment prospects are not helped; programs (17 groups by providing program participants are less likely to be evaluations) temporary employment employed in a normal job and they earn less than

and a safety net do individuals in the control group; not cost-effective if the objective is to get people into gain-ful employment.

Microenterprise Relatively older groups Very low take-up among the unemployed; signifi-development and more educated cant failure rate of small businesses; high dead-programs workers weight and displacement effects; high costs; (15 evaluations) cost-benefit analysis is rarely conducted but

sometimes shows costs to the unemployment insurance budget to be higher than for the control group; administratively intensive.

Note: Based on evidence from around 100 evaluations of active labor market programs, mostly in OECD countries—mainly,Canada, Germany, Sweden, the United Kingdom, and the United States—but with some examples from transition and developingcountries such as the Czech Republic, Hungary, Poland, and Turkey. Most of the evaluations were undertaken recently, during the1990s.

Source: Dar and Tzannatos 1999.

Design and Implementation ofRedeployment ProgramsThis section sets out the key steps in designing andimplementing a redeployment program tailored tothe circumstances of the PPI plan.

Step 1: Define Objectives

Before proposing redeployment support as part ofa labor program, implementing agencies must beclear about the rationale for it. Potentially there arethree objectives:

• From an economic standpoint, the objectiveis to facilitate the shift of unproductiveworkers to more productive activities else-where in the economy.

• From a social standpoint, the objective is tohelp workers acquire the necessary skills tobecome reemployed or self-employed.

• From a political standpoint, redeploymentprograms are intended to build public sup-port for restructuring by signaling to citizens,communities, and labor representatives thatthose responsible for restructuring are readyand willing to help those who need andwant help (Fretwell 2002). Such programshelp make difficult reforms acceptable toworkers and other stakeholders. In India, forexample, trade unions supported the retrain-ing elements of the National Renewal Fund(NRF) and welcomed this as a measure tooffset the social costs of enterprise adjust-ment and reform (and they were subsequent-ly very critical when the NRF funded mostlyseverance payments and little training).

In the right circumstances, redeployment programscan have important objectives. When those objectiveshave been clearly defined, the main challenge is toimprove the effectiveness of redeployment programs.

Step 2: Conduct Preparatory Surveys

Three types of surveys are typically needed early inthe program to help inform its design. They are:


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1. A survey of employees, including the skills,capabilities, and expressed redeploymentneeds of workers

2. A survey of the labor market itself, includ-ing areas of supply and demand

3. A survey of potential redeployment serviceproviders, including the types and capacityof existing public and private providers.

These three surveys could be carried out separately,but in practice the findings of each will inform thedesign of the redeployment program and closecoordination is thus required. Outline terms of ref-erence for the various surveys are provided in theaccompanying CD-ROM.

Terms of reference for surveys of the labor market,

workers, and potential redeployment providers.

Employee SurveysEmployee surveys provide a descriptive profile ofthe work force and help the implementing agencyto:

• Understand the profile of workers in theenterprise

• Identify the most vulnerable groups

• Monitor and challenge proposals from rede-ployment service providers based on a factu-al information base

• Provide a baseline for subsequent monitor-ing and evaluation.

The survey can build on, but is different from, thestaff and skills audits described in module 7. Thoseaudits focus on the needs of the enterprise, whereasthe worker survey focuses on the needs of workerswho will lose their jobs (see, for example, box5.18). The worker survey can also overlap with thestakeholder analysis needed for planning communi-cations and consultation (see module 6).Stakeholder analysis might be usefully scheduled atthe same time as the worker survey.

The worker survey can include:

• Assessing the likely plans of employees—what proportion will retire permanently, orreturn to their home towns or villages, or be

willing to migrate to find alternativeincomes?

• Developing descriptive profiles of the workersbeing retrenched through individual inter-views and focus-group discussions. Thesemeetings can provide a description of differentgroups of workers that bring to life—for deci-sionmakers—the risk profiles, key concerns,and challenges faced by different groups. (Box5.19 describes such risk profiles.)

• Assessing worker preferences in terms ofseverance packages (one-time lump-sumpayments, phased payments, or salary con-tinuation).

• Learning from the experiences of otherworkers, perhaps in other sectors, who haverecently retired or been retrenched.


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Redeployment haseconomic, social,and politicalbenefits.

A redeploymentprogram study isessential, and needsto cover threeaspects:

• The labor marketitself

• Redeploymentservice providers

• The characteris-tics of displacedworkers.

Can the survey ofworkers bescheduled at aboutthe same time as astakeholderanalysis?

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The outcomes of the survey can help in designingthe scope of the labor program. Those at highestrisk are unlikely to find jobs quickly and will bene-fit from job-creation activities (public works, sup-port for small enterprise, and community pro-grams) as well as access to income support. Thosewith the most skills and highest level of mobilitymay benefit more from job-search assistance skillsupgrading or retraining.

Worker surveys are an important input into thedesign and implementation of redeployment pro-grams and must be designed with considerablecare. An example of such a survey is included onthe CD-ROM that accompanies this Tookit.Design, implementation, and analysis of the surveycan be subcontracted out to national consultantsor to academic or policy institutions.

Box 5.18: Brazil Rail—Worker Surveys in a Labor Study

To minimize the social cost of layoffs, Brazil’sfederal railway, RFFSA, had to have a goodunderstanding of the profile of its employ-

ees. A detailed study was carried out as part ofthe preparation for World Bank support. Adetailed analysis of the characteristics of eachregional labor market and the outplacementopportunities for each excess worker was con-ducted. The study covered the employee’s age,experience, and education level, compared withsimilar characteristics in the regional labor marketwhere the redundant employees would have tocompete for a new job.

The study revealed that the two main character-istics of Brazil’s labor market are (a) the modestqualifications of its labor force and (b) its capacityto generate jobs of poor quality. The poor qualifi-cations of the country’s labor force reflect the lowlevel of formal schooling and the low quality ofbasic education. Professional training is notentirely effective, even for the most educatedworkers. Moreover, training on the job is oftennot sufficient because of the high turnover in thelabor market. There are frequent short spells ofunemployment. In many cases these spells resultin lower wages when workers return to the mar-ket. There is also an increasing trend towardswitching from the status of employee to that ofindependent businessperson.

In spite of some similarities, such as the low levelof education, the profile of RFFSA’s employeesdiffered from the rest of labor market. The aver-age rail worker was about 41 years old, hadabout 18 years of service with the same compa-ny, did not have much education, and had few orexcessively specialized skills. The average work-er in the general labor market is at least 6 yearsyounger. RFFSA’s workers were paid between 10and 30 percent more than the average worker inthe respective labor market.

The emerging concern was then that withoutsome assistance, many of the rail workersdeclared redundant were likely to find it difficultto compete in the labor market in the short run.Even if these workers did manage to reenter themarket, they were likely to be paid less. The viewat that time was that what was needed wasenough training to reduce the cost imposed byspecialized job experience and the lack of formaleducation. A team of advisers from various train-ing institutions was convened by RFFSA to pre-pare a menu of options from which affectedemployees could choose, and to design trainingpackages that would meet the employees’needs.


Labor Market SurveyThe supply and demand for labor and skills rele-vant to the workers leaving the infrastructure enter-prise will form the core of the labor market survey.The survey typically would include assessments of:

• The capacity of the labor market to providenew formal jobs through estimates of jobcreation, job destruction, and labor turnoverin the economy

• Trends in formal and informal employmentand areas of job growth and decline

• Alternative employment opportunities,including levels of wages and benefits andany trends


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• Probability of finding formal and informalsector employment

• Patterns of employment in the private sector,including changing hiring practices and skillrequirements

• Any barriers to entry into and exit from for-mal employment.

The labor market survey needs to consider boththe formal job market and the informal sectorbecause the latter is often a major source ofemployment. In South American and Caribbeancountries, for example, the informal sector repre-sents typically one-third to one-half of the workforce (Freije 2001).

Box 5.19: Ukraine—Profiles of Displaced Coal Mine WorkersLevel One—Highest Risk

A woman, alone with children, with 70 percent ormore of the family income derived from minewages, is in level one. People like this are clearlythe most at risk of losing everything.

Example: L. N. is 35 years old and has lived inthe community all her life. She has two school-age daughters. Her ex-husband moved awayand provides no child support. She has workedin the mine five years as an unskilled above-ground worker and earns US$32 a month in totalfamily income, all of which comes from the mine.Her job will be one of the first to go and is notconsidered to be transferable to another mine.She is very worried about how she will take careof her children.

Level Two—High Risk

Other aboveground workers make up this cate-gory. As a general observation, abovegroundworkers are considered a highly vulnerable groupof workers, not possessing particularly transfer-able skills. All female staff work aboveground,and 83 percent of the total number of above-ground workers (1,389) are women; 17 percent(285) are men.

Example: V. C. is 60 years old and has lived 60years in this community. She has worked 30years in the same mine. She currently worksabove ground in the stockyard in an unskilledposition. She and her husband have a monthlyfamily income of $64, which includes their pen-sions. Their family income is closely tied to themine, and it will be cut in half, to about $1 a day,

when the mine closes. She is frightened whenshe thinks about it closing. No one will hire her.

Level Three—At Risk

Underground workers in the engineering andother professions form this group. They are thehighest-risk group of the underground workers.

Example: V. G. is a 40-year-old man who hasworked 25 years in the mine. He is an electricianunder ground and earns $64 a month to supporthis wife and two school-age children. He is total-ly dependent on the mine. His wife is unem-ployed, and 100 percent of the family monthlyincome derives from the mine. He has no savingsand worries that the mine closing is going to be adisaster for his family.

Level Four—At Risk but Mobile

Underground skilled workers (face miners,drifters, timbers/fitters, and coal transport work-ers) have the best chance of adjusting to mineclosure. They are potentially the most in demandfor their skills and hence the most mobile.

Example: O. Z., 38, has worked under ground inthe mine for 19 years, most recently handlingexplosives. Seventy-five percent of his familyincome derives from the mine. His wife earns $18a month working in the hospital, and he is wor-ried about the future for his two sons. Where willthey work? He has lived in the same communityhis whole life and does not want to leave foranother job. His skills considerably improve hischances of getting a new job.

Source: World Bank 1996b.

Labor market surveys should not be seen as a one-time exercise. Follow-up studies on a periodic basiscan detect trends and changes in the labor market,fill in any gaps in understanding, and improve thequality, relevance, and targeting of redeploymentactivities.

Survey of Redeployment Service ProvidersA survey of service providers is the third importantsource of information in the development of aredeployment program. The main objectives of thesurvey are to:

• Identify the full range of available serviceproviders, including public and private onesand NGOs, as well as smaller organizationsthat are often invisible (see box 5.20).

• Identify the types of programs they offerand any gaps in services.

• Assess their capacity to deliver such servic-es. Where there are shortages of serviceproviders, the implementing agency mayneed to design the program so that serviceproviders from outside the region are invit-ed to provide services in partnership withlocal providers, or so that incentives todevelop the market are provided throughinstruments such as vouchers (see Steel2003).

Steel 2003.

• Assess the performance of service providersin placing recipients or trainees in jobs. Thiscan help determine appropriate performancemeasures to be included within performancecontracts for service providers.

Step 3: Identify the Main Components of theProgram

Counseling, training, and job search lie at the coreof most redeployment programs (figure 5.2). Jobcreation, community approaches, public works,and employee enterprise are supplementary ele-ments that can be appropriate in some circum-stances.


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Box 5.20: Tanzania—“Invisible” ServiceProviders

Despite the hostile environment for privateenterprise in the 1970s, the commercialdistrict of Dar es Salaam still hosted

many small, private business serviceproviders—bookkeepers and accountants, for-warding and courier agencies, marketingagents, and business training establishments.These small businesses seemed to be invisibleto the donor agencies and to the government,both of whom preferred to set up high-profilecentral promotion facilities. Yet these microfirmswere operating as profitable commercial busi-nesses; they understood the market and thebusiness environment. To the outside observer itseemed that the small accounting offices, forexample—stimulated by increased demand andwith some technical help—could be the seedsof future accountancy, business advice, andconsultant service firms. But they had to com-pete with donor-financed facilities working outof expensively staffed and equipped offices andproviding free services. Fortunately for them, thelocal knowledge and the marketing efforts ofthese state-sponsored bureaus were weak, sothe local service suppliers were not seriouslydamaged and largely retained their traditional“invisible” customers. It was an opportunitywasted, however, because these existing fledg-ling service firms themselves would have bene-fited from advice, training, and incentives toupgrade so as to contribute to enterprisegrowth and improved governance.

Source: Phillips 2000.

Counseling

Job-search assistance

Training

Supplementaryelements

Public works Community approaches

Employee enterprise

Core elementsof a

redeploymentprogram

Figure 5.2: Core and Supplementary Elements


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The labor marketstudy shouldanalyze both theinformal and formalsectors.

Weaknesses in theprovision of trainingare common. Theimplementingagency will need toassess these as partof the labor marketstudy.

There is no one bestmodel.

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There is no one best model for redeployment pro-grams. Country-specific and enterprise-level cir-cumstances influence the types of redeploymentcomponents that are selected. Every situation willbe unique, but some guidelines for when variousredeployment measures are most likely to beappropriate are set out in table 5.8.

Step 4: Design Appropriate Incentives

Poorly designed redeployment programs may havelittle economic effect. To improve economic bene-fits, redeployment activities need to be structuredin a way that creates appropriate incentives forworkers and service providers alike.

An example comes from Chile, where training fordisplaced workers is provided through theNational Training and Employment Service(SENCE), part of the Ministry of Labor and SocialSecurity. More than 1,700 training providers to theprogram are registered, including private firms,municipalities, or universities. Funds for trainingare awarded through competitive bidding (publiclytendered) among providers, and must include com-mitment from private firms for a three-monthapprenticeship for trainees. The program designhelps ensure a degree of training relevance becauseboth firms and training providers have incentivesfor monitoring quality (Freije 2001).

Table 5.9 summarizes incentive mechanisms thatthe implementing agency could adopt in a rede-ployment program. These are mechanisms forselecting the recipients of redeployment assistanceand performance incentives for public or privateservice providers.

Specific incentives that can be adopted includeavoiding or reducing stipend payments to employ-ees who attend activities; cost-sharing by partici-pants (especially for such services as training),including through vouchers; and performance-based contracts for service providers.

Avoiding StipendsMany programs offer generous stipends to workerswho attend the training programs. Althoughstipends encourage attendance—and hence high

levels of activity rates are reported by trainingproviders—they can significantly distort participa-tion in redeployment plans. Several such planshave high dropout levels. Workers attend thecourses while they have no other income, but assoon as they get a job they leave.

Increasingly, plans are moving to no or minimalstipends:

• In Trinidad and Tobago, training programsrun by SERVOL (an NGO primarily work-ing with poor youth) only provide trainingwith a small stipend that is set low enoughto prevent participants from dropping out offormal education and enrolling merely forthe stipend.

• In India (Orissa and Andhra Pradesh),stipends for workers made redundant by theprivatization program are kept at low levels.

• In Brazil’s rail privatization, a postprogramreview proposed that at least part of thestipend should have been paid when train-ing had been completed.

It is sometimes argued that the stipends given dur-ing training are social protection transfers. If this isa major issue for a large PPI scheme, then othermechanisms for targeting vulnerable workers andproviding a social safety net need to be considered,such as a public works scheme or a broader socialfund program.

Cost Sharing and VouchersOne approach to making programs more effectiveis to introduce some element of cost sharing. Givingworkers a choice between obtaining training or get-ting the equivalent amount in cash as part of sever-ance pay is one way. Making a small deduction orcharge for training is another, but this can chaseaway the poorest workers. A compromise approachis to offer free training for the poorest workers—forexample, those with severance compensation belowa defined amount—and then establish a slidingscale of (still modest) charges for other workers.

Another mechanism is the use of vouchers (eitherfree or at some cost) to allow workers to selecttheir own programs. Vouchers have been used as a


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Table 5.8: What Works Best When?

When it is most appropriate Activity or likely to work best When it is unlikely to work well

Counseling and prelayoff support

Job-search assistance/placement/employmentinformationexchange services

Skills-basedretraining/skills upgrading for employment

• Can be effective as a mechanismto provide information to workers ifdelivered efficiently, and on time(that is, before severance).

• Is useful as a screening mechanismto identify workers most likely todemand and benefit from trainingor other support.

• Works best where unemployment isfrictional (that is, there are jobvacancies but workers face infor-mation gaps) rather than structural(that is, workers lack the skills orlive in the wrong places to fill exist-ing vacancies) or where there is alack of labor demand (that is, toofew job vacancies).

• Works best where unemployment isfrictional rather than the result ofskill mismatch between workersand vacancies or a lack of labordemand.

• Country is large and job opportuni-ties are available for workers withexisting skills in other regions.

• Public employment service is trust-ed by workers and employers andoffers effective employment inter-mediation services.

• Government has deregulated toallow the private sector also to pro-vide placement services (with costsfunded by the employer to preventpotential abuses of workers).

• There is a local tradition of workermigration, nationally or internation-ally.

• Economy is growing reasonablyfast and employers are hiring, butdisplaced workers lack appropriateskills.

• There is a local tradition of workermigration, nationally or internation-ally.

• Is conducted too late (that is, afterworkers have left the enterprise).

• Is not supplemented by otherredeployment services.

• Informal economy dominates.• Economy is depressed and formal

work opportunities are few.• Country is small and private, and

informal networks (that is, friends,family) are the most importantsources of job information.

• Public employment services (PES)are weak, highly decentralized, andhave little capacity to provide anational labor informationexchange.

• Workers don’t trust PES (perhapsbecause they also monitor unem-ployment benefit fraud).

• Employers don’t trust PES (per-haps because they also regulatelabor standards).

• Private sector placement and inter-mediation services are still illegal orexcessively regulated.

• Formal sector job opportunities arelimited.

• Workers are illiterate or have a verylimited skill base on which toupgrade.

• There are barriers to entry intoemployment (regulations ondemarcation of jobs).



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When it is most appropriate Activity or likely to work best When it is unlikely to work well

Training for self-employment

Employee enterprise

Community-basedprograms

Public works programs

• Economy is diversifying or under-going rapid structural shift to serv-ices (e.g., in transition economies,India, and China).

• New entry into small business isrelatively easy, and economies aresubstantially deregulated.

• There are personal networks thatcan provide capital and support forentrepreneurs.

• PPI schemes have potential to con-tract out services (such as meterreading, construction, facilitiesmaintenance, infrastructure mainte-nance, and minor works).

• PPI schemes have managers com-mitted to developing a flexible workforce and helping contractors suc-ceed.

• There is a history of civil societyinstitutions (including trade unions)that can propose and manage localdemand-driven projects.

• Decentralized local and municipalgovernments are effective, capable,and trusted.

• Formal sector employment oppor-tunities are weak.

• There have been massive layoffs,with significant numbers of workersneeding a temporary safety netrather than a “trampoline.”

• Formal and informal economy andincome opportunities are bothweak.

• Vulnerable groups or regions canbe identified and resources target-ed there.

• Activities are demand-led by localcommunities and NGOs.

• Self-targeting is possible thoughrationing support to the poorestand most vulnerable people (e.g.,through low wages, queuing).

• Economy is stagnant or in reces-sion; the formal sector is moribundand not providing work for theinformal sector.

• Economy is highly regulated, withexcessive red tape that restrictssmall business and microenter-prise start-ups.

• Strong culture of the public sectorremains; workers expect “guaran-tees from government” for newbusinesses.

• Country has strong laws or tax dis-incentives against contracted labor.

• Strongly negative attitude existstoward subcontractors by man-agement or trade unions.

• Continuing underemployment with-in the PPI enterprise conflicts withplans to contract out services toformer employees.

• PPI operators have no effectivedisciplinary control over rent-seek-ing contractual practices.

• There is profound conflict amongethnic groups, factions, or interestgroups.

• Initiatives can be captured by vest-ed interest groups.

• Political interference and patron-age systems lead to excessivespending and misdirected support(that is, not to the poorest people).

• National minimum wage is relative-ly high and can’t be reduced.

• Government regulations will notallow self-targeting of the poorestpeople through low payments(e.g., there is a mandatory mini-mum wage).


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Table 5.9: Mechanisms and Incentives for Redeployment

Selection mechanisms Performance incentives for Activity for displaced workers service providers

Counseling • No active selection required; should • Performance bonus to contractor if reach all workers and spouses counseling reaches above a minimum

percentage of workers

Job-search • No active selection required; should • Competitive bidding for job-search assistance/ be open to all workers assistanceplacement/ or • Placement agency gets bonus for employment • Self-selection by payment of a every worker still in job after, for information minimum fee (cash or voucher) example, 3 monthsexchange services

Skill-based • Counseling as a means of screening • Competitive bidding, plus quality con-retraining/skill and matching workers with courses to trol criteria for program accreditation upgrading for improve the impact and relevance of of training institutions employment the training • Penalties imposed on training agency

• Self-selection by payment of a for dropouts (monitored by independ-minimum fee (cash or voucher) ent auditor)

Training for • Counseling as a means of screening • Competitive bidding, plus quality con-self-employment and matching workers with courses to trol criteria for program accreditation

improve the impact and relevance of of training institutions the training • Bonus for training agency for every

• Self-selection by payment of a worker still in job after, for example, 1 minimum fee (cash or voucher) year (according to monitoring

program)

Employee • Active selection on the basis of • Commercially oriented enterprise, enterprise objective appraisals of the business incubator, or managed workspace

plans receives revenue benefits from • Active selection by managers of successful cases

incubator or managed workspace

Community-based • Self-selection of possible community • Staged payments for activitiesprograms projects, as proposed by community • Transparency and audits

• Active selection of projects on the basis of (a) cost-benefit ratio and (b) social or poverty impact

• High levels of transparency in the community on the amounts and use of funds; independent auditing

Public works • Active targeting of vulnerable groups • Performance-based contracts for programs and geographic regions/locations services (e.g., transportation and

• Self-selection of the poorest supply of materials)displaced workers through mechanisms such as low pay (perhaps below minimum wage) and enforced queuing


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tool for obtaining training and business develop-ment services in Ecuador, Paraguay, and Peru. Theexperiences of these projects are relatively well doc-umented (see, for example, Bothelo and Goldmark2000; Goldmark and Fitzgerald 2001; andGoldmark, Bothelo, and de Andrade Orozco2001). Other examples are:

• A pilot program for the use of trainingvouchers was launched in the Republic ofKorea in 1998 (Betcherman and others2000a, 2000b), and vouchers were pro-posed for training redundant workers in theUkraine coal mines (World Bank 1996c).

• Tanzania’s Civil Service RedeploymentProgram has used vouchers for both coun-seling and training of some 63,000retrenched employees (Blomquist 2002.

Blomquist 2002.

• In Kenya a project to stimulate demand andsupply for training and business develop-ment services for the self-employed,microenterprises, and small businesses useda voucher mechanism. The demand-drivenapproach led to most training being provid-ed by small-scale, but more experienced, pri-vate sector master craftsmen. It also helpedexpand, diversify, and customize the supplyof training, and helped link the savings andcredit associations of microentrepreneurswith microfinance institutions (see Steel2003).

Vouchers help shift from such a supply-drivenapproach dominated by the training providers toone in which the clients (displaced workers) havethe power to select services relevant to their needs(see figure 5.3). Experience with vouchers, howev-er, is relatively recent. Although initial evaluationsof programs are promising, there is insufficient evi-dence to recommend widespread use. Nonetheless,they do address some of the fundamental deficien-cies in training provision. A voucher programtightly targeted at displaced workers has a numberof potential advantages over other types of voucherschemes in that:

• The client group is well defined.

• Concerns about distortion of the market areless significant because funding for any typeof redeployment training will distort themarket for redeployment and training serv-ices.

• There is less concern over the sustainabilityof the program—it ends when the last groupof workers has passed through it.

• Self-selection occurs when there is a chargefor the voucher because workers who donot intend to use it do not buy it. In theKenya project a charge of 10 percent wasmade. Even so, about 37,000 vouchers wereissued and 32,000 persons trained.

• The voucher could be traded within families(using identification cards, ration cards, andthe like to identify the trainee). This willanswer a common request among olderretrenched workers to have a younger fami-ly member trained in their place.

The problems that the implementing agency willface regarding vouchers are likely to be linked toadministration and to the training institutionsrather than to participants. For example:

• Programs may be complex and costly toadminister.

• There may be a shortage of trainingproviders willing to participate (althoughthe introduction of vouchers can help toimprove the supply of training providers).

