Role of Employee Considerations in Privatization Policy - The Case of Chinese Taipei-

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Role of Employee Considerations Role of Employee Considerations

in Privatization Policyin Privatization Policy --The Case of Chinese Taipei-The Case of Chinese Taipei-

Kuei-Lin ChangKuei-Lin ChangDirector General

Council for Economic Planning & DevelopmentChinese Taipei

Conference on Privatization, Employment and EmployeesIstanbul, Turkey 10 October 2002

Session I: Session I: THE IMPACT OF PRIVATIZATION ON EMPLOYMENT & EMPLOYEESTHE IMPACT OF PRIVATIZATION ON EMPLOYMENT & EMPLOYEES

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CONTENTSCONTENTS• Background of Taiwan’s Privatization Background of Taiwan’s Privatization • Working Conditions in Taiwan’s SOEsWorking Conditions in Taiwan’s SOEs• The Legal Framework of Taiwan’s PrivatizationThe Legal Framework of Taiwan’s Privatization• Policy Design for Employees’ Rights & InterestsPolicy Design for Employees’ Rights & Interests• Dimensions of Policy ImpactDimensions of Policy Impact• Prospect of Taiwan’s PrivatizationProspect of Taiwan’s Privatization• Concluding RemarksConcluding Remarks• AppendicesAppendices

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Background of Taiwan’s privatization Background of Taiwan’s privatization -1-1• The contribution of the SOEs in TaiwanThe contribution of the SOEs in Taiwan

- playing a significant role in the 1970s and then going slowly down.

1951 1961 1971 1981 1991 1996 2000

% share in GDP 14.7 15.9 16.7 16.0 13.4 10.8 9.5

% share of domestic

capital formation

29.1 35.2 32.7 31.6 24.1 13.3 9.8

% share of government

net revenues

3.7 9.4 10.5 9.4 6.6 9.0 8.2

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• 31 main SOEs in year 200131 main SOEs in year 2001:• Total Assets: US$ 593.8 billion

• Total Owners’ Equity: US$ 119.6 billion

• Annual Sales: US$ 80.8 billion

• Profit Before Tax: US$ 7.9 billion

• Number of Employees: 188,357

Background of Taiwan’s privatization Background of Taiwan’s privatization -2-2

• In addition to few utility SOEs (legal monopolies),In addition to few utility SOEs (legal monopolies), profitability and productivity of most SOEs in th profitability and productivity of most SOEs in the competitive industries fall behind their private ce competitive industries fall behind their private counterparts.ounterparts.

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– Employees of SOEs used to enjoy much better benefits than their private counterparts.• e.g. the average monthly salary in the public/private enterprises

in year 2000:

Working Conditions in SOEsWorking Conditions in SOEs

SectorPublic

Enterprises (A)Private

Enterprises (B)A/B(%)

Average 78,900 36,539 216Manufacturing 62,770 35,146 179

Utility 67,729 57,721 117Construction 66,907 36,299 184

Transportation & Telecom 119,197 37,320 319Financial Services 58,325 45,226 129

Unit: NT$ (1 US$=34.5 NT$)

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– In year 2000, employees in 90% SOEs work 42 hours on average per week but only 46% private businesses offer the same conditions.

– The ratio of labor cost to sales in most SOEs reaches 30% or more which is rare in the private businesses.

Accordingly, there is great fear of job loss, reduction in salary and fringe benefits, increase in workload and work pressure among employees in the SOEs chosen for privatization!!

Working Conditions in SOEs Working Conditions in SOEs -1-1

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• The Statute for Transforming State-Owned Enterprises into Privately-Owned Enterprises (STSP) :

– the law governing the process of privatization and regulating the rights & obligations of relevant entities in the process.

empower the line ministries to empower the line ministries to draw up the detailed regulationsdraw up the detailed regulations

MOEAMOEAVACVAC MOFMOFMOTCMOTC

Administrative Regulations on preemptive & favored shares subscription of Employees

Administrative Regulations on compensation for Employees’ rights & interests

The Legal Framework of The Legal Framework of Taiwan’s Privatization PolicyTaiwan’s Privatization Policy

Enforcement Rules of the STSP

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• Legal protection on employees’ rights and interests are set out in Article 8 of the STSP, including:

