Strategies and Options
RETIREMENT AND REDUNDANCY
If soft options or workplace restructuring options are not enough, voluntary departures, compulsory redundancy, or both may be needed. Given high levels of overstaffing, most PPI schemes will need to turn to these options.
Voluntary departure arrangements are the most widely used mechanism for reducing the size of the work force and arguably are the most politically and socially acceptable largely because of their voluntary nature. A voluntary departure program invites workers to vacate their posts in exchange for a certain compensation package. The compensation may be a cash payment alone or it could be in the form of enhanced pension rights, shares in the new private enterprise, or other emoluments, plus a cash payment. The amount of compensation should act as an inducement to voluntary behavior and therefore is typically more generous than a statutory settlement payable under any national labor laws. Other benefits may also be included in the voluntary departure package (for example, retained rights to medical or housing benefits).
Voluntary programs often include an early retirement component. In such a program, workers cease work before the normal retirement age and receive a partial or full pension (see module 5 for more). Early retirement is usually a voluntary option, but it can be compulsory if the retirement age is reduced for all workers
Voluntary redundancy is the most widely used mechanism for reducing work force numbers in infrastructure companies.
Public-Private Infrastructure Advisory Facility case studies:
- Valdez 2002 (Bolivia)
- López-Calva 2001 (Mexico)
- Ray 2001 (Orissa).
Most implementing agencies have used voluntary rather than compulsory departure as the core of their labor restructuring program (see, for example, the cases of Bolivia rail, Mexico railways, Orissa power distribution, and Brazil railways on the Toolkit CD-ROM). There are many reasons for this:
There are some compelling reasons for voluntary rather than compulsory redundancy.
- Political benefits: It is usually better for government if redundancies can be limited to voluntary redundancies because it demonstrates that there has been limited coercion of the work force (see box 4.8).
- Fairness: A voluntary departure package is an indicator that government is treating workers fairly, which will in turn help smooth subsequent labor programs and SOE reforms.
- Speed: Voluntary departure programs, almost by definition, provide a better severance package than the minimum statutory benefit. Where compulsory redundancy is politically difficult, the enhanced benefit is an incentive for workers to leave relatively quickly and in larger numbers.
- Control of rehiring: Governments and donors alike are wary of creating a "revolving- door" situation where they finance the costs of severance for workers but then rehire those same workers. One problem with compulsory retrenchment through statutory procedures is that government may be legally unable to prohibit the rehiring of workers. In contrast, the voluntary departure offer is usually a bilateral contract between employer (government) and employee, and so enables government to include clauses prohibiting the employee from working again for government or the post-PPI enterprise.
- Getting around restrictive legislation: Compulsory redundancy procedures may be determined by legislation, with statutory procedures, or within collective bargaining agreements or labor contracts. Governments may want to use voluntary departure to avoid compulsory redundancy procedures if those procedures set out mandatory and extended timetables for implementing compulsory redundancy or provide for courtbased challenges–all of which could delay labor adjustment by several months, or if they require particular selection processes (for example, a last-in/first-out selection process might be mandated, even though the staff audit might show a need to retain younger workers with different skills).
In a few cases compulsory redundancy may be the only route or may be a government policy decision.
Box 4.8: Argentina–The Success of a Voluntary Approach
"In November of 1990, Argentina began restructuring its Public Administration and Public Enterprises. Voluntary exit programs were implemented to downsize companies. In 1991 and 1992 there were 28,300 and 56,000 retirements respectively. These programs cost $1 billion financed out of treasury funds, loans from the World Bank and the Inter-American Development Bank, and from the proceeds of the privatization... Such a massive program of state employment reduction has not been without opposition. The weakness and infrequency of this opposition, however, is remarkable. And while clearly many factors have contributed to this...the absence of opposition to the state employment reduction was clearly also due to its purely voluntary nature" (Robbins 1996, pp. 6, 7).
For all these reasons, voluntary departure programs generally have been adopted to ensure a smoother, faster process of work force restructuring with less risk of confrontation with unions or workers.
Compulsory redundancy may be the selected route when:
- The enterprise is liquidated. This has been the case with a number of airlines, including Aeromexico (box 4.9).
- Governments make a policy decision to pay only the statutory minimum, either because of acute financial difficulties or an in-principle objection to "privileged" SOE employees receiving further benefits from government.
- Certain geographic or functional units are closed.
- Compulsory redundancy follows offers of voluntary departure, and insufficient workers have volunteered.
Box 4.9: Aeromexico–Liquidation and Labor Adjustment
One of two Mexican state-owned airlines, Aeromexico (Aeronaves de Mexico), had only 3 profitable years over the 30 years prior to its privatization, and the government had thought that it would be unable to sell the money-loser. But when 7,250 of the airlines ground workers went out on strike in early 1988, the government seized the opportunity to exit. It declared the company bankrupt, terminated all labor contracts, and sold the company as an asset sale. Compensation to workers was paid by Aeronaves, and it was the creditors of Aeronaves who effectively bore the cost of severance because on average they received only about 70 percent of their claims against the company. Tandon (1995) has suggested that some of the better post-privatization performance of Aeromexico compared with that of the other state-owned airline (Mexicana) arose from labor adjustment issues–specifically:
- Mexicana had been unable to match Aeromexico's aggressive campaign to improve service quality (which some observers felt reflected Mexicana's inability to deal with the unreformed labor unions).
- The investors in Mexicana had needed to fund severance costs themselves–over 100 billion (old) pesos in 1992 alone.
Source: Tandon 1995.
Compulsory redundancy is best achieved through clear objectives, open communication, and transparent and fair processes. The amount of statutory payment will be determined by labor laws or labor contracts.
Early retirement, voluntary departure, and compulsory redundancy each have their advantages and disadvantages for the implementing agency, as summarized in table 4.3.
Table 4.3: Advantages and Disadvantages of Early Retirement, Voluntary Departure, and Compulsory Redundancy
- 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)
- Makes a clean break with employees–no continuing government commitments
- Can be structured as a onetime payment with predictable financial costs (and usually a quick payback)
- Is relatively simple to negotiate and implement
- Gives the implementing agency and government flexibility in designing the package
- Is a bilateral contract with employees that often avoids both the legislative procedures and collective bargaining agreement relating to compulsory redundancy
- Is politically acceptable because it is voluntary
- Permits the government to require that anyone selecting voluntary departure agrees not to work again for the public sector, or for the PPI enterprise, and so reduces the "revolvingdoor" problem.
- Makes a clean break with employees– no continuing government commitments
- Can be structured as a one-time payment with predictable financial costs (and usually a quick payback)
- Is likely to be the lowest-cost option if the statutory minimum payment is made to workers
- Produces few adverse selection problems; workers will be selected for compulsory redundancy
- Produces uncertain longerterm 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 financially 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
- Has high immediate costs, especially because these plans tend to be generous
- Demands that particular care be given to the selection process; generous plans can lead to a rapid exodus of the best workers
- Is the most politically difficult to implement
- Needs a formal and strictly implemented process if it is to be seen as a fair and unbiased process
- May have to comply with any collective bargaining agreements with trade unions on which processes to follow in the case of compulsory redundancy
- Consultation and negotiation process can lead to long delays
- Legislation may prevent the implementing agency from imposing a no-rehiring clause on compulsory retrenched workers, thereby opening a "revolving door"