1.1 Concepts of privatization, restructuring and economic democracy

Origins, concepts and forms of privatization

The concept of privatization is not new, nor is it being applied only in developing countries. The private sector has delivered public services and helped build infrastructure in western industrial nations for several hundred years. However, the worldwide recession of the late 1970s, the debt crises faced by many African and Latin American countries during the early 1980s and the shift to market economies in Asia, Eastern Europe and Latin America during the early 1990s all exacerbated the problems of inefficient state enterprises and refocused attention on the crucial role of the private sector in economic growth and development. The current surge in privatization began with the period of deregulation that took place in Canada and the United States during the late 1970s and with the movement towards divestment of public transport and utility companies in France, Germany and the United Kingdom in the early 1980s. The reorientation of international financial institutions such as the World Bank and the International Monetary Fund towards macroeconomic adjustment, economic stabilization and market-based forces has developed such a momentum that even in countries that have not sold State Owned Enterprises - SOEs - on a large scale, governments are encouraging the private sector to participate in providing goods and services previously offered by public agencies. The World Bank reports that during the 1980s alone, more than 70 countries experimented with some form of privatization and that nearly 7 000 known privatizations of SOEs took place.

Throughout its history, privatization has implied a redefinition of the role of the State, with a corresponding transfer of ownership, operating and development rights in State Owned Enterprises and associated financial risks to the private sector. At the same time, the State has had to assume new responsibilities, for example in regulating privatized monopolies or in strengthening social protection where hitherto it was provided by SOEs.

In many countries state intervention has its origins in a lack of private savings or the absence of private entrepreneurs willing to set up a business with only long-term maturity and low return on investment. While some states were successful in establishing state-owned enterprises, in many cases those enterprises were vulnerable to particular influences. The logic of power prevailed over the logic of results. Consumers' and users' expectations were supplanted by political concerns and the self-interest of a number of powerful groups.

By its very nature, privatization is a political process; at the same time, it has important economic and social implications affecting not only economic and enterprise performance but also social welfare and stability. In fact, privatization has been carried out as an instrument of systemic change, as in economies in transition, or as part of economic reforms or structural adjustment in many developing countries. It has been used as an instrument for widening popular ownership of corporate capital and has served as a catalyst for change leading to the introduction of social protection and services, including public utilities.

The main forms of privatization include:

Restructuring

To succeed in privatization the first and perhaps most important challenge is to establish an appropriate economic environment for privatization and private enterprise development. This means managing the economic reforms necessary to support an emerging private sector. Experience suggests that neither domestic nor foreign investors will participate heavily in privatization in countries where economic and political risks are high or where economic uncertainty threatens the ability of privatized companies to survive and expand. Managers of the privatization process must create an economic environment conducive to the emergence and growth of a market economy. The economic reforms necessary to support privatization and private enterprise development include six essential elements:

1. Structural adjustment policies: including policies for creating market mechanisms that allocate economic resources and set priorities for both production inputs and consumer goods, financial liberalization and the reduction of price controls.

2. Economic stabilization policies: including a reduction in the balance of payments deficit, debt rescheduling, control of the money supply, reduction of subsidies and control of the speculative money flow. Stabilization also includes a wage policy giving rise to an increase in productivity and avoiding inflation.

3. Trade and investment reform policies: including programmes for export promotion, foreign direct investment, exchange rate adjustments and reduction of investment restrictions and trade barriers, as the result of multilateral negotiations designed to promote fair trading and anti-trust behaviour.

4. Political reforms: including appropriate degrees of democratization, decentralization of decision-making and deregulation of industry and services to allow private enterprises to operate efficiently in a transparent environment which should promote competition, investment and the quality of products and services for end users.

5. Institutional development policies: including programmes to support the creation and strengthening of an effective system of property rights, financial rights, financial institutions, labour markets, social and legal institutions that can legitimize business transactions and adjudicate or resolve conflicts effectively together with channels for marketing and distribution.

6. Private sector development programmes: including incentives and support for developing small and medium-sized enterprises, restructuring large companies and attracting investments in domestic industries from multinational corporations.

These necessary elements of economic reform and the institutional capacities that must be strengthened to support privatization and market development are summarized below:

Firstly, macroeconomic policies are needed to create an environment conducive to market transactions. Governments must enact structural adjustment and stabilization policies to curb inflation, liberalize trade and deregulate the economy. At the same time, however, they must establish a complex network of institutions through which market transactions can take place. These include financial and legal institutions, an education system that can prepare graduates to work effectively in a market economy, efficiently operating labour markets, a system of property rights and effective distribution systems. Market development also requires the expansion of foreign trade and investment, the promotion of small and medium-sized enterprises, the restructuring of large companies and investment by multinational companies in domestic industries. In many transition economies, NGOs, for example civic groups, labour organizations, business and professional associations, the media, and foundations, that form civil society must be recreated or strengthened. The success of economic and political reforms as well as the survival and expansion of privatized enterprises ultimately depends on human development, that is on an increase in the number of entrepreneurs and market-oriented business managers together with the expansion of a merchant and trading class and skilled technical and support workers. These changes often have to be implemented quickly in order to create momentum that will allow a market economy to come into being, as well as to survive the dislocations and hardships inevitably accompanying traumatic political, economic and social reforms.

The experience of Western market democracies as well as the deficiencies of former socialist regimes and the challenges facing reformers in emerging and developing countries reinforce our conviction that a set of policy reforms and institutional capacities, as shown in the figure above, are essential for market development and thus for successful privatization.

Economic Democracy

Successful privatization allows the development of economic democracy, as evidenced by increased participation in ownership, the development of small enterprises and greater private sector participation in decisions relating to the enhancement of the business environment.

2 A PARTICIPATORY APPROACH TO PRIVATIZATION AND RESTRUCTURING

A recent ILO Sectoral Meeting came to the major conclusion that "Public sector reforms are most likely to achieve their objectives of delivering efficient, effective and high-quality services when planned and implemented with the full participation of public sector workers and their unions and consumers of public services at all stages of the decision-making process."

Evidence from ILO studies confirms that the involvement of all stakeholders in privatization and restructuring processes is a prerequisite for success. The active participation of employee representatives and, for a number of matters, also of the users of products and services undergoing such changes, holds the key to solving or easing most of the challenges of those processes. Yet, ironically, evidence also shows that this is the issue on which achievements have so far fallen furthest short of potential. This is therefore where greater efforts must be concentrated.

The full involvement of employee representatives in design, planning, implementation and monitoring is desirable not just on ethical grounds, but also because it produces useful, tangible results for labour, society, and enterprises themselves.

In the absence of negotiation and even mere consultation, transformations have met strong opposition. The process needs to be discussed within the enterprise, to explain the situation, identify solutions, avoid misunderstandings and dispel fears. This opens up the possibility of transforming the enterprise into an effective results-oriented long-term coalition.

Trade unions are also a source of knowledge and ideas, both at the enterprise level and at more macro-economic levels, and can put forward suggestions on how to minimize employment and social costs, improve the quality of services, and increase enterprise competitiveness. In the early years of privatization and restructuring, the trade unions' general stance towards these processes was largely defensive and uncompromising. Opposition dominated, leaving little room for constructive input or counter-proposals. This partly reflected their apprehension vis-à-vis this new phenomenon and partly the generally uncompromising stance of the other parties pushing for those changes. In recent years, we have witnessed a gradual development towards more numerous and more constructive exchanges.

High indemnities granted to workers leaving voluntarily, commitment to rehiring a large number of workers in the new company, redeployment within the old company and assistance in seeking employment elsewhere have been major elements making these processes more acceptable. In many cases, the financing and distribution of shares to workers in the new company has helped make the new setting more attractive.

2.1 The role of employers' organizations

Although the activities undertaken by the employers' associations included in this paper vary significantly in terms of their depth and influence, the overall roles which they believe need to be assumed are essentially the same. These roles tie-in closely with the view of privatization as an integrated process of culture change, as opposed to a more limited structural programme of ownership change. In general terms, however, given the importance of the privatization process to employers' organizations, there is little question that the activities undertaken and their influence could and should have been more significant.

All the employers' associations identified the importance of the following roles:

In addition, the following important roles were identified in particular countries:

It is evident that the extent of activity of employers' associations in the privatization process varies widely from country to country, both in terms of the quantity and quality of the work undertaken and its influence. There are a number of reasons for this difference in activity and influence. However, the most common issues raised relate to the resources and skills available to the particular association and its prevailing level of influence in the country.

Looking specifically at the four areas identified by all the employers' organizations as being an important part of their role in promoting and securing a smooth transition to a market economy, the following are examples of specific activities undertaken.

The promotion of the development of enterprise reform

All the employers' organizations are in favour of the principles of privatization and see themselves as key players in convincing governments, employees, business managers and the national population in general of the benefits of privatization.

Many of the organizations have undertaken and published significant research demonstrating the virtues of privately owned enterprise. The most work was reported by CEDA in China and their activities are considered separately below in the form of a cameo case-study.

The VCCI in Viet Nam sees itself as the largest representative organization promoting activities towards the development of non-state enterprises. The VCCI has undertaken research projects in the field of privatization and organized subsequent public forums including one on the subject of "equitization" in Hanoi and Ho Chi Minh City in May 1996 which was attended by 600 participants.

The CNP in Senegal reports the importance of communicating effectively with and actively engaging national and international stakeholders in the privatization process. They describe the importance of distinct communication programmes aimed both at the general public and at those organizations and agencies involved directly in privatization.

The EFC in Sri Lanka has undertaken a special study into the performance of privatized enterprises, demonstrating that these organizations had, prior to privatization, been managed in a haphazard manner and, based on ad hoc political decisions, were more interested in keeping their employees as satisfied as possible.

The RUIE in the Russian Federation established an Expert Institute in 1991 responsible for analysing the process of privatization and the results achieved in order to shape public opinion about privatization and to influence the privatization process itself so as to improve its efficiency and effectiveness.

Influencing government proposals

The major part of each of the country reports dealt with both a description of the technical processes of privatization in each of the countries and the role played by the employers' organizations in influencing the development of that process.

There are considerable differences in the role played and the influence exerted by the national employers' organizations. In general terms, however, most employers' organizations felt that the decisions relating to the technical processes of privatization were political ones, with the views of the employers' organizations either not being sought or not really wanted. The only real exceptions to this view were reported by the FCI in Mexico and the UIA in Argentina, both of which are covered in more detail below.

In the Russian Federation, the RUIE criticized the government agency responsible for privatization (the Goskomimushchestvo) for rejecting almost all its proposals on the organization of privatization. Indeed, the Goskomimushchestvo is condemned for its rejection of virtually all the proposals made by academic and public organizations that ran contrary to its own pre-established views.

In Ghana, the GEA, together with all other employers' organizations, were excluded from any involvement with the Divestiture Implementation Committee. By 1993, as a result of a public outcry against the apparent secrecy surrounding the work of the DIC, the Government was forced to adopt a more transparent and integrated approach to privatization. Despite the fact that the trade unions were awarded a seat on the newly constituted eight-person DIC, no employers' representatives were involved.

In Latvia, the LDDK represents Latvian employers in the Tripartite Council of Latvia, the Committee of the Council of Ministers, the Tripartite Labour Protection Committee and the Tripartite Social Protection Committee. The weekly meeting of the Committee of the Council of Ministers regularly discusses privatization issues, including decisions concerning enterprises to be privatized and the legal processes of privatization. Despite this continuing and apparently close involvement with the Government, the LDDK reports little satisfactory progress in shaping the privatization programme from the employers' point of view.

In the Czech Republic, the SP reported active participation in the first wave of privatization through their role as members of the Ministry of Trade and Industry Committee advising on the selection of privatization projects and on areas including taxation reform and social security regulations. Since 1992, however, the new ruling coalition is reported to have little or no interest in involving or strengthening the role of the social partners on economic matters.

In Pakistan, the EFP reports that the Government did not formally consult the federation on the development of its privatization programme, despite the fact that the privatization of industry had been a long-standing demand of the private sector. In that process, the Government was criticized in the early stages of privatization for its lack of clear objectives and for creating suspicion and doubt due to the lack of transparency in the privatization process.

The FUE in Uganda is generally well connected with the Government through both formal and informal links, yet remains critical of its lack of influence on privatization law. The privatization statute adopted followed the model preferred by the Ministry of Planning and Economic Development and gave little scope for adequate consultation of either of the social partners concerning the broader social and employment-related issues associated with privatization. The FUE believes that its influence would have been more beneficial had it been more closely involved in the drafting of the law rather than working on the implementation of predetermined decisions.

More positively, the FCI in Mexico reported that their involvement in the development of privatization regulations was entirely satisfactory. They were most significant by being closely involved in the development of criteria for the selection of enterprises for privatization and valuation. This is reported in more detail in the Mexico cameo case-study below.

In Argentina, the process of privatization was uniquely based upon a formal agreement between the Government and the national employers' organization (the UIA). The Agreement for the Reconversion of Argentine Industrial Production was signed on 2 September 1991. Commenting on the significance of the agreement, the President of the UIA said: I want to emphasize that, historically, this agreement constitutes the first document subscribed to by both a government and a business sector.

Through this agreement, the UIA collaborated extensively and actively in the formulation and implementation of the privatization process.

Preparing managers for privatization, upgrading of skills and safeguarding the legal interest of directors.

Second in importance to the employers' organizations and behind the will to influence the shape of the privatization process adopted by governments, was the training of managers to cope with the new forms of industry. Training was not only important in terms of the activities carried out to date, but also featured strongly in the forward plans of the employers' organizations.

The significant investment in training undertaken by CEDA in China is reported in an ILO study, but recognition of management training as a crucial issue and the provision of significant support for training and education is evident in many countries. It has previously been pointed out that there are probably relatively few western managers and management teams who would be capable of accomplishing the kind of change programmes which need to be achieved in many of the newly privatized companies within the political timescales established for completion. The role of the employers' organizations in training and education is therefore crucial. In Viet Nam, between 1993 and 1996, 300 training programmes involving approximately 2 000 managers took place annually. The courses centred on business management and administration, marketing, finance, customer services and human resource management. The FUE in Uganda has undertaken training programmes at all levels of management from the executive board to supervisor level and, aiming directly at small and medium-sized enterprises, has stepped up the volume of training on the Improve Your Business and Start Your Business modules.

Establishing new rights and protection for the owners of privatized enterprises and ensuring them of their ability to exercise them was seen as an important part of the advocacy role played by the employers' organizations in a number of countries. It is felt by some employers' organizations that a new and more employer-friendly working environment has to be developed and demonstrated in order for entrepreneurs to seize the new opportunities open to them. However, other than stating that the safeguarding of the interests of entrepreneurs is an important part of the role of the employers' organizations, few specifics were reported in terms of particular problems faced or actions taken.

Menu for action for the effective involvement of employers' organizations in the privatization process.

Few, if any, subjects belong at the core of activities undertaken by employers' organizations more than the recent mass privatization of industry and services. Privatization is at the heart of plans for the economic regeneration of a number of countries currently trying to establish a place in the global economy. The privatization process carries with it extremely demanding economic objectives.

In many countries, the employers' organizations expressed concern at the lack of government willingness to seek and take account of employer advice and suggestions. The employers' organizations were also consistently concerned about the shortage of skills and/or resources within or available to their associations to enable them to undertake the influential role they would have wished to assume in the privatization process.