• There can be attempts at fraud or collusionbetween trainers and workers to share rev-enues among themselves. That risk can betackled through a combination of independ-ent auditing (random checks of attendanceat training courses, postcourse interviewswith trainees), regular monitoring of per-formance, and annual or biennial competi-tive rebidding of the contracts for training.

Performance ContractsMore demand-driven programs can also be encour-aged, without the complexity of vouchers, through

transparent, competitive procurement, regularretendering, and performance-related contracts forsuppliers. In Turkey’s privatization program, forexample, negotiated job placement rates wererequired in the contracts of service providers (atminimum levels of 10 percent for counseling and jobplacement services and 60 percent for retraining).

The reporting and publication of performance datacan also support performance contracts. If poten-tial program recipients gain access to good infor-mation on all training providers and performancemeasures (including numbers of other workersselecting the course, dropout percentages, qualityratings by former students, and success rates inredeployment), they are likely to move to programsthat are both relevant and appropriate for them.

Step 5: Set up a Redeployment Team

When the redeployment program has beendesigned, a key step is to put in place a team toimplement the program. The main tasks are to:


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Vouchers fortraining may beparticularly relevantfor redeploymentprograms. M

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• Agree on the institutional home for the rede-ployment program. There are variousoptions: one is to place the team in theimplementing agency; another is to have agroup such as the ministry of labor run theprogram. In either case, implementation ofthe actual program is generally subcontract-ed to private sector or nongovernmentalinstitutions.

• Obtain the necessary expertise. The manag-er of the PPI implementing agency will havemany other tasks and will need to delegateredeployment and severance matters to alabor specialist. (See the Toolkit CD-ROMfor an outline job description for a laborspecialist.)

Terms of reference for a labor redeployment

specialist.

• Advertise in well-known national newspa-pers to obtain a prequalified list of potentialcontractors who can subsequently be invitedto bid for redeployment services. Private sec-

Provider is dependent on thegovernment/donor

Provider is dependent onclient (the displaced worker)

Government/international

donor

Government/international

donor

Trainingprovider

Displacedworker

Trainingprovider

Displacedworker

$$$

Supply-driven model Demand-driven model

$$$(Vouchers)

$$$(Vouchers)

Figure 5.3: Moving from Supply-Driven to Demand-Driven Training

Source: Adapted from Goldmark, Botelho, and Orozco 2001 (annex 2).

tor providers, autonomous public organiza-tions, and NGOs will be eligible and shouldbe able to demonstrate minimum capabili-ties (that is, prior experience and trackrecord, financial resources, in-house staff,and staff qualifications).

• Consider working with other governmentagencies to establish a rapid response facili-ty. These facilities usually comprise an earlywarning system to predict the timing oflarge retrenchments, prelayoff advice, andthe rapid mobilization and coordination ofsupporting public services (see Hansen2001). Experiences in industrial countrieshave been adapted in some developing andtransition countries; for example:

– Canada’s Industrial Adjustment Servicesprovided on request on-site, rapidresponse redeployment services, follow-ing the announcement of plant closingsor layoffs. A committee, made up ofmanagement and labor representatives,funded by government and the company,organized job-search assistance forredundant workers. This approach wasdeveloped and adapted for use in Egypt.

– The U.S. Department of Labor has pro-moted a rapid response facility with adislocated worker unit in every state. Anational directory of private sector con-sultants and service providers is availableto enable state governments to quicklydraw in expertise in counseling, retrain-ing, and job search (seewww.doleta.gov/layoff). Variations onthis approach have been developed inRomania, where the approach is used aspart of a national program to offset theeffects of job loss arising from transition(see http://lrp.digi.ro/eng/), and inHungary (see http://lgi.osi.hu/resources/practices/pdf/labor1.pdf).

Links to the Web sites of redeploymentand rapid response units in:

• The United States• Romania• Hungary.


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Experience withvouchers isrelatively new.

Workers needhonest, transparentinformation on thequality andperformance ofcourses.

Labor funds can bea vehicle for a mixof government anddonor initiativesdirected at creatingemployment andsupportingredeployment.

Social funds aremore povertyfocused, but canalso support activelabor market andsocial safety netinitiatives.

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Step 6: Develop Cost Estimates and Funding Arrangements

In addition to program activities, funding will needto cover the costs of:

• Administering the program, including thecosts of labor experts, counselors, and thelike

• Monitoring program progress and overallgross effects on workers

• Evaluation of the net impact at the end ofthe program.

These funds should be linked to the overall timeta-bles for PPI and severance because there is littlepoint in releasing funds for a labor program beforebasic approvals for PPI have been received.

The accompanying CD-ROM provides a spread-sheet to help develop cost estimates for programactivities.

Spreadsheet (covering counseling, training activities) to

develop cost estimates for the redeployment program.

Redeployment programs can be implemented andfunded through national-level labor or unemploy-ment funds, as has been common in Eastern Europeand Central Asia. These funds are typically financedon a discretionary basis from the state budget, oftenwith the support of loans from donors and interna-tional financial institutions. The primary objectiveof these funds is to enable activities that help unem-ployed people get back into gainful employment.Where such funds do not exist, or where they servea different purpose than what is required at the PPIlevel, separate arrangements can be made in whichmonies are channeled directly to the PPI implement-ing agency or to the group that is directly responsi-ble for the redeployment program.

Social funds have also been used in some cases.Social funds are special-purpose, public sectorarrangements designed to mobilize resources toalleviate poverty. Social funds differ from laborfunds in that they are more directly concerned withpoverty reduction and income support rather thanemployment generation. Their activities may, how-

ever, support displaced workers, particularly inregions of acute unemployment or in single-indus-try towns. Social fund activities are generallydemand driven. Social funds do not directly imple-ment social safety net programs, but rather solicit,evaluate, finance, and then monitor projects pro-posed and undertaken by private contractors,NGOs, or other groups. Social funds can attractsubstantial donor financing.

In the context of retrenched workers, social fundsmay serve a range of active labor market pro-grams, such as retraining, microenterprise loans,and public works programs, in addition to socialand welfare services. In 1985 Bolivia establishedthe world’s first Emergency Social Fund to helpminers who lost their jobs because of economicadjustment (see box 5.21). It proved so successfulthat it became the model for Bolivia’s SocialInvestment Fund set up in 1990 to finance long-term development of the country’s social servicesand to deal with the more intransigent problem ofendemic poverty.

Further advice on the design and implementationof social funds is available from the World Bank atwww.worldbank.org/socialfunds.

World Bank “gateway” for advice on social funds.

Step 7: Identify and Commission ServiceProviders

The implementing agency’s office does not need toprovide services directly, and many services can becontracted out. Terms of reference and contractsshould include performance-based payment mecha-nisms to encourage performance, with clear per-formance measures and reporting requirements.This enables the program to be outcome driven(for example, by number of workers employed ornumber of workers with increased incomes) ratherthan numbers driven (for example, by number ofworkers counseled or number of workers whoattended training courses).

Other measures to improve the quality of serviceprovision are to:


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• Introduce open competition into the provi-sion of services, and ensure transparency inthe process of selection and award.

• Provide for pilots or phased programs sothat the initial performance of serviceproviders can be checked, as well as the rele-vance of the activity. These help deal withthe inevitable uncertainty as to what willwork best. Pilot activities can then be tested,monitored, reviewed—ideally by independ-ent specialists—and then rejected, amended,or expanded.

• Conduct regular progress reviews that arelinked to incentive mechanisms, such as reg-ular competitive bidding for services.

• Engage independent auditors and monitorsto review and evaluate the service providers.

Box 5.21: Bolivia—The Emergency SocialFund

In Bolivia the state mining corporation reducedits staff from about 28,000 in August 1985 tofewer than 6,000 by the end of 1986. The

World Bank supported an emergency fund tohelp redeploy the miners. The Emergency SocialFund (ESF) was set up as a temporary fund tofinance a large number of small-scale, labor-intensive subprojects in infrastructure (housing,schools, road improvements, erosion, flood con-trol, and irrigation works), as well as technicalassistance and extension programs.

The ESF illustrates some of the benefits of pub-lic works programs. The greatest benefits fromparticipating in the program were received bythose who would have been least well-off with-out it. Although the subprojects originally wereintended to employ mostly miners, only 15–20percent of them were employed under the ESF.Studies showed that although a number of min-ers moved rapidly to new jobs, others werereluctant to participate in ESF projects becausethe pay was low. The subprojects’ ex post ratesof return were generally positive and contributedsubstantially to reducing the social cost ofadjustment after the economic crisis of the mid-1980s.

Sources: Mathieu 1996; Newman, Jorgensen, and Pradhan1991.

Step 8: Monitor and Evaluate the Program

Module 7 sets out monitoring and evaluationprocesses in some detail and describes a range ofperformance monitoring measures. The implement-ing agency’s key tasks here are to:

• Set up formal monitoring arrangements(again using independent contractors if pos-sible) to provide regular reports on trainingand other services, and conduct follow-upsurveys and focus groups to assess howredundancy is affecting individuals, families,and communities.

• Measure against performance indicators,such as numbers of other workers selectingthe course, dropout percentages, quality rat-ings by former students, success rates inredeployment (see O’Leary 1995).

• Put performance and monitoring reports intothe public domain so that workers can makemore informed decisions on which servicesand providers are appropriate for their needs.This is important because, until training starts,neither the trainee nor the implementingagency has any real idea how good (or bad)the quality of training will be, especially ifthere are few redeployment service providerswith prior experience in the country.

• Include short-term tracer studies on theimpact of training on workers. This canhelp identify weaknesses in program activi-ties. For example, if a training activity isonly preparing workers for (perhaps nonex-istent) formal jobs, ignoring the informalsector and self-employment, then it mayhave very limited success.

• Adapt the program in the light of perform-ance findings.

• Provide for an independent net impact eval-uation and then redesign as needed.

CounselingCounseling is the first, and minimum, level of sup-port that the implementing agency can put into


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place to help displaced workers. There are manytypes of counseling. Although cost-effective, coun-seling is often neglected.

Types of Counseling

The content of worker counseling can include:

• Trauma counseling: Job loss is a clear caseof potential trauma in the lives of workers,and one component of the counselingprocess is to provide support and assistanceto those who are particularly distressed bythe event. Redeployment counselors maylack these skills and there is scope forinvolving NGOs with skills in these areas.

• Financial counseling: This is particularlyimportant because severance may be thelargest sum of money a worker receives inhis or her life. Counseling can help peoplemake prudent investment decisions by pro-viding advice on:

– How severance has been calculated.

– Options for investing money (choices andrisks).

– Investing in self-employment. Experienceshows that many recipients of severancepay assume (wrongly) that they need toinvest large amounts to start a business,when in practice a more cautious “startsmall and test the market” approach maybe needed.

– The need to protect severance pay fromfraudulent investment schemes set up toexploit the sudden increase in liquidity ina community where many people arereceiving severance payments.

– Helping prepare workers (particularly inrural communities) for the sudden arrivalof large numbers of “extended family”seeking to benefit from the perceivedwindfall.

• Counseling on job opportunities, redeploy-ment, and training services provides infor-

mation to workers on how to find new jobsand other income-earning opportunities, aswell as how to access redeployment services(training, small business support, placement,and job-search services). There is some eval-uation evidence (for example, Blomquist2002) that counseling plus training are moreeffective than training alone.

Timing, Location, and Frequency ofCounseling

Counseling can start when the first announcementshave been made to workers about potentialretrenchment. Two phases can be identified:

• Prelayoff counseling, which will focus on:

– Providing accurate information to workersand their families on severance programs,possible training opportunities, the timingof activities, selection procedures, andtreatment of staff housing, among otherthings. This helps improve workers’ deci-sionmaking and avoids damaging rumors.

– Establishing facilities for counseling (andjob-search assistance), which may belocated within the workplace or in a sepa-rate facility that workers can easily access.

• Postlayoff counseling: Counseling duringthis phase can become more intensive butshould not distract the worker from his orher own job-hunting efforts.

The workplace is often the best location for coun-seling, particularly for early interventions andprelayoff counseling. Improving employee accessi-bility to information about training opportunities iskey. Information can be made available at variouslocations:

• In the premises of the utility or PPI plan(easiest for workers and the most cost-effec-tive location for initial counseling)

• In temporary rented accommodations (use-ful where the redeployment program needsto distance itself from difficult separationprocess)


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• Through mobile visits (for counseling ortraining of smaller groups)

• At job fairs or meetings; in the community,using facilities of training institutions, localgovernment, or other partners; at traditionalmeeting places; or in workers’ homes.

Materials provided for workers should be in theirown language. If many workers are illiterate, rede-ployment programs need to make more use ofradio, video, group meetings, and means for pro-viding information via other people in the commu-nity who meet workers face to face (for example,health workers or workplace “peer counselors”).

How much counseling is required? Intuitively, asingle session is unlikely to be sufficient to helpworkers dealing with significant job-loss trauma orchallenges in finding new income. In India practicalexperience with national and state-level schemeshas found that repeated visits are necessary.

Designing an Effective Counseling Program

Counseling before and after severance is a relativelylow-cost measure. Hess (1997) estimated counselingcosts on the order of US$100 per worker. In practicethe costs have been significantly lower. In state-levelprograms in India counseling costs have been esti-mated at about US$10 per retired worker, equivalentto about 10 percent of the cost of training deliveredto each worker. The Toolkit’s CD-ROM contains asample spreadsheet that facilitates the calculation ofthe costs of setting up a counseling program.

Spreadsheet for estimating the costs of counseling.

Counseling is relatively low cost, but that does notalways mean it will be effective. The implementingagency can improve effectiveness if:

• There is rapid mobilization of counselingservices. In some cases workers may disperseto their homes very soon after severance soit is essential to deliver counseling advicebefore that happens. For the implementingagency this means that operating budgets,recruiting and training of counseling staff,

and counseling materials all need to be inplace well before workers start leaving theenterprise. A minimum of six months is ide-ally needed prior to the formal announce-ment of retrenchment so as to coordinate allthe resources (staff, materials) necessary toset up a counseling program for a majorwork force restructuring program.

• There is early attention to building capacityin counseling. The implementing agency canaddress this by:

– Contracting a training provider.Counseling is an underdeveloped skill inmany developing countries, and theimplementing agency may need to lookto NGOs with experience in disastercounseling, conflict resolution, and nego-tiation for “training the trainers.”

– Using competitive bidding mechanisms toidentify a range of potential serviceproviders from government agencies,NGOs, and the private sector.

– Recruiting and training local counselors.Some programs have successfully selectedyoung college graduates as counselors forprivatization redeployment programs.Local counselors have the advantage thatthey come from the same communities asthe workers; and their local sensitivitiesand language skills mean that they can bequickly effective when they have hadinduction training.

– Using peer counselors—that is, otheremployees from within the workplace.

• There is rapid feedback from counseling,gathered by actively seeking out the view ofthe counselors in the field, not just theirmanagers. Implementing agency managersshould attend some counseling sessions andlisten to the counselors as they share theirexperiences. The best feedback on the realproblems that workers face will come fromthose closest to the work—from workersand counselors and not from office man-agers.


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Severance paymentsmay be the largestamount of moneythat workers everreceive. Providingprudent financialadvice is a criticalpart of counseling.

Training andcounseling servicescan be contractedout to separateindependentagencies.

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• There is some degree of independence of thecounseling service so that the advice is notcompromised. This means:

– Keeping counselors independent of tasksthat are properly the work of theutility/PPI enterprise managers—forexample, the announcement of layoffs orthe selection of workers for redundancy.Counselors should be associated withhelping the worker, not with theretrenchment process itself.

– Ensuring that counselors are as inde-pendent as possible from the trainingprogram. Where counseling and trainingare combined, there is a risk that coun-selors become sales agents for the train-ing programs and push workers to inap-propriate courses simply to boost thenumbers of “trained” workers.

Job-Search AssistanceJob-search assistance can be valuable because ithelps identify and match workers’ skills to avail-able job opportunities. Job-search efforts generallyshow positive results and, when targeted, can becost-effective.

Employment Services

The purpose of job-search assistance (or outplace-ment) is to reduce the time and transaction coststhat displaced workers would otherwise incur intrying to find new employment. There is evidencethat job-search help works, at least in situationswhere the formal labor market is active:

The intervention that seems to work best—atthe lowest cost—is job search assistance(sometimes combined with other labor marketmeasures) (Fay 1996, reviewing active labormarket programs in OECD states).

Public employment services in particular haveserved as brokers matching jobs with job seekers,traditionally through physical centers (employment

“exchanges”). Internet technology is also beingused in some countries (box 5.22).

In a comprehensive review of active labor marketprograms, Dar and Tzannatos (1999) concludedthat evidence suggested job-search assistance couldhave positive effects and is usually cost effectivecompared with other active labor market pro-grams. Results, however, were linked to the labormarket conditions—where overall unemploymentis rising, job-search assistance has not had a posi-tive impact.

Dar and Tzannatos 1999.

Assisting Job-Search Efforts

In industrial countries, a first phase of job-searchassistance is often undertaken on the premises ofthe enterprise, and involves providing an outplace-ment center where workers can:

• Practice and be trained in job-search andinterview techniques

• Share experience and gain employmentideas from other workers, perhaps throughpeer counselors, as members of a job club(see box 5.23), or from visits by otherworkers who have been made redundantearlier

• Receive other relevant counseling advice(financial, household planning, trauma, life,livelihood)

• Have access to information (books,brochures, video, presentations) on trainingcourses, self-employment options, and otherresources

• Have access to computers (where appropri-ate) for preparation of curriculum vitae andfor searching Internet-based job prospects.

Another tool is the provision of an additional peri-od of paid time during which workers continue toreceive a salary but can use that time for jobsearch. It can help both workers and managers:

• Workers have paid time to find newincomes.


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Counseling is anunderdeveloped skillin many developingcountries. Additionaltraining may benecessary todevelop enoughcounseling capacityfor the redeploymentprogram.

Rebuilding displacedworkers’ confidenceis an importantelement of bothcounseling and job-search assistance.

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• Managers in the enterprise reduce anypotential problems arising from disaffectedworkers in the workplace.

RetrainingRetraining is often the biggest element of a rede-ployment program, and often the most costly.Retraining can be provided for both formalemployment and self-employment. The record ofsuch programs has been mixed. Retraining needsto be targeted and made demand driven if it is tobe effective in cost and outcome.

Retraining for Employment

Retraining programs to facilitate formal sectoremployment are a common element in redeploymentprograms (box 5.24). Courses usually combine a mixof practical and theoretical training and include:

• Short-term (one to six months) vocationcourses for unskilled and semiskilled work-

Box 5.22: Job-Search Assistance—UsingNew Technology

Labor programs associated with therestructuring of both Brazilian and Polishrailways made use of Internet technology

to deliver information on severance and rede-ployment to displaced workers.

In Chile the National Training and EmploymentService has developed a national electroniclabor exchange—InfoEmpleo (see www.infoem-pleo.cl/)—that holds the résumés of job seekersand receives notice of more than 300 job vacan-cies a month. Similar programs exist in Korea(“Work-net” at http://www.work.go.kr/worknet/main.htm) and in the Philippines (“Phil-Jobnet”at phil-jobnet2.dole.gov.ph/pls/philjobnet/main).

In Andhra Pradesh, India, the state govern-ment’s Social Safety Net Program established aWeb site where workers who have been dis-placed as part of a series of enterprise closuresand restructurings could post their résumés.Some workers found employment overseasthrough this mechanism, via a private sectorplacement agency in Chennai that hadaccessed the Web site.

Source: Adam Smith Institute, personal communication.

ers in areas such as taxi driving, basic car-pentry, motor rewinding, dressmaking.

• Short-term technical courses for more skilledemployees. For example, the growth ininformation technology services has prompt-ed the popularity of computer trainingcourses among more qualified workers rede-ployed from privatized SOEs in most Indiancities.

• In-service training and on-the-job trainingare particularly valuable. Often these pro-vide mechanisms where workers canenhance or extend their skills through work-ing as an “apprentice” to a skilled worker.In Kenya these were the most demanded


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training providers in a small-enterprise train-ing program (Steel 2002). Training pro-grams can work with employers to provideon-the-job training and a commitment tohire a proportion of trainees, perhaps inreturn for receipt of the worker’s stipend.(This approach was used in the PROBECATprogram in Chile.)

Generally, training costs are about US$200–$500per worker in middle-income countries (see Fretwell2002). In Brazil’s rail restructuring, however, theaverage cost of training was about US$900 perworker, and similar costs were reported for grouptraining in Hungary (O’Leary 1995). Uptake variesconsiderably but is generally relatively modest—typically 15 to 30 percent—and depends on labormarket conditions, the relevance of the training,and the level of incentives (stipends) to workers.

Fretwell 2002

Box 5.23: What Happens in a Job Club?

Ajob club is a group of workers who meetregularly together as part of their job-search efforts. The job club may be sup-

ported by the implementing agency or by thepublic employment service. Members of theclub can determine their main activities, whichcould include:

• Receiving job leads from potential employersand job-search agencies

• Sharing information about job openings

• Developing job-search strategies

• Preparing curriculum vitae or résumés andhelping each other complete job applications

• Creating job-hunting teams for moral supportand shared transportation

• Taking field trips to workplaces that may behiring

• Practicing interviews, telephone skills, andtelephone follow-up calls

• Listening to speakers or watching videosabout different kinds of jobs

• Getting and sharing information about hous-ing, legal aid, medical assistance, and otherresources

• Sharing experiences—good and bad—andtalking about how they feel about trying to geta job and the effects of unemployment onthem and their families; planning and takingpart in shared social events.

Source: Hansen 2001.

Box 5.24: Retraining—Chile’s Program forMine Workers

The Retraining Program for DisplacedWorkers is a pilot project organizedrecently by the government of Chile with

the financial assistance of the Inter-AmericanDevelopment Bank Multilateral InvestmentFund. The program is mainly designed forskilled adult workers displaced by industrialrestructuring and technological progress. Theprogram is currently focusing on the retrainingof more than 1,000 redundant coal miners. Theprogram managed by the ProductionDevelopment Corporation includes subsidies forcounseling, retraining, and employment interme-diation services for displaced workers. The pri-vate agencies that provide these services areselected on the basis of competitive biddingand receive a maximum subsidy of approxi-mately US$2,000 per reemployed worker.Enterprises that hire retrained workers receive asubsidy of approximately US$900 per worker.The retraining and reemployment program ispart of a broader plan for industrial restructuringin the coal-mining region that offers a series ofincentives for private investment in labor-inten-sive projects.

Source: Espinoza 1997.

It should also be pointed out that governmentsmay not want to offer redeployment and training,perhaps in circumstances where the broader reformgoal is to reduce a culture of dependence on gov-ernment for services, assistance, and subsidies.There may be a policy of offering a generous one-time severance package and encouraging a cleanbreak between workers and government:

We don’t want to offer redeployment andretraining. We have offered a generous separa-tion package, and workers are leaving quietly.If we offer them retraining, they will thenexpect a job at the end of it, almost a govern-ment guarantee (adviser to prime minister’soffice, developing country).

Retraining for Self-Employment

Most training for redundant workers has focusedon training for jobs in the formal sector. In partthis has reflected aspirations of government, imple-menting agencies, unions, and workers alike. Butretraining for self-employment is also relevant,especially where formal jobs are scarce. Trainingfor self-employment can address upgrading work-ers’ skills for the “informal sector” of casualemployment and trading, and is best linked tobroader small- and medium-size enterprise support.Reasons to focus on the informal sector are that:

• Many displaced workers have little formalcommercial or business experience. A com-mon counseling experience is that newly dis-placed workers, flush with their severancepayments, can have overly ambitious plansfor becoming entrepreneurs. Encouragingworkers to try out their business ideas andtheir aptitudes for business with very small,low-risk, informal trading activities is oftenmore appropriate than their investing—andrisking—most of their severance money inan untested business.

• The state may well provide barriers to entryto formal business.

• The informal sector can provide incomeopportunities that workers value (Maloney


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2003), as well as a transition into other full-time employment or formal business.

• Workers are often already engaged in part-time self-employment (and their spouses areas well).

• Only a small proportion of displaced work-ers will have the aptitude for formal busi-ness. For example, a study of OECD andtransition economies found that onlyaround 5 percent of unemployed workerswill choose to become self-employed (VanAdams and Wilson 1994).

From a policy perspective, support for self-employ-ment is an approach that can stimulate labordemand without distorting other aspects of theeconomic reform process (through subsidies, forexample). As with retraining for employment, pro-grams to encourage self-employment also sufferfrom dead-weight loss effects and will benefit frommeasures to select participants. For example, anevaluation in Hungary and Poland, based on morethan 5,500 follow-up interviews, indicated thatmany of those receiving financial and trainingassistance for self-employment would probablyhave gained reemployment without governmenthelp.

