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Privatisation, Restructuring
and Employee Retrenchment in
Brazil: Issues and Policy
Responses
Armando Castelar Pinheiro
Brazilian Development Bank (BNDES)
Conference on “Privatisation, Employment and Employees”
10 – 11 October 2002, Ataköy, Istanbul, Turkey
Privatisation, Restructuring
and Employee Retrenchment in
Brazil: Issues and Policy
Responses
Armando Castelar Pinheiro
Brazilian Development Bank (BNDES)
Conference on “Privatisation, Employment and Employees”
10 – 11 October 2002, Ataköy, Istanbul, Turkey
SD-2
A brief overview of privatisation
Labour market adjustment in 1990-2002
Labour issues in the privatisation process
Main conclusions
A brief overview of privatisation
Labour market adjustment in 1990-2002
Labour issues in the privatisation process
Main conclusions
SD-3
Stage I: Stage I: Small SOEs in Small SOEs in competitive competitive sectorssectors
Stage II: IndustryStage II: Industry SteelSteelPetrochemicalsPetrochemicalsFertilizersFertilizersMining Mining (CVRD - (CVRD -
1997)1997)
Stage III: InfrastructureStage III: Infrastructure RailRailElectricity (partial)Electricity (partial)TelecomTelecomHighwaysHighways
Stage IV:Stage IV: BankingBankingInfrastructureInfrastructureNon-controlling Non-controlling
shareholdingsshareholdings
Stage I: Stage I: Small SOEs in Small SOEs in competitive competitive sectorssectors
Stage II: IndustryStage II: Industry SteelSteelPetrochemicalsPetrochemicalsFertilizersFertilizersMining Mining (CVRD - (CVRD -
1997)1997)
Stage III: InfrastructureStage III: Infrastructure RailRailElectricity (partial)Electricity (partial)TelecomTelecomHighwaysHighways
Stage IV:Stage IV: BankingBankingInfrastructureInfrastructureNon-controlling Non-controlling
shareholdingsshareholdings
Privatisation evolved in three stagesPrivatisation evolved in three stages
SD-4
Total Results (1991-2002)Total Results (1991-2002)US$ millionUS$ million
Steel
Petrochemicals
Mining
Electricity
Sanitation
Oil & Gas
Telecom
Banking
Transports
Minority shareholdings
Others
Total
Steel
Petrochemicals
Mining
Electricity
Sanitation
Oil & Gas
Telecom
Banking
Transports
Minority shareholdings
Others
Total
TotalTotalSale Proceeds
Sale Proceeds
Debt Transferred
Debt TransferredSectorsSectors
August 2002August 2002
5,562
2,698
5,202
24,666
699
6,845
30,491
6,357
2,320
1,149
1,233
87,222
5,562
2,698
5,202
24,666
699
6,845
30,491
6,357
2,320
1,149
1,233
87,222
8,187
3,701
8,761
32,176
699
6,933
33,438
6357
2,320
1,149
1,577
105,298
8,187
3,701
8,761
32,176
699
6,933
33,438
6357
2,320
1,149
1,577
105,298
2,625
1,003
3,559
7,510
-
88
2,947
-
-
-
344
18,076
2,625
1,003
3,559
7,510
-
88
2,947
-
-
-
344
18,076
SD-5
Results by sector (1991-2002)Results by sector (1991-2002)
Electricity: 31 %Electricity: 31 %
Transports : 2 %Transports : 2 %Mining: 8 %Mining: 8 %Telecom: 31 %Telecom: 31 %
Other: 1 %Other: 1 %
Steel: 8 %Steel: 8 %
Petrochemicals: 4 %Petrochemicals: 4 %
Banking: 6 %Banking: 6 %
Oil & Gas: 7 %Oil & Gas: 7 %
Sanitation: 1 %Sanitation: 1 %