The level of influence of the employers' organizations in each country is, in part, linked to the governments' willingness to consult employers' representatives and, subsequently, to take account of their views. In reality, the extent to which governments have requested and taken into account employer views on privatization has varied widely.

At one extreme, in Argentina, the privatization process itself was based upon an agreement between the Government and the national employers' body, the UIA. At the other extreme, in the Russian Federation, the privatization authority (the Goskomimushchestvo) was not interested in the views of Russian employers unless they happened to be consistent with their own.

To sum-up, a government would be unprepared to take the views of employers' organizations into account for three reasons: firstly, because they wished to keep the politics of privatization exclusively within the government itself; secondly, because they did not believe that the employers had valuable input to give; or thirdly, because the country had no history of consulting employer bodies. Quite clearly, there has been very little government encouragement of employer involvement in those countries where processes for the consultation or involvement of either or both of the social partners are not well established.

The sustained success of privatization rests crucially on preparing for and implementing a large-scale and long-term culture change programme rather than simply implementing technical ownership change. The privatization process has to carry with it the support of all the major stakeholders in both the existing and newly privatized businesses, in other words the country's population, employees and their representative organizations, management, clients and customers, potential investors and government officials. Every one of these stakeholder groups has the potential power and influence to reduce the effectiveness or even nullify the best-planned technical transfer of ownership.

Inevitably, much of the responsibility for the success or failure of privatization will rest with industry's new owners and managers. It is therefore vital that the bodies representing owners and managers, the employers' organizations, do their best to help ensure a positive operating environment and to provide the fullest ongoing support in what will inevitably be challenging times.

Twelve employers' associations covered have taken the opportunity to influence the process of privatization for the better both with and without government invitation and encouragement. The following model of employer organization activity has been developed in the form of a menu for action based on the practice of those associations.

Initiatives toward participatory privatization

1. Promotion of privatization

Through national and international research, producing and publishing materials which promote the principles and practice of privatization and are aimed at the country's key stakeholders, that is the government, employees and their representative organizations, business managers, customers and clients, potential national and international investors and the population in general.

2. Preparation of management for privatization

Production and delivery of training and other appropriate materials aimed specifically at ensuring the understanding of and the commitment to the role of business managers in the successful privatization of industry.

3. Advising on best world practice

Establishing the employers' organization as a source of valuable learning, from the successes and difficulties experienced by other countries to employers and employees.

4. Establishing clarity concerning the privatization strategy and its objectives

Influencing the government in the development and publication of a clear strategy and objectives for the privatization process, in order for the key stakeholders to understand what is expected from privatization and the manner in which it will be implemented, including the impact on labour.

5. Developing the process of ownership transfer

Influencing the government concerning the appropriate means for transferring business into private ownership, including the criteria for selecting enterprises for privatization, the means for establishing the value of companies, the organizational structures which will result, the selection of appropriate new owners and financing.

6. Communication of the process and timescales to all stakeholders

Ensuring that all stakeholders are aware, throughout the privatization process, of the key milestones to be achieved and the progress made. This process should be sufficient for the most important stakeholders, managers, employees and investors, to work in an environment of transparency and certainty.

7. Training and education of managers and entrepreneurs

Provision of specific training and support in management skills for business managers and entrepreneurs.

8. Provision of change management support

he provision of specific training and consulting support on the process of introducing and managing major change programmes successfully.

9. Securing appropriate investment/investors

The promotion of the privatization process and the potential investment opportunities for appropriate national and international investors. This could include providing advice to the potential owners of small and medium-sized businesses and new entrepreneurs concerning the raising of funds for the purchase and running of a business.

10. Review of early privatizations and developing processes so as to learn from successes and failures. Research into both the process of privatization and the early experiences of businesses in transition in order to enable subsequent enterprises to learn from both the successes and difficulties experienced.

11. On-going support to businesses and management

Recognizing that the successful privatization of a business is a long-term and complex change management programme, providing on-going support to entrepreneurs and managers in the on-going development of their businesses.

In order to encourage and facilitate increased involvement and influence on the part of national employers' organizations, it would be helpful to establish appropriate support systems for the national federations. This could include a centre of excellence and/or a data bank of best practice which is readily available to national employers' organizations. A centre of excellence would provide both on-line and on the ground expert advice and guidance to national employers, trade unions and academic organizations. A data bank of best practice would document and make available the lessons learned from successful initiatives and provide model communication and training materials.

2.2 The role of trade unions

The decisive factor for trade unions is whether they will succeed in improving their standing among workers by achieving specific performance levels that stabilize and renew their membership base and their financial situation, and whether new people will be willing to work in the unions.

One specific example based on the experience of the Russian Federation is detailed below. In this respect, trade union practice differs widely on a company and regional basis. Undoubtedly, there are worlds of difference between the political and the trade union policy situation, for example in Vorkuta, Tatarstan, Ulyanovsk, St. Petersburg and Moscow. Trade unions are only partially continuing to discharge their traditional tasks. This becomes clear from the workers perception of the unions.

The future of the unions depends on the extent to which they can be of actual benefit to their members in a more forceful manner than in the past. The central areas of responsibility in this respect are as follows:

The Russian Tripartite Commission on regulating working and social conditions, comprised of employers, government and trade unions, has been working at the federation level since 1992. In the meantime, tripartite commissions have been set up in nearly all federation subdivisions and in many large cites. In 1996, 77 regional and 1 149 local tripartite agreements were concluded to regulate social and working conditions.

Comprehensive minimum social standards and the obligations of the State, employers and trade unions in the areas of work and social relationships should be laid down in the agreements and the commission should give guidance on all relevant issues in the field of social and labour legislation. This very ambitious, discerning assignment is, however, open to criticism from many trade unionists because of their disappointment at the results of the commission's work. Their attitude is based partly on an overestimation of the options open to the central Government's regulatory powers in a market economy principally designed along decentralized lines.

The wide-ranging regional and branch-related differences in the Russian Federation also make it more difficult to reach specific agreements at a federation or comprehensive branch level. The tripartite process is impeded nearly everywhere by the lack of employer representation. Many private companies or privatized companies choose not to become members of an employers' association which is authorized to conclude binding agreements on their behalf. Employers see no cause for allowing any restriction of their autonomy in decision-making or corporate power. There is no attraction for them in a supra-company command and regulatory framework as long as they can do pretty much anything they like with their company workforces and trade union committees. In the first phase following privatization, many directors and entrepreneurs held the opinion that collective contract negotiations and legal labour safety regulations would not apply to private companies. After privatization, many of them thought that the property rights of the private company owner were not subject to any legal restrictions whatsoever and that the manager had the absolute freedom to take decisions about working hours, working conditions, work safety and remuneration, etc.

Trade unions are now forced to prove that they are not just a social policy rubber-stamp to lend legitimacy to government decisions. They will have to develop their own competence in the field of social policy and at least be able to lay down some minimum social policy standards on the tripartite commission and in annual agreements. As a rule, this has been achieved neither at the federal nor regional level. The tripartite agreements are mainly collections of general statements of intent and a list of social policy issues which the tripartite commissions are to discuss over the course of the year. The Government has even frequently ignored the feeble right to a hearing in various instances; amendments to laws relevant to social policy have been introduced before the Duma without prior consultation with the tripartite commission. In some cases, the tripartite commission did not have a quorum because a sufficient number of government representatives failed to appear.

The trade unions will have to modernize their work if they wish to make use of the influential field of supra-company social policy and avoid being tied into the social administration merely as organizers of children's camps. Establishing their competence in social policy will be the deciding factor. Currently, the most pressing task is to exert an influence on the restructuring of the housing economy. This is urgently required both on grounds of social efficiency and in terms of social justice. Yet in the light of past experience, many people are still apprehensive that the final choice they will face as they emerge from the reform process will be between unaffordable rents and homelessness. The unions could make an important contribution towards avoiding social tensions and improving their own image by offering competent and practical ideas for socially acceptable reform on social issues.

Solidarity

The weight and authority of a trade union is inseparable from its ability to organize strikes. In this sense, it is essential to use strike funds and the strike weapon skilfully. The current situation whereby unions are practically unable to carry out long-term strikes yet simultaneously threaten a political general strike is not very helpful. Any political general strike raises the question of power in a given society and for this reason should only be considered as a last resort during a constitutional crisis or a state of emergency. The strike weapon should be developed rather as an effective instrument in contractual disputes for asserting clearly defined and reasonable, realistic demands.

The ability to strike cannot be achieved without a certain centralization of funds at the branch or federation level. However, if a centralized strike fund is to be created then at the same time the conditions under which trade union members or company locals would have a claim to payments from the strike fund would have to be made clear.

Given scepticism towards the trade union apparatus, it may be that any immediate creation of a strike fund financed by regular payment of dues would be too much for company locals to cope with. Organizing specific solidarity campaigns for companies or workforces involved in a dispute would be a more promising first step. Based on experience gained from successful displays of solidarity, members could later become more willing to regularly entrust money to the trade union leadership for a strike or campaign fund.

It is noticeable that practically no attempt is made in the trade union press to organize such solidarity campaigns. It could be, however, that the ability to sustain conflicts at the company level is so minimal that there are no trade union disputes with which one could affiliate in a show of solidarity.

2.3 The role of governments

One of the roles of government is business development and job creation. It is often repeated by economists who believe strongly in the market that governments do not really create permanent sustainable productive jobs, only the private sector can do that in a market economy. Whilst this may not be strictly true in all situations, it is a fact that, in most conditions, the private sector is the main generator of jobs.

However, the government can stimulate private business development and employment growth by fostering an enabling economic environment . This means minimum regulations; fair, broad-based taxation which is as low as possible and is simple in order to produce compliance; liberalized domestic and foreign trade; and help in creating a financial sector with easier access to funds for all businesses. The government should also make available funds (along the lines of the social fund mentioned above), including lines of credit for small business loans to off-set the damage caused to businesses and employment losses created by policy reform and restructuring. The government should act as a facilitator and a provider of resources for support and advisory centres, but not as a direct provider of services. The government is also responsible for creating physical infrastructure; roads, power, water, transport links, telecommunications, industrial land, estates and incubators and basic skills training and satisfactory education at all levels. Without these, the private sector cannot flourish. It is important to recognize that the provision of some of the above facilities may be the responsibility of local or regional authorities as well as central government. The decentralization of support services and the encouragement of regional and local initiatives is desirable and usually more cost-effective.

3 PRIVATIZATION AND RESTRUCTURING

FOR THE WELL-BEING OF PEOPLE

3.1 Regulatory frameworks for labour relations: possible policy guidelines

We aim to develop policy guidelines and a list of issues to be considered in response to the question of how labour law and labour relations machinery can help make ownership change on privatization better balanced from both an economic and a social point of view. There is considerable disparity in terms of political, economic, social, legal and historical circumstances among the countries included in the study. What may be an appropriate and successful measure in one context may be inappropriate in another, depending on the institutional and legal framework and the manner in which the measure is introduced. These differences make the formulation of detailed policy guidelines that would be applicable in all situations difficult. Countries undertaking privatization programmes do, however, face a number of similar issues, albeit it on a different scale with different resources available to deal with these issues. Given this fact, it is possible to formulate some basic guidelines together with a more detailed list of issues which should be addressed by labour law and/or labour relations machinery as part of the privatization process. It may be possible to draft more detailed policy guidelines for groups of countries sharing similar levels of development and similar legal systems. The guidelines and the list of issues to be addressed are in draft form only.

General Guidelines

1. The social dimension of privatization must be viewed as an integral part of the privatization process. A balance must be sought between the economic objectives of privatization and the need for workers to have equitable and adequate protection. Countries which fail to pay sufficient attention to the negative consequences of privatization risk strong opposition from both workers and the public at large, which can hinder or in some cases prevent privatization taking place.

2. The social dimension of privatization should be considered from the very beginning of the process. The adequacy of labour law and labour relations machinery in providing adequate protection on privatization should also be reviewed between different phases of privatization.

3. The process of privatization, including decisions regarding privatization, the way in which it is to proceed and measures to protect workers affected by the process, should be devised and implemented with the co-operation and participation of employers' organizations and workers' organizations and, in particular, those most affected by its outcome.

4. The privatization process must be transparent and accountable.

5. In connection with the above, information should be provided to the general public, the social partners and, in particular, to those affected by privatization at all stages of the process. Lack of information can lead to severe anxiety, rumours and ultimately social unrest which can undermine the entire privatization project.

6. The process of privatization should take into account relevant international labour standards including: Convention No 87: Freedom of Association and Protection of the Right to Organise Convention, 1948; Convention No 98: Right to Organise and Collective Bargaining Convention, 1949; Recommendation No 91: Collective Agreements 1951; Convention No 154: Collective Bargaining Convention, 1981; Recommendation No 163: Collective Bargaining, 1981; Recommendation No 92: Voluntary Conciliation and Arbitration, 1951; Convention No 151: Labour Relations (Public Service) Convention, 1978; Recommendation No 159: Labour Relations (Public Service) 1978; Convention No 158: Termination of Employment Convention, 1982 ; Recommendation No 166: Termination of Employment, 1982; Convention No 168: The Employment Promotion and Protection Against Unemployment Convention, 1988.

7. Whilst the exact nature of protection for workers who are dismissed as a result of privatization and the method by which protection exists (i.e. by law, by negotiated agreement or by a combination of these mechanisms) will vary according to national circumstances, workers in this situation should receive certain guarantees, for example measures guaranteeing some form of income and assistance in finding alternative employment.

8. Privatization should be seen as a means of creating sustainable human development rather than an end in itself. Reviews should be carried out to determine the success of the process according to broad criteria, including both economic and social considerations.

Integrating Social Dimensions Into Privatization - Issues to Be Addressed

Social dimensions can be integrated into the privatization process in a number of ways: by means of existing labour law; by amendments to labour law; by means of provisions included in laws regulating privatization; and by labour relations machinery. In some countries, the issues discussed below concern labour law in the sense of statutes and regulations, whilst in others they are a matter for negotiation or consultation. Experience demonstrates that the following issues should be addressed:

1. Transfer of employment

It is important that all aspects of transfer of employment of workers from the public to the private sector are considered. This includes workers' status (including issues such as the civil servant status of some public workers and whether or not workers in the privatized enterprises will be considered to be employees or contractors); terms and conditions of employment in the privatized enterprise (including the effect on collective agreements); union and representation rights in the privatized enterprise; accrued benefits such as holiday pay, severance pay and, in addition, pension rights. The latter issue has been neglected in a number of countries leading to anxiety, unrest and expensive litigation.

2. Redundancy and/or Retrenchment

In all of the countries included in the ILO study, the process of privatization has resulted in the retrenchment or redundancy of workers. As stated in the general guidelines, workers who lose their jobs as a result of privatization should benefit from special protection. This protection should be both substantive (in the sense that there must be a genuine reason for the redundancy) and procedural (in the sense that the redundancy should be carried out fairly).The provisions of ILO Convention 158 and Recommendation 166 can provide considerable assistance in this area.