Employee EnterpriseSome governments have helped employees set uptheir own enterprises to contract services that werepreviously provided by the state enterprise, or setup workspaces and small business incubators.

Contracting out Services

Contracted-out services are one way to encourageemployee enterprise and thus reduce unemploy-ment among displaced workers. The enterpriseawards limited-term, outsourced subcontracts tofirms set up by former employees. Those new smallbusinesses may then create jobs themselves.

Contracts are usually awarded with exclusivityperiods for a relatively short period—typically no

more than two years—long enough to provide asecure environment for the new business to learnthe disciplines required of private enterprise. Thelimited life of the contract provides an incentive tothem to improve their performance and innovate inorder to successfully bid competitively at the end ofthe contract. It also encourages them to devotetime to finding new work and opportunities fromother clients.

Contracting out also may be part of a wider strate-gy for restructuring of the enterprise. Ancillaryfunctions (for example, catering, building andequipment maintenance) and core functions (suchas revenue collection) can be separated from themain business and the services purchased from pri-vate providers. In cases where the private sector isstill developing, there may be limited skills andcapacity in the market to provide certain specialistservices. These contracted-out services may con-tribute to overall employment but need not neces-sarily employ the redundant workers.

Examples of contracting out include:

• Privatization of service units: For example,in Mexico rail privatization the period1990–95 saw the sale of various small facto-ries and workshops that provided services tothe railway. Many of the workers who leftthe company in that period joined the smallfactories as workers (López-Calva 2001). InBolivia’s railway, job losses in the privatizedrailway were partly offset by new jobs inmaintenance contracting companies (Valdez2002). Road reforms in a number of Sub-Saharan African countries have created newopportunities for road maintenance contrac-tors (box 5.25).

• Utility companies changing the skill mix, asthey become more customer and service ori-ented: For example, TelecommunicationsNew Zealand (TNZ) concentrated itsstrengths on marketing and customer serv-ice, and outsourced many technical jobs. Ina lot of cases, staff took early retirement orredundancy options before taking up posi-tions with subcontractors who were calledin to do the work (Ross and Bamber 1998).


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Counselors shouldcaution workersagainst overlyambitious or riskybusiness start-ups.

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• Redundant utility employees being offeredguaranteed contracts to undertake worksuch as meter reading: In the privatizationof the Manila water supply, the two conces-sionaires agreed to give preferred-contractorstatus to a service cooperative of formeremployees for one year (Cruz 2001). In theprivatization of Argentina’s national oilcompany, about 5,000 retrenched employeesreceived supplier contracts for up to twoyears for their approximately 200 newlyformed businesses (Shaikh 1996).

Cruz 2001 (a PPIAF case study).

• Private sector contractors being required togive first right of refusal to displaced work-ers: For example, following the introductionin 1992 of the Competitive ContractingProgram, the city of Philadelphia,Pennsylvania (United States) implementedseveral programs designed to help publicworkers in the transition required by privati-zation and public–private competitions. Thecity created new job classifications and

Box 5.25: Malawi—Road Maintenance byDisplaced Workers

Road maintenance in Malawi has beentransformed from an activity managed bythe (former) Department of Roads using

government road gangs to one that is managedby a new Roads Authority, where the actualwork is undertaken by private sector contrac-tors. This change did not occur overnight, how-ever, and there was a two-year interregnumbetween the old and the new management.During those 24 months, basic road mainte-nance was carried out through contracts issuedto small contractors by the Department ofRoads. In practice these were groups ofretrenched workers formed around formercharge hands and foremen who provided skillsand continuity. It may have been somewhatmessy, and undoubtedly that was a period ofmuddling through, but this approach did allowworkers and the government time to adjust tothe new regime and the new arrangements, andprovided something of a safety net for workerswho were displaced from regular governmentemployment.

established a redeployment office to matchthe skills of displaced employees with posi-tion openings in other departments. It alsogave displaced employees preferential con-sideration for other city jobs and requiredprivate contractors to give first right ofrefusal to affected city workers.

Special assistance and training in setting up a busi-ness can be offered because workers may not befamiliar with all the requirements and principles ofsmall business. The implementing agency cantherefore engage specialist small-business develop-ment agencies to undertake a selection and train-ing program for applicants for contracted-outschemes.

If successfully designed, such programs can win thesupport of workers. Trade unions may be opposedto contracting out, however, because of concernsabout workers moving into so-called atypicalemployment and less formal contracts that offerless protection to the workers.

Making Employee Enterprise Work

Not all employees are suited to employee enter-prise, and not all the new companies formed arelikely to succeed. This is normal—many small busi-ness start-ups fail, although ones that receive pro-fessional support have a higher success rate.

The prospects of creating sustainable new employ-ee enterprises can be improved by:

• Engaging business development advisers toscreen and select employees with the apti-tude to become small contractors

• Ensuring that the plan documentation andcontracts are clear, comprehensive, andcoherent so that workers can understandtheir choices, options, and risks

• Providing professional support to the select-ed employees through access to businessstart-up training and microenterprise train-ing (with a minimum level of basic businesstraining being mandatory)


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Training forlivelihoods or self-employment may beas important as, ormore so, thantraining for jobswhere theopportunities fornew employment inthe formal sector arepoor.

Contracting out canfavor redundantworkers and offeropportunities forsome to start theirown smallbusinesses.

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• Reducing the costs of initial business start-up by providing free or low-cost access tosheds, garages, and simple industrial units,and allowing workers to keep and take thetools of their trade with them into their newenterprise

• Providing an initial period (one to twoyears) of guaranteed employment or exclu-sivity to allow the new enterprises to startup

• Reducing the risks that management ortrade unions will renege on promises to sup-port the use of contractors in the future,through contractual clauses agreeing not tocompete unfairly with the new companiesover a longer period (say, five years) andallowing (not restricting) the new companiesto diversify and find other clients, and pub-lic memoranda of understanding or enter-prise policies in favor of the outsourcing andcontracting out of specified services.

Job-Creation InitiativesIn many transition and developing countries, a pri-mary problem is the lack of demand for labor.Initiatives that help create jobs are valuable inmany redeployment circumstances, but particularlyin regions or monoindustrial towns with high lev-els of local unemployment. These initiatives includepublic works programs, support for small andmedium-size enterprises, and local and communitydevelopment planning and job-creation incentivesfor employers.

Public Works

Labor-intensive public works programs are mainlythought of as safety net programs to deal tem-porarily with large numbers of poor people in cri-sis. Public works programs can, however, beappropriate in PPI labor programs in regionswhere there is a particular mix of high and chroniclevels of unemployment, lack of formal social safe-ty nets, and large numbers of vulnerable workers.

The pioneering Bolivian ESF had elements of pub-lic works programs within it and was initiallyintended to support redundant mine workers at atime when the economy was very weak (see box5.21).

Well-integrated public works programs can com-bine safety net benefits with community action,productive investment, and a degree of encourage-ment for workers to engage in microenterprise(where elements of the public works are contractedout). Senegal’s public works program, managed byAGETIP (Agence d’Exécution des Travauxd’Intérêt Public), is an example of a public worksprogram that combines these objectives and hasdeveloped transparent, streamlined procedures (seebox 5.26).

See www.worldbank.org/oed.

Support for Small Business

Support for small business includes technical advice(business development services), microfinance, andmanaged workspaces and business incubators.

Detailed consideration of these types of support isbeyond the scope of this Toolkit, but furthersources of information on each of them is providedat the end of this section on redeployment.

Managed workspaces and incubators deserve spe-cial mention, however, because the assets of the PPIenterprise can be used to help workers start up abusiness in a relatively low-risk way by providingworkspace and facilities. The principal differencebetween managed workspaces and incubators isthat incubators try to bring together both physicalspace and technical assistance to start-up entrepre-neurs in one location:

Workspaces and incubators can be set up inde-pendent of labor programs and may be wholly pri-vate or public–private partnerships. The best incu-bators are themselves profitable businesses, makingtheir incomes from tenant rentals. The implement-ing agency, however, will principally be interestedin looking at the existing assets held by the utility


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Privatized serviceunits can offer jobsto some redundantworkers.

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and infrastructure company and seeing how thesemay be used to benefit displaced workers.

British Coal Enterprise (BCE) is one of the earlyexamples of this approach (see box 5.27). TheBCE experience illustrates the value of very simpleand basic managed workspaces. BCE workspacesites were often not attractive new buildings butconverted former mine operation buildings. Somenational and regional governments have invested inmore substantial incubator facilities—some evenmoving toward high-tech science parks—but nor-mally they have done so as part of a wider employ-ment and economic development policy ratherthan as a strategy to deal with redeployment.

Worldwide there is much experience on the designand implementation of managed workspaces andbusiness incubators. One source of information isthe National Business Incubator Association.

The NBIA Web site is a source of information on incubators: www.nbia.org.

Box 5.26: Three-Point Checklist forSuccessful Public Works Programs

To make public works programs cost-effective, the implementing agency cancheck to see that:

1. They pay less than the prevailing marketwage for unskilled manual labor in the pro-gram area. Restrictions on eligibility can beavoided by setting the wage rate at a very lowlevel to ensure self-targeting (that is, onlythose in urgent need of a job take it, and assoon as they find better income opportunitiesthey will leave the program).

2. The labor intensity of projects is higher thannormal, although this may vary if the assetsbeing created have real value for the poor inthe area (for example, irrigation or road worksthat will benefit entire communities).

3. Where rationing of the public works schemeis required (for instance, where the demandfor work exceeds the budget available at the[low] wage level), the program should be tar-geted at the areas with the most people dis-advantaged by labor adjustment, as indicatedby a credible poverty impact map.

Source: Adapted from Ravallion 1998.

Local and Community EconomicDevelopment and Job-Creation Incentives

Community-based approaches are those wherecommunities—including local and municipal gov-ernments—participate in identifying, selecting,implementing, or monitoring programs designed tocreate employment or protect those who have lostjobs and incomes. The approach aims to buildcommunity partnerships to improve the businessenvironment, strengthen the local economy, andcreate jobs for displaced workers. It also helps inrebuilding the economic foundation and increases


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Where there ischronicunemployment, bothcommunityapproaches andpublic works canprovide elements ofactive and passivelabor marketsupport.

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citizen participation in local economic developmentefforts.

In some countries the employers remaining in thecommunity have received incentives to create newjobs. For example, in Cape Verde vouchers weregiven to private employers to provide on-the-jobtraining to employees retrenched as a result of pri-vatization. The employers were reimbursed 40 per-cent of the salary of a retrenched worker for up toa period of six months (Kikeri 1998). In Polandloans at prevailing interest rates were made avail-able to existing businesses to organize new employ-

Box 5.27: British Coal—Responding to Mine Closure

The coal-mining industry presents a chal-lenge when mine closure or work forcereduction is required. The geological dic-

tates of the industry mean that the closure ofmines leads to the concentration of redundancyin a few areas. In 1981 there were 211 collieries inthe United Kingdom, but this had shrunk to 17 by2001. Over the same period the number of work-ers employed in the industry fell from 279,000 tofewer than 10,000. In response, in 1984 throughthe National Coal Board, the government estab-lished a public sector job-creation agency for themining areas, British Coal Enterprise. BCE’scharge was to facilitate the economic regenera-tion of coal-mining communities.

BCE focused on the delivery of practical initiativesintended to stimulate regeneration of the coal fieldareas led by the private sector. The three mainactivities were outplacement services, businessfunding, and workspace provision. These activi-ties were intended to expand the prospects forthe labor market by lowering the threshold forbusiness entry and growth, and by promoting thedevelopment and expansion of skills.

The outplacement program helped about 60,000miners through one-to-one counseling withcareer consultants, and help with résumé prepa-ration and proactive job-search techniques.Some funding for retraining was also availablefrom British Coal.

The business-funding program aimed to supportfast-track financing. Loans of up to £25,000 weremade available to start-ups and new businesseswithin coal-mining communities, and larger start-ups or expanding businesses were able to applyfor larger venture capital investments of up to

£250,000. In all cases only business plans withconsiderable promise of growth were funded—not microenterprises employing one or two peo-ple. In many cases these start-ups or expandingbusinesses also made use of BCE’s managedworkspace programs. BCE also managed £3 mil-lion from other sources.

A central feature of BCE’s approach was to uniteoutplacement and funding by introducing man-aged workspaces or small-business incubators.BCE offered workshops and offices of varioussizes and types, as well as such shared servicesas secretarial support, photocopying, and fac-simile facilities. “Easy-in/easy-out” lease termswere designed to remove barriers to growth anddiversification for the nascent businesses. Theworkspaces made use of former British Coalpremises, redeveloping the existing infrastructureand so keeping the costs of conversion low.

In many cases the regeneration of existing facili-ties in derelict areas was the catalyst forincreased local economic growth. BCE investeda total of £101 million during its existence(1984–96) in more than 5,000 enterprises—there-by generating some 54,624 jobs (an average of11 jobs created per business). Overall, BCE esti-mated the investment cost per job created to be£1,384. About 56 percent of the jobs createdwere derived from business start-ups, and 44percent from business expansions. The managedworkshops operation led directly to the creationof some 16,200 jobs in more than 1,121 units,and itself became a viable commercial enterprise(that was subsequently privatized).

Source: Gore, Dabinett, and Breeze 2000; Tawney andLevitsky 2000.

ment places for at least 24 months. And inHungary, the employment fund gave grant aid toenterprises making investments that would employlong-term employed workers. This was, however,the most costly form of active labor program—about six times more expensive than individualizedtraining or self-employment assistance in terms ofcost per person reemployed (O’Leary 1995).

Typically, the implementing agency or other govern-ment representatives or contractor will help organizea broad-based community task force to conduct aneconomic assessment and planning effort “owned”by the community. Community leaders are invited toparticipate in a structured economic renewal pro-gram designed specifically to strengthen the localeconomy and create more employment and liveli-hood opportunities. Workshops are conducted over,for example, a six-month period, and residents learnthe principles of local economic development andare taught how to assess their community’s needs,write a local strategic plan, select and design proj-ects, and begin implementing them. Communityapproaches may be complemented and financed byother programs, such as regional development initia-tives, social funds, or labor funds.

Those approaches are particularly relevant where:

• The PPI plan produces significant employ-ment effects on single-industry towns (forexample, some ports).

• There is systemic and chronic unemploy-ment in the region.

• There are opportunities that will benefit thecommunity (for example, conversion ofbuildings into not-for-profit workspaces orpublic–private business incubators).

• The PPI plan leads to some resettlement ofstaff, perhaps because of the relocation ormerger of operating units.

Tools (on the CD-ROM)Terms of reference for a redeployment survey

Terms of reference: Turkey’s Labor Assistance Group(privatization social support project)


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Incubators can bringtogether workspaceand businessassistance in onelocation.

Simple buildingsand facilities can beused very effectivelyas workspaces.

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Job description for a labor redeployment manager

Sample worker survey

Sample questionnaire for counseled workers

U.S. Department of Labor adjustment model

Monitoring and evaluation performance measures forjob search assistance services

Additional material (on theCD-ROM)

Dar, Amit, and Indermit S. Gill. 1998. “EvaluatingRetraining Programs in OECD Countries: LessonsLearned.” The World Bank Research Observer13(1)79–101.

Fretwell, David H. 2002. “Mitigating the SocialImpact of Privatization and EnterpriseRestructuring.” Working Paper. World Bank,Human Development Sector Unit, Europe andCentral Asia. Washington, D.C.

Web SitesCommittee of Donors for Small Enterprise

Development: www.ilo.org/employment/sedonors.(The site provides access to guidelines on financialintermediaries and business development servicesfor small enterprises.)

The European Database of Business Incubators:europa.eu.int/comm/enterprise/bi. (Site providesaccess to information on incubators in 28 Europeancountries, case studies, benchmarking information,and a database of nearly 950 business incubators.)

International Labour Organisation’s InternationalTraining Centre: www.itcilo.it (For courses onenterprise development.)

International Labour Organisation’s Small EnterpriseDevelopment: www.ilo.org/dyn/empent/empent.portal?p_prog=S.

National Business Incubator Association:www.nbia.org. (This site provides informationabout the organization’s publications on businessincubation and about annual conferences. NBIAprovides materials and experiences from developingas well as industrial countries.)

Polish Railway Retraining and Re-employmentAgency: www.kaaz.pkp.pl/en/kaaz.html. (An exam-

ple of an implementing agency for a labor pro-gram.)

PPIAF: www.ppiaf.org. (Site provides access to otherPPIAF toolkits, as well as information about PPIAFand how governments and other agencies canaccess PPIAF resources to accelerate privatization.)

U.S. Agency for International Development microen-terprise site: www.usaidmicro.org. (Site includespapers on the use of vouchers in the delivery ofsmall business development services.)

Webcast presentation on the voucher program inKenya’s small business development plan:www.worldbank.org/wbi/B-SPAN/sub_kenya_voucher.htm.

World Bank Social Funds site:www/worldbank.org/socialfunds.

World Bank: www.worldbank.org. (The site’s searchengine can be used to obtain the Bank’s latest oper-ational policies on involuntary resettlement.)

Other Material and SourcesCommittee of Donor Agencies for Small Enterprise

Development. 2001. Guiding Principles forBusiness Development Services. Available atwww.ilo.org/employment/sedonors.

Fay, Robert G. 1996. “Enhancing the Effectiveness ofActive Labor Market Policies: Evidence fromProgram Evaluations in OECD Countries.”Organisation for Economic Co-operation andDevelopment Occasional Paper 18. Paris.

Hansen, Gary B. 2001. A Guide to WorkerDisplacement. Some Tools for Reducing the Impacton Workers, Communities and Enterprises.Geneva: International Labour Office.

Harper, Malcolm, and Gerry Finnegan. 1998. Valuefor Money? Impact of Small EnterpriseDevelopment. London: Intermediate TechnologyPublications.

IFC (International Finance Corporation). 2002.Handbook for Preparing a Resettlement ActionPlan. Washington, D.C.

Lalkaka, Rustam. 1997. “Lessons from InternationalExperience for the Promotion of BusinessIncubation Systems in Emerging Economies.”


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Available at www.unido.org/userfiles/PuffK/lalkaka.pdf.

Ledgerwood, Joann. 1998. Microfinance Handbook:An Institutional and Financial Perspective.Washington, D.C.: World Bank.

NBIA (National Business Incubator Association.)1995. A Comprehensive Guide to BusinessIncubation. Athens, Ohio.

O’Leary, Christopher J. 1995. “PerformanceIndicators: A Management Tool for Active LabourProgrammes in Hungary and Poland.”International Labour Review 134(6):729–51.

Robinson, Marguerite. 2001. The MicrofinanceRevolution: Sustainable Finance for the Poor.Washington, D.C.: World Bank.

EMPLOYEE SHARE OWNERSHIPEmployee share ownership can be used as part ofthe PPI program, as an element of compensation,as an inducement to remain with the operationpost-PPI, or as part of an employee buyout. Thissection outlines those potential roles.

Employee share ownership often has multiplegoals, centered around:

• Concepts of redistribution through gainsharing of the wealth generated from thePPI enterprise.

• Reduction of the principal-agent problem(where managers behave in ways that hurtthe interests of the firm and its owners).When workers and managers share in theprofits of the firm there is likely to be closeralignment among the work force and man-agers and the owners of the enterprise (theshareholders).

• Reducing opposition to PPI by enlisting sup-port from workers.

In work force restructuring, employee share owner-ship can be used in three ways:

1. As a form of compensation to displacedworkers. Instead of cash, they can receiveshares of the enterprise.

2. As part of a new incentive or reward pack-age for workers who remain with the enter-prise.

3. As the basis for management employee buy-outs or employee buyouts of units of theenterprise.

Compensation Packages forRedundant WorkersAs part of a compensation package, share transfersare probably best viewed as a supplement to,rather than a substitute for, severance or earlyretirement. This is true for three reasons:

1. As a social safety measure, share transfersare problematic because the benefits thatworkers receive will depend on movementsin share prices. Those movements in turndepend on uncertain micro- and macroeco-nomic factors. Implementing agenciesshould exercise considerable caution if theywish to promote share ownership as a com-pensation mechanism; dramatic falls inshare prices during 2001 are reminders ofshare price volatility. Although in the pastsome workers have done very well fromshares, these successes have been in sec-tors—such as telecommunications—thathave recorded very high levels of growth fora period. A strategy that provides a largeproportion of workers’ post-PPI compensa-tion and safety net in the form of shares istoo risky an investment strategy—particular-ly for older workers. Governments, howev-er, have sometimes offered shares backed bya guarantee to workers.

2. Many developing countries have relativelyweak institutional environments for theircapital markets (that is, uncertain propertyrights, limited protection of minority share-holders, poor share registration and deposi-tory systems, and weak regulation and over-sight). Combine that environment with awork force that has little experience of shareownership, and there are significant risks ofgovernance failure and abuse.


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3. If only a limited number of shares are avail-able for allocation to employees, many man-agers would prefer to see those allocated tothe remaining work force as a performanceincentive rather than to departing workers.

Shares as an Incentive or RewardThe use of share transfers or discounts as an incen-tive to workers is a common feature of infrastruc-ture PPI through privatization (see box 5.28). In ananalysis of 630 privatizations of infrastructure,energy, and other enterprises, conducted by initialshare offer in more than 59 countries, more than90 percent of the transactions transferred shares toworkers. On average 7.6 percent of the shares weresold to employees, often on favorable terms (Jonesand others 1999). Data for the individual enterpris-es is available at http://facultystaff.ou.edu/M/William.L.Megginson-1/.

Some countries have established the concept orprinciple of employee share transfers in privatiza-tion laws. For example, Article 14(4) of Nepal’sPrivatization Act 1994 states that “His Majesty’sGovernment shall make available to the workersand employees of an establishment which is to beprivatized some of its shares free of cost or at asubsidized price.” In Malawi the governmentencourages employees in privatized companies tobuy shares in the form of an employee or manage-ment buyout. In such cases the privatization com-mission may offer a discount of 20 percent. Inaddition employees may be allowed to pay fortheir shares by deferred payment terms or througha privatization fund managed by the Investmentand Development Bank of Malawi, as part of afinancing agreement between that bank and theEuropean Investment Bank. (The fund was so pop-ular that the money originally allocated wasexhausted within a few months.)

Employee Share Ownership Plans An employee share ownership plan (ESOP) is amechanism that enables and facilitates employeeownership in a company. As some of the examples


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Box 5.28: Shares as Incentives in Infrastructure PrivatizationThailand power: Privatization of the RatchaburiElectricity Generating Holding Public CompanyLtd. provided for 45 percent of shares retainedby Electricity Generating Authority of Thailand(EGAT), 40 percent of shares offered to the publicthrough an initial public offering (IPO), and 15percent offered to employees through an ESOP.The employees received shares at par value (10baht/share) compared with the IPO price of 13baht/share. The aggregate value of the sharesoffered to the EGAT employees was no greaterthan three times the monthly wage bill for allEGAT employees (Bhoocha-oom 2001).

Bolivia rail: In the concessioning of Bolivia’s railnetworks, the ministry decided to use shareoptions as a means to minimize risk and promoteshare ownership among workers. To access theoption, workers had to purchase one share at apreestablished book value share price of US$20.The option contract gave workers the right tobuy shares owned by the state or by publicshareholders at book value, up to a total of theirsocial benefits (one monthly wage per year ofwork). The option could be exercised anytimeduring a period of one or two years after theclosing of the transaction with the private opera-tor (it varied among companies as a result ofnegotiations). However, after the opening of theeconomic envelopes (financial tenders), the offerfor the newly issued shares in the case of theeastern network was only 4.6 percent abovebook value and for the Andean network it was54.3 percent below book value. Therefore, mostof the workers decided not to exercise theiroptions to buy additional shares (Valdez 2001.

Italy’s Enel: The first stage of privatization of EnelSpa, the publicly owned Italian electricity sectoroperator, took place in November 1999.Approximately one-third of the capital stock ofthe company was floated on the Milan and NewYork stock exchanges. The offer was well sub-scribed and included share requests to 70,302 ofthe company’s employees (85 percent of the totalgroup work force as of June 1999). In addition,the three main sectoral unions had promotedestablishment of an association of employeeshareholders (European Industrial RelationsObservatory On-line [EIROnline]). Available atwww.eiro.eurofound.ie/).