Minority shareholdings: 1%Minority shareholdings: 1%
SD-6
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 20011991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
US$ billionUS$ billionUS$ billionUS$ billion37,537,5
2,02,0 3,43,4 4,24,22,32,3 1,61,6
6,56,5
27,727,7
4,44,4
10,710,7
1,81,8
State Govt: State Govt: US$ 34,7 billion US$ 34,7 billion
Federal Govt.: Federal Govt.: US$ 67,5 billionUS$ 67,5 billion
Total: US$ 102,2 billionTotal: US$ 102,2 billion
State Govt: State Govt: US$ 34,7 billion US$ 34,7 billion
Federal Govt.: Federal Govt.: US$ 67,5 billionUS$ 67,5 billion
Total: US$ 102,2 billionTotal: US$ 102,2 billion
Annual distribution of privatisation results (1991-2001)Annual distribution of privatisation results (1991-2001)
SD-7
Total Employment in Six Largest Metropolitan Areas (Number of Workers)
Total Employment in Six Largest Metropolitan Areas (Number of Workers)
2000000
2500000
3000000
3500000
4000000
4500000198
2
198
3
198
4
198
5
198
6
198
7
198
8
198
9
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
10000000
11000000
12000000
13000000
14000000
15000000
16000000
17000000
18000000
Manufacturing Total
SD-8
Unemployment and Productivity (Mnfg) in 1981-2002
Unemployment and Productivity (Mnfg) in 1981-2002
80
90
100
110
120
130
140
150
160
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
0
1
2
3
4
5
6
7
8
9
Productivity Unemployment
SD-9
Number of Employees and Salary Expenditures (1994)
Number of Employees and Salary Expenditures (1994)
Number of employees Salary expenditures Sector Number % % of GDP % Finance 145132 19.3 1.91 50.3 CVRD 21263 2.8 0.11 2.9 Eletricity 44245 5.9 0.24 6.3 Oil 54551 7.3 0.38 10.0 Telecom 109497 14.6 0.38 10.0 Ports 13693 1.8 0.05 1.3 Steel (1991) 68914 9.2 Rail 58215 7.7 0.12 3.2 Other 236503 31.4 Total 752013 100.0 3.80* 100.0 (*) Does not include steel sector.
In 1994, employment in Federal SOEs represented less than 2% of the overall non-agricultural employment,
In 1994, employment in Federal SOEs represented less than 2% of the overall non-agricultural employment,
SD-10
Ratio of Salary to Investment Expenditures: 1980-94 (%)Ratio of Salary to Investment Expenditures: 1980-94 (%)
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1980 1982 1984 1986 1988 1990 1992 1994
SD-11
Investment by Federal-Owned SOEs: 1980-94 (% of GDP)Investment by Federal-Owned SOEs: 1980-94 (% of GDP)
0
1
2
3
4
5
6OtherItaipuRailSteelPortsTelecomOilEletricityCVRDFinance
Short-Term Impact of Privatisation on Employment
Overall employment fell by a third, comparing the pre- and post-privatisation periods
Three-fourths of this downsizing took place prior to sale, while preparing the companies for sale
Downsizing was less pronounced for employees working in production lines
SD-13
Employment and salariesEmployment and salaries
Median %
Change
Companies
with growthBefore After
Number of employees
Employees in production activities
Average salary*
132.0
125.8
76.5
88.4
88.7
96.5
-33.0 %
-29.5 %
26.1 %
2.4 %
10.0 %
64.7 %
* Total salary expenditures/number of employees.