In some countries, the law prescribes the method by which redundancies should be carried out, whilst in other countries it is an issue for negotiation between workers and employers. In many countries, the law is seen to guarantee minimum protection for workers and further agreements regarding redundancy and or retrenchment are negotiated, providing workers with additional protection. Where employees have been guaranteed certain minimum rights by law and, in addition, negotiations have taken place concerning the methods by which redundancies are carried out and the forms of assistance to be provided to workers, the result has often been a relatively smooth transition process.

In countries where resources are scarce, the question of how assistance should be granted to workers who lose their jobs raises complex issues. In many cases, public sector workers represent a privileged group. The provision of extensive benefits and privileges to this group, whether financial or by other means, can result in further exclusion of other individuals. On the other hand, public sector workers in many countries support a considerable number of dependants apart from the nuclear family. Attention must be given to these issues.

(a) Procedure

Careful consideration should be given to the procedure by which redundancies are carried out. In a number of countries, voluntary redundancy schemes, or alternatively, incentives to early retirement have been put in place. These can have both positive and negative effects. Whilst in many countries these schemes have resulted in a reduction in staff numbers with less resistance than compulsory schemes, they can result in the loss of experienced and skilled workers to the enterprise. Careful consideration must therefore be given by all parties to the levels at which these incentives are set and to the timing of redundancies. The proper functioning of the service in question must be taken into account.

Compulsory redundancies are also a common phenomenon, being used by both the State as employer prior to privatization and during the process itself, and by private employers in the new enterprise. Like voluntary redundancy schemes, compulsory redundancy can involve substantial costs to various government organs and funds. In a number of instances, international associations have provided assistance in the form of loans in order to meet these costs. The costs associated with increased unemployment should also be taken into account. Compulsory redundancies can also engender considerable opposition from workers. As stated in the general guidelines, workers and their representatives should be involved and consulted regarding all aspects of the privatization process and, in particular, redundancies. This can help to reduce the level of conflict which takes place during privatization. It is also important as a matter of respect for workplace democracy.

The question of the selection criteria for redundancy is also important. Criteria such as last-in, first-out and performance based assessments are commonly used. In some countries, consideration is also given to those with dependants. Procedures such as last-in, first-out can have discriminatory effects on groups such as women, minorities and disabled people in countries where these groups have only recently obtained jobs in the public sector. Such procedures may also discriminate against younger, and in some cases, better educated employees whose skills should be retained by the enterprise. Care should be taken, therefore, to ensure that the privatization process does not undermine policies for improving the status of disadvantaged groups.

Prior to any redundancies taking place, consideration should be given to alternatives to redundancy. This process should involve workers and their representatives. In some countries, this has resulted in the greater use of part-time work or extended leave provisions. Such forms of work can help in some instances to preserve jobs. At the same time, however, consideration should be given to the conditions of use of such contracts in order to prevent abuse. Employees in this situation should receive benefits on a pro rata basis. Other methods used include freezes on employment in companies undergoing privatization. The long-term effects of such methods should also be taken into consideration.

In a number of countries, special provisions exist in terms of the procedure for collective redundancies. These procedures can facilitate the search for alternatives and agreement on the terms and conditions on which redundancies take place. Care should be taken to ensure that these provisions are respected and that workers' representatives are in a position to use the tools provided for negotiation.

(b) Forms of Support

As stated in the general guidelines, the provision of support to employees who lose their jobs as a result of privatization is important. Whilst the resources available to support workers will vary according to national circumstances, the following matters should be considered:

(i) Compensation for redundancy or severance pay

(ii) Financial and personal counselling

(iii) Establishment of pools for the redeployment of redundant workers

(iv) Access to special credit

(v) Technical and financial assistance for redundant employees in terms of establishing their own enterprises

(vi) Preference for re-employment

(vii) Preference for re-engagement in other State projects

(viii) Preference in awarding contracts for services formerly performed by the public enterprise to contractors who were employees of the enterprise. (This should not be used as a means of avoiding payment of compensation to dismissed workers.)

Assistance may also include employment services and training and retraining schemes. Some of the services described may be provided with the assistance of local and national authorities. Privatization is often carried out as part of general economic restructuring. General services may have been designed to cope with social issues arising from this process. These may also be relevant during privatization and in the subsequent restructuring of privatized companies. The human resource implications for those workers who are retained in public enterprises may also require consideration. Workers in this position may experience considerable guilt and may also be anxious regarding their future employment prospects. This can have an effect on efficiency.

3. Provision of unemployment benefits

In some countries, the need for a comprehensive social insurance scheme may be seen as more important than extensive assistance to workers made redundant through privatization. On the other hand, the provision of a scheme of this nature may be unrealistic given the resources available. In some countries, it may be necessary to strike a balance between attempts to expand existing social insurance systems and the services referred to in paragraph 2 (b) above.

4. Provision of comprehensive employment services

Employment services may include: the registration of job vacancies; vocational counselling; job training and retraining schemes; initiatives for creating new jobs; and measures for helping individuals set up their own enterprises. They may also cover initiatives for creating jobs in areas where unemployment is highest. In some countries, the provision of these services by a national body is unrealistic, but public enterprises undergoing privatization may be able to provide some assistance in these areas.

5. Provision of training and retraining schemes

The provision of training and retraining schemes is a frequent feature of assistance or safety net packages. The effectiveness of these types of schemes has been controversial. It is clear that the real ability of these schemes to reintegrate employees into jobs must be considered. The training system should, wherever possible, be part of a national vocational training and certification system which recognizes skills and experience wherever they have been attained. The schemes should be monitored for their effectiveness and adapted to the needs of the labour market.

6. Participation of the Social Partners

The involvement of employers' and workers' organizations and, in particular, of those most affected by privatization, is important in terms of how the process proceeds and its consequences. Social dialogue is somewhat unusual in the sense that the State is also an employer in this context. Different organs within the State may take different approaches, thus rendering the process more complex.

Social players should consider the following issues:

The process of privatization has important implications, not only in terms of the future development of enterprises, but also for the status of workers, working conditions and in some cases for the labour market as a whole. For this reason, the social partners cannot be ignored during privatization, both at the national and enterprise level.

Three degrees of participation can be established:

(a) Information

The need to provide information is highlighted in paragraphs 3 and 4 of the general guidelines. Conflict within companies to be privatized sometimes arises because of the lack of information provided to workers. Confronted with little to go on apart from rumours, workers may oppose privatization.

Information mechanisms should be developed if not already established. Workers should be aware of all decisions that may affect the future of the enterprise and, therefore, their positions. In particular, they should be informed of the reasons for and the objectives of privatization, of the advantages and risks for the enterprise, about the social consequences and about changes in working conditions, etc.. A transparent process can help to engage support for the privatization process amongst the workers in the company.

Employers' organizations should also be provided with information. They may then be able to enrich the process by contributing their experience and suggestions in relation to issues such as management practices, human resource policies, training of employees, incentives for hiring employees, business start-up, marketing support, etc. and commercial aspects of the process, such as the regulation of monopolies in the private sector.

(b) Consultation

A higher degree of worker participation in the company is provided through the establishment of consultation mechanisms aimed at seeking the opinion of the workers in relation to the issues affecting the enterprise. Workers should be able to express their concerns regarding privatization to management prior to decisions being taken by management in this area. This mechanism can help management in taking into consideration the opinions of the workers and their representatives and in providing constructive solutions to the privatization process.

(c) Negotiation

Negotiation is the most comprehensive form of worker participation. It implies bargaining between management and workers and their representatives on the subject of privatization, with a view to reaching a final agreement.

The provision of information, consultation and negotiation can take place on a number of levels and at many different stages of the privatization process. Employers' and workers' organizations should, in general, be free to decide the level at which these processes take place: national, sectoral or enterprise level. The appropriate level depends on the issue to be negotiated (wages, training, retrenchment plans, creation of employment, other social benefits) and on the location of the organization and the resources and real skills of the social players. In order for bargaining systems to operate effectively, workers' representatives in both centralized and decentralized labour relations systems require information on diverse issues, so that they may have all the tools necessary to analyse all aspects of the privatization process. Bargaining may guarantee a conflict-free process, but to be effective it also requires players to have a certain degree of technical skill and bargaining practice. Players should have a deep understanding of the economic and institutional issues affecting privatization. It may be necessary to provide the social partners with technical assistance.

Participation can lengthen the process of privatization. This can sometimes have an adverse impact on the value of enterprises to be privatized and may discourage potential investors. This fact should not be neglected. On the other hand, negotiated settlements can also mean the establishment of good labour relations and fewer problems in the future, with long-term positive efficiency results.

Participation should not end when an enterprise is privatized. Privatization can result in a change in employment terms and working conditions, since in a number of countries the public sector provides better terms and conditions than the private sector. This change may be traumatic for workers, but problems can be minimized with an adequate participation mechanism. In a number of countries, public sector employment has served as an example with regard to human resource policies and terms and conditions of employment. The loss or diminution of the example value of public employment should be taken into consideration.

In many countries, public sector unions represent the power base of the union movement. Privatization and economic restructuring has generally had negative implications for the strength of the unions. The restructuring of public enterprises has meant that unions themselves have had to reorganize. The implications for social dialogue caused by the fall in the strength of workers' organizations should not be neglected.

7. Does the country have a good mechanism for settling disputes?

Practical experience shows that considerable conflict may arise from privatization, in particular when no information is provided and no consultation takes place. Irrespective of the origin of conflicts, the industrial relations system should have an effective mechanism for preventing and settling disputes which allows the partners to solve their problems rapidly and effectively.

If no such system exists, the government should promote its creation, giving careful consideration to the appropriate level at which it should be implemented. Even where general mechanisms exist, States should consider the creation of specialized mechanisms to deal with issues arising from privatization. Such bodies could offer experience in dealing with conflicts which occur in this area. Enterprises may also be able to create their own dispute settlement mechanisms. This may be appropriate where a relatively low number of enterprises are to be privatized and specialized dispute resolution mechanisms have not been created. The advantage of such a system is the potential for quick solutions which are tailored to the unique situations that occur in individual enterprises. Relationships within the enterprise must be well developed in order for this to be workable. In all cases, however, parties should have access to national dispute resolution mechanisms.

3.2 PRIVATIZATION AS A COLLECTIVE LEARNING PROCESS

3.2.1 Preconditions for success:

Since privatization is a major undertaking, combining both risks and opportunities and demanding important policy choices, its success depends on a number of critical factors. These need to be addressed when creating the conditions for success and include:

Furthermore, it is also necessary to:

The rate of change and the timing of a transition are also essential for achieving success in privatization. The speed or pace of privatization may be influenced by the size of the public sector.

Where the public sector is large or dominant, as in economies in transition, privatization may need to be implemented quickly in parallel with other measures to create a legal, regulatory and institutional infrastructure for the development of a market economy. Thus a multi and fast-track approach may be adopted, combining different techniques for different types of SOEs and promoting quick sales where possible. The latter has been true for small-scale privatization, involving retail shops, restaurants, bakeries, etc.

Furthermore, in many of these countries privatizations have taken place in an unfavourable macroeconomic context, with high inflation and interest rates, as well as unstable exchange rates. In such a situation, policies involved choosing between a bad situation, since privatization could fail (and some privatization schemes have indeed failed), and a worse situation if nothing was done.

However, where the public sector is relatively small and there is less emphasis on speed, privatizations can be phased-in gradually, for example by starting with profit making SOEs which do not have major over-staffing problems, whilst preparing less favourable enterprises for sale through restructuring and corporatization.

In addition, sales can be timed to take place at favourable moments in order to maximize their revenue or to minimize their negative social impact, taking into account macroeconomic and industry-specific conditions. Meanwhile, SOEs may be subjected to more stringent budgetary discipline, periodic performance evaluation or performance agreements with clear targets and enhanced competition, whilst steps are taken simultaneously to expand the private sector.

In industrial relations and labour institutions, it is necessary to bear the following guidelines in mind: employees of SOEs need to be won over. For SOEs where internal privatization is suitable, management or employee buy-outs may be used, a proportion of shares in the privatized enterprise may be distributed free or at a discount price to employees, an employment protection plan for a fixed period after privatization may be devised and the nature of investment and social plans, in addition to sale price, may be taken into account in deciding on direct sales terms.

In order to minimize labour retrenchment, SOEs for sale may be initially selected from those that do not have major over-staffing problems and steps may be taken through corporatization and restructuring to put SOEs on a sound commercial and financial footing before they are sold.

Some measures should be taken to achieve the expected impact on productivity, competitiveness and improvement of labour conditions.

In large scale enterprises, effective restructuring may be essential to success.

Trade policy, competition policy and competent regulatory authorities for promoting fair trading and anti-trust behaviour all have an important role to play.

In the case of public utilities, economic regulations need to be introduced in order to protect welfare, to promote efficiency and to foster competition in contestable sectors.

Where there is a strong media industry and where competitive sectors of public utilities can be developed through marketing deregulation and privatization, light regulation such as compliance with certain requirements and standards, combined with the promotion of competition, may suffice.

On the other hand, where there is little or no competition in a public utility industry, regulation assumes a particular importance, particularly if the industry is perceived to be making excessive profits at the expense of consumers.

3.2.2 Preparing the restructuring and privatization strategy and methods - legal requirements.

The privatization process requires legislative action at both the systemic and transaction levels. The former includes legislation to create a legal framework and institutional machinery for privatization.

The basic legal requirements for privatization include the establishment of a legal framework for privatization, including:

The basic legal requirements also include:

Another important step in the privatization process is the planning and organization of the privatization process. A privatization plan should serve two purposes: plan the process and be part of a public education and information campaign.

Organization of the privatization process includes:

After the general organization of the privatization process, it is necessary to divest a specific SOE. This involves two phases: a preparatory phase and the decision-making and implementation phase.

The first phase includes revising the legal status and the value of the enterprise, the structure of the market (competitive/non competitive), the need for any restructuring of the enterprise and the financing requirements and methods, including profiles of potential investors.

After approval, the decision-making and implementation phase includes:

3.2.3 Implementing privatization

In order to implement privatization, it is necessary to staff the organizational structure. The first step toward staffing the organizational structure is to decide what needs to be centralized and what may be decentralized. Policy making and coordination need to be centralized and the implementation may be decentralized.

The arguments for centralization of implementation responsibilities are that it:

The arguments for decentralization of implementation responsibilities include:

Although the answers will depend on where the balance of costs and benefits of cost efficiency and speed lies, there is a need for:

It is also recommended that conflict resolution procedures be established. In order to choose correctly from amongst these procedures, it is important to understand the possible conflicts between privatization and microeconomic objectives, based on the:

The best way of resolving conflicts is usually through the involvement of and dialogue between all the social players involved in the conflict. An agency for coordinating the privatization process may also be responsible for the establishment of conflict resolution procedures. The evaluation of public enterprises is also essential for privatization centred on the well-being of individuals. Generally speaking, evaluation may be carried out on the basis of assets, earnings and opportunity.

More specifically, the most common methods of evaluating enterprises include market value, book value, liquidation value, replacement value, threat value, owner's value, capitalized earnings and a combination of the values described above. The financing of privatization in order to sustain ability and corporate responsibility is also essential for achieving success in the privatization process. The main methods of financing privatization are:

a) Domestic sources of financing which include:

b) Public share offerings of SOEs in capital markets contributing to the widening and deepening of share ownership, which in turn contributes to the increased capitalization of such markets

c) Internal privatizations which may be used to facilitate sales and to attain the social objectives of privatization may be preferable to liquidation with the loss of jobs. In this case, it is also interesting to note that:

d) Foreign sources of finance which:

In addition to finance, foreign direct investment provides other inputs, including technology, management skills and international links which may help the privatization process achieve success.

