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

1. Session I: THE IMPACT OF PRIVATIZATION ON EMPLOYMENT & EMPLOYEES Role of Employee Considerations in Privatization Policy-The Case of Chinese Taipei- Kuei-Lin Chang Director General Council for Economic Planning & Development Chinese Taipei Conference on Privatization, Employment and Employees Istanbul, Turkey 10 October 2002

2. CONTENTS • Background of Taiwan’s Privatization • Working Conditions in Taiwan’s SOEs • The Legal Framework of Taiwan’s Privatization • Policy Design for Employees’ Rights & Interests • Dimensions of Policy Impact • Prospect of Taiwan’s Privatization • Concluding Remarks • Appendices

3. Background of Taiwan’s privatization -1 • The contribution of the SOEs in Taiwan - playing a significant role in the 1970s and then going slowly down.

4. Background of Taiwan’s privatization -2 • 31 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 • In addition to few utility SOEs (legal monopolies), profitability and productivity of most SOEs in the competitive industries fall behind their private counterparts.

5. Working Conditions in SOEs • 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: Unit: NT$ (1 US$=34.5 NT$)

6. Working Conditions in SOEs -1 • 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!!

7. The Legal Framework of Taiwan’s Privatization Policy • 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 draw up the detailed regulations Enforcement Rules of theSTSP VAC MOEA MOTC MOF Administrative Regulations on preemptive & favored shares subscription of Employees Administrative Regulations on compensation for Employees’ rights & interests

8. Policy Design for Employees’ Rights & Interests • Legal protection on employees’ rights and interests are set out in Article 8 of the STSP, including: • Job Security with conditions • Seniority Settlement • Severance Pay • Compensation for Insurance Discrepancy • Priority Shares & Favored Subscription Prices for Long-term Holding • Vocational Training & Displacement Services

9. Seniority settlement for all employees Stay on Transferred concurrently Being laid off within 5 years of privatization the time of privatization Not transferred concurrently • Severance pay • Compensation for insurance discrepancy • Vocational training & • displacement services • Priority shares • Favored offering for • long-term shareholding Policy Design for Employees’ Rights & Interests

10. Policy Design for Employees’ Rights & Interests • Job Security: • When a SOE is transformed into a POE, the employees can be transferred concurrently as they desire. • 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)

11. Policy Design for Employees’ Rights & Interests • 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.

12. Policy Design for Employees’ Rights & Interests • 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

13. Policy Design for Employees’ Rights & Interests • 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.

14. Policy Design for Employees’ Rights & Interests • 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) • a certain ratio of shareholding can be additionally subscribed at par value.

15. Policy Design for Employees’ Rights & Interests • How much compensation can an employee obtain from privatization of his company? • Assumptions: a middle ranked employee with 15 years of service. • Seniority settlement: NT$2.5 million (US$72,464) • Insurance compensation: NT$0.5 million (US$14,493) • 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. (*): only for those who don’t transfer concurrently or laid off within 5 years after privatization.

16. Policy Design for Employees’ Rights & Interests • 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.

17. How are employees’ rights in financially difficult SOEs being protected? • 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 of the severance pay and/or seniority settlement amount to its employees.

18. Employees’ attitudes toward legal protection on their rights & benefits Notes/ 1: very unsatisfactory; 6: very satisfactory; 3~4: neutral Source: a commissioned research project by the CEPD in 2002.

19. Dimensions of Policy Impact

20. Impact on Performances: the cases of 6 privatized SOEs  worse ;  better;  much better 1 China Insurance; 2 BES Engineering; 3 China Petrochemical; 4 China Steel; 5 YangMing Marine; 6 Liquidized Petroleum Supply.

21. Impact of Privatization on Employment • Theory: • employment levels will be reduced around the time of privatization as a result of work reorganization initiatives, measures for labor shedding and attempts to get employees to work harder. • Practices: • impact on levels of employment is mixed due to the mediation by political-institutional context which those privatized SOEs exposed to market competition.