• Job Security with conditionsJob Security with conditions• Seniority SettlementSeniority Settlement• Severance PaySeverance Pay• Compensation for Insurance DiscrepancyCompensation for Insurance Discrepancy• Priority Shares & Favored Subscription Prices for Long-term HoldingPriority Shares & Favored Subscription Prices for Long-term Holding• Vocational Training & Displacement ServicesVocational Training & Displacement Services

Policy Design for Policy Design for Employees’ Rights & InterestsEmployees’ Rights & Interests

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the time of the time of privatizationprivatization

Seniority Seniority settlement for settlement for all employeesall employees

Seniority Seniority settlement for settlement for all employeesall employees

Transferred Transferred concurrentlyconcurrently

Not transferred Not transferred concurrentlyconcurrently

Stay onStay on

Being laid off within 5 years Being laid off within 5 years of privatizationof privatization

•Severance paySeverance pay•Compensation for Compensation for insurance discrepancyinsurance discrepancy

•Vocational training & Vocational training & displacement servicesdisplacement services

•Severance paySeverance pay•Compensation for Compensation for insurance discrepancyinsurance discrepancy

•Vocational training & Vocational training & displacement servicesdisplacement services• Priority sharesPriority shares

• Favored offering for Favored offering for long-term shareholdinglong-term shareholding

• Priority sharesPriority shares• Favored offering for Favored offering for long-term shareholdinglong-term shareholding

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• Job Security:Job Security:– When a SOE is transformed into a POE, the

employees can be transferred concurrently as they desire.

– Premise:Premise: unless otherwise provided in an agreement between the original and new employers upon the change of legal status of the original enterprise (e.g. reorganization or assignment of the unit(s) of the enterprise)


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• Seniority Settlement:Seniority Settlement:– The original owner of the enterprise shall, on the date of privatization, settle the account of

all employees’ benefits in terms of their respective lengths of service based on the criteria for payment of retirement set out in the Labor Standards Law:

• 2 month’s salary for each year of the first 15 years of service; one month salary for the rest years. • Seniority settlement pay shall not exceed 45 months’ salary in total.

– After employees’ account have been settled, the calculation of their service year shall start anew.


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• Severance Pay:Severance Pay:• The employees who are not transferred concurrently or being laid off

within 5 years after privatization shall be entitle to the “severance pay”, including

• 6 months’ salaries• additional wage payable for the period of the one-month advance notice


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• Compensation for Insurance Discrepancy:Compensation for Insurance Discrepancy:– Where the employees suffer the losses of pension payable to them

because of the original insurance scheme interrupted by privatization, their losses of such benefits shall be duly compensated.

The scope of all other compensation shall be limited to the losses which incurred at the time or privatization.


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• Priority Shares for Employees:Priority Shares for Employees:– encouraging employees’ participation in corporate governance through their shareholdings – The employees are entitled to preemptively subscribing a specific amount of shares. Each

employee is allowed to buy shares equal in value up to his 48 months' salary.– priority shares for employees shall not exceed in total 35% of outstanding shares.

• Reserved shares in favor of employees holding shares for 1 or 2 year(s)Reserved shares in favor of employees holding shares for 1 or 2 year(s)– a certain ratio of shareholding can be additionally subscribed at par value.


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• How much compensation can an employee obtain from privatization of his company?How much compensation can an employee obtain from privatization of his company?¤ Assumptions: a middle ranked employee with 15 years of service.Assumptions: a middle ranked employee with 15 years of service.• Seniority settlement: NT$2.5 million (US$72,464)Seniority settlement: NT$2.5 million (US$72,464)• Insurance compensation: NT$0.5 million (US$14,493)Insurance compensation: NT$0.5 million (US$14,493)• Severance pay (*): NT$0.56 million (US$16,232)Severance pay (*): NT$0.56 million (US$16,232)• Preemptive subscription of shares equal in value up to NT$3.84 m in the run up to privatization.Preemptive subscription of shares equal in value up to NT$3.84 m in the run up to privatization.(*): only for those who don’t transfer concurrently or laid off within 5 years after privatization.


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• Vocational Training & Displacement Services:Vocational Training & Displacement Services:

– Employees who are not transferred concurrently or laid off in 5 years after privatization shall be provided with secondary specialty training and displacement services rendered by the administrative authority in charge of labour affairs.


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• Special Fund is raised to help financially difficult SOEs:

– Part of government’s revenues from privatization should

be appropriated to a special fund (Article 15 of the STSP)

– The Privatization Fund is mainly to finance the shortage

as required by the financially troubled SOE for payment o

f the severance pay and/or seniority settlement amount to

its employees.