3.2.4 Follow-up and monitoring

Privatization implies rebalancing the social benefits of economic growth and creating a basis for sustainable long-term growth. The social dimensions of privatization include:

These dimensions should be incorporated into the enterprise development strategy at the beginning of the process rather than as an afterthought. Furthermore, another strategy for improving social welfare is to improve public utilities and other social services. Privatization can affect social welfare by influencing the delivery, price and quality of public utilities and other social services. It may involve:

The importance of regulation and competition for increasing efficiency and protecting consumer welfare is unquestionable. Privatization can affect the organization of social protection by privatizing either social protection or the management of pension fund assets, using the proceeds of privatization to establish social protection and rebalancing the role of State and the private sector in the re-organization of social protection and services linked to employment.

The effects may go beyond social protection to the extent that pension funds:

Privatization can enhance popular participation in economic activities by:

Popular participation in economic activities is also obtained by widening ownership of shares and productive assets which may involve:

Lack of finance may prevent the objective of broadening the ownership of shares and productive assets so that they are available to everybody from being achieved. The finance problem may be addressed by:

4 THE NEXT DECADE

4.1 Strategies for optimizing social and employment results

As a central feature of the transition process, privatization can make an indispensable contribution to creating the conditions for employment growth and security and social justice and inclusion. However, these are by no means inevitable results - as we have seen, privatization can, and frequently does, entail major social and employment costs. It may seem banal to suggest that privatization and transition will most likely maximize social and employment benefits and minimize social and employment costs if these are explicit goals. Obvious though this may appear, however, it is a point frequently overlooked in the design of privatization programmes and related measures. As UNCTAD noted:

Whatever the balance between the various objectives of privatization, social considerations are an essential component of the process of privatization. They should form an integral part of the design and implementation of privatization policies and programmes. In this context, these social considerations should be incorporated into the strategy of privatization as early as possible, in an explicit manner and not as an afterthought, as is sometimes the case.

A similar view was taken by an important International Labour Organization meeting in 1995, the bipartite Joint Meeting on the Impact of Structural Adjustment in the Public Services (Efficiency, Quality Improvement and Working Conditions). (ILO meetings are normally tripartite - governments, employers and employees - but they are bipartite when dealing with matters in which the employers are governments.) The Meeting's conclusions stated: "Public sector reforms and macroeconomic structural adjustment measures should aim to enable all citizens to participate equitably in their society's economy, as producers and consumers, and share fully in its cultural life."

Identifying the more specific objectives associated with those goals, the ILO has pinpointed the need for:

Other objectives can be added to these, such as equal opportunities for women and minorities.

There is less agreement, however, on which policies can best achieve those goals. Schools of economic policy which pay little explicit attention to the social and employment dimensions are not necessarily careless of those dimensions but can be committed to the belief that they are best catered for by paying uncompromising attention to economic fundamentals. To the extent that privatization contributes to economic growth and more efficient deployment of resources, it frees the State from unproductive expenditure and attracts investment, enabling social benefits to follow (which is not to say that they do so automatically or that there are no social costs). However, there is considerable evidence to show that failure to address the social and employment dimensions explicitly and directly throughout the process can undermine the economic objectives of privatization and restructuring. As UNCTAD commented: "If welfare objectives are not adequately addressed, social conflicts can arise which may also have significant economic costs, both by causing domestic dislocations and by increasing risks to investors and thereby raising the costs of access to finance."

In brief, whether with regard to political commitment to giving higher priority to social and employment goals, or with a view to creating the right environment for the economic success of privatization and restructuring programmes, it would make sense to incorporate the social and employment dimensions throughout the process, from goal-setting to implementation, evaluation and follow-up. Perhaps even more fundamental is that they should be expressed in the process itself. The key concept here is participation, enabling the appropriate level of involvement of all interested stakeholders in a transparent process through freely functioning institutions.

The ILO believes that a participatory approach is correct in principle - it is a manifestation of the ILO's central remit of promoting social partnership. Again, however, there are politically realistic as well as principled arguments in its favour. These include the fact that, when developing a privatization programme, it makes political sense to engage with potential opponents, to anticipate their concerns and to negotiate what is negotiable and make clear the government's resolution about what is not. In addition, there are always compromises and trade-offs to be made concerning the relative priority of a range of objectives, and these can best be reached and sustained in practice through a participatory consultative process.

Privatization works most successfully when backed by social consensus and support, the conditions of good economic management. Experience from a range of countries suggests that conditions such as the following can enhance popular support for and therefore the success of the privatization process:

An early step is therefore to identify stakeholders and establish institutional arrangements for their involvement. Authentic representatives from labour unions and professional and civil service representative associations, consumer representative organizations and community-based groups need to be engaged. Policies and plans need to be explained to them throughout the process, from programme development to implementation, and their views canvassed and taken into account. This does not mean giving a veto to any particular interest group or allowing the views of the noisiest to drown out those of other legitimate stakeholders in charge. It does mean enabling an institutional framework in which all legitimate stakeholders can feed their views and concerns into a process of consultative policy formation.

It can make sense for potential buyers to be involved pre-sale in discussions about post-sale labour restructuring, since future obligations and trade-offs are likely to influence the price they will be willing to pay for going concerns. Alternatively, or additionally, the capacity and willingness of potential buyers to meet the investment and employment obligations agreed as part of the terms of sale can be a factor in the choice of buyer.

In some cases, existing institutional arrangements such as tripartite bodies linking government, employers' and workers' organizations may suffice to enable a participatory process, whilst in others ad hoc arrangements would need to be made. In some countries, the basic institutional framework itself needs to be created, meaning that an element of the transition process is the establishment of an enabling environment for organizations of civil society. Iacono identifies the following categories of such organizations:

Creating the right enabling environment can also be vital to maximizing the economic and indirect social and employment results of privatization. Van der Hoeven and Sziraczki have argued that although "privatization is widely expected to promote productivity and efficiency", whether or not it actually does so "largely depends on whether an enabling environment exists for the firms to operate efficiently, and even if it exists, how efficiently those firms operate." Key aspects of this enabling environment are therefore market structure and a regulatory framework.

Issues concerning market structure and regulation are likely to figure prominently in the development of a strategic plan for privatization, the development of which is the next and crucial step after setting objectives. The plan needs to be made on the basis of those objectives and through the participatory processes and institutions already discussed. Key elements of the plan are likely to be the scope, pace and means of privatization and/or restructuring.

The importance and yet difficulty of including social criteria in policies concerning the scope of privatization and the environment in which it takes place can be illustrated by reference to telecommunications, one of the main strategic utility services typically included in privatization programmes. For some, the social as well as economic objective of ensuring equitable and affordable access to high quality telecommunications is a reason not to privatize this sector. There are concerns that an inadequately developed market and/or regulatory capacity would turn public monopoly into private monopoly, with predictable effects on consumer welfare. However, the fact that telecommunications is increasingly run privately by transnational companies and consortia, rather than through the state monopolies which developed the service at an earlier stage of technological and international economic development, coupled with pressures on state finance, can push governments to privatize precisely in order to achieve the social goal of extending services rapidly to more people. They hope to achieve optimum results by constructing a market and regulatory environment in which the private sector has obligations and incentives to deploy the capital, technology and managerial expertise at its disposal in socially beneficial as well as privately profitable ways.

The pace of privatization is another aspect of strategic planning, with clear social and employment dimensions concerning not only privatization itself but also related policies of transition and structural adjustment within a developing market and regulatory environment. Whilst the case for privatizing or liquidating a particular enterprise might be overwhelming, decisions about when and how to do it might well depend on local economic development and labour market programmes, which underlines the importance of inter-agency collaboration within a participatory approach. Whether restructuring should take place before or after a change of ownership - a perennial dilemma of privatization in the context of transition - can also be an important aspect of strategic planning best resolved through a participatory approach. Whenever restructuring takes place, its success can often hinge on the effective involvement of employee organizations and other groups, within clear parameters of government policy - if the choice is between reform and privatization rather than between the status quo and privatization, then all parties need to understand that.

No matter how much employment and social goals are included in the objectives of privatization, no matter how participatory the process and promising the enabling environment, there will still be many cases in which restructuring before or after privatization requires facing up to overstaffing. Particularly at a time of jobless growth and even "job-loss" growth, privatization is typically associated with reduction and reorganization of the labour force, either in preparation for privatization or soon afterwards. Moreover, even where expansion and investment can be expected to absorb labour and even facilitate growth of the labour force in the long-term, there is frequently a short-term decline. In addition, some employees find the cultural and organizational changes which tend to accompany privatization and restructuring much harder to deal with than others, and may wish or need to retire or move on.

Rather than maintaining high levels of employment artificially, the intent should be to introduce changes in employment patterns which create less immediate harm to individual employees and less drain on state revenue which would otherwise be spent on unemployment benefit and safety net measures.

At the enterprise level, measures for avoiding retrenchment may include:

The Association of Estonian Trade Unions has managed to attach employment guarantees to contracts to ensure that jobs are maintained for a certain period after privatization (originally three years, but pressure on the Government is now shortening this to one year).

Where there is no other option but to make job cuts, there is also a range of possible measures for mitigating the effects on the enterprise, the retrenched workers and the local population. These include:

As with privatization itself, however, for measures undertaken in particular enterprises to be effective, they need to be complemented by and take place within an environment of effective policies and facilities in the wider economy and society. These could include active labour market policies such as the following:

They also include broader social policies and social security services to effect:

_ policies to prevent serious disparities of income.

The development of effective and adequately resourced welfare and public services through the national and local state (possibly in partnership with the private and voluntary sectors) is an essential characteristic of modern economies, bringing not only social but also economic benefits. As Nicholas Barr, one of the authors of the World Bank World Development Report "From Plan to Market", has written:

The welfare state has two purposes: one is redistributive, or compensatory, to enhance social justice, the other functional, e.g. to deal with varying forms of market failure, thereby increasing economic efficiency. Virtually all parts of the welfare state display both aspects. The theoretical arguments support the existence of the welfare state not only for the familiar equity reasons but also very much in efficiency terms. This, it turns out, is an area in which economic theory is capable of strong results which can justify the general idea of the welfare state to a surprising extent without resort to ideology.

In transition countries, one of the economic benefits of developing effective social public services is to release enterprises from the burden of doing so, which undermines their capacity for restructuring and their competitiveness. One possible mechanism may be to transitionally finance social assets with the help of foreign aid. In the Russian Federation, for example, the Privatization Centre has started a $20 million pilot project backed by the World Bank to support the transfer of kindergartens from privatized enterprises to local governments in several regions. The idea is to use the World Bank loan to subsidize the kindergartens accepted by the local governments on a declining scale over two years. Over time, the municipality assumes greater responsibility for financing each kindergarten, until, after two years, it is fully responsible.

4.2 Policies and action guidelines for the ILO, the social players and other multilateral institutions.

The ILO shares the concerns of other international organizations in ensuring that privatization and transition achieve their economic and political objectives, but its special remit and unique tripartite structure also gives the ILO a particular role in focusing on the social and employment dimensions. For this reason, the ILO supports governments in strengthening the institutional capacity needed to implement and manage privatization equitably as well as effectively, so that it contributes to expansion of opportunities to enable all social groups to participate in economic activities. If privatization is to yield strong benefits to society as a whole, it needs to be managed in such a way as to ensure transparency, equity and fairness, and consideration must be given to its impact on workers, employers, owners and investors, consumers, management and all other stakeholders.

With these aims in mind, the ILO has developed a framework for managing privatization based on the need for a participatory approach in which governments, the emerging private sector and other groups in civil society work together to plan and manage policies and programmes. Such an approach requires the social and employment dimensions to figure throughout the process, from the setting of objectives through to the design of strategic plans and the development and implementation of particular measures for evaluation and follow-up. To achieve this, the process itself needs to reflect the principles of social partnership and of sound and effective industrial relations practice.

Once again, the success of targeted measures can depend to a great extent on the strength of the enabling environment and for this reason the ILO also pays great attention to the development in the transition countries of effective and fair industrial relations systems which embody the principles of social partnership and to the development of institutional capacities, including social protection networks. In relation to privatization in particular, the ILO aims to help constituents to:

The role of labour standards is essential for the ILO. These labour standards are the result of a tripartite consensual process in which Conventions and Recommendations are adopted by the International Labour Conference and once ratified by member States are binding upon them. They are relevant to a wide range of privatization-related concerns, including employment conditions, productivity, industrial relations, workplace democracy and even the quality of the services provided by privatized enterprises.

Standards deal mainly with four concerns, which can be seen as basic human rights:

ILO labour standards which are particularly relevant to the privatization process are those related to employment contracts and conditions of work. They reflect the need for governments and civil society to each make an indispensable contribution along with private business in order to balance dynamic and competitive economic development with social justice so that the benefits and costs are equitably shared and all have a real stake in the success of transition policies and the future of prosperous market economies, democratic political systems and inclusive societies.

4.3 Recommendations for further research on public policies

Many of the enterprises being privatized were created as private initiatives and then became state owned. The performance of companies, sectors and economies in transition has to be monitored. A network of research units should be engaged in following up the impact of restructuring and privatization. The impact on the workforce, the evolution of the rate of employment, remuneration, working conditions, training as well as the level of competitiveness should be studied to provide feedback for other sectors and other countries. This is important given the major transformation in economic and business relations as well as the constraints imposed on large segments of the population.

5 CONCLUSIONS

Changing technology and the dynamics of international relations, mainly in trade and financial flows, have created a new landscape where employers, employees and government officials have to find a new pattern of relations. The concept of progress is going through a crisis. Consumerism has been an engine for the market economy, but there are limitations. Economic rationality must prevail, even when such rationality is the cause of unsustainable wealth concentration amongst and inside countries, since income distribution must be promoted in order to avoid a risky fragmentation which can destabilize the system as a whole. The two world wars and many regional conflicts resulted from insupportable fragmentation.

There is a clear demand for economic democracy. Education and health are preconditions for citizens to compete for better living conditions. Restructuring means the prevalence of economic rationality through market orientation with social concerns to avoid exclusion and misery. Privatization has been one way of avoiding inefficiency when supplying services that are of general interest. In spite of the benefits and apparent relationship between privatization, restructuring and economic democracy, further research has to be carried out.

It is clear from the report of this action plan that there is an objective relationship between the above dimensions but a direct link between cause and effect can only be determined through further studies. Countries such as Great Britain and sectors such as the telecommunications industry provide examples of the virtuous circle between privatization, restructuring and economic democracy.

The success achieved by Great Britain is now entering a second period of difficulty. In 1998, Britain will enter the second phase of the revolution brought about by privatization. Having sold government assets, there is now nothing left to sell. There is, however, plenty of scope for the competition and price cutting that will now follow. Other countries that have been slower off the mark in the privatization race must take note: this second stage will be more painful, more controversial and more beneficial than the first. The British consumer will at last become the chief beneficiary of the structural reforms brought about denationalization. Over the next year, technocratic Labour ministers will increase competition to benefit those who put them in power.