Chile airline and power: The second phase ofChile’s privatization program included a programthat offered low-risk share ownership. As a gen-

eral rule, workers were offered 5 to 10 percent ofthe company’s shares at a discounted price. Topay for the shares workers were allowed to bor-row up to 50 percent of their severance pay, withthe company promising to repurchase the sharesat retirement at a value at least equal to the for-gone severance payments. Therefore, employeescould buy shares below market price with nocash outlay, with no risk of loss, and a potentialfor gain if the shares increased in value. Theresulting enthusiasm among workers led, insome cases, to workers becoming the largestsingle shareholder group via personal borrowingsused to expand their stake. This was the case inthe privatization of LAN Chile (the airline),Metropolitan Chilectra, and the Steel Companyof the Pacific (Gates and Saghir 1995). In privatiz-ing ENDESA, the electricity holding company,broader-based share ownership was encour-aged, and the government not only placed 30percent of the shares on the local stock marketfor the general public but also reserved sharesfor the work force.

Mexico telecommunications: To win overemployees to the privatization of Telmex, thegovernment offered them eight-year loans onfavorable terms from a government bank toenable them to purchase 4.4 percent of its classA shares for a total of US$324 million. The bankheld the shares in trust to ensure payment of theloan. The strategy was beneficial for workers: by1995 employees had gained some US$1 billionin increased share value (Tandon 1995, Welleniusand Stern 1994).

Ireland telecommunications and post: In July1998, 11,000 employees were given a 14.9 per-cent stake in Telecom Eirann—Ireland’s state-owned telecommunications company, through anESOP, as part of an agreement that included2,000 voluntary redundancies and changes tolong-established working practices, and that wasmeant to help prepare the company for its sub-sequent privatization in 1999. Previous ESOPs instate enterprises (airline and electricity) had beenlimited to about 5 percent of the shareholding,but the 14.9 percent Telecom Eirann model set aprecedent that was adopted for other infrastruc-ture and utility firms, including the postal service,An Post EIROnline. Available at www.eiro.eurofound.ie/.

(Box continues on the following page.)

in box 5.28 illustrate, ESOPs now form part of thestructure of privatization programs for infrastruc-ture enterprises in developing countries. ESOPs areusually:

• Structured as a separate legal entity (often atrust) that purchases shares held on behalfof the employees, with a defined mechanismthat describes how shares are distributed.

• Designed to take advantage of national taxlaws so that the plans are tax efficient bothfor employees and for the companies. Forexample, the ESOP for Kenya Airways priva-tization was structured as a unit trust for taxreasons (Megginson, privatization database).

• Established by the enterprise, which con-tributes either new shares of its own equityinto the ESOP or cash to buy existingshares.

Establishing a formal ESOP is relatively complex(see box 5.29) and requires independent profes-sional advice. Except in the case of employee ormanagement employee buyouts of infrastructureunits, ESOPS normally provide a level of owner-ship of 5 to 15 percent. Higher levels of ownershipoften entitle representation on the board, but thismay deter investors if they believe that furtherlabor adjustment is essential after PPI is settled.


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Employee shareownership can beused ascompensation, as anincentive, or as ameans for theemployees topurchase significantblocks of shares.

Shares transfers arebest seen as anaddition to, ratherthan a substitute for,voluntary departureor early retirementcompensation plans.

Shares transfers arenot the bestmechanism forprimarycompensation totransferred workersbecause of the riskimplicit in shareownership.

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Cruz, Wilfred. 2001. “Addressing Labor Concernsduring Privatization: Lessons from theMetropolitan Waterworks and Sewerage System(MWSS), Manila, Philippines.” PPIAF case study.World Bank, Washington, D.C.

Gates, Jeffrey R., and Jamal Saghir. 1995. “EmployeeStock Ownership Plans (ESOPS): Objectives,Design Options and International Experience.”World Bank CES Discussion Paper Series 112.Washington, D.C.

Ray, Pranabesh. 2001. “HR Issues in PrivateParticipation in Infrastructure: A Case Study ofOrissa.” PPIAF case study. World Bank,Washington, D.C.

Valdez, Jose. 2002. “Case Studies on HumanResource Issues in Private Participation inInfrastructure in Bolivia.” PPIAF case study. WorldBank, Washington, D.C.

Web SitesCapital Ownership Group:

www.capitalownership.org/. (This is the site of athink tank on ownership issues funded by the FordFoundation.)

European Industrial Relations Observatory Online:www.eiro.eurofound.ie/. (This site monitors various

Box 5.28 (continued)Argentina water: The Argentine government builtworkers’ support for the Buenos Aires water con-cession by pledging to transfer to them 10 per-cent of shares in the new water company whenthe dividends paid to the government for theseshares covered their book value (US$12 million)(Alcázar, Abdala, and Shirley 2000). Similar pro-grams were adopted in other Argentine enterpris-es. In the case of Argentina Gas (GdE), however,given the size of GdE relative to the number oftotal employees, the government decided to giveless than 10 percent of the shares; employeeswere offered 3 to 5 percent because of the largesize of the company relative to the number of theemployees (Shaikh 1996, p. 4).

Manila water: In the concessioning of MWSS theconcession contract required that the conces-sionaire grant every regular employee an annualstock (share equity) purchase bonus equal to notless than the last basic monthly salary due thatyear until all of a block of 6 percent of shares setaside for employee share ownership was fullysubscribed (Lazaro n.d.; Cruz 2001)

Senegal electricity: In 1999 10 percent of theshares were offered for sale to workers.

Kenya Airways: In the 1996 privatization ofKenya Airways, the Dutch airline KLM becamethe largest single strategic investor with a share-holding of 26 percent, but 3 percent of the airlinewas also reserved for staff at the float on theNairobi Stock Exchange.


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Shares are commonincentives inprivatization plans.

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Box 5.29: Checklist for Successful ESOPs

If some form of ESOP is to be established,here is a checklist of key issues that theimplementing agency should ensure are being

followed.

Participation Issues• All employees should be able to participate,

subject to a qualifying length of service suchas 12 months.

• There should be no great discrepancy betweenmanagement’s stake and that of the rest of thework force.

• There should be similar voting rights.

• There should be similar dividend rights.

• Use of an employee trust aids flexibility andhelps sustain the plan for the longer term.

• Transparency—particularly regarding the firstallocation, where it is important that everyoneknows broadly who is getting what.

• A “free share” allocation, even quite modest, isusually essential to get everyone in as a share-holder.

• Wages and other benefits (for example, pen-sions) should not be sacrificed for a sharescheme.

• It is usual for employees leaving or retiring tohave to sell their shares to the trust.

• The trust will be run by trustees and a bal-anced make-up of the trustees avoids its beingdominated by any one faction—for example,two management representatives, two workforce representatives, and one independenttrustee agreed on by the other trustees wouldstrike a good balance.

Management Issues• The engagement of a specialist adviser, famil-

iar with ESOPs, trust law, and taxation, will beessential.

• A participative style of management is adoptedto make the best of the plan.

• Communicating with the work force before,during, and after the plan has been implement-ed is vital to gaining their initial and ongoingsupport, thereby creating the necessary long-term enthusiasm.

• Plans should be subject to full consultationwith the work force.

• There is a need for culture change on bothsides (that is, management and the workforce), but it should be led by management.

• Employees need to understand the differencebetween their rights and duties as employeesand their more limited rights as shareholders—

an important part of the communicationsprocess, particularly around the time that thedeal is completed.

• In all of the concerns about the work force, it isimportant to ensure that management hasadequate incentives and that these arrange-ments are transparent. Often, an appropriateshare option plan is one that allows employeesto acquire additional shares when they achieveagreed targets, both corporate and individual,over, say, a three-year period.

• Management also still has the right to manage.

Structural and Technical Issues• What is the source of the shares (existing gov-

ernment shares, newly issued shares)?

• What are the eligibility rules (how many sharesto offer, when, and at what price)?

• What constitutes compliance with national leg-islation?

• Wages and conditions of employment shouldbe kept separate from share ownership.

• Employee representatives (including tradeunionists) should have access to independentprofessional advice about the plans.

• It is important to build in features that will pro-mote the sustainability of the plan, such asleavers must sell their shares, use of trust.

• There is nothing wrong in principle withemployees being asked to put their ownmoney in—some employees will be morefocused on their jobs if they have their ownmoney at risk.

• For distribution of shares it is best to use tax-efficient share plans where available.

• Internal market: some of the work force willwant to buy or sell some shares, and this isusually allowed in private companies, on a“matched” basis when the scheme has beenrunning for a while.

• Depending on the size of the stake theemployees have, they may be entitled to lookat having a representative on the company’smain board—as a rule of thumb, a holding inexcess of 25 percent?

• If the ESOP is put in place before PPI, shouldthe ESOP offer existing employees the possi-bility to cash in at the time of privatization orshould it be structured as a long-term, per-formance-related incentive plan for theemployees who best respond to the transitionto private management? (The answer is proba-bly both, and this will have implications forhow the ESOP is eventually put in place.)


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An ESOP easesemployee shareownership. Acommon model is atrust with well-defined rules onshare distribution,transfer, andbuyback.

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aspects of labor relations in Europe, includinginformation on share ownership.)

National Center for Employee Ownership:www.nceo.org

Ohio Employee Ownership Center:http://dept.kent.edu/oeoc/AbouttheOEOC/AboutTheOEOC.htm. (This center, based at a uni-versity in the United States, has an internationalprogram.)

Rapid Response: http://rru.worldbank.org. (This siteis a gateway to a range of information on infra-structure, privatization, and private sector develop-ment policies.)

William Megginson. http://faculty-staff.ou.edu/M/William.L.Megginson-1/ (This home page forProfessor Megginson has a number of papers onprivatization to download, as well as databases giv-ing information on shares offered to employees ininitial privatization public offerings, and longitudi-nal measures of share ownership in privatizedenterprises worldwide.)

Other Material and SourcesBinns, David. No date. “Privatization through

Employee Ownership: Learned From theInternational Experience.” Available atcog.kent.edu/lib/Binns%20-%20Privatization%20Through%20Employee%20Ownership.htm.

Brzica, Dane. No date. “Privatization in Slovakia: TheRole of Employee and Management Participation.”International Labour Organisation Working PaperIPPRED-12. Geneva. Available athttp://www.ilo.org/public/english/employment/ent/papers/ippred12.htm.

Cliento, Marco. 1998. Practice and Models ofFinancial Participation of Employees in theCompanies of Europe: A Comparative Analysis.Rome: Institute of the Study of Innovation andChanges in Production Processes and Labour(SINDNOVA).

Degeorge, Francois, Dirk Jenter, Alberto Moel, andPeter Tufano. 2000. “Selling Company Shares toReluctant Employees: France Telecom’sExperience.” Working Paper 7683. Cambridge,Mass.: National Bureau of Economic Research.Available at http://papers.nber.org/papers/W7683.

Jones, Steven L., William L. Megginson, Robert C.Nash, and Jeffrey M. Netter. 1999. “Share Issue

Privatization as Financial Means to Political andEconomic Ends.” Journal of Financial Economics53(2):217–53.

May, Karen. 1998. “Conversion to Worker-Owned orCooperative Businesses through Privatization:International Experience and the Case of PuertoRico.” Available at cog.kent.edu/lib/May.htm.

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This section introduces the different forms ofengagement and the sequencing of activities. It thendiscusses how to select different approaches andsequence the labor engagement process within theoverall PPI transaction. It concludes with a briefdiscussion of the resource needs involved.

Fundamentals of EngagementMany stakeholders will be involved during thecourse of a PPI transaction. Government is itself avital stakeholder, as well as the principal decision-maker at key approval steps in the PPI process andthe labor program. Investors, consumers, and regu-latory authorities are stakeholders, too. The widerprocesses of public policymaking and strategiccommunication for privatization and PPI aredescribed in material provided in the accompany-ing CD-ROM.

The CD-ROM contains:

• Worksheets for conducting stakeholder analysis

• Terms of reference for a stakeholder analysis.

As described in module 1, the starting point forengagement is a thorough stakeholder analysis.This module focuses on the processes of engage-ment with the key actors with whom governmentneeds to interact in designing a labor program, inparticular labor and trade unions.

Forms of EngagementThere are four forms of engagement that can applyin labor restructuring, namely:

• Communication

• Consultation

• Negotiation

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6Engagingwith Stakeholders

Infrastructure services are vital to economic and social development.Many stakeholders therefore have an interest in the process and out-comes of private participation in infrastructure (PPI). This module

guides the implementing agency in involving stakeholders, particularlyworkers and trade unions. Directions to more general resources on stake-holder consultation and communications are provided at the end of themodule.

MODULE

• Cooperation.

Communication is mainly a one-way transfer ofinformation from government, the implementingagency, or redeployment counselors to the stake-holder audience.

Consultation and negotiation are both two-wayprocesses, but the expectations of outcomes arevery different. Participants in consultation expecttheir views to be heard and taken into account,whereas those in negotiations expect that mutuallybinding results will be the outcome.

Cooperation can be seen as a more mature form ofengagement where both sides expect to participateactively and are committed to win–win outcomes.That distinguishes it from negotiation, which canbe adversarial and can yield win–lose outcomes.Cooperative approaches often have longer-termand broader perspectives than does negotiation.

Communication, consultation, and cooperation inthe labor relations context align well with the threeforms of engagement between citizens and govern-ment recognized by the Organisation for EconomicCo-operation and Development (OECD) (see box6.1). Negotiation is a distinct form of engagementthat arises from the contractual employer–employ-ee relationship between government and the workforce. (Subsequent sections of this module deal inmore detail with each of the four levels of engage-ment.)

The OECD PUMA program has reports on how to

engage with citizens.

Designing an Engagement StrategyThe engagement strategy sets out which of the var-ious forms of engagement are to be used, andwhen. For the purposes of labor restructuring,which is the focus of this Toolkit, the main stake-holder groups are employees and unions, govern-ment, and investors—and the views of all need tobe heard. It is, however, rarely the case that allstakeholders must be dealt with at the same time.An engagement strategy (see table 6.1) may there-fore envisage a series of actions using all four

forms of engagement. For example, the strategymight resemble the following:

• Communication with employees and unionson the proposed PPI transaction and theneed for work force restructuring.

• Consultation with employees, unions, andinvestors on restructuring approaches,including severance packages and proce-dures.

• Carrying out negotiations among govern-ment, workers, and investors prior to PPI onissues such as labor contracts, pensions, andworking practices. If there is an economic


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Consultation andnegotiation are verydifferent processes.

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Box 6.1: OECD—DefiningGovernment–Citizen Relationships inPolicymaking

An OECD study of the mechanisms ofinteraction between government and citi-zens in policy design, implementation,

and evaluation recognized three forms ofengagement: information, consultation, andactive participation. The working definitionsadopted in the study recognized a key role forgovernment in setting the boundaries forengagement, and noted that the final decision-making responsibility remained with govern-ment:

• Information—a one-way relationship in whichgovernment produces and delivers informa-tion for use by citizens. It covers both “pas-sive” access to information upon demand bycitizens and “active” measures by govern-ment to disseminate information to citizens.

• Consultation—a two-way relationship inwhich citizens provide feedback to govern-ment. It is based on the prior definition bygovernment of the issue on which citizen’sviews are being sought and requires the pro-vision of information.

• Active participation—a relationship basedon partnership with government in which citi-zens actively engage in the policymakingprocess. It acknowledges a role for citizens inproposing policy options and shaping the pol-icy dialogue, although the responsibility forthe final decision or policy formulation restswith government.

Source: OECD 2001.

regulator for the sector, it too may beinvolved.

• Identifying opportunities for cooperationamong business, unions, and local govern-ment in monoindustrial towns sufferingfrom a major loss of employment.

One particular risk is that of premature activities.Hasty and ill-prepared announcements, press con-ferences, and newspaper or radio interviews candamage the credibility of everyone in governmentand so delay PPI if they expose uncertainty onkey issues or weaknesses in the government’s“story.” The implementing agency should be ableto advise government officials and politiciansabout when to sequence engagement events and

the key messages to be conveyed. Certainly thebasic rationale for work force restructuring mustbe clearly defined and understood before any gov-ernment official or politician approaches TV,radio, or newspapers.

The actual process of engagement is likely to havestops and starts and periods of progress and set-back. It may not always be possible to follow aprecise, neatly sequenced plan. As the case of Côted’Ivoire Railways presented in box 1.14 in module1 illustrates, a commitment to engage on workforce restructuring issues can lead to mutuallyacceptable solutions and improved outcomes forthe implementing agency, workers, and otherstakeholders.

Engaging with Stakeholders

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Hasty or ill-preparedevents can bedamaging.

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Table 6.1: Outline of an Engagement Strategy (Illustration)

Phase in work force restructuring (sequencing)Type of Initial Monitoring and engagement assessment Design Implementation evaluation

Communication • Stakeholder • Media audit • Press briefing • Monitoring of analysis • Opinion polls and releases attitude

• Opinion polls • Focus groups • Small-group changes• Focus groups meetings • Follow-up

• Video opinion polls• Progress reports

Consultation • Stakeholder • Visit for trade union • Ad hoc • Follow-up meet-analysis officials to another meetings with ings or surveys

• Draft policy infrastructure SOE union officialspaper and that has been meetings through PPI (government • Forums to gather policymakers) stakeholder views

Negotiation • Stakeholder • Set up joint task • Task force • Task force analysis force (enterprise, meetings review meetings

• Review of union, government) • Bargaining existing • Design and meetingsnegotiating negotiate bargaining framework arrangements

Cooperation • Stakeholder • Set up joint task • Task force • Task force analysis force (enterprise, meetings review meetings

• Identification of union, • Finalize issues • Possibly further issues suited government) for cooperation cooperation to active involve- • Refine issues and begin imple- arising out of ment of stake- identification mentation of earlier effortsholders arrangements

Acquiring Engagement SkillsEffective engagement requires a particular mix ofskills. Where government does not have these inhouse, some skills can be acquired through subcon-tracting to specialist providers or consultants. Skillsand capacity in opinion polling, conducting focusgroups, copywriting, media design and commis-sioning, and strategic advice can all be brought in.

Other skills, however, may have been developed inkey people through training. As part of the com-munications process the senior manager in theimplementing agency or senior government offi-cials may need to communicate directly and credi-bly with workers or via radio or TV. Personal skillsdevelopment for these circumstances may be veryvaluable. Negotiation training for key people canalso have significant financial, strategic, and tacti-cal benefits.

In some cases, it is more a question of acquiringthe right person than the right skills. In Italy the“right” minister was able to be credible with tradeunions (box 6.2).

The implementing agency can budget and securefinancing for the government’s side of the engage-ment: consultants and advisers, opinion pollsters,stakeholder research and analysis, and media pur-chase. Donor funds are an important source offinance for these activities and resources, but build-ing the capacity of other parties in the engagementshould also be encouraged.

In many developing countries, for example, thereare no effective trade unions or the existing oneshave limited capability. Both the InternationalLabour Organisation (ILO) and a number of inter-national trade unions have programs designed tostrengthen the capacity of trade union organiza-tions in developing and transition countries.Although there are few concrete examples, thevalue of capacity building is increasingly recog-nized. In India the ILO helped trade unions in thetelecommunications sector develop strategies forreskilling in the face of technological change. InRussia trade unions were seen as having an impor-tant role in coal sector restructuring. Over a five-year period, financing from a World Bank technicalassistance loan allowed the trade unions to con-duct regular seminars on topical issues in sectorrestructuring (for example, on relations with pri-vate employers), to maintain legal services in thecoal regions, and to carry out monitoring andother activities relevant to sector restructuring(Artemiev and Haney 2002).

Where workers and trade unions are weaklyorganized, one approach is to ignore capacitybuilding, exploit that weakness, and use coercionto accelerate work force restructuring. Thisapproach, however, is embedded in a win–losemindset. Cooperation, for example, assumes muchmore of a partnership or win–win approach.Attention to capacity building is therefore mostlikely to be adopted in the same circumstances asthose in which cooperation is the appropriateengagement approach.

COMMUNICATIONThe most basic issue for implementing agencies inmanaging the process of labor adjustment in PPI isto communicate effectively with all stakeholders.

ObjectivesGood communication with workers and unions isimportant for successful PPI. Get it right and, allother things being equal, PPI can be relatively


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Skills may beacquired bysubcontracting or bytraining key people.

The ILO hassupported capacitybuilding in nationaltrade unions indeveloping andtransition countries.

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Box 6.2: Italy—Ministerial ChangeFacilitates NegotiationsThe privatization of Italy’s Enel, the state-ownedelectricity giant, was opposed by unions untilthe government decided to propose a cabinetreshuffling and select a former leader of theCommunist Party in parliament as minister ofindustry. The new minister, who had close tiesto the unions and some credibility with them,helped the unions to accept a deal, acting as amediator and broker between the parties. Theprivatization that followed the agreement in1999 was the largest initial public offering thatever appeared in the marketplace.

Source: World Bank 2002.

smooth. Get it wrong and PPI can be delayed orpostponed indefinitely.

The following are common objectives of a commu-nication program:

• Build broad public understanding of andconsensus for the need for reform

• Explain the rationale for work force restruc-turing and government’s efforts to mitigateadverse impacts on workers

• Influence and win support from a narrowgroup of key decisionmakers to approve poli-cy, new legislation, or a restructuring strategy

• Educate all parts of government (ministers,officials, enterprise managers) to ensure acommon understanding of the rationale,processes, and procedures of work forcerestructuring in PPI

• Inform workers and others of the proceduresfor restructuring, severance, and redeployment

• Promote the government’s approach topotential PPI investors

• Inform all stakeholders on progress

• Mitigate specific risks to the project thatresult from action or inaction by key stake-holders.

At a minimum, the implementing agency mustensure that employees and their representativesknow what decisions have been made on workforce restructuring, and why. They need to knowthe implications for them and any actions they musttake. Poor (or late) communication of informationabout work force restructuring can lead to misun-derstandings, rumors, low morale, and poor per-formance within the enterprise. Moreover, it canlead to breaches of law in countries where employ-ees have a legal right to be informed about plans todownsize or change their terms of employment.

Preparing a Communication PlanThe communication plan must provide a timetableof activities and indicative estimates of the costs

involved. Costs vary greatly from country to coun-try and should be calculated at an early stage. (Achecklist on the CD-ROM provides a list of itemsfor which costs need to be determined.)

Checklist for costing a communications program.

In addition to timing and resource questions, acommunications plan must consider five elements:

• Audience—to which audience(s) shouldcommunications be addressed?

• Specific objectives—what specific behaviorsor changes should the communication leadto or avert?

• Message—what messages will encourage thedesired behavior?

• Communication channels—what channelsare available and effective?

• Monitoring and evaluation plan—how willthe success of the communication be moni-tored and evaluated?

A methodology for bringing those five elementstogether into a practical communication plan isdescribed by Cabanero-Verzosa and Mitchell(2002) on the Toolkit CD-ROM. That approachuses a standard template (illustrated in table 6.2)based on identifying stakeholders (the audience)and sharply defining the communication objectives.

Cabanero-Verzosa and Mitchell 2002.

Audience

Each of the key stakeholder groups identified bythe stakeholder analysis should be included in thecommunications plan. Communications to otherstakeholders may also be useful but should not dis-tract from or compromise the program of commu-nication to key stakeholders.

Specific Objectives

The specific objectives should be defined as tightlyas possible so that it is clear what is wanted fromthe communications. For example:


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Clearly definedobjectives areessential.

Employees mayhave a legal right tobe informed orconsulted on workforce restructuring.

There are five keyelements in acommunicationplan.

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• “Ministers and officials in the sector min-istry to know that downsizing by 15 percentwill reduce government subsidies by theequivalent of $x million next year and willfacilitate the PPI transaction, and that newwork practices introduced over the last fiveyears mean there will be no adverse impacton service level and quality.”

• “Members of the council of ministers toapprove the overall work force restructuringstrategy by a specified date.”

• “Leaders of the three main trade unions toagree to participate in consultations onwork force restructuring.”

• “All workers, including those in distantregional offices, to be aware of the sever-ance options open to them by a specifieddate.”

The objectives also provide the basis for subse-quent monitoring and evaluation, which can thencheck whether the communications have producedthe desired effects.

Designing the Message

Designing the message requires careful preparationbecause when the message is disseminated widely,it cannot easily be withdrawn.

Stakeholder analysis allows the implementingagency to disaggregate broad groups and betterunderstand their concerns. This allows for mes-sages to be fine-tuned and couched in terms rele-vant to different subgroups or audiences. Forexample:

• Unskilled workers may need to know thatthat “government is offering a generous vol-untary departure plan for unskilled workersbecause new technologies have meant thatthere are fewer unskilled jobs today andthere is no guarantee of employment forunskilled workers tomorrow.”