How are employees’ rights in financially How are employees’ rights in financially difficult SOEs being protected?difficult SOEs being protected?

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Employees’ attitudes toward legal Employees’ attitudes toward legal protection on their rights & benefitsprotection on their rights & benefits

Source: a commissioned research project by the CEPD in 2002.

Notes/ 1: very unsatisfactory; 6: very satisfactory; 3~4: neutral

Rights & Benefits Employee Approval

Job security 3.9 Priority shares & long-term shareholding 4.0

Seniority settlement 4.2

Severance pay 4.5 Compensation for insurance discrepancy 4.2

Job-transfer training & displacement assistance

3.2

Overall protection 3.4

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Dimensions of Policy ImpactDimensions of Policy Impact

Dimensionsof Impact

Macro-viewindustry-level

Micro-viewfirm-level

Economic Economic freedom Aggregate efficiency Market development Government revenue Public sector borrowing …

Operational efficiency Profitability Business expansion Share price…

Social National or regionalunemployment

Service qualities Income inequity…

Redundancy Salary and wage level Utility fares…

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MarketShare

Financialleverage

Mainbusiness

Profitability LaborProductivity

Degree ofdiversification

1 - - × -

2 × × ×

3 - ×

4 - × Same

5 × ×

6 - - -

worse ; worse ; better; better; much better much better

1 China Insurance; 2 BES Engineering; 3 China Petrochemical; 4 China Steel; 5 YangMing Marine; 6 Liquidized Petroleum Supply.

Impact on Performances: Impact on Performances: the cases of 6 privatized SOEsthe cases of 6 privatized SOEs

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• Theory:Theory:– employment levels will be reduced around the t

ime of privatization as a result of work reorganization initiatives, measures for labor shedding and attempts to get employees to work harder.

• Practices:Practices:– impact on levels of employment is mixed due to

the mediation by political-institutional context which those privatized SOEs exposed to market competition.

Impact of Privatization on EmploymentImpact of Privatization on Employment

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• Job Security: international comparison 5.75%5.75% reduction in employment after 3 years

from privatization based on 39 privatized SOEs in the world (Megginson, W.L. et al , 1994).

7.4%7.4% reduction in employment after 3 years from privatization based on 13 privatized SOEs in Taiwan (CEPD, 1999).

Impact of Privatization on Employment Impact of Privatization on Employment -1-1

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• Job Security: little impact on national unemployment

Year 1994 1995 1996 1997 1998 1999 2000

NationalUnemployment

Ratio (%)1.56 1.79 2.60 2.72 2.69 2.92 2.99

UnemploymentRatio in the

Public Sector (%)4.26 4.87 3.80 3.25 3.55 3.18 2.74

Public sector accounts only for Public sector accounts only for 6.7% labor force in Taiwan.6.7% labor force in Taiwan.

Public sector accounts only for Public sector accounts only for 6.7% labor force in Taiwan.6.7% labor force in Taiwan.


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• Dilemma of promoting privatization in a time of economic slowdown:– Some poorly managed SOEs have turned to be a serious financial burden to government. Only this year the loss of US$650 million is estimated to incur.– Strongly promoted privatization or corporate restructuring will inevitably causes redundancy which is politically disadvantageous to regional employment.

Privatization will remain on the government agenda, but be implemented in more cautious manner to avoid exacerbating unemployment problem.Privatization will remain on the government agenda, but be implemented in more cautious manner to avoid exacerbating unemployment problem.


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• The case of a state-owned construction company which was privatized in June 1994.

1 yearbefore p-day

The year ofp-day

1 year afterp-day

2 yearsafter p-day

Average (a) 210 203 158 186mid-level 223 300 292 281Hi-level 259 347 343 329Top-level (b) 587 700 690 654b/a 2.80 3.44 4.36 3.52

• Average salary & wage level in the construction industry = 100• p-day = the day of privatization

Impact of Privatization on Pay StructureImpact of Privatization on Pay Structure

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• The time for an overall appraisal of the impact of privatization on labor management and industrial relations seems ripe after 12 years from government’s initiative.

• The full impact and enduring effects of privatization on industrial relations might lag far behind ownership change and had not yet been covered by prior studies.