22. Impact of Privatization on Employment -1 • Job Security: international comparison • 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% reduction in employment after 3 years from privatization based on 13 privatized SOEs in Taiwan (CEPD, 1999).

23. Impact of Privatization on Employment -2 • Job Security: little impact on national unemployment Public sector accounts only for 6.7% labor force in Taiwan.

24. Impact of Privatization on Employment -3 • 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.

25. Impact of Privatization on Pay Structure • The case of a state-owned construction company which was privatized in June 1994. • Average salary & wage level in the construction industry = 100 • p-day = the day of privatization

26. Impact of Privatization • 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.

27. The Costs &Benefits of Taiwan’s Privatization Policy Notes: (1) Privatization proceeds include sales of shares and assets for those privatized SOEs. (2) Related expenditures cover mainly the payments for the seniority settlement, redundancy and insurance compensation of employees in privatized SOEs.

28. Prospect of Taiwan’s Privatization • 17 SOEs have been chosen and approved by the Premier to be privatized by the end of year 2007. • Petro • Power • Telecom • Railway • The deadlines and methods are currently being reconsidered by the authorities.

29. Concluding Remark:Privatization v.s. Employees’ Rights • The legal protection on employees’ rights & benefits in Taiwan’s privatization is high by international standards. • With employees’ rights & benefits being reasonably protected, Taiwan will fulfill its privatization commitment as well as introduce competition into all markets by stages. • Deregulation and exposure to market competition have a more powerful impact on firm behavior than privatization per se.

30. Concluding Remark:Privatization v.s. Employees’ Rights • The timing for promoting privatization may cause some concerns in a time of economic downturn. While structural reform may be costly, it will restore public confidence and create social welfare in the long term. • Communication with employees is indispensable. However, the government should not bow to political gimmicks.

31. More Information about Taiwan’s Privatization More details of privatization in Chinese Taipei can be found at the website: http://www.cepd.gov.tw/english/special/9002212.htm or contact directly with: Mr. Peter C. S. Lee Sectoral Planning Department, CEPD Tel: 886-2-2316 5497 e-mail: cslee@sun.cepd.gov.tw

32. Appendices

33. A 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 Netherlands). • 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.

34. The Location of Taiwan China

35. Retrospect of Taiwan’s privatization • 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.

36. Retrospect of Taiwan’s privatization -1 • 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.

37. Premier SCPPS MOF MOEA MOTC VAC Other Ministries 5 SOEs 11 privatized SOEs CNC 3 SOEs 3 privatized SOEs 6 SOEs 3 privatized SOEs 4 privatized SOEs 10 SOEs 6 privatized SOEs Institutional Framework of Management of SOEs & State Holdings The Steering Committee for Promoting Privatization of SOEs (SCPPS) • SCPPS: The Steering Committee for Promoting Privatization of SOEs • MOF: Ministry of Finance • MOEA: Ministry of Economic Affairs • CNC: Commission of National Corporations • MOTC: Ministry of Transportation & Communication • VAC: Veteran Affairs Council

38. The Definition of Taiwan’s Privatization • A state-owned enterprise with less than half (50%) of the equity shares being held by government has transformed itself into a privately-owned enterprise . • The parliament has the monitoring power over SOEs in accordance with the provisions of the Budget Law.

39. Government’s Approaches -The 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

40. Government’s Approaches -Privatization v.s. Liberalization • Privatization of SOEs (particularly for utility companies)must be proceeded in concert with market liberalization. • e.g. Privatization of Chung-Hwa Telecom Corp.

41. Government’s Approaches -The methods of Taiwan’s privatization • 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

42. Government’s Approaches -The methods of Taiwan’s privatization-2 • 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.

43. Taiwan’s Strength in promoting 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).

44. Taiwan’s Weakness in promoting 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

45. Accomplishment of Taiwan’s Privatization • Up to July 2002, 27 SOEs have been privatized, yielding total proceeds of US$ 12.5 billion. • 15 small-scale factories have been closed down upon deliberate reviews by the authorities.