• Skilled engineers and accountants may needto know that “the government is on track tobring in a PPI investor within two years, withnew investment equivalent to $x million.Demand for the enterprise’s services are fore-cast to grow significantly. Skilled staff mightbenefit from staying on to see what new jobopportunities and freedoms PPI can offer.”

In table 6.2 these differing messages are called“take-away” messages, to emphasize that theyneed to focus on the specific concerns of eachstakeholder group and not on a vague and unfo-cused government desire to tell people about itswork force restructuring plans.

To be credible, “take-away” messages need to bebacked up by credible supporting evidence. Mere


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Just as stakeholderanalysisdisaggregatesstakeholders intogroups,communicationmessages need tobe tailored for eachof those groups.

“Take-away”messages reflect thespecific concerns ofstakeholder groups.

Messages need tobe supported bycredible evidence—and this may taketime to acquire.

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Table 6.2: Communications Plan Template

Overall engagement objective______________________________________________________________________

Specificobjective Message Method of

Audience (change Supporting Communication monitoring (stakeholder in stakeholder Take-away data and channels and group) behavior) message evidence and media evaluation

Group A

Groups B, C, and so forth

Source: Adapted from Cabanero-Verzosa and Mitchell 2002.

assertions by government or the implementingagency will not be enough. Indeed, they could wellbe counterproductive; telling workers thatretrenchment will open up new opportunities forthem without providing evidence will only rein-force suspicions. Collecting, organizing, and pre-senting the supporting evidence may be very timeconsuming, so the timetable and work plan need toschedule the preparation of this evidence at anearly stage. Among the main evidence to be gath-ered is the following:

• Benchmark data on labor productivity,which is one of many indicators of over-staffing

• Independently commissioned cost-benefitanalyses of PPI, including impact on efficien-cy, investments, employment, and fiscal mat-ters

• Data on the financial and economic costs ofmaintaining state-owned enterprises

• Data on enterprise debt and pension planliabilities

• Data on enterprise subsidies expressed interms of proportions of total governmentexpenditure or converted into measures

• Data on employment trends within thesector.

Effective communications should not be confusedwith propaganda or “spin.” Although it is oftennecessary and legitimate to present the case for PPIand to detail any changes—such as work forcerestructuring—associated with it, it is just asimportant to give the bad news as well as thegood. The whole process can be undermined byloss of trust if stakeholders lose confidence in theaccuracy and honesty of what they are told.

Delivering the Message

Senior managers and ministers need to deliver mes-sages themselves in face-to-face meetings. Whenwritten information is provided it should be pre-sented in the appropriate language and in waysthat reach all who are entitled to it—and that

means taking into account the particular needs ofdifferent groups of workers. A note on the CD-ROM (“Do’s and Don’ts of Communicating withWorkers”) gives some practical tips on how to use

various communications tools.

Checklist of “do’s and don’ts” for communicating

with workers.

The implementing agency can use a variety ofchannels for delivering messages. A media auditcan be commissioned to provide factual informa-tion on alternative media and channels of commu-nication. The audit can help the implementingagency select among various channels (table 6.3),some of which are also relevant to consultation,negotiation, and cooperation.

As table 6.3 shows, a variety of channels can beused. In rough order of effectiveness these channelsare:

• Small-group meetings where officials cananswer worker’s questions firsthand. Athousand workers can be addressed in 10small groups of 100 people each, and theactivity can be concluded in a few days.

• Meetings where the main presenters are“expert witnesses” credible to the audience.In the labor context, this often means work-ers who have lived through PPI elsewhereand so can speak with authority.

• Virtual meetings with these expert witnesses,through a nonpropagandistic video in whichthose workers describe their experiencesbefore, during, and after PPI. In some coun-tries useful videos are available, and makingone can be a cost-effective option (see theCD-ROM note on preparing videos).

• Meeting with colleagues who have seenreform firsthand, ideally coworkers whohave toured a PPI operation and spoken tothe workers there.

• Personalized printed material, such as per-sonal letters to individual workers or work-er families, delivered with paychecks or sentto worker’s homes.


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Visits allowstakeholders toexperience the realsituation forthemselves.

Effectivecommunication isnot propaganda.

Video presentationsof workers’ viewsare powerful toolsfor communicatingwith other workers.

Small-groupmeetings withpresentations byexperienced workersare the key toeffectivecommunications andconsultation.

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• Impersonal but detailed printed materialdescribing, for example, redundancy, coun-seling, and retraining procedures in sharpdetail.

• General radio or television advertisements.

• Impersonal general printed material, such asposters.

The best medium is the one with the most impact,so face-to-face meetings are usually strongest andan impersonal printed leaflet is probably the weak-est medium.

Posters contain short messages that, even if true,are so abbreviated as to seem propagandistic andhence perhaps unbelievable. For workers whoselivelihoods may be at stake, posters will be credibleonly if accompanied by more informative andmore convincing materials.

Visits to see how others have dealt with PPI arevaluable for government, workers, and unionsalike, and are a means of communication in theirown right. When planning visits, the followingdesign points can be borne in mind:

• Hearing from fellow workers and colleaguesis likely to be the most credible source ofmessages for workers. For this reason visits

by workers to enterprises that have success-fully experienced PPI are particularly valu-able. Box 6.3 illustrates how the experienceof seeing for themselves was important inwinning the overall support of unions forthe privatization of Manila water.

• If individual visits are only possible for a fewpeople, short videos made up mainly of thecomments of workers in other successful andcompleted PPI enterprises are an alternativeway to provide supporting information forthe take-away message (see the CD-ROMfor practitioner guidelines on such films). Forexample, a video can be made of workersfrom the PPI enterprise visiting and talkingto the workers in another enterprise that hasalready completed its PPI transaction. Thedocumentary can then be screened backhome, with some of the workers who madethe trip and with some of the workers fromthe already-completed PPI site in attendance.The home audience of workers can then seethe privatized plant secondhand, talk withthe workers in the privatized plant, and talkwith their own coworkers who traveledthere and saw everything first-hand.

Guidelines on videos for communicating with

workers.


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Posters andcommercials alonecannot changeopinions.

Communicationscan be combined:for example a visit,with a video,followed by a groupmeeting.

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Table 6.3: Example of a Media Audit—Picking the Right Tools for the Task

Communication Consultation Negotiation Cooperation

Opinion polls and focus groups ✔

Small meetings ✔ ✔ ✔ ✔

Mass meetings ✔

Visits to other PPI schemes ✔ ✔ ✔

Video documentary ✔

Video memo ✤ ✤ ✤ ✤

Consultation papers ✤ ✔ ✤ ✤

Information brochures ✔

Mass media (TV, radio) ✔ ✤

Press releases ✔ ✤ ✤

Press briefings ✔ ✤ ✤

Posters ✤

✔ = highly relevant tool; ✤ = somewhat relevant tool.

• Visits by ministers and key officials can alsobe important:

One of the most important things we didwas to take a group, including three minis-ters, on a tour of other countries’ privatiza-tion programs. It was not an easy trip, asthe ministers were very demanding on pro-tocol and status issues. Subsequently, how-ever, decisionmaking was much faster,because the ministers had seen and heardthe issues for themselves. They were alsoable to debate, question, and challenge pro-posals that came before the cabinet of minis-ters (adviser at a privatization agency inAsia).

• Media can be combined for greater impact.

Monitoring and Evaluation

Communications campaigns are intended to alterstakeholders’ perceptions, so the implementingagency should check now and again to see whathas been accomplished. This can allow the correc-

tion of misunderstandings before they emerge. Theimplementing agency therefore should plan to sur-vey stakeholders periodically for changes in atti-tudes, actions, or intentions. Tools to assess themcan include opinion polls, longitudinal surveys, andfollow-up focus groups (with the same partici-pants).

CONSULTATIONAn effective way to communicate is to consult, butthat is not the only reason for consultation.Consultation can also help improve the processand outcomes of work force restructuring.

Role of ConsultationAs a two-way process, consultation:

• Offers a way to tap into the experience andknowledge of stakeholders in the design andimplementation of labor restructuring pro-posals


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Check to see if thecommunications areworking.

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Box 6.3: Manila Water—How a Trip to Buenos Aires Improved Understanding

Akey government official involved in theconcessioning of the MetropolitanWaterworks and Sewerage System

(MWSS) in Manila, the Philippines, kept a diary ofthis PPI transaction. He wrote:

Sometime in April 1996, the World Bankbroached the idea of organizing a trip toBuenos Aires. We had actually been thinkingabout this possibility from the very beginningof the transaction, but, with so many otherthings to take care of, it had never beenactively pursued.

From all the reports we had received, theBuenos Aires transaction was highly success-ful. We thought that it would be great if keypeople involved in the MWSS privatizationcould actually meet people who had beeninvolved in the Buenos Aires transaction.

When we decided on the composition ofthe contingent, we took a great risk. Asidefrom MWSS top and middle management,we decided to send members of Congress

and the labor union leaders. We were notreally in control of what would happen inBuenos Aires, but we gambled that the tripwould have a positive result.

In the end, the trip turned out to be highlysuccessful. The contingent met with numer-ous officials and all of them were happy withthe privatization. The happiest were the laborunion leaders. Their counterparts in BuenosAires explained that even if so many jobswere apparently lost with the privatization(due to retrenchment), all of those jobs andmore were recovered in the private sector.The concessionaire generated a lot of newbusiness, most of it for other companies inthe private sector.

It seems this trip was key to securinglabor’s support of the privatization. They sawthat the results in Buenos Aires were posi-tive. They also saw that the MWSS privatiza-tion itself was transparent.

Source: Dumol 2000.

• Provides a source of information to tailorlabor strategies more closely to prevailingcircumstances

• Provides ideas about how to design thecommunications strategy, prepare for nego-tiations, and develop any cooperation proj-ects that might be possible

• Adds legitimacy through involvement ofstakeholders in decisions affecting theirfuture.

Consultation should be undertaken with all keystakeholders. Consulting with trade unions has aparticular facet, however: union opposition to PPIoften has its basis in a belief that the unions areinsufficiently consulted about PPI, or consultedtoo late when there are problems in the process(box 6.4).

Methods of ConsultationAs well as one-to-one or small-group meetings, theprincipal tools that the implementing agency canuse to consult are:

• Focus groups, which help the implementingagency to understand what people really

think; identify, explore, and design pollquestions that matter to the audience; andestimate the intensity of feeling on a subject(which polls cannot gauge). Focus groupsare relatively fast, cheap, easy, and reliable.The CD-ROM provides notes on how toundertake focus groups.

Notes on managing focus groups.

• Opinion polls, which offer evidence ofstakeholder attitudes. To be statistically rele-vant, opinion polls require at least 1,000respondents. Some PPI workplaces are notthat large. Even when they are, a problemwith polling is that the wrong questionmight be asked. You might find out that 86percent favor one solution rather thananother, but you might not find out that thebest solution is a third one about which theyhave not been asked.

• Policy papers, which can take various formsand have narrow or wide audiences. A strat-egy paper for a cabinet or the council ofministers might seek approval from minis-ters. A draft policy statement or “white”


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Focus groups aregood exploratorytools.

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Box 6.4: Trade Unions and Consultation

The key issues and agenda for each unionwill vary, and can only be determinedthrough a stakeholder analysis and through

the process of engagement itself. Here, however,is what one global union federation with morethan 20 million affiliated members in public serv-ices has commented, in general, on what unionswant:

Politicians and public managers must be madeto state clearly the goals of any particular privati-zation measure and show how it would achievethem. Trade unions have a right and a responsi-bility to ensure that those goals are in the publicinterest, to satisfy themselves that they will beachieved in ways that involve fair treatment ofpublic employees, and to insist that alternativesto privatization and commercialization are fullyexplored. That is why they must insist on beingconsulted at every stage of the process andensure that any changes in service and employ-ment levels and conditions are negotiated(Public Services International 1997).

This statement encapsulates the key issues typi-cally raised by trade unions and workers:

• Fair treatment for employees

• Negotiation rather than imposition of changesin employment numbers and conditions ofservice

• Consideration of alternatives to PPI—with noor limited private sector involvement

• Consultation with unions at every stage of theprocess

• Accountability and transparency of decision-making on PPI.

The relative importance of each of these issueswill vary from country to country and among PPIplans. Some issues (such as fair treatment) areunexceptional, whereas others (consultation at allstages) may not be easy for government to agreewith. Whatever the case, it is important thatimplementing agencies be prepared to discussthese issues with union leaders.

paper might put policy proposals into thepublic domain for wide debate, perhapsusing Web sites.

• Consultation frameworks and joint taskteams, which are institutional arrangementsto facilitate consultation, debate, and discus-sion on labor adjustment issues. They canbe sector based or national. For example, inthe ports sector, task force or task teamapproaches have been established to providea forum for government, port managers,port users, and workers’ organizations toshare views. (See an example from theGhana port sector in box 6.5, and thePublic-Private Infrastructure AdvisoryFacility [PPIAF] Port Reform Toolkit).Several countries also have long-standinginstitutional arrangements for consultationthrough tripartite forums of government,business, and labor.

PPIAF Port Reform Toolkit.

NEGOTIATIONNegotiating changes in work force numbers orconditions of service lies at the heart of the chal-lenge facing the implementing agency. This sectionprovides a framework for negotiations, and some

examples—good and bad—from different environ-ments.

If consultation is meant to seek views about thenature of the changes to be made from a range ofstakeholders, negotiation is intended to agree onthe terms of those changes with the people directlyaffected by them. In practice, negotiation—as aspecific form of engagement—will usually involveinvestors, workers and trade unions, and govern-ment.

For example, in the Buenos Aires water concession,the labor union was represented on the committeethat was set up to oversee the process and wasclosely involved in negotiations on restructuringmethods, severance options, and retrainingarrangements (World Bank 2002).

Negotiation is a common feature of work forcerestructuring in infrastructure enterprises simplybecause the enterprises are usually large and thework force is generally organized. Theemployer–employee relationship between govern-ment and the work force provides the primary con-text for negotiation as a form of engagement. Keyactors in the negotiations are therefore governmentand workers’ representatives, although each partymay enlist support (lawyers, advisers, nongovern-mental organizations [NGOs]).


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Joint task teams area commoninstitutionalmechanism forenablingconsultation.

Negotiation arises inwork forcerestructuring as aresult of theemployer–employeerelationship betweengovernment and thework force.

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Box 6.5: Ghana Port Reform—Working Effectively with Unions

The Ghana Ports and Harbours Authority(GPHA) is to be converted into a “landlord”port authority whereas the private sector

will participate in port operations, particularlycontainer handling operations, dock yards man-agement, sites maintenance, and services. A crit-ical issue was overcoming the resistance tochange from many of the stakeholders in the portindustry. This was achieved through:

• Timely, proactive, and professional actionsof the government of Ghana (particularly theinitiatives of the minister of roads and trans-port) and the GPHA management

• Avoidance of any autocratic approach

• Adoption of a consultative, persuasive, andparticipative style, which has resulted in avery positive atmosphere among the port

community with regard to implementation ofthe port component of the GHATIG Project.

• Inclusion of representatives of the Maritimeand Port Workers Union on the organization-al restructuring and labor rationalizationworking team of the Project ImplementationCommittee and their attendance at its meet-ings on a regular basis.

There was public consultation through a nationalworkshop on the acceptability of the govern-ment’s policies about port reforms. The ministerof roads and transport also made personal visitsto the ports to speak and, more important, to lis-ten to the port work force and the port laborunions.

Source: PPIAF 2001.

Negotiation is important because of the financialconsequences for all parties. As box 6.6 illustrates,an otherwise exemplary engagement strategy canlead to adverse consequences for government if thenegotiation element goes awry (in that case, onpension matters).

The ability to negotiate through collective bargain-ing is central to unions. Most OECD countries per-mit and guarantee rights to collective bargainingand the freedom of workers to associate, butrestrictions on these rights exist in a number ofdeveloping countries. Although the economic bene-fits of collective bargaining for workers and forenterprises are context specific and not very clearcut (Aidt and Tzannatos 2002), unions can play a

key role in achieving negotiated changes in workpractices that are of mutual advantage and moresustainable.

The centrality of negotiations for unions has fourpractical implications for the implementing agency:

1. Unions might expect to be engaged in nego-tiation at times when the implementingagency might be using other forms ofengagement (communication, consultation,or cooperation).

2. Attempts by government to diminish theopportunity for negotiated change are likelyto be vigorously opposed.


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Negotiation is acentral role of tradeunions and canshape the nature ofthe engagementbetween organizedlabor andgovernment.

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Box 6.6: Engagement Strategies in the Privatization of Sri Lanka Telecom

Sri Lanka Telecom (SLT) was partially priva-tized in 1997 through the divestiture of 35percent of shares plus management to a

strategic investor—NTT of Japan. Issues ofredundancy were considered explicitly from thetime that privatization was envisaged in the sec-tor. The sector was large, employing over 8,000workers in the early 1990s. It was clear from theoutset that worker support was essential if priva-tization was to be done smoothly, even thoughoverstaffing was not a critical issue. Over a peri-od of five years, from 1992 to 1997, variousstrategies were adopted to involve and increaseworker awareness on preparations for privatiza-tion and the process itself.

A national steering committee was appointed tomake high-level decisions and recommendationsregarding the transaction while a Telecom Cellwas created at the PERC (the privatizationagency) to handle implementation of the transac-tion. The cell was meant also to interact with the31 trade unions operating in SLT. However, forthe purpose of closely interacting with the cell,the unions were represented as a ”joint front”involving nine trade unions. Six union leadersalready had been sent to visit privatized telecom-munications companies in Chile and Mexico tofamiliarize themselves with the facilities availablein those countries.

An independent consultancy group (the NationalInstitute of Business Management, NIBM) wasappointed to study labor issues relating to thereconstruction of SLT. A key finding by NIBM wasthat trade union leaders did not always voice the

opinion of the majority of workers. This suggest-ed that the trade unions had to be contactedindividually and the workers had to be addresseddirectly. Such dialogue was found to be muchmore productive than dialogues with the unionleaders alone. In fact, certain trade unions withskilled workers (accountants, engineers) werestrongly in favor of privatization, recognizing thatit would lead to enhancing of company worthand career development opportunity.

An in-house magazine, Amathuma, waslaunched by a media subcommittee. SLT alsoconducted regional open house “awareness”forums at offices throughout the island, alongwith representatives from the Ministry of Postsand Telecom, PERC, and NIBM. Several mediacampaigns were also launched, addressing theneed for restructuring SLT and the telecommuni-cations sector.

All of this careful preparation led to the compara-tively smooth transition of SLT from a govern-ment department to a privatized enterprise. Noworkers were retrenched during the process. Thegovernment, however, had to pay a high price forthis relatively peaceful transition. The price wasnot just in the form of expenses incurred duringthe awareness campaigns, or in terms of airfaresfor the unionists. The principal expense came inhandling the negotiations that arose with regardto pensions, with the outcome leaving the gov-ernment with substantial pension commitmentsto several hundred telecom workers for severaldecades hence.

Source: Salih 2000.

3. Negotiation processes (that is, those thatreach a mutually agreed outcome) maywiden the scope of discussion to mattersbeyond the original ones. This means thatwork force negotiations may start with alimited discussion of the number of surplusworkers but quickly expand to cover allaspects of work force restructuring—selec-tion processes, redeployment options, treat-ment of pensions, terms and conditions oftransfer, and employment guarantees.

4. The process of negotiation may be widenedeven further. Trade unions (and othersopposed to PPI) may challenge the govern-ment and the implementing agency on poli-cy, financial, or social grounds. If the ration-ale for PPI is not well communicated, or ifthere are flaws in the process, these issuestoo may be brought to the work forcerestructuring negotiations. An example isthe restructuring of South Africa’s transportrail (Spoornet) networks, during which con-sultations and negotiations took placethrough a joint task team. The trade unionteam emphasized the importance for theunion (SATAWU) of widening the debate(see box 6.7), and both parties found the

process demanding of time and resources(see box 6.8).

In an ideal world, everybody would gain all the timefrom effective negotiations among PPI stakeholders,but in the real world, although win–win situationsoften arise, just as often tradeoffs have to be madeand competing interests have to be balanced.

Steps in NegotiationsThere is no easy recipe for negotiations, but clarityof the objective (a successful PPI) and good prepa-ration will always be needed. At its simplest, nego-tiation requires four steps:

1. Making preparations

2. Identifying and discussing potential areas ofnegotiation

3. Proposing and bargaining

4. Closing.

Step 1: Making Preparations

Preparation is essential. Working with other govern-ment stakeholders, the implementing agency must:


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Box 6.7: South Africa Rail Restructuring—Widening the Negotiation

Last year government announced its plan tobreak Spoornet [the state-owned rail enter-prise] into separate businesses and conces-

sion them to the private sector. This year, aftermore than six months engagement with labour,government has accepted that this plan makes nodevelopmental, business or financial sense. Whatpersuaded government to change its view? Whydid it adopt such a flawed plan in the first place?The first important point is that SATAWU [SouthAfrica’s transport workers’ union] successfullyused Parliament and the press, as well as massaction and a march to the Minister of Transport’soffice, to put pressure on government to engage inserious and meaningful consultation. The tradeunion movement can draw several lessons fromthis experience. Firstly, engaging with governmentrequires a large commitment of time andresources—in this case the SATAWU policy officer[and two researchers] working between half and

full-time for more than six months. Secondly, thelabour team focused on issues of socio-economicdevelopment and sustainability, rather than simplynegotiating over job loss. Thirdly, managementwas a crucial party to the process, since onlymanagement can generate the detailed financialand business information that is necessary for aproper assessment of restructuring proposals.Fourthly, labour has to take responsibility for man-aging the process of engagement, as the DPE[Department of Public Enterprises, responsible forthe management and restructuring of state enter-prises] lacks the skills of stakeholder consultation.Finally, government was not monolithic.Fortunately, management was totally opposed togovernment’s plan, and there were officials bothwithin DPE and in other departments, and minis-ters, sufficiently committed to socio-economicdevelopment to change their minds on the basisof the evidence” (Von Holdt 2001, pp. 2–4).

“

• Reconfirm overall objectives—expressed interms of the overall PPI project, as well aswork force restructuring.

• Define government interests and attempt topredict those of the other parties (drawingon the findings of earlier stakeholder analy-sis).

• Identify the best solution that could beachieved for government without negotiat-ing, and identify possible outcomes thatcould meet the needs of government and theother parties.

• Decide which overall outcomes are fixed(absolutely nonnegotiable), and which havesome scope for variation.

• Consider likely scenarios and outcomesfrom the negotiations (“what if...?”) andestimate cost impacts where possible. Theimplementing agency may also need to bal-ance between the need to maintain levels ofinfrastructure service (adversarial negotia-tions that lead to strikes and disruption ofessential services are undesirable for bothpolitical leaders and the economy) and the

need to avoid “giving away” improved con-ditions of service while the company is inthe public sector because overly generousconditions can frighten off investors at thetime of the PPI transaction.

• Have a full understanding of the detail oflegislation and labor contracts likely toaffect negotiations. In many countries, col-lective bargaining rights and procedures areprescribed in legislation, while labor agree-ments also cover them. (See module 4.) So afirst step is to establish the legal and con-tractual situation. Where negotiation proce-dures are not set out in labor contracts, apreliminary step is to discuss and share thedetails of the negotiating process, includingits logistics, participants, and overalltimetable. Third-party mediation and arbi-tration bodies may also have a role (see theCD-ROM for comments from one suchbody).

Notes on arbitration and labor conflict

prevention.

Step 2: Discussing Potential Areas ofNegotiation

During this stage both sides set out what outcomesthey are looking for. The discussion stage of negoti-ations contains significant exchange of messagesand information about the wants and needs ofeach party. It is important not to close this out toosoon, or to “box in” the other party, because theother party has little or no room for making con-cessions and effectively is forced out of the negotia-tions before moving to the next step—proposingand bargaining.

Table 6.4 provides a checklist for implementingagencies that suggests possible negotiatingissues between labor and government, settingout labor’s possible concerns and potential bar-gaining incentives and the outcomes that maybe mutually beneficial. Although it is not anexhaustive checklist because every circumstancewill bring out different issues, it can be used asa starting point and a framework for identify-


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Preparation isessential beforeentering intonegotiations.