Encouraged by their new political masters, independent regulators in industries ranging from the railways to gas supply will be reviewing licenses and exercising their authority. A new competition bill, which will come into effect in 1998, will also increase the powers of watchdogs to tackle anti-competitive practices.

The Labour government will emerge as a reforming party for business. The changes will be welcomed by many companies, through certainly not by all. Utility shareholders will be obliged to share more of their profits with utility consumers and many companies which, although privatized are still protected, will find their traditional monopolies eroded. This is a hurdle that most privatized companies in Europe and the emerging world have yet to jump. From 1998 onwards, Britain's new competition law will ban anti-competitive agreements such as price-fixing, market-sharing cartels and predatory pricing. Based upon European competition rules, it will make companies that abuse market power liable to fines of up to 10% of their turnover.

The government's director-general of fair trading will gain new powers to raid premises and seize documents. Customers and rivals who can prove they were wronged will be able to sue for damages. The Monopolies and Mergers Commission will act as an appeals tribunal.

In this context, the positive attitude of all the social players will be crucial in order to reinforce the conviction that privatization and restructuring can be conducted in the interests of the people.

The privatization of the telecommunications industry also demonstrated that it is possible to privatize companies and enhance benefits for the individual. To succeed in this task, it was necessary to promote a change in regulatory policy in order to spur technological innovation and provide incentives for companies to create markets for new services as well as expand their current service markets, allowing them to create several new job training and retraining schemes that played an important role in maintaining employment security in both existing and newly formed companies, by disclosing information which allowed a genuine participatory approach.

Some unions were given access to a considerable amount of sensitive information about company strategies that was not publicly available. Integrating all the social players gave transparency to the privatization process and provided economic democracy.

This is not the case, however, with Russia or with the health sector where it seems that change has promoted a dramatic concentration of wealth and caused alarming social exclusion.

It is not uncommon to find in a country report that privatization in the health sector has led to a two-class health care system which excludes the socially disadvantaged, especially in countries with inadequate insurance systems and social protection.

In Russia, the architects of the reform sought to carry out privatization as quickly as possible. They failed to give the people a chance to comprehend the results of the first stage in the reform, such as the liberalization of prices which caused production and consumption to plummet. Some authors believe that had privatization been effected gradually, the people's response to the changing economic situation might have prevented property reform altogether. Another reason for the haste was to make the reforms irreversible and to create a class of owners. As a result, large sums of capital were amassed in the shadow economy or through speculation, bribes and embezzlement.

Other countries such as those in eastern Europe or Latin America and sectors such as electric energy distribution have to be observed. These countries are emerging economies in political transition, searching for new sociocultural structures for sustainable development. The main challenge for these economies is how to minimize the cost of privatization that generally tends to fall on redundant workers and, in very few cases, on those workers that remain under less satisfactory conditions in the privatized enterprises.

Experience in Africa highlights the need to create conditions for promoting economic development in some countries on this continent. In this context, some countries have taken the following measures: investment in human capital through education, nutrition and health; active promotion of wage employment, particularly in the urban and informal rural sectors; increase in household productive assets so as to raise the income level of the poor; raising the return on such assets through changes in relative prices.

In spite of the diversity between countries and sectors, the report and studies of the action plan provide an extensive number of examples and cases which are useful to the improvement of the well-being of the individual. It is too early to draw definitive conclusions, but it is possible to affirm that in most of the countries and sectors change in public enterprises was badly needed. Negative political interference and inward-looking decision making has damaged the strategic positioning of those companies. Technological changes only made such paralysis even more evident. For this reason, generally speaking, society welcomes privatization. Nevertheless, there are many concerns regarding the consequences of privatization in countries with no tradition of economic democracy. Many people are concerned with the question of what is more threatening for economic democracy - a monopoly managed by a public company or by a private interest?

Economic democracy also depends on well-structured and modern political parties, but this is not easy to achieve in today's society. Political parties need access to information concerning structural issues but are under pressure to deal with immediate and urgent problems. Parties aim to provide a concrete vision of the future, a vision based on values and principles, a vision that is consistent with the expectations of its constituencies, a vision which stimulates hope and avoids later frustration. This means that political parties should be directly involved in debates on the restructuring of the economy. Ruling and opposition parties should be equally involved in-depth in such debates and should contribute to improving the decision-making process concerning privatization.

With these lessons in mind, a few principle recommendations can be made.

Firstly, entrepreneurial capability should be favoured. It is widely accepted that the success of economic and political reforms as well as the survival and expansion of privatized companies ultimately depends on human development, that is on an increase in the number of entrepreneurs and market-oriented managers together with the expansion of a merchant and trading class and skilled technical and support workers. Amongst these groups, special attention is given to the entrepreneurs due to their importance in the creation and distribution of wealth.

The unprecedented rise in the rate at which new businesses are formed is a strong indicator of the importance of entrepreneurs in creating wealth. In the United States, the number of annual new businesses has doubled in the last ten years, from annual rates of approximately 300,000 to over 600,000.

These trends are mirrored in the capital markets that fund these undertakings. The decade between 1975 and 1984 saw explosive growth in the amount of capital committed to venture capital firms in the United States. There was a consistently dramatic increase in the amount of money raised in the public capital markets by young companies.

In addition to the interest shown by individuals wishing to become entrepreneurs and the investors who wish to back them, there has been a wave of interest in what some refer to as entrepreneurship, or entrepreneurship within the context of the larger corporation. In addition to the wealth of reports concerning this subject, some large firms seem to have recognized their shortcomings on certain critical dimensions of performance and have restructured themselves in an attempt to be more innovative.

Indeed, we believe that the strengthening of entrepreneurship is vital in creating a society centred on the well-being of individuals. The first thirty years of the post-war period were characterized in most countries by an abundance of opportunity, bringing about expanding markets, high investment in the national infrastructure and increasing debt. Within this environment, it was relatively easy to achieve business success, but this is no longer the case. Access to international resources is not as easy as it once was; government regulation has brought recognition of the full costs of doing business, many of which had previously been hidden; competition from overseas has put an end to American dominance in numerous industries; technological change has reduced product life in other industries; and so forth. In short, a successful firm is one that is either capable of responding rapidly to changes that are beyond its control or is so innovative that it brings about change in its respective field. Entrepreneurship is a management approach that offers these benefits. Well-managed organizations are the basis for the success of privatization processes which aim to promote better distribution of wealth amongst all the social players.

Secondly, indigenous local development strategies should be promoted.

Local and regional policies and initiatives for economic growth and employment creation have so far received insufficient attention in Central and Eastern Europe.

Particularly in the initial years of transition, economic policy in most CEE countries centred on macroeconomic objectives, including price and trade liberalization, restraining inflation, limiting budget deficits and other tasks. It was expected that under the right macroeconomic conditions, market forces would create the necessary economic dynamism. However, with few exceptions, present economic strategies do not seem capable of creating sufficient and sustainable economic growth, nor does economic growth have a net employment creating character. One of the reasons for this unsatisfactory performance is that the particular needs and opportunities of specific areas are not sufficiently taken into account and local development is promoted very little.

Consequently, important development opportunities are missed and resources are wasted. Strengthening economic growth and creating employment requires national level policies to be based on a decentralized approach which takes account of the variety of local economies and promotes local initiatives.

Effective local development policies aimed at promoting economic and employment growth take a multi-sectoral approach and coordinate between the various policy areas to produce a comprehensive local development strategy. As observed by the OECD, "local development is an attempt to combine a range of policy responses originating from many sources into a cohesive programme tailored closely to local needs and characteristics". It facilitates the reinforcement of a variety of policy areas (e.g. the labour market, enterprise development or education) based on local shared goals, rather than operating in a vacuum. The formulation of a local development strategy allows for the identification of specific objectives, such as full and balanced employment, improving the environment or attaining diversity of economic activities in the region in order to reduce its vulnerability and dependence on particular industries. A local development strategy includes both short and long-term considerations and is based on a thorough analysis of the region's strengths and weaknesses, obstacles to development and opportunities for economic growth and employment creation. It identifies actions and determines the role of the relevant players in policy design and implementation. Most importantly, it should specify how proposed actions will be financed.

Sustainable local development is above all indigenous by nature. Its primary aim is to improve the local economic and social infrastructure, develop local resources and create a high-quality enabling environment that stimulates economic growth. Local development initiatives and projects include both public and private investment in the physical infrastructure, in the education and training of workers, in innovation, information and marketing, in communications, in the financial infrastructure and in other elements that improve capacity for economic activity. Creating an enabling environment often implies providing assistance in order to establish or strengthen local support institutions, labour offices or chambers of commerce. Indigenous development does not exclude external input, for example outside (foreign) investment. However, attracting such investment should be consistent with local development objectives and should mainly be based on offering high-quality resources, rather than providing cheap labour or financial incentives.

Thirdly, development efforts and capacity building need to be coordinated.

Developing an effective local development strategy and identifying development objectives is not a matter for a small group of elite experts, but requires the strong involvement and intervention of many regional and local players. Economic and employment policies need the support of local leaders and interest groups and success often depends on the strength of these players and their contribution to the policy-making and implementation process. This kind of participation, based on social partnership, may be channelled through bodies such as regional social and economic councils or other regional forums of strategic choice and action. These bodies should include relevant local players with an interest and role in socio-economic development, including representatives of the regional and local governments, trade unions and employers' organizations and also other relevant players such as universities, enterprises, private entrepreneurs, or labour offices. The possible functions of these bodies, apart from serving as a forum for building a regional strategy, include securing support from the relevant players and institutions, building a consensus and lobbying outside institutions (e.g. central government). Such bodies can also provide the required coordination of activities and ensure that everyone is working towards the same goals. This kind of structured cooperation often requires participants to step outside the borders of their traditional activities.

Setting and implementing a regional development strategy is not an easy task and will often require capacity building at a local level. It is of vital importance for local policy makers and interest groups to understand the selection of subjects for consideration and the problems and opportunities they may encounter in their attempt to restructure and revitalize the local economy. This is an important task for the national governments and other international institutions involved in the promotion of local development. Local development activities may be channelled through professional bodies such as local and regional development agencies which are often indispensable in ensuring that regional strategies have been put into practice. However, the actions themselves should have the support of a broad-based regional coalition of socio-economic players and interest groups.

Fourthly, regional development policies must be strengthened.

National governments can play an important role in promoting development at a local and regional level, through regional development policies and initiatives in related policy areas. However, so far little has been done to this end in the transition countries. As observed by Grzergorz Gorzelak in his book, no government in any CCE country, with the possible exception of Hungary, has developed a comprehensive regional development policy and regional considerations are almost non-existent in present social and economic policies. Although good intentions have been announced in this regard in several countries, little has been achieved in practice. To fill this gap, several steps need to be taken.

Firstly, national governments should define the objectives of regional development policies. There are two commonly defined but potentially conflicting aims of regional policy. One of these is increased equity, meaning the achievement of a geographically more balanced development of economic activities, generally pursued by support measures for trailing regions. The other is increased efficiency, aimed at facilitating local development in general, by achieving the maximum contribution of each region to national welfare. Both aims may be highly relevant and the question of which objective can or should be emphasized depends on the particular national situation. Given the significant regional differences in Central and Eastern Europe, the equity objective should have a prominent place in most countries, with the most problematic regions receiving special assistance. Larger regional differences create social tensions and the further less developed regions fall behind the national average, the harder it is to close the gap. However, a general promotion of local development may be equally more important. Analysing the case of Moldova, for example, Per Ronnas states: "Although there are traditional regional differences in the level of economic development, with development and prosperity generally increasing from south to north, these differences pale in significance when compared to the challenge of rebuilding the economy as a whole". Strategies for regional or local development and employment creation should be seen in this context. In practice, in most CEE countries both the equity and the efficiency objective have a place.

Promoting general local development from a national perspective may have many components. In most cases, the main objective in this regard should be to provide local players with the necessary capacity and means to develop and implement local development initiatives. This may include many specific measures such as decentralizing responsibilities from the central governments to regional or local governments; strengthening the role of local and regional labour offices; decentralizing decision-making powers on the use of employment or social funds; all potentially powerful instruments in promoting development in general and employment creation in particular. Considering the present situation in the labour markets in CEE countries, it is vital that this policy area receive more attention. Players at both a local and national level have important roles to play in promoting and executing local development initiatives.

Finally, a participatory approach to privatization and restructuring centred on the well-being of individuals should be adopted.

A recent ILO Meeting came to the major conclusion that "Public sector reforms are most likely to achieve their objectives of delivering efficient, effective and high-quality services when planned and implemented with the full participation of public sector workers and their unions and consumers of public services at all stages of the decision-making process".

Evidence from ILO studies confirms that the involvement of all stakeholders in privatization and restructuring processes is a prerequisite for success. The active participation of employee representatives and, for a number of matters, also of the users of products and services undergoing such changes, holds the key to solving or easing most of the challenges of those processes. Yet, ironically, evidence also shows that this is the issue on which achievements have so far fallen furthest short of potential. This is therefore where greater efforts must be concentrated.

To conclude, it is possible to say that we can have privatization processes aimed at the well-being of individuals by following the above recommendations.