Impact of PrivatizationImpact of Privatization

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(1). Privatization proceeds US$11.35 billion

(2). Related expenditures US$4.1 billion

Net Revenue: (1)-(2) US$7.25 billion

The Costs &Benefits of Taiwan’s The Costs &Benefits of Taiwan’s Privatization PolicyPrivatization Policy

Notes:Notes:

(1) Privatization proceeds include sales of shares and assets for those pri(1) Privatization proceeds include sales of shares and assets for those privatized SOEs.vatized SOEs.

(2) Related expenditures cover mainly the payments for the seniority set(2) Related expenditures cover mainly the payments for the seniority settlement, redundancy and insurance compensation of employees in privattlement, redundancy and insurance compensation of employees in privatized SOEs.ized SOEs.

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Prospect of Taiwan’s PrivatizationProspect of Taiwan’s Privatization

• 17 SOEs have been chosen and approved by the Premier to be privatized by the end of year 2007.

• The deadlines and methods are currently being reconsidered by the authorities.

Utility Industrial Firms

Financial Institution

MOEA 2 6 MOTC 2 1 VAC 5 MOF 1

•Telecom•Railway

•Petro•Power

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• The legal protection on employees’ rights & The legal protection on employees’ rights & benefits in Taiwan’s privatization is high by benefits in Taiwan’s privatization is high by international standards.international standards.

• With employees’ rights & benefits being With employees’ rights & benefits being reasonably protected, Taiwan will fulfill its reasonably protected, Taiwan will fulfill its privatization commitment as well as introduce privatization commitment as well as introduce competition into all markets by stages.competition into all markets by stages.

• Deregulation and exposure to market Deregulation and exposure to market competition have a more powerful impact on competition have a more powerful impact on firm behavior than privatization per se.firm behavior than privatization per se.

Concluding Remark:Concluding Remark:Privatization v.s. Employees’ RightsPrivatization v.s. Employees’ Rights

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• The timing for promoting privatization The timing for promoting privatization may cause some concerns in a time of may cause some concerns in a time of economic downturn. While structural economic downturn. While structural reform may be costly, it will restore public reform may be costly, it will restore public confidence and create social welfare in the confidence and create social welfare in the long term.long term.

• Communication with employees is indispensable. However, the government should not bow to political gimmicks. political gimmicks.

Concluding Remark:Concluding Remark:Privatization v.s. Employees’ RightsPrivatization v.s. Employees’ Rights

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More Information about More Information about Taiwan’s PrivatizationTaiwan’s Privatization

More details of privatization in Chinese Taipei can bMore details of privatization in Chinese Taipei can be found at the website:e found at the website:

http://www.cepd.gov.tw/english/special/9002212.htmhttp://www.cepd.gov.tw/english/special/9002212.htm

or

contact directly with:Mr. Peter C. S. Lee Mr. Peter C. S. Lee Sectoral Planning Department, CEPDSectoral Planning Department, CEPD

Tel: 886-2-2316 5497Tel: 886-2-2316 5497

e-mail: [email protected]: [email protected]

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AppendicesAppendices

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A Glance at TaiwanA Glance at Taiwan

• Location: The island is almost equidistant from Shanghai and Hong Kong.

• Area: 36,000 square kilometers (roughly equal to the size of the Net

herlands).

• Population: 22 million.

• GNP per capital: US$14,216 (in year 2000)

• Foreign Exchange Reserves: US$106.7 billion

• 14th largest trading country in the world.

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China

The Location of TaiwanThe Location of Taiwan

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– The 1950s: The STSP was promulgated in support of the land reform program, the legal basis of privatization policy was thus established.

– The 1960s: Some SOEs floated in support of the newly established stock exchange.

– The 1970s: Several capital intensive SOEs were established in National Infrastructure Projects.

– The mid-1980s: Few SOEs went bankrupt. SOE’s role as a policy instrument had gradually changed to a fiscal burden.

Retrospect of Taiwan’s privatizationRetrospect of Taiwan’s privatization

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• The late-1980s: Government restarted the privatization policy in the face of global trend of liberalization and changing domestic political & economic environment.

• The mid-1990s: Several consensus were reached by major political parties at the “National Development Conference” held in late 1996:– 42 chosen SOEs should be privatized in 5 years.– Privatization should be promoted in broader scope.– State holdings of the privatized SOEs in the competitive

industries should be entirely released in 5 years.