Year of privatisation = 100
CSN: Employment and Productivity
22,134
18,222
16,125
15,14715,082 14,773
13,707
11,086
10,995
163 160
225
295 296 314 326
403
542
-
5,000
10,000
15,000
20,000
25,000
1989 1990 1991 1992 1993 1994 1995 1996 1997
Year
Em
plo
ym
en
t
-
100
200
300
400
500
600
Pro
du
ctiv
ity
Employment Productivity (tons/employee/year)
Embraer: Productivity(US$ 1000/employee/year)
41
82
109
191
020
4060
80100
120140
160180
200
1994 1995 1996 1997
CVRD: Employment and Productivity
18,440 17,829 17,766
15,573
15,483
10,865
113,1
114,3128,8
158,2178,1
255,7
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
1992 1993 1994 1995 1996 1997
Ano
Em
plo
ym
en
t
0
50
100
150
200
250
300
Pro
du
tivi
ty
Employment Productivity (US$1000/emp,year)
Railways: Employment
44,601
24,603
13,607
0
10,000
20,000
30,000
40,000
50,000
Before Adjustment Period After
Railways: Productivity
-
50
100
150
200
250
300
350
400
1995 1996 1997
Centro-Atlântica MRS-Logística Tereza Cristina Sul-Atlântica Novoeste
Number of employees engaged in Number of employees engaged in
R&D declined, but R&D declined, but Better educated people were hired, Better educated people were hired,
with an overall improvement in with an overall improvement in
quality.quality.
Number of employees engaged in Number of employees engaged in
R&D declined, but R&D declined, but Better educated people were hired, Better educated people were hired,
with an overall improvement in with an overall improvement in
quality.quality.
19
Impact on R&D Employment
SD-21
The impact on overall employment varied from one
sector to another
The impact on overall employment varied from one
sector to another In mature sectors (steel, petrochemicals, etc.),
the rise in productivity tended to prevail.
In infrastructure, privatisation led to a major increase in supply, often compensating for the rise in productivity.
Moreover, in infrastructure privatisation allowed for regulatory reform that brought new players (and jobs) into the market.
Taking all these effects together, privatisation has had a positive impact on employment
In mature sectors (steel, petrochemicals, etc.), the rise in productivity tended to prevail.
In infrastructure, privatisation led to a major increase in supply, often compensating for the rise in productivity.
Moreover, in infrastructure privatisation allowed for regulatory reform that brought new players (and jobs) into the market.
Taking all these effects together, privatisation has had a positive impact on employment
SD-22
Anecdotal evidenceAnecdotal evidence In the year following privatisation employment fell by 10
thousand jobs in the 40 companies considered in the survey (excluding the telecom companies) compared to the year of sale, and by 35 thousand jobs compared to employment in the year before,
145 thousand new jobs were created in the telecom companies alone (including the new telecom companies created after market liberalisation)
13 mil jobs were created in the highway concessionary companies
In only one of the 37 highway concessions awarded until 1999, 3,500 jobs were created in outsourced activities (cleaning, signalling etc,)
One of the new (B-band) cellular operators has 1,239 suppliers
In the year following privatisation employment fell by 10 thousand jobs in the 40 companies considered in the survey (excluding the telecom companies) compared to the year of sale, and by 35 thousand jobs compared to employment in the year before,
145 thousand new jobs were created in the telecom companies alone (including the new telecom companies created after market liberalisation)
13 mil jobs were created in the highway concessionary companies
In only one of the 37 highway concessions awarded until 1999, 3,500 jobs were created in outsourced activities (cleaning, signalling etc,)
One of the new (B-band) cellular operators has 1,239 suppliers
SD-23
Critical management problems in privatised companiesCritical management problems in privatised companies
Technological backwardness
Lack of maintenance of equipment and installations
Poor information systems
Significant environmental liabilities and debts with tax authorities
Lack of strong business culture and excessive focus on production (engineering-oriented)
Excessive number of hierarchical management levels
Staff lacked motivation
Often, time with the company, rather than merit, as the main criterion for promotion
Large number of labour judicial disputes
Technological backwardness
Lack of maintenance of equipment and installations
Poor information systems
Significant environmental liabilities and debts with tax authorities
Lack of strong business culture and excessive focus on production (engineering-oriented)
Excessive number of hierarchical management levels
Staff lacked motivation
Often, time with the company, rather than merit, as the main criterion for promotion
Large number of labour judicial disputes
SD-24
OutsourcingOutsourcing
Direct impact of privatisation was not large, although there
were exceptions
Core business activities that had been outsourced started to
be carried out directly by the companies
Outsourcing increased in the cases of security, catering and
transportation of employees and, in some companies,
maintenance of facilities and computer services.