APPENDIX I

Results of the Interdepartmental Action Programme on

Privatization, Restructuring and Economic Democracy

Objective:

To promote social equity and economic efficiency

Results:

1. Studies on privatization, restructuring and economic democracy that identify problems and propose strategies and solutions

2. Case studies documenting successful experience and best practice

3. Policy and process-management guidelines for governments, employers and workers' organizations

4. Stakeholders action-planning workshops to develop strategies and actions

Themes:

1. Developing conducive policies and institutional environments for privatization and restructuring

2. Managing privatization policies and programmes for equity

3. Coping with employment, retrenchment and redeployment

4. Developing social safety nets

5. Ensuring participation and dialogue

Concerns:

1. Measures to protect and assist retrenched employees

2. Quality of jobs, working conditions, wages and income differentials

3. Positive effects of economic democracy

4. Small enterprise development

Available working papers:

IPPRED-1 Bilan et perspectives des privatisations en Afrique francophone: Une étape de la démocratisation?; par Bruno Chavane

IPPRED-2 Enterprise privatization and employee buy-outs in Poland: An analysis of the process; by Rainer Schliwa

IPPRED-3 Management development in Russia; by Igor Gurkov

IPPRED-4 Social and employment consequences of privatization in transition economies: Evidence and guidelines; by Brendan Martin

IPPRED-5 Issues in privatization and restructuring in sub-Saharan Africa; by Akanimo Etukudo

IPPRED-6 Small enterprise development as a strategy for reducing the social cost of restructuring and privatization: Public and private initiatives; by Clare Tawney and Jacob Levitsky

IPPRED-7 The role of employers' organizations in privatization; by Alan Wild

(English, Spanish and French versions)

IPPRED-8 Traditional trade unions during transition and economic reform in Russia: by Frank Hoffer

IPPRED-9 Privatization of two state enterprises in Lao PDR; by Moise Allal and Florence Bonnet

IPPRED-10 Management Development and Privatization in Africa: by Cornelius Dzakpasu

IPPRED-11 Employee ownership in Hungary: The role of employers' and workers' organizations; by Bela Galgoczi

IPPRED-12 Privatization in Slovakia: The role of employee and management participation; by Dane Brzica

IPPRED-13 Les petites entreprises, les associations professionnelles en Afrique: Perspectives pour la consolidation du secteur privé; par Hakim Hossenmmamode (French, English)

IPPRED-14 Institutions and market development: Capacity building for economic and social transition; by Dennis A. Rondinelli

IPPRED-15 The promotion and privatization of medical services in the Russian Federation, Ukraine and Georgia; by Igor Vocatch-Boldyrev

IPPRED-16 The employment impact of privatization and enterprise restructuring in selected transition economies; by Christine Evans-Clock and Alexander Samorodov

IPPRED-17 Privatizacion de los servicios municipales a traves de microempresas, el ejemplo de Lima: editado por Kees van der Ree

IPPRED-18 Privatization, labour law and labour relations: A comparative report by Suzanne Nola and Marleen Rueda

IPPRED-19 Aspects sociaux des privatizations et restructurations: le cas des services d'intérêt général (services de santé, de télécommunications et de distribution de l'eau, du gaz et électricité) par Claude Duchemin

IPPRED-20 Políticas e instituciones para dirigir el proceso de privatización - Experiencia internacional por Dennis rondinelli y Max Iacono

IPPRED-21 Employee Ownership in Privatization: Lessons from Central and Eastern Europe;

by Daniel Vaughan-Whitehead (Experts' policy report, Budapest 1998)

Regional Development and Employment Policy - Lessons from Central and Eastern Europe; edited by Maarten Keune (Budapest, 1998)

IPPRED-22 Ajustes trabalhistas da privatizacao (com enfase nos sectores siderurgico e ferroviario - Argentina, Brasil, Chile, Bolivia, Peru); by Armand Pereira, Director, ILO Office Brazil (Brasilia, 1998)

IPPRED-23 Making Privatization Work - Training materials for policy-makers and practitioners; by George Manu and Ken Kaw (Turin Centre, March 1998)

IPPRED-24 Privatization: Lessons from Russia and China; edited by Joseph Prokopenko (ILO Geneva, April 1998)

IPPRED-25 Labour and social dimensions of privatization and restructuring (Public utilities: water, gas, electricity); edited by Loretta de Luca (ILO Geneva, November 1997)

IPPRED-26 Labour and social dimensions of privatization and restructuring: Health care services; edited by Gabriele Ullrich (ILO Geneva, December 1997)

IPPRED-27 Labour and social dimensions of privatization and restructuring: Telecommunication services; edited by Tomoaki Ishii (ILO Geneva, November 1997)

Workshops held:

1. Seminar on privatization in Brazzaville with CFDT (Confédération Française Democratique du Travail) (October 1996); Bruno Chavane

2. Seminar on privatization in Dakar with CFDT (February 1997); Bruno Chavane

3. Workshop in Budapest on employee buy-outs in privatization for Central and Eastern European region countries (March 1997); Budapest MDT

4. Workshop in Budapest on regional economic and social restructuring for the Central and Eastern European region countries (May 1997); Budapest MDT

5. ILO/BNDES symposium on privatization of railways and steel industry in Latin America (Rio, August 1997), Pereira, Iacono

6. Several privatization training programmes held at the Turin Centre for senior managers and government officials; Turin, Iacono

7. Privatization of municipal services to the informal sector in Latin America (Lima, December 1997); van der Ree, Iacono

APPENDIX II

LESSONS FROM SPECIFIC SECTORS, REGIONS AND COUNTRIES

1. Restructuring and privatization of services of general interest

Within the context of rethinking the role of the State and restructuring, adjusting and downsizing public budgets, communities at local, national, regional and international levels are looking for new ways of financing and providing services of general interest. In Europe, for example, such services aim to serve the public whilst protecting the environment, enhancing economic and social cohesion and promoting consumer interests. The basic operating principles of such services are: continuity, equal access and universality.

There are various ways of organizing the provision of these services, reflecting different geographical and technical circumstances, political and administrative settings and cultural and social traditions. The services can be provided by both public and private operators, in either competitive or monopolistic situations. The providers listed by the European Commission includes private companies, public bodies and joint public-private partnerships. These different organizational set-ups make it necessary to speak of services of general interest rather than of public services. The provision of these services is regulated by public authorities to various degrees, depending on the sector.

Whilst analysing the experience gained from the restructuring and privatization of such services, social and labour issues are frequently ignored or left to the bargaining partners of a specific situation. The analysis of the impact on and the reaction of users of these services attracts more interest than the analysis of the situation of the workforce in these fields. Hence the absence of studies and literature in this area. Although the impact on the consumer and society in general are linked, there is hardly any general evidence showing the impact that restructuring and privatization have on the workforce in different sectors providing services of general interest and, in reverse, what impact the workforce can have on restructuring and privatization.

Consequently, in 1996/98 the ILO launched, within the context of an interdepartmental action programme, a series of studies on the restructuring and privatization of services of general interest which focused specifically on social and labour issues. The sectors selected were utilities (water, gas, electricity), telecommunications and health care. The results of these studies are complex and vary according to the form of privatization, sector, region, country and type of social dialogue. Some of the findings are described below.

1.1 Public utilities

The last 15 years have witnessed major transformations in water, gas and electricity services at both national and international levels, mainly linked to their privatization and restructuring.

A proper supply of water, gas and electricity is indispensable in the life and development of any society. A sufficiently developed infrastructure and easily accessible distribution represent strategic dimensions for competitiveness. These utilities are also essential for individuals, both in their everyday existence and to enable them to integrate into the economic, social and political life of their community.

Water is an essential component of life itself and an integral part of most development activities, ranging from health and sanitation to the location of human settlements, agricultural production, nutrition and the maintenance of an ecological balance. Electricity is essential in industry, transport and households, as well as in many aspects of modern social life. Gas, albeit less vital, has recently been gaining importance as a cheap and convenient source of energy.

As such, the distribution of water, gas and electricity is a public service, irrespective of ownership. That is, these services are supplied directly to individuals and individual firms, but at the same time satisfy an important need in society. The Commission of the European Union stressed that "These Services play an important role as social cement over and above practical considerations.... This implies certain basic operating principles: continuity, equal access, universality and openness."

A second key aspect of utilities is a marked tendency to be natural monopolies. Their typically high fixed costs and economies of scale may well mean that, in the attempt to increase the number of customers (so as to lower average costs) only the largest, most cost-effective firm will survive. This firm could then take advantage of its monopolistic position to impose high prices, neglect the quality of its services or limit access to them. This risk would logically be higher in the case of a private company, for which profitability is a major argument, than for a public one which is more oriented towards seeking social results.

Given both the public service and natural monopolistic nature of these three industries, it is easy to see why ownership and operation have traditionally been of strategic importance for governments. Thus, privatization of public utilities has started later and is proceeding less quickly than in the manufacturing and even the telecommunications industries. Indeed, ILO studies confirm that it is generally in water, the most vital of the three industries, that privatization efforts are the fewest, the least far-reaching, the most regulated and closely supervised, and in general those conducted with the greatest caution. In gas, the least essential of the three, privatization and restructuring raises the least controversy.

Probably the main challenge in these sectors is to strike a balance between commercial and business concerns, calling for cost-efficient, profitable operations and broader public service values that emphasize the provision of cheap, reliable, good-quality and widely accessible services. This duality is found in all the problems relating to these services and devising solutions to them requires reconciling what are sometimes conflicting requirements.

Consumption of the three products provided by these utilities is increasing steeply, creating challenges in terms of the large volume demanded, rising energy costs and ecological considerations. This is putting pressure on providers to find ways of making greater and greater quantities available more efficiently, whilst keeping an eye on equity and longer-term environmental sustainability.

Since the early 1980s, privatization and restructuring in particular have been rapidly gaining ground worldwide and are still accelerating in an attempt to address the aforementioned challenges, reduce pressure on public finance or merely reduce the State's role in the economy. Privatization has taken a variety of forms ranging from complete or partial sale of state assets, to contracting-out, concession and leasing contracts and the introduction of market concepts, concerns and work methods in public firms. Restructuring has consisted, for example, in decentralizing operations from a national level down to local and even community levels, or in vertically disintegrating public utilities, separating the production, transportation and distribution stages.

In the wake of these sweeping changes, utility firms are also becoming transnational. National utility markets are opening up to cross-border competition, as has been the case with electricity supply in the European Union since the middle of 1996. Cross-border ownership is also spreading, sometimes through mergers but usually through acquisitions. Large areas of Central and Eastern Europe, Asia and Latin America are opening up their utility industries. In electricity, the global annual value of transnational acquisitions rose in the decade between 1985 and 1995 from about US$ billion to US$ 20 billion.

These trends bring ever greater pressure to emphasize commercial and profitable concerns. Yet whilst reforms may be necessary, namely to make services more efficient, effective and economical, the "raison d'être" of public services remains essential.

Utility industries are capital and knowledge-intensive. As such, they are not usually major employers. They rarely account for more than 2 per cent of the total national workforce and mostly remain below one per cent. In all three industries, the presence of women is low and concentrated in clerical jobs. Yet employment levels and working conditions in the utilities have a much wider impact. The level of activity and employment opportunities in all other sectors depend on a smooth supply of water, gas and electricity services and thus on these services having appropriate staffing, both quantitatively and qualitatively. This makes it all the more important to choose an appropriate management approach which should put the accent on total quality and careful human resource planning in order to succeed in the privatization and restructuring of public utility services.

General finding

There are no "best practices", but a variety of "good practices". The successful experience in a specific enterprise of a given country or region is not directly applicable to the enterprise of another country or sometimes even to another enterprise within the same country. The in-depth studies made by the ILO confirm that the social, economic and political context plays a major role and thus needs to be borne in mind. There are many paths to privatization and restructuring and decision makers need to choose the one most appropriate to their specific context. Appropriateness depends on a number of factors, such as the development of dialogue between the social partners, the financial situation and the political culture.

Employment

Employment losses almost always accompany adjustments in the public utilities, both under privatization and under restructuring schemes. Employment reductions may occur before privatization, as governments try to render the company more attractive to potential buyers or operators. They may occur during the privatization process or some time after it. In some cases they have accompanied all three stages. In many instances worldwide, they have indeed been considerable. It is not unusual to see the workforce reduced by 30 to 50 per cent. Employment cuts were found to be somewhat more severe under certain forms of privatization, namely contracting-out and total privatization and where a combination of privatization and restructuring processes occurred. There were also instances of employment increases after privatization, but these usually followed periods of large-scale retrenchment.

Such sharp employment cuts are particularly worrying, since in most cases they have occurred in times of economic recession and high unemployment. This makes it all the more difficult for retrenched workers to find alternative occupations and sources of income for themselves and their families and for governments to assist them, thus aggravating the problem. In a sense, the substantial costs of privatization and restructuring may ultimately be passed on to governments and society.

It is also worrying when human resource strategies rely heavily on workforce reduction as a means of increasing profitability, as appears to be the case in the United Kingdom. As mentioned earlier, human resources need to be more fully recognized and treated as the real competitive advantage of companies.

More positive strategies do seem to exist, as in French public companies and can prove quite successful. In many cases, the employment picture need not be as bleak as it has been. The case studies point to a number of measures that can be taken to alleviate the problem:

-- By moderating the pace of change, at least some of the desired reductions can be achieved through natural attrition and voluntary separations. This gives time to consider and select less traumatic, more positive options.

-- At all stages, decision makers need to keep their minds open to alternatives, such as organizing redeployment and retraining schemes for workers to adapt to the different new jobs and tasks that may be needed within the new set-up. In a number of cases, job flexibility could advantageously substitute employment flexibility. However, this requires social partnership and dialogue.

-- Although separations may be necessary as a result of overstaffing in the past or the fact that the new work organization requires fewer workers, they should be limited. As pointed out in an ILO study on Africa, keeping the workforce intact engenders trust and with it cooperation and loyalty. Both are important at any time in an enterprise, but become essential for introducing change successfully and for boosting performance.

-- Gradual reductions help attenuate the traumatic effect on the enterprise and also afford governments and societies more time to adapt and lend support to the affected workers and their families.

-- Voluntary separations should be encouraged, for instance through financial and other forms of compensation. Generous compensation renders the process less traumatic for those leaving the company and for their families and at the same time smooths the transformation process.

Remuneration and other working conditions

The impact of privatization and restructuring in public utility companies on employee salaries is less clear. For some occupations and grades it may decline, whilst for others it may increase. For instance, in privatized British utility firms directors have had sharp pay increases. In some companies, there are pay raises for all the employees retained, in others a decline in pay for all and in others no change. ILO studies did not find any clear pattern concerning pay levels.

A much clearer and common feature is the move towards more flexible and individualized remuneration systems in which larger portions of pay are determined by personal performance or the firm's profits. This is considered as the passage from the public sector value of solidarity to the private corporate culture in which merit is based on what the employee contributes to profit.

Distributing shares in the new company to employees appears to be a fairly widespread practice. In Latin America, virtually all privatization projects provide for a distribution of 3-10 per cent of the company's shares to employees. The underlying aims of such offers are multiple, in particular, they may make workers feel more involved in the fate of "their" company and in the decision-making process. In various cases, they have been part of the package for encouraging employees to move to the new company and in general have helped defuse opposition. As demand for the utility increases, employment and working conditions are usually less seriously affected and have sometimes improved with privatization and restructuring.

Here as well, a few ground rules can be extracted from past experience:

-- It appears that, as in the case of employment, pay levels should be discussed before the process is launched and the outcome of those discussions included in a formal agreement.

-- Higher wages could indeed be logical and even necessary following privatization and restructuring. They may help compensate employees retained for the loss of a protected status and facilitate the achievement of greater productivity which may entail more strenuous working conditions such as the longer working hours detected in some of the cases examined. They may also pave the way to a more flexible, multi-functional workforce.

-- In matters of remuneration also, transparency is an essential element of success. To avoid opposition and stimulate performance, any changes in levels, scales and components of pay need to be discussed between management and labour and should be understood by all.

Training and industrial relations

ILO studies showed that training is the third most important concern of employees after employment and income security and is actually closely linked to both of these. Within the context of a company's restructuring, changing work organization, workforce reduction and its quest for flexibility and higher standards of performance, retraining is the key to employment security, or at least labour market security (that is, the capacity to find employment fairly rapidly elsewhere). The basic logical proviso highlighted in the studies is as follows:

-- To ensure employability and thus be credible, training must be appropriate. It should provide skills that are in high demand and thus genuine potential for redeployment (within the same organization or in the wider labour market) and career opportunities also.

Unionization is relatively high in public utilities worldwide. The nature of and modifications to a country's general industrial relations framework are essential elements in determining the labour effects of privatization and restructuring.

Privatization generally affects unionization, bargaining patterns and collective agreements, but the results are fairly mixed. In countries where public sector workers, or specific categories of them, have more limited union rights and in general lower labour standards than are current in private companies, privatization may well bring improvement. However, in a large number of cases, unionization and industrial relations are weakened by privatization and restructuring processes.

The national political context and habits play a key role in determining the pattern of industrial relations, even after privatization. Some studies show that even foreign companies that become the owners or operators of a public utility seem to adapt their policies to the context in which they function.