Retrospect of Taiwan’s privatization Retrospect of Taiwan’s privatization -1-1

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Institutional Framework of Institutional Framework of Management of SOEs & State HoldingsManagement of SOEs & State Holdings

•CNC: Commission of National Corporations

•MOTC: Ministry of Transportation & Communication

•VAC: Veteran Affairs Council

•SCPPS: The Steering Committee for Promoting Privatization of SOEs

•MOF: Ministry of Finance

•MOEA: Ministry of Economic Affairs

PremierPremier

SCPPSSCPPS

MOF MOEA MOTC VACOther

Ministries

5 SOEs11 privatized SOEs

CNC

10 SOEs 6 privatized SOEs



4 privatized SOEs

The Steering Committee for Promoting Privatization of SOEs (SCPPS)

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The Definition of Taiwan’s The Definition of Taiwan’s PrivatizationPrivatization

• A state-owned enterprise with less than hA state-owned enterprise with less than half (50%) of the equity shares being held alf (50%) of the equity shares being held by government has transformed itself intby government has transformed itself into a privately-owned enterprise .o a privately-owned enterprise .

• The parliament has the monitoring power over SOEs in accordance with the provisions of the Budget Law.

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Government’s ApproachesGovernment’s Approaches - -The scope of Taiwan’s privatizationThe scope of Taiwan’s privatization

While a SOE is deemed unnecessary by the competent authority after considering the current situation, the transformation is brought into effect after a privatization proposal has been reported to and approved by the Premier.

- Article 5 of the STSP

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• Privatization Privatization of SOEs (particularly for utility companies) must be proceeded in concert with market liberalizationmarket liberalization.

• e.g. Privatization of Chung-Hwa Telecom Corp.

Time Progress of Deregulation

Aug. 1987 User-end terminal devices

Jun. 1989 Value-added telecom services

Jan. 1997 2G mobile phone licenses

Dec. 1999 Satellite telecom services

Jul. 2001 Fixed line telecom services

Mar. 2001 3G mobile phone licenses

Dec. 2003 Privatization of state-owned Chung-Hwa Telecom.

Government’s ApproachesGovernment’s Approaches - -Privatization v.s. LiberalizationPrivatization v.s. Liberalization

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• The privatization of a SOE can be proceeded in the following manners for unspecified investors:

•Share selling (e.g. IPO, auction, book-running, Depositary Receipt)•Assets selling through public tender process•Providing the assets of a SOE as the equity capital contribution•Merging with a private enterprise•Right issue by private capital to dilute state ownership

• For public solicitation of private investor(s): •Approval from the Premier for soliciting terms & conditions•Entering into negotiation with private investor(s)•Submit the content of deal to the Parliament for recordation

Government’s ApproachesGovernment’s Approaches - -The methods of Taiwan’s privatizationThe methods of Taiwan’s privatization

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• Employee-Buy-Out: Employees of two financially troubled SOEs raised capital to buy and lease part of operating assets of their companies respectively in this year.

• Other forms of privatization: Such as contracting out, management contract, Leasing etc. have been applied in some public services and considered feasible for some loss-making SOEs.

Government’s ApproachesGovernment’s Approaches - -The methods of Taiwan’s privatization-2The methods of Taiwan’s privatization-2

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Taiwan’s Taiwan’s StrengthStrength in in promoting privatizationpromoting privatization

• Mature capital market: (May 2002)

– Market capitalization of US$300 billion– Annual trading values of US$ 556 billion in 2001– 593 listed companies (excluding 397 OTC listing

firms)

• Rich experience accumulated in privatizing 27 SOEs in various sectors.

• A stable institutional framework composed of a set of laws and regulations (the next slide).

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Taiwan’s Taiwan’s WeaknessWeakness in in promoting privatizationpromoting privatization

• Opposition from vested interest groups:– Labor union: bargain for

• working conditions unchanged

• more compensation for their benefits & interests interrupted by privatization

• participation in corporate government (mitbestimmungsrecht)

– Some legislators– Management level of some SOEs

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• Up to July 2002, 27 SOEs have been privatized, yielding total proceeds of US$ 12.5 billion.

Accomplishment of Taiwan’s Accomplishment of Taiwan’s PrivatizationPrivatization

• 15 small-scale factories have been closed down upon deliberate reviews by the authorities.

Manufacturing Financial services

Transportation Others

Share selling 4 13 2 Asset selling 3 2

Assets as equity contribution 1

Employee buy-out 1 1

Documents

Role of Employee Considerations in Privatization Policy - The Case of Chinese Taipei-