Direct impact of privatisation was not large, although there
were exceptions
Core business activities that had been outsourced started to
be carried out directly by the companies
Outsourcing increased in the cases of security, catering and
transportation of employees and, in some companies,
maintenance of facilities and computer services.
Although privatisation affected only a small share of the labour force, it faced strong political opposition,
To deal with inside opposition, the government offered:
Incentives for early retirement (age-skewed downsizing)
Bonus for workers willing to leave the firm
Possibility of buying company shares at highly subsidised prices
158,647 employees bought subsidised shares as part of the privatisation of their companies, accounting for US$ 731.4 million in revenues,
The share of total capital offered to employees ranged from 3.1% to 20%,
The percentage of capital subscribed in individual companies ranged from 0.1% (Álcalis and Geraul) to 20% (Açominas, Cosipa and Caraíba)
In some cases public credit was extended to employees to buy shares
With privatisation, company bylaws were changed to include a representative of employees in the board of directors.
26
Structure of share sales in the case Structure of share sales in the case of CVRDof CVRDStructure of share sales in the case Structure of share sales in the case of CVRDof CVRD
TotalTotalTotalTotalPreferredPreferredStockStock
PreferredPreferredStockStock
Common Common StockStock
Common Common StockStock
Strategic InvestorStrategic Investor
EmployeesEmployees
Global OfferGlobal Offer
TotalTotal
Strategic InvestorStrategic Investor
EmployeesEmployees
Global OfferGlobal Offer
TotalTotal
40 - 4540 - 45
4.454.45
26.5 - 31.526.5 - 31.5
7676
40 - 4540 - 45
4.454.45
26.5 - 31.526.5 - 31.5
7676
00
6.36.3
--
6.36.3
00
6.36.3
--
6.36.3
26 - 2926 - 29
5.15.1
17 - 2017 - 20
5151
26 - 2926 - 29
5.15.1
17 - 2017 - 20
5151
2323
Often, employees ended up accepting privatisation without much opposition
Although there was the perception that bloated work forces would need to be downsized, employees favoured privatisation for various reasons:
In some companies (e.g., CSN and Embraer), there was the perception that the alternative to privatisation was closing the company down
State ownership was perceived to limit management flexibility, access to finance and competitiveness
Privatisation offered the possibility to make a financial gain
For younger employees, privatisation offered a greater opportunity to advance in the company
SD-28
It was often the case, though, that employees did not hold on to the shares they bought.
In most of the cases in which employees kept their shares, they participated in investment clubs with important shareholdings in the company, often participating in the controlling group.
Although there is no systematic evaluation of how well SOE employees did with privatisation, anecdotal evidence suggests that
For employees who kept their jobs, privatisation seems to have been in general positive
For those who left the company, the evidence is mixed, with many former workers engaging in unsuccessful businesses of their own
It was often the case, though, that employees did not hold on to the shares they bought.
In most of the cases in which employees kept their shares, they participated in investment clubs with important shareholdings in the company, often participating in the controlling group.
Although there is no systematic evaluation of how well SOE employees did with privatisation, anecdotal evidence suggests that
For employees who kept their jobs, privatisation seems to have been in general positive
For those who left the company, the evidence is mixed, with many former workers engaging in unsuccessful businesses of their own
Main conclusions The promises of privatisation were, broadly speaking,
fulfilled, contributing to limit the growth of the public debt, raising investment and efficiency and, through the attraction of FDI, helping to close the external accounts.
The impact on employment has been mixed.
The workforce of the SOEs has declined, with the rise in productivity more than compensating that of output.
In some sectors, notably in infrastructure, though, the overall increase in sector output has led to higher employment levels.
Overall, however, privatisation played a minor role in labour market dynamics, due to the relatively small size of the SOEs’ workforce
Main conclusions
Employee opposition to privatisation was successfully mitigated by selling SOE shares to employees at subsidised prices.
With privatisation human resource policy changed to reduce the number of management levels and make promotion schemes more merit sensitive.
Pension schemes were also geared towards defined contribution schemes and sounder management.
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