It is therefore important to better understand the impact of multinationals. As mentioned earlier, these are becoming major protagonists in water, gas and electricity services in the wake of privatization and liberalization processes. Their transnational nature is reflected in their economic behaviour and human resource strategy, including bargaining and labour relations.

Codes and Agreements

International Codes and written Agreements have proved to be important instruments in mitigating the effects on employees caused by the changes that follow the privatization and restructuring of a company. They typically contain provisions for dealing with employment reductions and on the employment and working conditions of employees who will transfer to the new company.

Studies indicate that specific provisions vary considerably, but the area of most concern and which all of them cover is employment security. Provisions usually specify that the new company must retain the whole workforce or a portion of it. The other two major concerns most frequently covered in Agreements are remuneration and training.

International rules may be effective in limiting employment cuts resulting from privatization. The Acquired Rights Directive of the European Union, for example, requires that workers whose company is undergoing capital privatization or is being contracted out be automatically transferred to the new structure. Similar protections included in the same Directive cover working conditions and industrial relations rights. However, this experience is so far rather unique. International codes dealing with privatization contain virtually no social provisions.

Agreements and formal Undertakings by governments also help considerably in smoothing the process. In the absence of clear Agreements, workers often strive to stay with the old company owing to the lack of guarantees about employment and working conditions in the new company. Trade unions which reflect those apprehensions typically oppose the process through strikes and public campaigns.

The cases examined highlight various elements and circumstances that determine the strength of Agreements and their impact:

-- The credibility of Agreements rests heavily on the process decided on in the early stages of privatization and restructuring, as opposed to having been rapidly sketched as a last-minute, remedial action.

-- Their credibility also requires the active involvement of trade unions in their preparation, rather than being the fruit of unilateral decisions of governments or the new employing company.

-- Their reliability is strengthened if they are the result of constructive negotiations rather than open confrontation.

-- The effectiveness of Agreements rests on their long-term sustainability. So far, measures stipulated in Agreements have, by and large, been time-bound, which causes apprehension about the long-term possibilities.

-- The sustainability of Agreements is enhanced if the differences between the requirements they set and the needs of the new structure, contractor or owner are kept to a minimum.

-- When a private developer or owner is involved, negotiations leading to an Agreement being reached should have the State as intermediary and guarantor.

-- Labour market deregulation that runs parallel to the establishment and implementation of Agreements clearly reduces their impact on employment, working conditions and industrial relations.

-- Special consideration should be given in Agreements to women employees and more vulnerable social and ethnic groups. In times of adjustment, they are typically the first to be affected by drastic employment reductions and deterioration in working conditions.

Timing, sequencing and participation

A few important lessons on scheduling emerge from ILO studies:

-- The pace of the process needs to allow the players to consider all possible options and weigh-up their respective costs and benefits, then to select the one that best answers the specific problems that have prompted changes in the company set-up. By adopting a suitable pace, employment reductions can be gradual and retrenchments limited by means of voluntary departures and retirements. It also gives time for the appropriate accompanying measures, regulatory structure and monitoring devices to be set up. Finally, but perhaps most importantly, it also gives time for consultation and negotiation between all the players involved and for the process to be explained to society at large.

-- Spacing out privatization in a given country makes it easier to ensure better control over the various stages of the process and to plan and put in place measures protecting against possible negative side-effects. Labour protection is inevitably more difficult when various large-scale privatizations occur simultaneously.

-- Countries deciding to privatize would benefit from starting on a small scale with "pilot" processes. This would enable them to refine the approach based on their direct experience.

-- Agreements and deregulation measures need to be established at an early stage. In any case, when privatization comes into effect, the core questions of employment and remuneration should already have been debated and settled and a new regulatory set-up should be in place to preserve the public service nature of water, gas and electricity operations.

The cases reviewed illustrate trade unions' willingness to participate and make a positive contribution to the process, provided they are genuinely involved (that is, provided their participation is not a mere formality or administrative procedure) and the interests of their members are duly considered.

Yet social dialogue in public utility privatization and restructuring processes is still often rudimentary and its role not fully appreciated. In the large majority of countries and cases studied, it is not formally recognized.

A number of general lessons emerge from ILO empirical studies on this key issue also:

-- Recognizing and addressing a few basic employment and income concerns is fundamental to defusing tense situations between public utility employees operating in companies undergoing privatization and restructuring and the other parties involved in those processes.

-- Agreements and formal Undertakings (covering employment, income, etc.) that are the outcome of a dialogue between all stakeholders are more credible than those devised unilaterally by governments or the enterprises themselves.

-- The dialogue with trade unions and other stakeholders should start at the very beginning of the privatization and restructuring processes. Their input should be sought to analyse the situation, identify the problems, and explore the costs and benefits of the various options available. The earlier stakeholders come into the picture, the wider the array of possibilities concerning options and paths to implement them, the smoother the process, and the stronger the solutions.

-- There is a considerable need to construct paths for social dialogue, both at enterprise level and more still at macro-level, so that stakeholders can debate and negotiate the development, enactment and monitoring of the schemes.

-- The development of mechanisms for social dialogue within multinationals deserves special attention. These are becoming prominent in all regions and their functioning, in many ways different from that of national enterprises, is still little known, as well as being difficult to follow and control.

-- A favourable political and industrial relations climate facilitates and even stimulates a participatory approach.

1.2 Telecommunications services

Technological breakthroughs are moving telecommunications from an industry governed by supply to one led by demand. All the countries covered in the studies conducted by the ILO are moving towards a deregulated telecommunications system if not one which has been privatized. It is a basic presumption of the ILO that among the many factors driving the rapid pace of change in telecommunication services, the inter-relationship between the three changes in technology, market and regulatory policy is a key aspect to be taken into consideration. Structural change lags behind technological innovation in technology driven operations.

In this context, there appears to be about a five-year time lag between the beginning of restructuring of the telecommunications sector and significant impact of these reforms on the workforce. Regardless of the time lag, it is important to note that the three factors mentioned above are closely related; furthermore, independent development takes place in each of these three spheres. In some cases, regulated telecommunications may mean that their users lose out relative to those who have access to cheaper services. In other cases, a change in regulatory policy can spur technological innovation or prompt firms to create markets for new services or expand the market for current services. Technology has also made sufficient advances to enable more firms to enter the industry, although this is not an exclusive or all encompassing factor.

The speed and degree of the changes taking place also depend on technological advances, the political environment and profitability of the market. Although in the late 1970s many governments had nationalized their key industries and were discouraging foreign investment, today most developing countries are actively seeking foreign investment in order to obtain the benefits of modern technology and to expand their economies. In the 1970s and 1980s, even telecommunications operators in developed countries had limited international opportunities since other countries had not yet begun to deregulate. In the 1990s, however, these companies have begun to work actively to liberalize telecommunications markets in other countries. Privatization and deregulation of telecommunications services are still under way in many countries covered in the ILO study, and pressure on all countries to open up their telecommunications markets to national and international competitors is increasing. Within the process of considering deregulation in telecommunications services, it is extremely important to note that the conventional monopoly regulation tends to resist some changes, since many regulators are not yet quite sure whether they could maintain "universal services" which enable special-interest groups such as low-income families, rural households, public schools, libraries, and so on to afford telecommunications services. In this connection, an OECD study points out that competition can also be applied to enhance universal service in the lives of many different types of users, since new customers in some countries are receiving a telephone for the first time as they can now afford one thanks to competitive services supply. Nevertheless, experience from the US, UK and Canada have shown that there are numerous examples of "regulations" aimed at ensuring better access to new services. One such experience cited in the ILO study insists therefore that "even as markets are deregulated, there will be a need to strengthen some regulations that will ensure universal access". Possible adjustment between regulation and competition should be pursued while continuing to ensure technological advances, a stable political environment and market profitability.

Privatization does not necessarily precede deregulation or vice versa. In Australia, for example, Telstra is not yet in private hands, although the government has begun to deregulate the markets. In contrast, Bell Canada was always a private company although deregulation of telecommunications only began in the 1990s. The processes of deregulation and privatization, however, normally follow the same path in most countries. The process usually starts with the separation of telecommunications from the postal service, and then moves to the operation of telecommunications administration on the basis of commercial principles. The autonomous public corporation finally leaves the government with a share of ownership and moves towards privatization through the sale of shares. While deregulation allows competition in all relevant services (local services, long distance services, telecommunications software and equipment markets together with other relevant industries), the long distance services market is often deregulated first since normally it has fewer obstacles to entry for its competitors and traditionally has had the highest profit margins. By contrast, the local markets are usually the last to be deregulated because of the high capital cost involved in providing services and the relatively lower returns. Finally, deregulation and privatization allow companies to compete in non-telecommunications related markets where services are beginning to converge.

Employment trends

Employment levels in telecommunications services expanded rapidly in the 1980s but gradually declined in the 1990s as a result of privatization, deregulation, and technological advancement. In large operators in both developed and developing countries, the level of employment in the public telecommunications services sector has declined by 6 percent since 1982. Particularly notable falls have been observed in the Pacific area of around 25 percent, and in the Americas of around 23 percent, primarily in North America. In OECD countries, the overall contribution by Public Telecommunications Operators (PTOs) to total national employment fell from 0.81 percent to 0.67 percent between 1982 and 1992 owing to a reduction in staff numbers of some 8 percent and overall growth in the number of jobs in the OECD area. The fall in the level of employment in telecommunications services is seen largely in traditional sectors such as building, installation, repair and maintenance of central office switching equipment in addition to cable and line jobs.

The general trends should, however, be understood in a wider context within and outside the conventional operators. Within existing operators, a certain rise in employment is taking place in many fields related to the installation of new equipment. The convergence of communication and computing technologies is causing a fundamental shift in the employment outlook in communications services. Most companies have worked to eliminate 'low value' services (for example white and yellow pages) and are concentrating on 'value-added' services (for example call return, call forwarding). New jobs are therefore being created in software development and marketing.

ILO studies identify the greatest increase in employment opportunities in areas such as network planning and management, and customer services. It is argued that liberalization and technological change are spurring demand, so that the telecommunications sector is growing with new employment opportunities, involving new competitors in basic and new services such as cellular, satellite, and value-added services. In fact, the telecommunications industry as a whole has contributed to increasing jobs, as "pent-up demand in developing countries can stimulate growth in the sector that results in more jobs" In this context, the total number of employees in the telecommunications industry increased between the 1980s and 1990s, since the investment in infrastructure exceeded the improvements in efficiency both in the Americas and Asia. The liberalization of telecommunications markets in several Asian countries has resulted in the formation of new companies to build infrastructure and/or provide services. Countries in Southeast Asia, in particular, have encouraged foreign investment through incentive schemes to expand infrastructure. In Africa, however, network expansion did not increase as much as efficiency, and the number of employees has either decreased or only slightly increased.

Furthermore, deregulation has been attracting an ever increasing number of smaller firms where employment may well exceed the number of job cuts in the existing larger telecommunications enterprises. Privatization and deregulation have therefore contributed to an increase in employment levels in new telecommunications companies as well as a decrease in employment levels in existing companies. In this connection, ILO studies note in particular that newer areas of growth tend to be more non-union rather than unionized. At Mexican Telmex, for instance, the company acquired a greater degree of freedom in hiring non-unionized workers, generally administrators and supervisory personnel in exchange for providing trade unions with a greater participatory role. Employment is therefore less stable and employment security depends to a large extent on the changing nature of market needs.

Faced with the need to restructure, telecommunications companies have chosen several alternative downsizing initiatives, corresponding to the size, speed, and degree of warning they have received. Downsizing measures include early retirement, voluntary resignation, hiring freezes, job sharing, compressed working weeks which vary widely between countries and companies according to the conditions prevalent. These conditions are identified in the degree of privatization, transferability of employees, union-management relationship and employees' interest in downsizing options. One of the major findings of an ILO study is that an increasing number of companies have been inclined to downsize themselves by adopting flexible "buyouts" rather than involuntary "layoffs." These buyout measures include early retirement packages, attrition, redeployment and retirement over a number of years, all of which are designed to minimize the impact of privatization and restructuring.

Another factor occurring in the course of privatization and restructuring in telecommunications services is a reduction in the number of civil servants where the company's employees were originally government officials. As an employee of a newly established private company, telecommunications employees often face a loss of job security while continuing to be civil servants. The problem appears to be particularly significant in France where some 90 percent of France Telecom employees are civil servants. However, they still have substantial job security guarantees, since the government has promised the unions that all current employees would be allowed to retain their civil servant status and would receive pensions guarantees.

In Germany, some 50 percent of employees remain civil servants on "permanent loan" to Telekom, with their conditions of work being determined by parliamentary legislation.

An extreme reaction was seen in India where the proposed corporatization of the Department of Telecommunications was rejected by trade unions representing 45,000 workers who were concerned about losing job security and other benefits granted to civil servants. Restructuring is viewed with scepticism in some African countries, because privatization and liberalization will lead to a loss of government revenues and civil service jobs in the telecommunications sector.

Implications for training and upgrading of skills

While privatization and restructuring may increase the overall efficiency of telecommunications services in both developed and developing countries, the processes have had a significant impact on the training and retraining of workers to meet changing needs and increased market competitiveness. Training is becoming increasingly important for telecommunications employees who wish to keep up with a rapidly changing work environment. In many countries, the expansion and upgrading of networks require training for planning, installation and maintenance, and the operation of new facilities. Privatization and the introduction of competition require new skills such as marketing and customer services. One of the companies studied has established regional training centres throughout the developing world, and provides developing countries with assistance in establishing their own training facilities. It also provides technical assistance to meet new demands for technical and managerial skills such as administration, marketing, customer service, commercial accounting and finance in countries that are restructuring their telecommunications systems.

The introduction of digital switching and transmission technology created, in particular, the need for a vast programme of training and retraining to enable staff to use the new technology. The new systems within telecommunications services require more intensive training, and entail more employee involvement with more flexible working arrangements. ILO studies indicate that "employment security in the future would come from possessing market-relevant skills not necessarily from acquiring seniority through long term employment with a single employer". In this context, it is clear that training and retraining components will play a key role in maintaining employment security in both existing and newly formed companies, or at least in the wider context of the labour market within the telecommunications industry. However, the issues of resources and forecasting skill requirements remain unresolved: who pays for training and what to train for, since employers are generally reluctant to provide generic skills? Again, ILO studies suggest that the collaboration between employers and employees in terms of career planning and development will be central to enhancing employability and thereby securing employment in telecommunications services.

Changing industrial relations

In response to the deregulation and restructuring of the telecommunications industry, telecommunications companies are taking significant initiatives in reorganizing human resources management. They have developed programmes focusing on increasing employees' involvement, training employees, rewarding employees with performance-related pay and developing flexible work arrangements. While some companies still develop these programmes using existing labour-management relationships, our studies suggest that most telecommunications companies today are focusing on new human resources practices.

The union-management relationship has no doubt played an essential role in the process of restructuring the organization of work. One of our findings within such a process is the general trend of centralization, decentralization and recentralization of industrial relations. Many companies have decentralized processes to make their organizations more responsive to customer needs. If the union-management relationship is a good one and the union is strong, the company will most probably work with the union to develop proactive joint solutions in downsizing the organization of work. In the United Kingdom, for instance, BT moved its labour relations from the corporate level to its local managers to give them greater control over the business unit. In some countries, however, companies have centralized their customer service personnel to take advantage of call centre technology and have also centralized some of their technical staff, since digital technology allows staff to correct problems from central locations. In Australia, Telstra recentralized its labour relations and human resources management process in order to provide its programme of change with momentum. In Italy, Telecom Italia centralized certain key labour relations functions since the company was created through the merger of five companies in order to be more competitive in international markets.