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Box 6.8: South Africa Transport SectorNegotiations—A “Long and Arduous”Process

Transnet [a public sector holding companyfor transport enterprises] has finalized itssocial plan agreement with organized

labour. This process has been long and ardu-ous, stretching over 2 years with no less than 30meetings of negotiation to reach agreement.Spoornet itself has been dealt with separately,given the major concerns that exist there. Thus,a joint Government/Labour task team onSpoornet was established and so far has had10 meetings that have resulted in the presenta-tion to the principals of a final report. However, afurther technical working group has been estab-lished to review the end-state model forSpoornet restructuring, and this group has metat least 12 times so far, but is yet to completeits work.”

Source: Department of Public Enterprises, South Africa(www.dpe.gov.za/docs/policy/restructuring.html.

“

ing areas of potential negotiation, building onstep 1.

This stage is also important in creating the right cli-mate for discussion. The aim of the implementingagency should be to engender a tension-free atmos-phere where mutual trust and confidence can bedeveloped.

Step 3: Proposing and Bargaining

It is during this stage that personal negotiationskills are most important. Key elements are clearcommunication, active listening, a willingness toseparate the people and personalities from the sub-ject of the negotiation, and a desire to look for out-comes that can satisfy the interests of all parties(even though they cannot always be found).

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Table 6.4: A Checklist for Negotiations with Labor

Potential Possible outcomes Issue Labor concern bargaining areas or agreements

Staff reduction to • Job protection • Enhanced employ- • Costs savings used for meet competitive- • Loss of competitiveness ment security for capital and equipment ness benchmarks through loss of vital skills remaining work force • Investment to increase

• Loss of institutional • Improved dialogue labor productivityknowledge and memory • Alternatives to • Sequenced employment

• Fair process and avoid- retrenchments reduction timetableance of union victimization • Consistent and • New job evaluation,

• Compensation transparent selec- career development, and tion criteria pay system

• Severance terms, • Hierarchy of reduction including retraining, mechanisms: attrition, job-search assistance, soft options volunteers and a retrenchment before compulsionpackage • Mutually agreed sever-

ance processes, terms, and selection proce-dures

Introduction of • Intensification of work • Training in new ways • Training courses for flexi-flexible work • Health and safety of working and skills ble work and multi-practices • Too much discretion • Enhanced employa- skilling of the work forceinstead of rests with management bility and job satis- • New rules for labor rigid work rules faction deployment and organi-

• Team-based flexi- zationbility and worker empowerment

Improvement in • Sharing benefits of • Gain-sharing plan • Performance/bonus labor productivity productivity • Worker involvement scheme, with clear crite-

• Unfair measurement in job redesign and ria and protected budgetmethods measurement criteria • Forums for worker

• Further job loss • Enhanced employ- involvementment security through • Employment protectionsuccess

Merit-based • Fair and transparent • End to patronage • Recruitment and selec-recruitment process and favoritism tion procedures



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Potential Possible outcomes Issue Labor concern bargaining areas or agreements

• Equal opportunities • Negotiated, objective • Equal opportunities (gender, ethnic group) selection criteria procedures

Flatter hierarchy • Loss of middle- • Targeted severance • Middle-management management jobs support for middle severance package cov-

• More work and managers ering pension, retraining, responsibility • More responsive and redeployment

• Inadequate supervision management– • New hierarchical struc-and support frontline communi- ture and communica-

cations tions procedure• Increased pay for • Job evaluation, career

increased responsi- development, and new bilities grading structure

Change in • Impact on redundant • Training in new skills • Skills and qualifications skills mix workers • Rewards for gaining audit

• Evidence base for qualifications • Job evaluation and new skills-mix decisions • Support for redun- career development pro-

dant workers gram• Enhanced employa- • Training courses, access

bility rights, and budgets• Dialogue arrangements

Market-oriented • Loss of collective • Access to training, • New pay, grading, job pay structure bargaining rewards for gaining evaluation, and career

• Equal pay for work of skills and qualifi- development systemequal value cations • Improved skills mix

• Protection for low- • Transparent pay • Equal opportunitiesskilled workers determination

• Widening differentials criteria• System for review-

ing effects of restructuring

Reduction of • Loss of pension rights • Putting retirement • New pension arrange-nonwage labor • Loss of social benefits benefits on mentscosts • Loss of custom and sustainable footing • Assurance of future

practice benefits • Improved quality of benefitsremaining benefits • Buyout of lost benefits

• Compensation for • Stronger governance of lost benefits pension funds

Managers’ right • Fairness and • Shared benefits of • Disciplinary and griev-to manage (and transparency improved discipline ance procedurediscipline) the • Protection against • Disciplinary rules • Revision procedureswork force injustice linked to grievance

rules

More efficient • Nonsocial working • Independent health • Working hours and shift use of company hours and safety reviews patterns/premiumsresources • Health and safety • Rewards for shift • Review procedures

work

Changed • Loss of power to • Clarity of • Recognition and repre-relationships protect members procedures sentation criteriawith unions • Loss of facilities • More effective • Bargaining procedures

for officials bargaining system and facilities

operating divisions. The implementing agency willthen need to ensure coordination among all theseaspects. The example from South Africa (box 6.8)again illustrates this point.

Step 4: Closing

When agreement has been achieved, it is importantto be sure that it can actually be implemented byall parties. The agreement needs to be put in writ-ing, but rushing to signature may be inappropriate.Usually each party will have to ratify the agree-ment: workers’ representatives need to gain agree-ment from the work force, and the implementingagency may need approval of the privatizationagency, ministers, or the head of state.

COOPERATIONWhere circumstances are favorable, effective com-munication strategies, consultation exercises, andnegotiation processes can lead to deeper forms ofengagement in which stakeholders actively partici-pate in the design and implementation of PPI andlabor adjustment programs.

Cooperation in PracticeConsultation and negotiation with labor can leadinto more active forms of participation in thedesign and implementation of programs to dealwith labor issues. These more cooperative forms ofengagement are based on a win–win philosophywhereby most stakeholders obtain mutual benefits,as illustrated in box 6.9.

Cooperative approaches to engagement duringwork force restructuring have parallels with theconcept of “social dialogue.” That concept impliesgoing beyond the traditional forms of collectivebargaining to a continuous process of engagementamong the social partners—government, business,labor, and (in some circumstances) other civil socie-ty interests. Social dialogue aims to build an envi-ronment in which engagement with labor can

bring sustainable gains to both sides within a long-term perspective, and has been defined by the ILOas “all types of negotiation, consultation or simplythe exchange of information, between and amongrepresentatives of governments, employers andworkers, on issues of common interest relating toeconomic and social policy.”


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Cooperation is awin–win approach.

Social dialogueencompasses allaspects of economicand social policy.

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Box 6.9: From Confrontation to Cooperationin Indianapolis

When the U.S. city of Indianapolis,Indiana, decided to invite the privatesector to bid to run most of its servic-

es, the city’s workers, organized in the AmericanFederation of State, Country and MunicipalEmployees, planned to resist the plans, with mil-itant action if necessary. The union also pro-posed an alternative based on the idea that ifthe workers were given a fair shot at putting intopractice their own ideas about how to improveservices while spending public money lesswastefully, they could compete with the privatecontractors and win.

The city’s mayor, Stephen Goldsmith, was skep-tical at first but decided that the workers hadvaluable knowledge they could contribute to thePPI process. As a result, the workers wereinvolved through their union in designing thecompetitive bidding program, improving theirown efficiency, and competing with privatecompanies. A great deal of restructuring wasrequired, and the city established a labor pool towhich surplus workers were transferred andfrom which other departments of the city andprivate employers could recruit. Training wasprovided for these workers.

Indianapolis succeeded by this route in reducingits annual budget by $12 million and serviceshave improved so much that the city and theworkers’ union were jointly awarded anInnovations in American Government Award bythe Ford Foundation and the John F. KennedySchool of Government at Harvard University.Workers’ earnings have greatly increasedbecause of a gain-sharing agreement underwhich workers are awarded 25 percent of thesavings their efforts achieve below alreadyreduced budgets.

Source: Martin 2004 (forthcoming).


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Cooperation is mostappropriate in fourcircumstances.

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Social dialogue is seen not as single event but acontinuous process of consultation, negotiation, orboth, among employers (public and private) andworkers’ representatives, which does not end whenthe PPI is implemented. The process may be timeconsuming and long, but it is rewarded by sustain-able results and ownership of all stakeholders inthe decisions made.

Circumstances that SuitCooperationThe nature of cooperation will vary greatly accord-ing to circumstances. Cooperation is, however, like-ly to be most appropriate in any of four circum-stances:

1. Where large-scale, fundamental restructur-ing of a sector critical to economic develop-ment is foreseen: Here the agenda is notsimply downsizing, but more a question ofsector reform. Where it is clear from pasthistory that this restructuring—includingPPI and work force restructuring—will becomplex and protracted, then cooperationmay be more likely to lead to success thanrelying only on other less participatoryforms of engagement. It may take muchlonger, however (see box 6.8).

2. Where private participation and laboradjustment are deeply opposed, perhaps bya strong and powerfully organized workforce with public support: In this case, coop-eration is the only way forward and govern-ment has fewer choices. Attempts at overtcoercion by government may lead to vigor-ous industrial action, disruption of infra-structure services, and discredit to PPI as awhole

3. Where there are acute social challenges: Forexample, if PPI involves drastic job losses inmonoindustrial towns (some port or railwaytowns, mining towns), with few alternativeemployment options, then community-basedredeployment measures are likely to beneeded (as discussed earlier). In such circum-

stances, participative and cooperativeapproaches among government, local gov-ernment, municipalities, enterprises, tradeunions, and other NGOs are likely to beneeded.

4. Where there is a strong political consensusin favor of inclusive processes and socialdialogue: South Africa is one example of acountry where government has establishedformal frameworks for the participation oftrade unions and workers’ organizations inpolicy formulation and implementation onPPI and enterprise restructuring.

If cooperation is about mutual advantage andwin–win relationships, why is cooperation notalways the norm, and why do tough negotiationsor strikes occur? Circumstances vary greatly, butthree points can be made:

1. In practice, consultation and negotiationusually work. Engagements that lead tomutually successful negotiations are in factmore common than one expects at firstsight. High-profile industrial disputes catchthe attention of the media, but overlook themany more disputes that are resolvedthrough negotiation, arbitration, and othermechanisms. This should give the imple-menting agency some confidence—engage-ment usually has positive, not negative, out-comes.

2. Parties may misjudge one another’s position(information asymmetry). Government,workers, unions, and other parties mayeach lack complete information. One partymay misjudge another’s position, and it isonly later that each becomes aware that theother party did indeed mean what it hadsaid. For the implementing agency, thisreinforces the need to prepare well fornegotiations and, at the outset, to ensurethat the messages and rationale for PPI andwork force restructuring are well made andwell communicated.

3. Negotiating credibility must be demon-strated occasionally. If government is to be

credible in undertaking reform, or if atrade union is to be credible to its mem-bership, from time to time each may haveto demonstrate that credibility. Resolvingan acrimonious strike can be portrayed asa success for both parties if each audiencebelieves that the credibility of its “side”has been enhanced. The strike can earnone or both parties the right to a fair hear-ing for several years because the threat ofaction has become more credible. Theimplementing agency has limited optionshere. If government (or labor) has decidedthat such a strong demonstration of credi-bility is needed, then all that can be doneis to manage the situation by (a) continu-ing to communicate accurate, honest infor-mation to all stakeholders to reduce anyinformation asymmetry; (b) taking steps toreduce adverse impacts of strikes or otherindustrial action on the public, consumers,and business users of infrastructure servic-es (for example, by stockpiling fuelreserves for power stations, contracting forsubstitute transport services, using newmodes and routes of transshipment, andemergency liberalization of services to pri-vate operators); and, perhaps more impor-tant, (c) keeping the channels for discus-sion and debate open so that engagementis facilitated when it is (sooner or later)resumed.

Tools (on the CD-ROM)Terms of reference for stakeholder analysis

Stakeholder analysis worksheets

Checklist of communication costs items

Do’s and don’ts of communicating with workers

Working with opinion polls and focus groups

Making short films for worker communication—apractitioner’s view

Notes on arbitration and prevention of labor conflict


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Additional material (on theCD-ROM)

Cabanero-Verzosa, Cecilia, and Paul Mitchell. 2002.“Communicating Economic Reform.”Development Communications Division. WorldBank, Washington, D.C.

World Bank. 2002. Public Communications Programsfor Privatization: A Tool Kit for Task TeamLeaders and Clients. Washington, D.C.

Web sitesACAS (Arbitration and Conciliation Advisory

Service): www.acas.org.uk. (Site offers downloadson handling redundancy and labor relations.)

ILO International Training Centre: www.itcilo.it. (Siteoffers courses on social dialogue.)

PPIAF Port Reform Tool Kit: www.ppiaf.org.(Module 7 addresses engagement and labor issues.)

Some international trade union organizations:

• ICFTU (International Confederation of Free TradeUnions): www.icftu.org.

• World Confederation of Labor: www. cmt-wcl.org.

• International Transport Workers’ Federation:www.itf.org.uk.

• Public Services International: www.world-psi.org.

• Union Network International (telecommunicationssector): www.union-network.org.

• International Federation of Chemical, Energy, Mineand General Workers’ Unions: www.icem.org.

• Trade Union Advisory Committee to the OECD:www.tuac.org.

Other Material and SourcesAsian Development Bank. 1994. Handbook forIncorporation of Social Dimensions in Projects.

Manila. (This source includes checklists for road,rail, telecommunications, and power projects.)

Brinkerhoff, Derick W., and Benjamin L. Crosby.2002. Managing Policy Reform: Concepts and

Tools for Decision-Makers in Developing andTransition Countries. Bloomfield: Kumarian Press.

DFID (Department for International Development).1993. “Guidance Note on How to Do StakeholderAnalysis of Aid Projects and Programmes.”London. Available at www.dfid.gov.uk.

IFC (International Finance Corporation). 1998.Doing Better Business through Effective PublicConsultation and Disclosure: A Good PracticeManual. Washington, D.C. Available atwww.ifc.org/enviro/Publications/Practice/practice.htm.

OECD (Organisation for Economic Co-operation andDevelopment). 2001. “Engaging Citizens in Policy-

making: Information, Consultation and PublicParticipation.” PUMA Policy Brief 10. Paris.Available at www.oecd.org.

Walton, Richard E., Joel E. Cutcher-Gershenfeld, andRobert B. McKersie. 2000. Strategic Negotiations:A Theory of Change in Labor ManagementRelations. Ithaca: Cornell University Press.

World Bank. 1996. World Bank ParticipationSourcebook. Washington, D.C. (This publicationreviews participatory approaches to developmentactivities, and includes case studies and method-ological appendixes.)


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OVERVIEWThe specific objectives for monitoring and evalua-tion of labor programs are to:

• Assess financial and economic returns.Labor programs involve spending consider-able resources in the short run to reap somegain in the longer term. Consequently thedecision to undertake a labor restructuringprogram should consider the financial andeconomic returns involved, much the sameas would an investment decision.

• Learn from past experiences. Monitoringand evaluating a program’s effectiveness canhelp assess what works and what doesn’t,and the lessons from past experiences caninform future labor programs.

• Reduce costs to government. Most laborprograms can be very costly. Cost-benefitanalyses help avoid the experience in onecountry where a policy of generous levels ofseverance pay (the highest in the region) had

been set, but where the key decisionmakerlater admitted, “We didn’t actually work outhow much it was going to cost us. We justmade our decision after looking at other[voluntary departure] schemes elsewhere,but felt we should increase it somewhat.”

• Help make the case for work force restruc-turing. There will always be opponents ofwork force restructuring. Cost-benefit analy-ses can help provide key information forcommunication and negotiation (see module6).

• Assess financial sustainability and identifyrequired financial resources. Cost-benefitanalyses can help provide insight into thefinancial sustainability of the overall pro-gram by taking into account the overallcosts of the redundancy program and esti-mating the impact of possible future addi-tional redundancies. These costs should takeinto account all associated costs: compensa-tion, redeployment, and the costs for the

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The capability toundertake effectivemonitoring, analysis,and evaluation willenhance thecredibility andreputation of theimplementingagency.

7Monitoringand Evaluation of Labor Programs

This module provides guidance on why and how to evaluate the costsand benefits of labor restructuring programs and how to set up effec-tive monitoring systems to track progress and learn from experience.

MODULE

pension system where there are early retire-ment programs.

Early analysis can be critical in helping govern-ments assess severance options and the size andscope of the resource envelope for which funding isrequired. Consider the following example: An eco-nomic reform–implementing agency had embarkedwith some success on a pilot program of privatiza-tion. In most cases work force restructuring tookplace prior to privatization (and in some cases, clo-sure). The agency developed a five-year plan foraccelerated privatization that would include majorinfrastructure enterprises. Empirical estimates oflikely levels of downsizing were made, based onexperience in the pilot state-owned enterprises(SOEs) and from similar enterprises elsewhere inthe region. Those estimates revealed that unexpect-edly high levels of expenditure on voluntary depar-ture might be required in 2005 and 2006 (aboutUS$200 million annually) when restructuring oflarge mining and infrastructure enterprises wasplanned. This analysis helped to inform planningby government (the ministry of finance, in particu-lar) on (a) the sequencing of privatization and (b)discussions with donors on a new lending facilityin support of privatization and state enterprisereform.

The audience for analyses will extend beyond theimplementing agency. Although analysis is anessential input for decisionmaking on labor pro-grams, work force restructuring is both a technicalissue and a political issue. The logic and rigor oftechnical analysis may not always be the decisivefactor, and the quality of presentation is importanttoo. In practical terms this means that:

• The findings are presented in a way that willbe accessible to policymakers and to a wideraudience (for example, an overly academicpresentation may not communicate conclu-sions effectively).

• The presentation of financial and economicanalysis will reveal political costs and bene-fits. Simple examples are:

– Comparing the number of workers whomay lose their jobs with the number of

beneficiaries of private participation ininfrastructure (PPI) and infrastructuresector reforms (for example, projectednumber of households expected toreceive new water or power connections).

– Presenting estimates of likely employ-ment outcomes for the sector as a whole,not just the state enterprise. For example,in telecommunications immediate short-term job reductions in the state enterprisemay be quickly made up by new jobs innew entrants in mobile and data commu-nications.

– Expressing the financial cost savings togovernment from work force restructur-ing in terms of the alternative social ben-efits that could be provided from thosesavings (that is, number of new ruralschools or health clinics built a year,annual maintenance of rural roads, annu-al salaries of school teachers).

• Financial and economic analysis of the laborprogram needs to be complemented bystakeholder analysis (which includes politi-cal concerns), as discussed in module 6, andcost-benefit analysis of the wider case forPPI, in situations where opponents of laboradjustment are likely to challenge PPI itself(see the negotiations section in module 6).

The usefulness of analysis is constrained by two fur-ther factors: time and the availability of the data.Governments often must make their decisions basedon limited and incomplete information—they rarelyhave the luxury of the time needed to conduct a fullanalysis and to receive robust conclusions. Evenwhen analysis is done, the quality of available datamay restrict the usefulness of analysis.

ASSESSING FINANCIALRETURNSGovernments, like the private sector, need to assessthe financial costs and benefits of a work forcerestructuring program. Unlike the private sector,however, governments also need to assess a pro-


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Complementfinancial analysiswith stakeholderanalysis, andpresent the resultsin ways that revealsocial costs andbenefits.

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gram’s economic costs and benefits to society, or theeconomy, as a whole. The key questions and poten-tial tools of analysis are summarized in table 7.1.

As outlined in module 1, the immediate triggers forwork force restructuring are often financial crisis,not economic crisis. In such cases the financialanalysis can be a more critical question for govern-ment than is economic analysis.

Financial Costs—A ChecklistTable 7.2 provides a checklist of potential financialcosts that may be incurred and that must be includ-ed when assessing financial returns. Essentially, thefollowing equation captures the situation:

Financial costs = SC + RC + FC + CC + JC + TC + UC

where SC is the present value of severance costs,RC is the current net value of retirement costs, FCis the existing value of transportation for worker

and family, CC is the cost of counseling, JC is thecost of job-search assistance, TC is the cost oftraining, and UC is the present estimated value ofunemployment benefit and other social payments,

When collating those costs the implementingagency will need to ensure that:

• All costs are viewed from the perspective ofgovernment as a whole. For example, costsshould include any incremental cost to gov-ernment of additional unemployment bene-fits or pensions for displaced workers.

• Costs are all brought to present values. In amajor restructuring, downsizing is likely tobe a phased activity, so planned downsizingtwo or three years hence should be appro-priately discounted. In addition, the esti-mated costs to the pension plan of anyearly retirement benefits paid in future mayneed to be measured in terms of presentvalue.

Monitoring and Evaluation of Labor Programs

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Work forcerestructuring oftenuses batches ofworkers over time.The costs (andbenefits) of futurebatches need to bediscounted to acommon presentvalue.

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Table 7.1: Financial Analysis—Key Questions and Tools

Question Tool

How much will the program cost? • Initial estimates of total program cost, based on rough assumptions of severance costs (see the quick calculator on the accompanying CD-ROM)

What are the financial benefits? (How much • Net present value of net cash flows to and from money will government save?) government, taking account of savings in:

– Salary and related costs and allowances– Retirement benefits– Other nonsalary benefits

How can the program be funded? • Financial gap between cost estimates and potential funding sources (consider budget sources, privatiza-tion revenues, commercial loans, donor funds, and so forth)

How long will the program take to pay for itself? • Payback analysis—how long before the costs of a labor program are recovered through savings in reduced wages and other labor-related costs?

What is the financial impact of different • Payback and net present value analyses for different approaches to selection and work groups of employees (grade, age group, operating force restructuring? units)

• Analysis of alternative severance formulas

Looking at the economy as a whole, do the • Substitution of financial costs and benefits with economic benefits of work force restructuring economic costs and benefits in analysesexceed its costs?

Financial Benefits—A ChecklistTable 7.3 summarizes sources of benefits from alabor program, as portrayed by the followingequation:

Financial benefits = W + R + B + O + P

where W is the present value of wage savings, R isthe current net value of retirement benefits saved, Bis the present value of savings in kind (nonwageallowances and other benefits), O is the currentvalue of reduced operating costs, and P is the esti-

mated increase in PPI transaction proceeds result-ing from the labor force adjustment.

As with costs, benefits should be assessed in thecontext of overall government spending. If anenterprise gains cost savings as a result of the trans-fer of staff to another enterprise or elsewhere ingovernment, then overall there is no cost saving togovernment (as in the example of the transfer ofAqaba rail employees to the Jordan PhosphateMines Company, described in module 4, box 4.6).The pension analysis similarly needs to consider


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Financial benefitsshould also beconsidered in thecontext ofgovernment as awhole, not just ofthe infrastructureenterprise.

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Table 7.2: Checklist—Financial Costs of a Labor Program

Item Comments and examples

Direct costs of separationPresent value of severance costs (SC) • Includes all the costs described in module 5: ex

gratia, statutory payments, gratuity, bonuses, allowances per enterprise rules, payments negotiat-ed in individual or collective labor contracts.

Net present value of retirement costs (RC) • Estimated present value of future obligations to pro-vide retirement benefits (using realistic estimates of life expectancy, investment returns, and so forth)

• Costs should include possible arrears in pension contribution and any additional investments needed to ensure the financial sustainability of the pension scheme.

Present value of transportation for worker • Costs vary according to the enterprise (central or and family (FC) dispersed), country (size, transportation costs),

nature of the work force (locally hired or nationally hired).

Redeployment costsCounseling (CC) • Counseling costs based on expected take-up rates.

• Assume that almost all workers will receive counsel-ing.

Job-search assistance (JC) • Little data on actual uptake in severance programs—perhaps 60–75 percent

Training (TC) • Only a percentage of the work force is likely to undertake training—perhaps 10–30 percent, accord-ing to experience.

Other costsPresent value of estimated additional • Costs of social insurance to workers: Estimate addi-

unemployment benefit and other social tional social insurance payments according to rules. payments (UC) Estimated periods of unemployment can be derived

from social security records, public employment service records and interviews, private sector place-ment agencies, and surveys of workers displaced previously.

the whole government context. If pension costs aremerely transferred from the enterprise to anotherpublicly guaranteed scheme, then there may be nocost saving for government.

Most benefits are self-evident, but pensions can becomplex. In a defined-benefit plan with a highratio of pensioners (receiving pensions from theplan) to employees (contributing to the plan), a

large number of departures could tip the plan intofinancial insolvency. Complexity can also arise ifdifferent workers within enterprises have differentpension programs. To illustrate, if some workersare public servants and others are enterprise work-ers subject to a general labor code, net savings togovernment might be higher for retrenchment ofthe public servants because they have more gener-ous pension benefits.


