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.