Privatisation, Restructuring and Employee Retrenchment in Brazil: Issues and Policy Responses

1. 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

2. A brief overview of privatisation Labour market adjustment in 1990-2002 Labour issues in the privatisation process Main conclusions

3. Privatisation evolved in three stages Stage I: Small SOEs in competitive sectors Stage II: Industry Steel Petrochemicals Fertilizers Mining (CVRD - 1997) Stage III: InfrastructureRail Electricity (partial) Telecom Highways Stage IV: Banking Infrastructure Non-controlling shareholdings

4. US$ million Sale Proceeds Debt Transferred Sectors Total 5,562 2,698 5,202 24,666 699 6,845 30,491 6,357 2,320 1,149 1,233 87,222 2,625 1,003 3,559 7,510 - 88 2,947 - - - 344 18,076 Steel Petrochemicals Mining Electricity Sanitation Oil & Gas Telecom Banking Transports Minority shareholdings Others Total 8,187 3,701 8,761 32,176 699 6,933 33,438 6357 2,320 1,149 1,577 105,298 August 2002 Total Results (1991-2002)

5. Oil & Gas: 7 % Sanitation: 1 % Electricity: 31 % Other: 1 % Banking: 6 % Steel: 8 % Petrochemicals: 4 % Minority shareholdings: 1% Telecom: 31 % Mining: 8 % Transports : 2 % Results by sector (1991-2002)

6. US$ billion State Govt: US$ 34,7 billion Federal Govt.: US$ 67,5 billion Total: US$ 102,2 billion 37,5 27,7 10,7 6,5 4,4 4,2 3,4 2,0 2,3 1,8 1,6 Annual distribution of privatisation results (1991-2001)

7. Total Employment in Six Largest Metropolitan Areas (Number of Workers)

8. Unemployment and Productivity (Mnfg) in 1981-2002

9. Number of Employees and Salary Expenditures (1994) In 1994, employment in Federal SOEs represented less than 2% of the overall non-agricultural employment,

10. Ratio of Salary to Investment Expenditures: 1980-94 (%)

11. Investment by Federal-Owned SOEs: 1980-94 (% of GDP)

12. 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

13. % Change Companies with growth Median Before 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. Employment and salaries Year of privatisation = 100

14. CSN: Employment and Productivity 25,000 600 542 22,134 500 20,000 18,222 16,125 400 15,082 14,773 403 15,000 13,707 15,147 Employment 300 Productivity 326 10,995 314 295 296 10,000 11,086 200 225 163 160 5,000 100 - - 1989 1990 1991 1992 1993 1994 1995 1996 1997 Year Employment Productivity (tons/employee/year)

15. Embraer: Productivity(US$ 1000/employee/year)

16. CVRD: Employment and Productivity 20,000 300 255,7 18,000 18,440 250 15,483 17,829 17,766 16,000 15,573 14,000 200 12,000 158,2 178,1 Employment 10,000 150 Produtivity 10,865 114,3 8,000 128,8 100 113,1 6,000 4,000 50 2,000 - 0 1992 1993 1994 1995 1996 1997 Ano Employment Productivity (US$1000/emp,year)

17. Railways: Employment 44,601 50,000 40,000 24,603 30,000 20,000 13,607 10,000 0 Before Adjustment Period After

18. Railways: Productivity 400 350 300 250 200 150 100 50 - 1995 1996 1997 Centro-Atlântica MRS-Logística Tereza Cristina Sul-Atlântica Novoeste

19. Impact on R&D Employment • Number of employees engaged in R&D declined, but • Better educated people were hired, with an overall improvement in quality. 19

20. 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

21. Anecdotal 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

22. Critical 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

23. Outsourcing • 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.

24. 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.

25. Common Stock Preferred Stock Total Strategic Investor Employees Global Offer Total 40 - 45 4.45 26.5 - 31.5 76 26 - 29 5.1 17 - 20 51 0 6.3 - 6.3 Structure of share sales in the case of CVRD 26 23

26. 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

27. 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

28. 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

29. 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.