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Table 7.3: Checklist—Financial Benefits of a Labor Program

Item Comments and examples

Direct benefits of separationPresent value of wage savings (W) • This is usually the largest single source of savings:

Includes wages of separated staff plus additional costs, allowances per enterprise rules, payments negotiated in individual or collective labor contracts.

• Eliminating ghost workers may be an important and immediate source of financial savings in some enter-prises.

Net present value of savings in retirement • Some pension costs must be paid even without benefits (R) restructuring, so the difference between what would

be paid with and without the labor program should be estimated.

• Benefits also arise from the elimination of ghost pen-sioners.

Present value of savings on benefits in kind— These benefits can include but are not limited to:both variable and semivariable (B) • Transportation to work, subsidized food (canteens),

and heating fuel costs• Reduced medical costs• Child support and childcare (kindergartens)• Free or subsidized housing or reduced housing

maintenance costs.

Other benefitsPresent value of reduced operating costs (O) • Reduced costs, such as transportation and vehicle

costs, reduced administration costs (fewer support staff), reduced pilferage.

• In some cases disposing of employee housing (per-haps cheap sales to workers), surplus offices, depots, and vehicles will reduce running costs.

Estimated increase in PPI transaction • Increase resulting from downsizing per se.proceeds as a result of work force • Increase (or decrease) resulting from more (less) flex-restructuring (P) ible labor contracts.

• Increase resulting from faster PPI transaction.• These may be difficult to estimate but are potentially

significant. López-de-Silanes (2002) found that a 20 percent reduction in the work force before privatiza-tion led to a 24 percent increase in net privatization price (see box 7.5).

Financial Payback AnalysisWhere the costs of work force restructuring arewholly front-loaded, the simplest method of analy-sis that could be considered is undiscounted pay-back (or breakeven) analysis. In the example pre-sented below, an initial expenditure of $100,000 inseverance payments is “paid back” by the end ofyear 4 as a result of annual savings (wages andother staff costs) of $25,000. The simple payback(or breakeven) period is calculated as the numberof years it takes for the wage bill savings to equalthe financial costs—in this case 4 years.

Work force restructuring Cash Net cash

Year costs ($) savings ($) flow ($)

0 100,000 –100,000

1 25,000 –75,000

2 25,000 –50,000

3 25,000 –25,000

4 25,000 0

5 25,000 25,000

6 25,000 50,000

The introduction of discounting in the aboveexample gives a more accurate picture of the pay-back period. By taking into account the lesservalue of money tomorrow instead of today andassuming an annual discount rate of, say, 10 per-cent, the initial expenditure of $100,000 is paidback not at the end of year 4 but during the courseof year 5.

Work force Discoun-

restruc- ted Net turing Cash Present values cashcosts savings value at flow

Year ($) ($) factor 10% ($) ($)

0 100,000 1.000 100,000 –100,000

1 25,000 0.909 22,725 –77,275

2 25,000 0.826 20,650 –56,625

3 25,000 0.751 18,775 –37,850

4 25,000 0.683 17,075 –20,775

5 25,000 0.621 15,525 –5,250

6 25,000 0.564 14,100 88,850

The payback period is calculated on the basis ofthe fraction of year 5 needed to bring net cash flowto zero. In this case:

Payback = 5 –(–5,250/25,000) = 5.21

Some Results of Payback Analyses

In a survey of work force restructuring programsin six countries, Svejnar and Terrell (1991) foundthat payback periods varied from just four monthsto 4.7 years. Haltiwanger and Singh (1999) evalu-ated the financial returns of 41 downsizing opera-tions based on World Bank internal documents fora range of civil service and state enterpriseretrenchment programs. Their evaluation includeda discounted financial payback method, whichassumed a 10 percent annual discount rate. For the24 operations with sufficient information to calcu-late payback analyses, their results can be summa-rized as follows:

• In 9 cases there were no net financial bene-fits from downsizing. These cases implythat there is never any payback (that is, thepayback period is infinite). These circum-stances arose as a result of rehires, newhires, or an increase in wages for theretained workers.

• In 15 cases there were positive financial ben-efits and the average payback period was2.3 years. Fourteen of the programs hadshort payback periods of between 0 and 3.6years—the one exception being the Bolivianmining corporation where the payback peri-od was 10 years. The other 3 enterprises inthe sample had payback periods of 3.40(Bangladesh jute), 1.44 (Pakistan publicenterprises), and 1.56 years (Argentina pub-lic enterprises). Programs with immediatepayback periods (0 years) were those thatinvolved involuntary reductions withoutdirect compensation of other assistance.

These findings are striking. On the one hand, manylabor programs appear to offer exceptionally goodrates of return. Few investment projects display such


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The simplest cost-benefit analysis thatthe implementingagency can make isan undiscountedfinancial payback.

Most evaluations ofwork forcerestructuringprograms revealvery fast paybackperiods.

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high financial returns as the 15 cases mentioned.Other programs, however, have not recovered theircost, often because of the problems of adverse selec-tion and rehiring described in module 5.

Haltiwanger and Singh.

Discounted Cash Flow AnalysisWork force restructuring can be viewed as a proj-ect. Classic investment projects are based on an(often high) initial capital investment, followed bya stream of positive cash flows arising over a num-ber of years. Those positive cash flows are derivedfrom productivity improvements that lead to high-er revenues or greater savings. Work force restruc-turing shares a similar pattern, so the tools ofinvestment analysis can be applied equally well to awork force restructuring project as to a capitalinvestment project. (A sample spreadsheet is pre-sented on the CD-ROM.)

Sample spreadsheet for analysis of labor projects.

Where work force restructuring involves significantdownsizing, it is difficult to persuade some to seethis as a “productive” investment. Downsizing isproductive, however, in the sense that it removesand reallocates unproductive labor to more pro-ductive activities elsewhere. It increases labor (andoften total factor) productivity within the enter-prise. Where there is a genuine surplus within thework force, the jobs are not “real” jobs, and sur-plus workers’ marginal productivity within theenterprise is likely to be close to zero. Their expect-ed productivity will be greater in other employ-ment or other activities outside the enterprise.

When using discounted cash flow analysis tech-niques for labor adjustment, the implementingagency should check that:

• A mix of indicators is used, rather than relyingon a single measure such as internal rate ofreturn or net present value (see box 7.1).

• An appropriate discount rate is selected.Choosing the right discount rate is a com-


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Many people wouldobject to the ideathat downsizing canbe seen as a“productive”investment, butwork forcerestructuring can beanalyzed using thenormal tools ofinvestmentappraisal.

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Box 7.1: Indicators for Cost-Benefit Analysis

Three main indicators for cost-benefit analy-sis are:

1. Internal rate of return (IRR) is the discountrate at which the future streams of costs andbenefits are equal. The higher the IRR, thebetter the project, so the IRR method is aconvenient way to compare different alterna-tive options in labor programs.

2. Net present value (NPV) is the differencebetween the discounted streams of futurecosts and future benefits. If costs exceedbenefits, the NPV is negative; if benefitsexceed costs, the NPV is positive. The NPV isthe value, discounted to the present, ofundertaking a work force restructuring projectrather than not doing so. NPV assessmentsrequire that a predetermined discount rate isselected. One criticism of NPV assessmentsis that, when comparing alternative restructur-ing proposals, the decision rule would selectthe largest project (giving the highest NPV)

over a smaller project with a higher IRR but alower NPV.

3. Benefit-cost ratio (BCR) is the ratio betweendiscounted total benefits and costs. Thus, ifthe discounted benefits are $150 million andthe discounted costs are $100 million, theBCR is 1.5 (and the NPV is $50 million). TheBCR is a useful check to the NPV process, asa way of spotting program options that offerattractive NPVs only because they are large.Reporting of BCRs again demands mentionof the discount rate used.

In complex activities, such as work force restruc-turing, a single number—be it IRR, NPV, orBCR—is unlikely to be enough for informed deci-sionmakers. Sensitivity analysis shows how varia-tions in the key assumptions underlying theanalysis influence the expected outcomes of therestructuring program. At its simplest, this meansrunning a spreadsheet model under differentassumptions and presenting these variations in atable.

plex issue but, in practice, sources of infor-mation for the rate are the general interestrate defined by the ministry of finance forthe application of public funds—the bestsource—or offices of international lendingagencies such as the World Bank andregional development banks.

• Costs and benefit flows have been calculatedfor a sufficient period. If discount rates areabout 8–12 percent, then a 20-year period islikely to be sufficient.

ASSESSING ECONOMICRETURNSThis section outlines the rationale for, and elementsof, economic analysis of labor programs. Theresources listed at the end of this module includeseveral examples of economic analyses of workforce restructuring in public enterprises.

RationaleAs discussed above, the near-term financial benefitfor government is sometimes the critical factor forcash-strapped ministries of finance faced with anurgent need for infrastructure enterprise reform.However, economic analysis is also needed for thefollowing purposes:

• First, it assesses impact on aggregate outputor welfare. Financial analysis tells nothingabout whether displaced workers are, in theaggregate, more or less productive followingthe labor program. It is quite possible that aproposed labor program can be attractivefrom the financial analysis perspective, butcan fail when subjected to economic analysis.

• Second, it provides an answer to opponents ofwork force restructuring in PPI, who mayargue that by ignoring the wider economiccosts and benefits, government is making a baddecision (see, for example, the South Africancase presented in box 6.9 of module 6).

• Third, it may be a requirement of interna-tional funding agencies whose lending or

funding procedures need economic as wellas financial analysis.

Labor productivity issues are central to an econom-ic view of work force restructuring, which sees theprocess as a reallocation of resources within theeconomy. From an economic cost-benefit perspec-tive, the cost of restructuring must be met by anincrease in worker productivity following displace-ment. The effect of moving workers out of the PPIenterprise into other parts of the economy can leadto negative outcomes if overall labor productivityfalls, neutral outcomes if overall labor productivityis unchanged, or positive outcomes if overall laborproductivity rises. Much therefore depends on theassumptions regarding marginal productivity of theworker in the enterprise compared with the mar-ginal productivity of his or her activities followingretrenchment.

Economic vs. Financial CostsEconomic cost-benefit analysis is similar inapproach to the discounted cash flow approach tofinancial analysis. As the spreadsheet sample on theaccompanying CD-ROM shows, both financialand economic analysis can be combined in thesame cost-benefit model. Financial costs and bene-fits are substituted by economic costs and benefitsin the economic cost-benefit analysis.

Differences between economic and financial costs(summarized in table 7.4) are as follows:

• Financial costs of severance (item 1): Ineconomies with no tax distortions or subsi-dies, and no fiscal budget constraint, thefinancial costs of severance would not nor-mally be treated as an economic cost.Rather they would be seen as a neutraltransfer payment. Most developing coun-tries, however, do have distortions andbudget constraints, so severance paymentsto workers divert public funds from otheruses. Except in a few upper-middle-incomecountries, a conservative approach would beto treat the economic costs of severance as100 percent of the financial costs.


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• Financial costs of early retirement (item 2):Similar considerations apply for the costs ofearly retirement as for severance. In practice,the principal difficulty is likely to be the esti-mation of the present value of the net finan-cial costs of early retirement.

• Financial costs of redeployment (item 3): Ifprivate sector firms are providing redeploy-ment services (training, counseling, outplace-ment) then the full market price of the train-ing can be taken as the economic resourcecost of redeployment. Where governmentsdelegate redeployment to state agencies thatare heavily subsidized and operating belowcapacity, the economic costs are likely to bebelow financial costs, and an adjustmentfactor should be applied.

• Marginal productivity of employees in theSOE (item 4): If there is a genuine surplus ofworkers, their retrenchment will not resultin a loss of productivity in the enterprise,and the marginal productivity of employeesin the enterprise can be set at zero. This is areasonable assumption, if the work forcerestructuring strategy adequately tackles therisk of adverse selection (for example,through close targeting of workers offered

severance, through restricting downsizing tocadres with obvious levels of surplus labor,or through a mixed government–investorapproach (see table 4.1, module 4).

• Financial savings on wages (item 5): This islikely to be one of the largest sources of sav-ings. Two points are important:

1. Given the evidence of rehiring in manydownsizing programs, an explicit adjust-ment factor to take rehiring into accountmay be appropriate in the financialanalysis. If workers are hired elsewherein government, or by the same enterprise,financial saving will be reduced. Forexample, employees of the Sri LankaTransport Board were induced to leavewith severance funding, but were beingrehired almost simultaneously (Svejnarand Terrell 1991). High numbers ofworkers rehired following a labor pro-gram are an indicator of the failure of theprogram, both in a financial sense (awaste of public money in financing thecosts of the workers’ departure) and inan economic sense (a failed attempt toreallocate the workers’ labor to moreproductive use). Some new hiring is occa-


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Table 7.4: Economic vs. Financial Costs and Benefits

Include in Include in Item Cost and benefit items financial analysis? economic analysis?

Costs

1 Financial costs of severance Yes Yes—adjusted

2 Financial costs of early retirement Yes Yes—adjusted

3 Financial costs of redeployment Yes Yes—adjusted

4 Marginal productivity of employees in the SOE No Yes

Benefits

5 Financial savings on wages Yes No

6 Financial savings on nonwage benefits Yes No

7 Marginal productivity of worker outside the SOE No Yes

8 Marginal productivity value of labor savings No Yes

9 Increase in privatization proceeds from downsizing Yes/No No

10 Increase in privatization proceeds from faster PPI Yes/No No

sionally needed, however, to bring miss-ing skills to the work force.

2. A decision needs to be made on whetherto adjust wage savings to take account ofenterprise profits. All other things beingequal, a wage saving should ultimatelyreturn to the budget whether the enter-prise is fully or partially subsidized.

• Financial savings on nonwage benefits (item6): This should take into account savingsfrom reduced expenditure on all allowances,plus projected cost savings arising from theclosure or reduction of services provided toemployees such as food, medicine, housing,education, and cheap loans.

• Marginal productivity of a worker outsidethe SOE (item 7): This is the product of (a)the probability of an employee’s engage-ment in a productive activity and (b) the netincome produced by this activity. The mar-ginal productivity of the retrenched workerafter he or she has left the enterprise there-fore depends greatly on his or her circum-stances following retrenchment (see“Assessing the Effects on Workers’Welfare” in this module for a list of poten-tial postretrenchment circumstances).Incomes will depend on worker attributes(age, education, and, in some situations,gender); market conditions (overall eco-nomic growth rate, labor market supply,and demand); and worker location (capitalcity, urban, rural).

Estimates of workers’ marginal productivityshould be based on local market informa-tion. This should be assumed to be less thancurrent salaries. But what factor should beapplied? Evidence suggests that even inindustrial economies a permanent earningsreduction of 15–20 percent can be expectedamong displaced workers, but reductionsmay be even greater in developing countrieswith public sector wage premiums (see box1.1 in module 1). Moreover, many workersgo not into formal employment but intoinformal employment or self-employment,

about which there are fewer data. Estimatesof marginal productivity—disaggregated bythe major classes of workers—can be bestsourced from data of actual wage or incomelevels outside the public sector, gained fromlabor surveys, national statistics, agriculturaleconomics studies and research, householdincome surveys, interviews with placementand business support agencies, and (if possi-ble) focused follow-up studies from earlierretrenchment exercises.

• Marginal productivity value of labor savings(item 8): The economic value of the wagesavings following downsizing should reflectthe opportunity costs of these savings ifinvested by the enterprise in expanded serv-ice areas, improved productivity, orimproved quality of service by the enter-prise. Assuming the enterprise is budget con-strained, then this opportunity cost can beset as 100 percent of the financial cost.

• Increase in privatization proceeds fromdownsizing (item 9): Global evidence of theincrease in privatization proceeds as a resultof downsizing is limited. The best study(that of López-de-Silanes 1997) suggests anincrease of net privatization prices of 12 per-cent for every 10 percent reduction in thelabor force. However, because investorbehavior is difficult to predict, a conserva-tive approach would be to ignore theprospect of improved privatization prices inboth economic and financial analysis, ortreat it as a factor in a sensitivity analysis.

• Increase in privatization proceeds fromfaster PPI (item 10): A key rationale forwork force restructuring (particularlythrough voluntary departure and earlyretirement) is that it helps remove barriers toPPI investment by reducing political andworker opposition to PPI.

In the absence of country-specific estimates,a conservative approach to cost-benefitanalysis will probably ignore this time effecton privatization proceeds, not least becausethere are many potential sources of delay to


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a transaction in addition to labor issues.Nonetheless, in some circumstances the timeeffect may be a significant source of benefits.

EVALUATING LABOR MARKETPROGRAMS

Constructing the CounterfactualAnalysisEvaluation is the periodic assessment of the rele-vance, performance, efficiency, and impact of theproject in relation to stated goals. It differs frommonitoring in that it is not an essential task for theimplementing agency. Evaluation is mainly con-cerned with impact, which may only be measura-ble toward the end of implementation or in lateryears and so is often better done by a separateagency independent from implementation.

A central requirement of any evaluation is separa-tion of the effects that would have happened any-way from those that resulted from the intervention.Before-and-after comparisons alone are not suffi-cient. If earnings rise after training, for example,that may be the result not of the training but ofchanges in the macroeconomy or local changes inlabor demand or of such worker-specific attributesas life-cycle changes in earnings.

Evaluation therefore requires a counterfactual test,which is normally provided by a control or com-parison group of workers who did not participatein the severance or redeployment program. Box 7.2illustrates the importance of creating such groupsfor a hypothetical redeployment training program.

Counterfactual analysis can use either:

• Control groups, which consist of partici-pants that are selected at random within awell-defined population from which themembers of the treatment group are alsoselected

• Comparison groups, which consist of partic-ipants who are purposively matched to theparticipants in the treatment group.

Counterfactual analysis demands careful choice ofthe scenarios against which the outcomes of laborprograms are compared. For example, if the intro-duction of a PPI project in a declining public sectorport leads to the loss of 1,000 cargo-handling jobsout of a total of 3,000 jobs through voluntarydeparture over three years, which of the followingis the appropriate counterfactual comparison?

• The before-and-after calculation of 1,000job losses

• A comparison with trends in other similarpublic sector ports (which might suggest anannual decline of 10 percent in cargo han-dlers as mechanization is introduced)


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Box 7.2: The Importance of ControlGroups—A Hypothetical Example

In the town of Abca, 1,000 workers were laidoff as a result of the closure of the ABC GasCompany. Based on random selection, 500

workers were given a severance package andthe other 500 were put through an intensiveretraining program in computer skills. All 1,000people were monitored over time. Three monthsafter the completion of the training, 400 traineeswere employed. This employment rate of 80percent for the treatment group was touted bymany as the impact of the training program.

However, Abcan evaluators cautioned againstusing only this figure to judge the success of theprogram. They wanted to compare this employ-ment percentage to that of the control group—those who did not go through training. It wasfound that 375 of the control group of 500 werealso employed three months after the treatmentgroup completed its training—an employmentrate of 75 percent. Hence, Abcan evaluatorsjudged that the true impact of the training pro-gram was 5 percent, not 80 percent.

Although this example makes many generaliza-tions—there was no selection bias or random-ization bias, those who got a severance pack-age did not enroll in any training or other relatedlabor programs, and so forth—it serves to illus-trate the importance of using control groupswhen evaluating the impact of labor programs.

Source: Adapted from World Bank, no date.

• A comparison with normal annual rates ofjob loss and job creation in private sectorports (a private sector counterfactual test)

• A comparison with cargo-handling laborbenchmarks in the most efficient ports inter-nationally against which the port can rea-sonably be compared.

In each case the counterfactual alternative providesthe “what-would-have-happened-if” comparison(in this case, what would have happened if PPI hadnot happened). Each comparison is, however, likelyto give rather different answers, and small differ-ences in the assumptions and comparisons beingmade can lead to very different conclusions. This iswhy the use of a counterfactual test with a veryclear definition of the assumptions being used is soimportant.

Assessing the Impact ofRedeploymentIn developing countries the evaluation of redeploy-ment programs, social safety net programs, andactive labor market programs has generally beeninadequate.

One reason for the neglect of evaluation might bethat properly assessing the impact of redeploymentpresents a significant technical challenge to evalua-tors everywhere. Undertaking a robust counterfac-tual analysis is particularly difficult because partici-pants in, for example, a training program may beselected or may self-select. Such selection biases candistort policy conclusions, and redeployment pro-grams are especially prone to these biases.Evaluators use two methodological approaches totackle these selection problems:

1. An experimental approach randomly assignsindividuals to enter a program. Thisapproach avoids many (though not all) ofthe selection problems of statistical method-ologies. It is difficult to implement, however,for practical reasons (that is, cost and thefact that only current or future programscan be evaluated by this approach) and forethical and political reasons (for example,

some workers are refused entry to the pro-gram). Few developing countries are likelyto implement such an approach. A recentillustration of such an evaluation is that of ajob-search assistance program for unem-ployed workers in the United Kingdom,where the evaluation identified a 6 percentlower unemployment rate among partici-pants five years after the initial program(Dolton and O’Neill 2002).

2. A statistical approach allows selection of theparticipant and nonparticipant groups afterthe redeployment program has started. Todeal with selection biases, complex econo-metric techniques are needed to reduce thebiases (elimination is not possible).Regression techniques and matched-paircomparisons are the principal statisticaltools. The main advantage of statisticalapproaches is that the evaluation can bedone at any time, provided that adequatelongitudinal data are available.

Dar and Gill (1998) summarized these alternativemethodological approaches in the context ofretraining programs. Theoretically, experimentaltechniques are more robust. However, the statisti-cal approach is more practical, although it can besubject to large biases that risk offering false con-clusions to policymakers. Matched-pair statisticaltechniques are preferable to regression-based tech-niques because (a) they offer the greatest potentialfor reducing differences between the participantand nonparticipant groups (other than the rede-ployment program), and (b) the results are easierfor nonstatisticians and policymakers to interpret.

The example of the evaluation of Mexico’s retrain-ing program for unemployed and displaced work-ers (box 7.3) illustrates some of the challenges ofconducting evaluations. Problems for evaluatorsinclude:

• Creaming: If program managers are evaluat-ed on the percentages of trainees who findemployment, then creaming may occur. Inthis situation managers actively select thebest or most-qualified trainees to inflate theprogram’s apparent success rate:


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Rigorous evaluationpresents a technicalchallenge toevaluators andrequires specialistskills.

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The analogy is to whole milk where the rich-est part, the cream, floats to the top and canbe skimmed off. Creaming is an issue inlabor market programs because if only themost able people get reemployment assis-tance, then the benefit to society of the pro-grams is not as great as it might be other-wise. Highly qualified program entrants havea good chance of becoming reemployed evenwithout the services offered in the program,while for less qualified applicants the pro-gram services might be the only realistic pathto employment (O’Leary 1999, p. 3).

To tackle this problem in evaluations, theright counterfactual test is needed. If theemployment rate of participants is com-pared with that of all displaced workers,then the apparent success of the programwill be inflated. Control or comparisongroups should therefore compare traineeswith other displaced workers who had simi-lar levels of qualifications and other observ-able attributes.

• Creating matched control or comparisongroups: If evaluations are undertaken sometime after the program is completed, itbecomes increasingly difficult to ensurematching between the treatment and the con-trol or comparison groups. In Mexico’sPROBECAT evaluation, for example, thecomparison group was taken from a separatedata set of an urban household survey ofworkers who were also unemployed at thetime that unemployed trainees entered thePROBECAT program. Such different datasets may not be fully comparable. Ideally,control or comparison groups should be indi-vidually matched, but adequate data for suchmatching are available only sometimes.

• Self-selection: In training programs whereindividuals choose (self-select) whether toenter the program, the problem of con-structing the counterfactual comparisonbecomes more difficult because those whoattend the program will be different fromthose who do not. If trainees volunteer forthe program because it offers a stipend, for

example, this can lead to selection biaseswhen evaluating the program.

• Dropouts: This is a related problem. Iftrainees drop out of the program when theyfind jobs, is that counted as a program suc-cess? Or does it simply show that traineesmerely participated for the stipend?

• Dead-weight loss: In later phases of PROBE-CAT, in-service training was provided bylocal employers. Government provided theworkers’ stipend, and the employers wererequired to hire at least 70 percent of thetrainees. “Dead-weight loss” refers to thefact that firms participating in the in-servicetraining would have hired some of the sameworkers anyway.

• Influence of the very existence of the pro-gram: The evaluation approach outlined inbox 7.3 used a conventional “differences-in-differences” approach, where the before-and-after earnings or employment changesfor participants in the redeployment pro-gram are compared with the before-and-after change for a similar group of nonpar-ticipants at a similar time. The approachassumes that the existence of the programitself is an external variable. Training pro-grams may function as a form of job searchfor many of their participants (Heckmanand Smith 1998). The decision to participatetherefore also needs to be controlled for inthe design of the evaluation.

• Displacement effects: If a program partici-pant improves his or her reemploymentchances at the expense of nonparticipants,then one person’s job may merely be takenby another. If this happens the program’soverall benefit to the economy as a wholemay be less than intended.

• Changes in program design: Programs oftenchange their design and approach duringimplementation. This is a problem for evalu-ators because (a) it compounds selectionproblems and (b) what they are evaluatingmay be seen as the “old” approach andtherefore not relevant.


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Given the importance often attached by govern-ments to redeployment, there is a good case forbetter evaluation. In a review of active labor mar-ket programs, Fay (1996) concluded that evalua-tion will be improved if:

• Evaluation is made compulsory in the pro-gram design phase. Most donor-funded pro-grams are subject—or potentially subject—to postevaluation. Although the benefits ofevaluations may not accrue to the govern-ment, they will improve the quality of thedatabase for other countries.

• Evaluations are more rigorous. Evaluationof the overall effects of labor programs iscomplex. The design of the evaluationmethodology requires specialist economicand evaluation skills.

• Evaluations are undertaken by nongovern-ment agencies. This has two benefits: gov-ernments do not need to use scarce profes-sional resources; and if the results comefrom an independent organization, they willprobably carry more weight.

• The period of evaluation is extended. Impactson workers of, for example, retraining maynot be observable shortly after the end oftraining. It may be valuable to wait longerafter the program before beginning the evalu-ation.

Evaluation studies of active labor programshave been conducted in middle-incomecountries at costs of about US$150,000(Fretwell 2002), which is a relatively modestamount compared with the levels of expen-diture incurred.


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Box 7.3: Example of a Redeployment Evaluation—PROBECAT, Mexico

In 1984, as a response to a growing economiccrisis, the government of Mexico established alabor retraining program for unemployed and

displaced workers—Programa de Becas deCapacitación para Trabajadores, or PROBECAT.Revenga, Riboud, and Tan (1994) reported animpact evaluation analysis. The evaluation setitself four clear questions. First, what is theimpact of training on the subsequent employ-ment experiences of trainees? Second, doestraining increase the speed with which traineesmove from unemployment to employment?Third, conditional upon finding employment, whateffect does training have on the monthly earn-ings, work hours per week, and hourly wages oftrainees? Fourth, do the monetary benefits fromprogram participation outweigh the costs of pro-viding retraining for the unemployed?

PROBECAT was a large program. At the time ofthe evaluation it had trained 251,181 unemployedpeople and provided 9,268 courses since 1987.During the training period (usually three months),program participants received a stipend equal tothe minimum wage. Vocational courses wereorganized to respond to the needs of the locallabor market and were designed to redress localshortages of workers with particular skills. Theseneeds were determined through periodic studiesof local labor market conditions.

Not everyone was eligible to participate inPROBECAT. The selection procedure gave vari-able weights to different criteria, including thenumber of economic dependents, attainment ofcertain levels of basic education, prior work expe-rience, and unemployment of less than threemonths. The weighting scheme was quite com-plex and nonlinear, and only individuals with atotal composite score exceeding a threshold levelwere eligible to join the program. In addition, par-ticipants had (in theory) to be between the agesof 20 and 55 and be registered as job seekers atthe local state employment office. This nonran-dom selection of individuals into PROBECATposed potentially serious measurement problemsfor the evaluation of the training program.

The evaluation approach taken was to adopt astatistical methodology to account for the selec-tion bias in the program, and to compare thepost-training labor market experiences ofPROBECAT trainees with those of a comparisongroup—a matched sample of unemployed peo-ple who were eligible for but did not participate inthe training program. The evaluation found thatparticipation in the training program decreasedthe period of unemployment for men and womentrainees and increased the monthly earning ofmen but not of women.

Source: Revenga, Riboud, and Tan 1994.

In addition, the costs and benefits of redeploymentneed particular attention because they are oftenneglected in evaluations. Although evidence ispatchy (Dar and Gill 1998), cost-benefit assess-ments indicate that:

• Large-scale retraining programs may not beas effective as other measures, such as job-search assistance.

• Targeting programs may improve their rele-vance and effectiveness. In some cases (forexample, in Hungary) redeployment trainingis better focused on relatively disadvantagedjob seekers, whereas other evaluations (suchas PROBECAT in Mexico) suggest that theprogram is more cost-effective if focused onbetter-educated and more experienced jobseekers.

Box 7.4 offers some key indicators that could beused both for interim (gross impact) monitoring ofredeployment programs (where usually there willbe batches of trainees) and for subsequent netimpact evaluations.

Assessing the Effects on Workers’WelfareOne of the simplest approaches to estimatingworker welfare loss was that of Galal and others(1994) in their evaluation of the impact on work-ers of one form of private participation (privatiza-tion). As Birdsall and Nellis (2002, p. 31) pointedout, that approach was “simple, completely openin noting the short cuts taken and derives a usable,quantified answer to a most complex question”—in their case, whether workers had been worse orbetter off following severance. To illustrate theirapproach they simply assumed an average wage inthe economy (for example, $250 per month), andif it took workers 10 months to find a job, thenworkers receiving a severance package of $2,500would be no worse or better off.

Birdsall and Nellis 2002.

This simple approach does not provide a robustcounterfactual test. In practice, however, it can bedifficult to eliminate other factors influencing theimpact on workers. As Rama and MacIsaac (1999,pp. 101–2) noted:

The most straightforward indicator of the lossexperienced by displaced employees is thechange in their annual earnings, excludingreturns from invested compensation. This indi-cator could be criticized on the grounds thatearnings before separation do not provide anappropriate counterfactual. A case could bemade that the appropriate comparison is withthe earnings these employees would havereceived had there been no downsizing. If thesituation prior to downsizing was unsustain-able, it could be argued, earnings would havedeclined in any event. Alternatively, if the situ-ation was sustainable, some of these employ-ees would have gotten pay raises and promo-tions in the 15 months elapsed since separa-tion. More generally, the appropriate compari-son would be between the lifetime earningsprofile after separation from [the enterprise]and the corresponding earnings profile in thecase of no separation. But this comparisonwould require heroic assumptions, so that it issafer to stick to observed earnings before andafter separation.


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Box 7.4: Possible Cost and BenefitIndicators for Redeployment Programs• Average cost per entrant into counseling or

training—disaggregated among differenttypes of counseling or training

• Average cost per trainee employed

• Percentage of trainees employed or self-employed

• Percentage of trainees engaged in the voca-tion of training

• Average monthly wages/net incomes oftrainees (absolute and relative to preprogramincomes)

• Average household incomes (to assesseffects on other family members and thehousehold as a whole)

More robust evaluations of effects on worker wel-fare, however, can use the same experimental andstatistical methodologies described above for evalu-ating redeployment impacts. Unfortunately, therehave been few longitudinal tracer studies on whatactually happens to displaced employees over time.

A further difficulty in assessing impacts on work-ers’ welfare is the wide range of workers’ outcomesfollowing displacement:

• They retire and cease looking for paidemployment or income-earning opportuni-ties.

• They cannot find work or incomes andremain in long-term unemployment.

• They find alternative permanent employ-ment.

• They find alternative short-term, contractu-al, or informal employment.

• They chose to become self-employed as indi-viduals or start a microenterprise.

• They launch a formal small business withpotential for growth.

• They expand existing income-earning activi-ties that they were already running whileemployed in the enterprise (either “moon-lighting” or “daylighting”).

• They migrate out of the region to find jobsor to return to rural communities where thefamily home is based.

If workers migrate to find new employment, fol-low-up evaluation is more difficult and more cost-ly, and it is likely that such workers will not becaptured in subsequent evaluations. In a survey of5,334 workers from Brazil’s railway, 1,217 work-ers could not be found because they moved with-out a trace (Estache, Schmitt de Azevedo, andSydenstricker 2000).

In a follow-up survey of 675 former workers inBrazil that was conducted two to three years afterretrenchment, it was found that although 53 per-cent were earning less than when they were at thestate enterprise, 23 percent were making a better

living. In general the dispersion of wages wasgreater in this survey than one conducted ninemonths earlier. (There is no information on thesampling methods in these surveys, however.)

Most cost-benefit assessments make fairly simpleassumptions regarding the consequences of dis-placement—a number of months of unemploymentat a wage of zero, followed by a wage of, forexample, 60 percent of the previous wage. Withoutmore detailed tracer studies the impacts of morecomplex outcomes may not be well known.Nonetheless, it is clear that many displaced work-ers move into self-employment. Table 7.5 showsone example from Turkey, where nearly one-fifthof workers displaced during privatization usedtheir severance money to enter into self-employ-ment. A January 1998 survey of displaced workersin Brazil’s federal railway found that “over halfwork on their own and 20 percent have openedtheir own business. Only 18 percent are employeesand four percent are civil servants” (Estache,Schmitt de Azevedo, and Sydenstricker 2000, p.18). A tracer study in Ghana found that nearly 70percent of displaced civil servants went into self-employment (table 7.6). In addition, there may beimpacts on others. Although SOE workers are rela-tively well paid, those benefits may be shared withhouseholds and extended families.

Assessing Overall PPI BenefitsEvaluating the success of a labor program requiresthat initial objectives be revisited. It asks, whatwere the initial objectives? and did the programmeet those objectives?

An evaluation can be made at two levels:

1. Evaluation against the specific objectives ofthe labor program itself: This is the focushere, especially the impact of redeploymentprograms on workers’ incomes and the peri-od of unemployment, and the impact oflabor adjustment on workers’ welfare.

2. Evaluation of the contribution of the laborprogram to achieving the wider policy objec-tives of PPI: The effects of a labor programmay go well beyond the consequences for indi-


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vidual displaced workers. Table 7.7 indicatesthe scope of a comprehensive assessment—which would include impacts on government,consumers, investors, and labor unions, as wellas workers themselves. Box 7.5 summarizesinformation on the extent to which labor vari-ables influence privatization prices.

MONITORING LABOR PROGRAMSMonitoring of the labor program is a managementtask, but one that is often overlooked and neglected.

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Many workers moveinto self-employment.

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Table 7.5: Turkey—How Workers Used Severance Compensation(percentage of workers)

Petrochemical workers Cement workers Total Use of severance money (n = 682) (n = 563) (n = 1,245)

Established own business 12.8 22.0 17.0

Used for daily expenses 31.4 28.2 30.0

Lent money 6.0 1.7 4.0

Placed time deposit in a bank 22.1 5.4 11.2

Bought a house 40.0 36.1 38.2

Bought gold or foreign exchange 9.4 18.3 13.3

Bought treasury bills 1.6 0.4 1.1

Bought securities 0.9 0.7 0.9

Used interest income for daily expenses 7.1 5.0 6.2

Used rental income for daily expenses 4.2 3.4 3.8

Bought a car 18.1 10.0 16.7

Bought land 3.5 1.4 2.6

Note: Based on an interview where respondents were faced with a number of possible choices and asked to choose as many as applica-ble. So, for example, around 40 percent of petrochemical workers stated that they bought a house with their severance compensation.

Source: Tansel 1996.

Table 7.6: Preferred Employment Status of Redeployed Civil Servants—Ghana

Preferred Agriculture Nonagriculture Totalemployment status Number Percent Number Percent Number Percent

Self-employment 1,124 72 782 65 1,906 69

Cooperative 420 27 260 21 680 24

Private wage employment 20 1 164 14 184 7

Government 2 0 6 0 8 0

Subtotal 1,566 100 1,212 100 2,778 100

No preference (number) 95 n.a. 837 n.a. 932 n.a.

Total sample size (number) 1,661 n.a. 2,049 n.a. 3,710 n.a.

n.a. Not applicable.

Note: Based on sample of workers opting for retraining.

Source: Alderman, Canagarajah, and Younger 1994.


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Table 7.7: Assessing Labor Programs—A Checklist of Potential Effects on Different Stakeholders

ForType of For For For consumers For impact government unions employees and customers investors

Positive •Reduced •Greater job •Salary improve- •Faster access to • Improved financial effects subsidies or security (but ments for improved PPI performance

net costs of for fewer retained services •Reduced costsproviding employees) workers •Evidence of •More flexible labor PPI services •Stronger role, •Changes in growth in contracts

•Time advan- if consulted labor contracts supply of • Improved labor tage from and partici- that affect services productivityfaster com- pate in (improve or (e.g., access pletion of PPI preparation reduce) non- to water) or transaction, of the labor wage benefits demand for and faster program services implemen- (number of tation of passengers investment on trains)or service •Reduced costs improvements to business

•Revenues (e.g., telecom-from PPI munications, transaction transportation)(concession •Reduced tariffs or privatiza- to consumers tion receipts) (services)

•Increases in •Service quality tax revenue improvementsfrom private operators

•No disruption of service (power sup-plies, port operations)

Negative •Political •Loss of •Loss of •Increased •Higher wage or (adverse) costs (if membership salary and tariffs (if benefits costs if effects disputes) numbers other tan- there are negotiated upward

•New incre- •Reduced gible and labor cost by labor prior to PPImental costs bargaining intangible increases) •Less flexible labor

•Financial power benefits for contractsloss if displaced •Loss of valuablerehiring workers skills if adversetakes selectionplace


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Box 7.5: Impact of Downsizing on PPI Prices

The very high levels of downsizing in infra-structure enterprises described in module2 suggest that infrastructure enterprises

are qualitatively different from other privatizationsor PPI schemes. Unfortunately, there is little evi-dence of the impact of downsizing on PPI pricesreceived from investors. In part this is becauseinvestor behavior is inherently complex, and inpart because downsizing is often part of a widerpackage and investor responses to downsizingmay be confounded by other changes (such asrevised labor contracts or relations). In somecases, without work force restructuring it isunlikely that any investor will be found. The dra-matic work force restructuring in Mexico’s air-lines, described in module 4 (Box 4.9) is oneexample. Another is Argentina’s railway, whichRamamurti (1997) characterized prior to privatiza-tion as a “lemon”—an enterprise not attractive toa private investor because it was in a stagnant ordeclining market with poor profit prospects—butnoted that:

The government did several things to turn FA[Ferrocarriles Argentines] from a lemon—notinto a plum—but into a much sweeter proposi-tion than before (a grapefruit?) Four govern-ment steps in that direction were: breaking theFA’s unions, picking up the tab for downsizingits work force, splitting up the company intosmaller parts and then leasing rather than sell-ing its assets. In addition, the unions agreed togreater flexibility in the deployment of workers,and to negotiate contracts with private ownersthat would increase rail’s competitiveness (p.1982).

One attempt to review alternative factors influ-encing privatization prices is that of López-de-Silanes (1997). Using a database of all 236Mexican privatizations between 1983 and 1992,he assessed the factors that influenced privatiza-tion price (as measured by a privatization quo-tient [PQ]). He found that “labor issues play acentral role in explaining privatization prices” (p.997), and that after accounting for endogeneity,reduction in the labor force increased privatiza-tion prices: “the net effect of a 20 percent reduc-tion in the labor force before privatization is a 24percent increase in PQ, evaluated at the predict-ed mean” (p. 1015). Moreover, union relation-ships were important: union contract renegotia-

tion improved privatization prices (although thiswas not statistically different), and industrial dis-putes strongly depressed privatization prices:“one of the strongest results...is that an addition-al strike in an SOE leads to a 19 percent reduc-tion in the net price evaluated at the mean pre-dicted PQ” (p. 997).

A more recent assessment by Chong and López-de-Silanes (2002) undertook follow-up surveys of308 privatized enterprises taken from a globaldatabase of privatizations. Using dummy vari-ables for various labor downsizing policies, theyfound that labor downsizing did little for net pri-vatization prices. The analysis, however, wasunable to differentiate between large levels ofdownsizing—as occur in most infrastructure pri-vatizations—and more modest levels of downsiz-ing (only a quarter of the survey respondents pro-vided any numerical information).

Evidence of the complexity of investor behaviorcomes from private sector work force restructur-ing. The common assumption is that stock mar-ket prices will rise following downsizing. Abrahamand Kim (1999) reviewed a number of studies onthe effects of downsizing on investor behaviorand found that the evidence is inconclusive. Theirown study of 381 firms found that both layoffannouncements and employment guaranteeannouncements lead to reductions in stock mar-ket share prices. They suggested that investorresponse depended on the net result of four pos-sible effects on investor behavior following down-sizing:

1. A positive cost-saving effect (downsizingreduces cost of production)

2. A positive efficiency effect (downsizingimproves overall firm efficiency)

3. A negative industrial relations effect (downsiz-ing leads to poorer labor relations)

4. An ambiguous signaling effect (for a firm ingood shape, layoffs indicate a positiveresponse to changing circumstances; for firmsin poor shape, layoffs confirm that firm per-formance is poor or even worse than expect-ed).

Note: PQ is government’s net privatization price afterrestructuring, adjusted by the percentage of companyshares sold plus total liabilities at the time of privatization,divided by the total assets of the company at the time of privatization.


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Box 7.6: Monitoring and Evaluation DefinedMonitoring is the continuous assessment ofprogram implementation in relationship toagreed schedules and the use of program out-puts by beneficiaries.

Evaluation is the periodic assessment of therelevance, performance, efficiency, and impactof the program in relationship to stated goals ofthe program.

involves both review of performance against targetperformance indicators and foreward-looking fore-casts (see box 7.6). Effective monitoring of thelabor program is integral to good management bythe implementing agency. It provides the agencycontinuous feedback on implementation and identi-fies both successes and problems as early as possibleto facilitate timely adjustments to project operation.

The potential benefits of monitoring assessmentsare large: one study in Tanzania found that theinformation from monitoring studies could havesaved the government up to US$7 million duringthe course of retrenchment of about 5,000 stateenterprise workers.

Given the potential scale of infrastructure workforce adjustment programs (thousands of workers,perhaps tens of millions of dollars), making thecase for monitoring should seem unnecessary. It isclear, however, that when the work force restruc-turing plan is in place, some governments fail tomonitor it adequately.

Why is this so? Five possible reasons:

1. Ownership: a general problem of all moni-toring (and evaluation). If there is no cus-tomer for monitoring information, thenmonitoring systems are unlikely to work.

2. An (incorrect) belief that implementation is theeasy part: When the big decisions have beenmade on the severance package, the mecha-nism of restructuring, and the scope of restruc-turing, the implementing agency and govern-ment officials may feel that the main chal-lenges have been resolved. Unfortunately, allthe evidence suggests that effective work force

restructuring needs strong, active ownershipand strong monitoring during implementation.

3. Compartmentalization within government:Institutional gaps between policy and imple-mentation responsibilities for work forcerestructuring can result in a lack of policycoherence and coordination

4. The desire for a clean break: There may bea concern that follow-up surveys can lead toraised expectations by workers of what gov-ernment may be able—or willing—to do forthem. Particularly if politicians have agreedgenerous severance terms, there may be adesire to minimize all contact with workersfollowing severance.

5. Exaggerated expectations: There is a tenden-cy among politicians and governmentspokesmen to convey exaggerated expecta-tions of what redeployment programs canachieve. Hence, there is little subsequentinterest in monitoring or evaluation if doingso might reveal a different story.

Where day-to-day implementation of some elementsof work force restructuring is delegated to the enter-prise or to other agencies, monitoring systems areparticularly valuable. Here are some key steps thatthe implementing agency can take to help:

• Define and promulgate a set of monitoringindicators, against which the implementationmanagers report, and indeed on which theimplementing agency reports. Possible indica-tors are set out in box 7.7. These indicators ontheir own will not guarantee effective monitor-ing. But the selection of an indicator can helpto ensure that progress is made in that area.

• Require regular staffing reports from theenterprise. These will be especially relevantwhere there are high risks of adverse selec-tion or rehires or a history of labor hoard-ing, or where the PPI process is likely to beslow. A sample monitoring report providedon the accompanying CD-ROM illustrates aformat for monthly or quarterly reporting ofwork force change due to natural retirementand attrition, soft options (such as transfers,

administrative leave, and removal of ghostworkers), early retirement and voluntarydeparture, rehiring, and new hiring.

• Clearly define the objectives and institution-al responsibility for monitoring. This caninclude the creation of special units withinthe implementing agency to monitor compli-ance with labor (and other) conditions inPPI contracts. In Germany the privatizationagency—the Treuhandstadt—set up a spe-cial department responsible for enforcingprivatization contracts using penalties andlegal action; when the agency was dissolved,those monitoring tasks were transferred toanother government body.

Tools (on the CD-ROM)Spreadsheet for analysis of labor projects

Labor program monitoring report

Example terms of reference for impact evaluation

Monitoring and evaluation performance measures forjob-search assistance services


Birdsall, Nancy, and John Nellis. 2002. “Winners andLosers: Assessing the Distributional Impact ofPrivatization.” Working Paper 6. Center for GlobalDevelopment. World Bank, Washington, D.C.

Chen, Yi, and Ishac Diwan. 2000. “When theBureaucrats Move out of Business: A Cost-BenefitAssessment of Labor Retrenchment in China.”Policy Research Working Paper 235. World Bank,Washington, D.C. (Sets out a methodology to esti-mate the costs and benefits of labor retrenchmentin state-owned industrial enterprises in China.)

Dar, Amit, and Indermit S. Gill. 1998. “EvaluatingRetraining Programs in OECD Countries: LessonsLearned.” The World Bank Research Observer13(1):79–101. (Summarizes alternative evaluationtechniques and also reviews the findings of evalua-tions of retraining in OECD countries.)


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Governmentscommonly fail tomonitor laborprograms effectively.

Insufficientinvestment inmonitoring cansuggest that the sizeof theimplementationchallenge has beenunderestimated.

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Box 7.7: Severance and Redeployment: Some Monitoring Indicators

The key objectives of monitoring are toassess overall progress and performanceof the work force restructuring program, to

identify the extent of adverse selection, and toreinforce accountability in the use of publicfunds. Examples of monitoring indicators are:

Severance Indicators

• Numbers of workers displaced by differentmechanisms (early retirement, voluntary depar-ture, mandatory departure, administrativeleave)

• Disaggregation of displaced workers by age,grade, years of service, gender, ethnic group,region

• Disaggregation of displaced workers byskill/job description/operating unit

• Staffing ratios (based on relevant benchmarks,such as those described in module 3)

• Total wages and staff-related costs (from finan-cial management reports)

• Total employment changes in the enterprise—inflows and outflows (monthly or quarterlyreports).

• Time between workers’ termination and receiptof monies

• Time between termination and receipt of audit-ed accounts for disbursement

• Total and average severance payments

• Percentage of disbursements with queries/out-standing (sorted by reason)

• Numbers of appeals filed by workers againstseverance period.

Redeployment Indicators

• Numbers and percentages of displaced work-ers who receive counseling of different types,job-search assistance, training, or retraining

• Disaggregation of displaced worker by age,grade, years of service, gender, ethnic group

• Number (percentage) of dropouts from differ-ent training programs/percentage completingtraining

• Duration of training programs (training days perworker) disaggregated by type of training andby worker characteristics.

Not all of the above indicators are needed. Ingeneral, use as few indicators as necessary.

Haltiwanger, John, and Manisha Singh. 1999.“Cross-Country Evidence on Public SectorRetrenchment.” The World Bank EconomicReview 13(1):67–88. (Reviews evaluations of 41downsizing programs, some in state enterprises andsome in the public sector as a whole.)

Rama, Martin. 1997. “Efficient Public SectorDownsizing.” Policy Research Working Paper1840. World Bank, Washington, D.C. (Provides anoverview of public sector downsizing, and com-ments on approaches to financial and economiccost-benefit analysis of downsizing.)

Rama, Martin, and Donna MacIsaac. 1999.“Earnings and Welfare after Downsizing: CentralBank Employees in Ecuador.” The World BankEconomic Review 13(1):89–116. (Describes anevaluation of the impact of downsizing in a state-owned bank.)

Revenga, Ana, Michelle Riboud, and Hong Tan.1994. “The Impact of Mexico’s RetrainingProgram on Employment and Wages.” The WorldBank Economic Review 8(2):247–77. (Describes animpact evaluation of a retraining program forunemployed and displaced workers.)

Ruppert, E. 1999. “The Algerian RetrenchmentSystem: A Financial and Economic Evaluation.”The World Bank Economic Review 13(1):155–83.(Summarizes an analysis of the retrenchment pro-gram in Algeria that combined both severance andunemployment benefits.)

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