In some cases, there are external factors such as government, national and international regulatory bodies together with the economy which put pressure on companies to adopt particular labour-management strategies. The nation- or firm-specific institutions for consultation and bargaining can therefore also have an impact on determining the nature of industrial relations. In this context, the labour-management relationship in the United Kingdom and the United States has generally been dominated by market forces while the labour-management response of companies in Canada, Japan, and Australia and so on has been driven by a combination of market and social forces. In Norway, Germany, Italy and France, the influence of deregulation is less strongly felt, since these countries are only just beginning to deal with restructuring in the field of labour-related issues.

In most cases, trade unions are consulted with a view to obtaining their agreement after strategies affecting employment and working conditions have already been developed by their management. There have also been identified "forcing" strategies in which workforces were obliged to agree to a plan not to their liking because of several factors such as weak unions, unfavourable laws, and unfriendly governments. In some cases such as in Japan, however, it has been customary to consult the workforce before decisions are made. For example, NTT developed an employee-involvement programme, share-ownership programme and a new wage system, eliminating traditional divisions of work and improving the efficiency of the training system.

ILO studies indicate that such cases are most likely to occur when unions have been consulted in advance. Unions are inclined to support positive actions involving "joint governance" where they jointly determine workplace decisions in cooperation with the management. In this case, it is important to note that the disclosure of information plays a key role in proceeding with such a participatory approach. Those involved in the process of technological and structural change in telecommunications services, therefore, should be secured in the knowledge that they are well informed. To date, some unions have been given access to a considerable amount of sensitive information relating to company strategies which is not publicly available, while there are still many companies which show a reluctance to release information to trade unions.

Conditions of work

As trade unions have become more involved in the decision-making process relating to company strategies, they have committed themselves to accepting forms of functional flexibility in terms of working conditions in telecommunications services. In many countries, the use of performance-related pay has increased, although the extent of that increase varies from company to company. Performance-related pay has been introduced for non-managerial telecommunications services employees during the past ten years in many countries such as Australia, Germany and Italy. In Germany, a performance-based system was introduced for civil servants, white collar workers and manual workers to provide a bonus based on performance for up to 25 percent of employees. At Telecom Italia, the productivity bonus represents 3-4 percent of an employee's pay. In Japan, the new wage system at NTT is based on merit which is designed to recognize improvements in employees' abilities. With a few exceptions such as British Telecom, where performance-related pay rewards are given to non-managerial staff, it is often the case that managers receive performance-related pay in the form of annual bonuses, profit sharing and stock ownership, although such contingency pay does not as yet form a large share of employees' remuneration. An increasing number of employees have individual contracts, even though their form of remuneration was originally set through collective bargaining contracts. Individualization of employment conditions is widely acknowledged in many countries through individual career planning, the spread of performance appraisal, merit payment, and other forms of individualized remuneration.

As a competitive market in telecommunications services grows, previous agreements on working time and work organization have been changed to be more customer oriented in order to meet new competitive environments. In many countries, flexible hours of work have been introduced in particular for technicians who are expected to meet customer service requirements. In Australia, Telestra has adopted flexible working arrangements and reduced the number of job categories to facilitate the mobility of staff. In Italy, the flexibility of working hours has been a key human resources issue at Telecom Italia, where staggered and alternating shifts have been introduced. In the United Kingdom, BT has introduced more flexible working hours particularly for technicians in order to meet customer service requirements. Job descriptions have been broadened and activities classified into work communities and knowledge-based skills. Although new arrangements for working hours have not yet been implemented by France Telecom, flexible working hours have been applied for staff in administrative services.

Women and part-time workers

Telecommunications services have traditionally been one of the major employers of female workers who have played an important but very poorly remunerated role. In the process of restructuring and privatization, female workers in the industry have often faced segregation and have been confined to low paid and lower skilled positions in telecommunications services. Their rights as wage earners and their representation within the workplace have often been limited in many countries. An ILO study points out that most women at Telmex in Mexico and Korea Telecom are stuck in low paid jobs, primarily as operators. At Telmex, work categories where men and women workers are mixed are extremely limited, although the largest number are identified in marketing and administration. At Telecom Malaysia, in 1990 some 24 percent of staff were female, but most of them worked in data entry, clerical and telephonist positions.

In telecommunications services, female employees have worked mainly as telephone operators and administrative clerks both in developed and developing countries. As a result of the continuing introduction of more automated switchboards, a large number of operating staff have become surplus to requirements and have been made redundant; their employment has therefore been endangered. Owing to the automation of telephone services, the number of female telephonists has decreased dramatically. Under such conditions, there had been a general assumption that overall employment levels would drop as a result of these changes, but in fact redundant female employees in some countries have been successfully redeployed to work in newly created posts in the fields of network planning, management, marketing and customer services through training and retraining programmes. While female employment is decreasing in switchboard operating services, a tangible increase in women workers is taking place among sales and service personnel. In fact, all European Union member states have seen an increase in the share of women in the workforce, which is regarded as a reflection of both changing social expectations and of the general movement in employment from manufacturing to services.

While women's overall share of employment is increasing in many countries, they are still under-represented in managerial, professional and technical jobs. It is considered that uneven distribution still exists due partly to women's domestic and family roles, and to employers' human resources management policies and procedures. Female workers at Korea Telecom are disadvantaged in terms of promotion, although there is no wage discrimination between the sexes. In the past decade, sexual equality between male and female workers has been permanently on the agenda of the PTTI especially in the European region. Many telephone companies have also taken necessary measures including training and re-training in order to secure the employment of female workers who had been at risk during the restructuring and privatization process. It should also be noted that while restructuring often leads to employment opportunities in newly created services, it may also contribute to more part-time and temporary jobs. A certain level of labour flexibility in telecommunications services has been maintained by increasing the use of part-time workers, most of whom are women. The growth of part-time employment has been closely linked with the growing participation of women in the workforce. The promotion of better status for women in the workplace therefore still remains to be addressed.

Meanwhile, unlike the traditional telecommunications systems characterized by long-term employment and low-level employee involvement, newly prevailing work practices are being directed more and more towards the empowerment of individual employees working in teams and towards customer services. Today an increasing number of companies develop their own human resources systems without resorting to the conventional instruments used when their employees are not union members and there are no pre-existing collective agreements; trade unions themselves are also losing some of their traditional power due to the individualization of employment.

1.3 Health care services

Health care is an important factor for public health and is therefore considered to be an essential service of general interest to the population. However, this is not the only factor, as health is also dependent on many economic and social development factors, and the natural environment.

Restructuring and privatization can be a means of improving the efficiency and availability of health services; however, equal access to quality health services has to be ensured. There is a danger that a two-tier health care system will evolve which would exclude the socially disadvantaged, especially in countries with inadequate insurance systems and social protection mechanisms. The professions in this sector require long and intensive training which results in a slow reaction from the labour market to changes in demand and requires government orientation and regulation.

There are certain features of the health services sector which require clarification before restructuring and privatization of the workforce can be analysed. In particular, a distinction needs to be made between financing, delivery and allocation mechanisms within these services.

As the studies on restructuring and privatization of health care services show, the impact on these three aspects of health care services differs and leads to different conclusions. In general: "BR1">

- finance systems appear to be better when they are established by governments because they can create the largest possible category of risk and better cost control can be achieved through a single payer;

- service delivery does not show a clear advantage within either public or private systems, since both have distinct strengths and weaknesses;

- the allocation mechanism (training/managed care or fee-paying services) appears to be an important determining factor in the delivery of services.

Moreover, the shift from predominantly curative and hospital care to more primary and preventive care is changing the composition of the workforce and the required qualifications.

General findings

Owing to the political sensitivity of public health leading to essential limitations for deregulation in this sector, and to the relatively slow reactions of the labour market in this labour intensive sector, it has been difficult to identify the impact of restructuring and privatization on the workforce at this stage. Additionally, the impact of health reforms on labour practices has not attracted much interest in the past, since such practices were not the primary target of the reforms and changes in this area were rather considered to be a side effect.

In Europe, the reforms strengthened management, reorganized service delivery, decentralized to provide greater autonomy at hospital and local government level and thereby placed traditional employment practices and working conditions under threat. However, despite attempts in the health sector to restructure with market-type elements and privatize parts of service delivery, the traditional approach in Europe whereby health services are considered to be a public obligation remains strong.

Although gender issues are included in the analysis, there is no evidence that the disproportion between a high percentage of women in the total health-sector workforce and their under representation at higher and management levels is being changed through the reform processes. Furthermore, flexible work arrangements with their predominantly negative consequences for career advancement are still more frequent for the female workforce.

Employment

The employment variations in the health sector cannot be compared with the drastic reductions in other general interest services such as the utilities sector. However, an increasing lack of employment security can be observed in the health sector.

In Chile, at the beginning of privatization under the military regime, a sharp decline in the employment of health workers occurred as a result of drastic cuts in public health spending and opening-up to private competition in the health sector. With redemocratization the situation improved slightly. In Alberta Province (Canada), layoffs among hospital staff took place when the provincial government as the single payer for health services decided to move from hospital care to lower cost facilities. However, under pressure from the unions some of these posts were re-established. In Los Angeles County (USA), restructuring combined with privatization led to a loss of 10% of jobs in this sector. The unions, however, reached an agreement by which workers laid off had first refusal on newly created jobs in private companies.

Although flexibility in France is reduced by predominantly public service conditions for health workers, the unions are expecting considerable job losses in public hospitals in the future. In Germany, even though no lay-offs are noted, the efforts for cost control and reduced demand for medical and health personnel have already led to a situation which undermines the former strong position of medical staff in the labour market. Should the health care system develop further into managed competition, the impact on the employment situation would be even more far-reaching. In general, stagnation is observed in labour markets following massive expansion in the past. In the United Kingdom and other countries in Europe, there has also been increasing fragmentation of the labour market with better employment and working conditions for well qualified nursing and medical staff, and a more negative outlook for less qualified personnel. Ancillary staff employment fell by more than half in the UK between 1984 and 1994.

The majority of the cases investigated in relation to the impact of privatization on the level of employment leave open the question as to whether there is evidence of excess supply in the labour market of the health sector, whether workers laid off during restructuring and privatization are absorbed by other institutions of the sector or whether they remain in the sector as self-employed persons. Additionally, the absorption of migrant workers by the labour market is not obvious. At present, the social partners appear to have managed, however, to limit the reductions through their bargaining and collective action.

Remuneration and working conditions

Since the sector is highly labour intensive and owing to the direct relationship between health workers and service consumers, working conditions have an immediate impact on patients and their assessment of the effectiveness of the health services. This direct link, although often not consciously recognized, also contributes to the political sensitivity of the working conditions of health workers.

In Chile a double labour market has emerged, with higher pay and better working conditions in the private health sector as compared to the public health sector where the share of salaries within total public expenditure has constantly declined. This led to the migration of the better qualified workforce from the public to the private sector. In the case of Los Angeles County and Alberta Province, reduced incomes have been observed.

In the United Kingdom an increase in salaries was paid for with reduced job security and poorer working conditions. In France, working conditions and health-sector pay are regulated by the conditions for public servants. In Germany, the introduction of private for-profit hospitals has made the pay structure more flexible as compared to the public and private, non-profit hospitals. The transfer of services to the private sector has frequently resulted in a worsening of working and employment conditions in both the public and private sectors. Particularly worth noting in all countries is the work intensification resulting from a reduced number of staff and working hours. Since flexibility may be needed in the reorganization of work for multi-skilled staff, this may, however, result in more precarious contract situations and a loss of high-quality services.

The decentralization of public services has also affected health care and with it the centralized collective bargaining mechanisms of the past, as evidenced by experiences in Sweden and the United Kingdom. The decentralization of methods to determine wages has not, to date, produced the anticipated benefits. Nonetheless, efforts towards decentralization in its different forms will continue, because of the concern with containing wage costs and target-wage increases in more specific ways. The trend towards market-related and merit-based pay in Europe which devolves responsibilities for improved efficiency to managers has been limited and was mostly opposed by workforces. The assessment of its effectiveness is, however, rather pessimistic. Objective criteria for differentiated pay are difficult to establish and the general effect is often demotivation rather than the opposite.

Training and Labour relations

Health professions require long, specialized training and signals from the demand side of the labour market receive only a slow response from the supply side, therefore resulting in the need for market guidance from governments in this sector. In Alberta Province, a change in the mix of skills was necessary owing to the shift from hospital and curative care to primary and preventive care. In the short term this can be reorganized by assigning a different mix of tasks to the staff, as in the case of Alberta Province. In the long run, training has to respond to these modified needs. Certainly this also appears to apply to the demand for multi-skilled staff (including management skills). A specific problem for health services appears to lie in the essential requirement for regulation of the training and practice of health professions which might not keep pace with evolving new tasks owing to technical change and work reorganization.

The experiences observed show different kinds of labour relations. The factor determining these differences are the conditions prevailing in individual countries. The restructuring and privatization in Chile was marked by the absence of participation of the workforce as the labour movement was a specific target of repression after 1973. Collective bargaining was first banned and then only allowed under restrictions which only changed with the redemocratization process. In the case of Alberta Province, restructuring was a big challenge for the unions, caused in particular by administrative reorganization which changed bargaining rights. The unions tried to coordinate bargaining power even though strikes were not allowed. In Los Angeles a process of confrontation and cooperation led to an alternative plan developed with the support of all stakeholders. Consequently, the new private employers recognize, as bargaining partners, the unions which previously represented the workers affected.

In France in 1996, collective action evolved also from labour movements outside mainstream labour unions and achieved changes in working conditions and pay. Other cases of collective action took place in Germany in 1997, in Sweden and in the United Kingdom in 1995. Particularly in the last case, it resulted from changes in collective bargaining mechanisms caused by decentralization which targeted working conditions and terms of employment. In most cases, the activities received support from the public which was equally concerned by the changes.

2. Restructuring and Privatization in Regions and Countries

2.1 Comparisons between Russia and China. Rapid or gradual reforms?

It would be wise to begin these comparisons by outlining the main economic and social results. Although in China reform has resulted in rapid double-digit economic growth, increases in labour productivity and exports and marked improvements in living standards, Russia, by contrast, has experienced sharp declines in output and living standards.

A striking lesson of transition in many countries is the importance of the new businesses that have emerged in response to the lifting of restrictions and liberalization. To be widespread and effective, entry must be cheap and administratively easy and new firms must have broad access to markets for their products and inputs. China started its reform with liberalization for new entrants to the market and the majority of new entrants were at first community-owned township and village enterprises. Most recently, new private firms and joint-ventures have constituted the most dynamic sources of growth, employment and exports. In Russia, the main emphasis was placed on state property privatization, delaying the opening of the market to new entrants. The first attempt in this direction was made by Gorbachev when he tried unsuccessfully to spur the development of cooperatives and new small firms. Even today in Russia more attention is given to the privatization of SOEs and much less to the development of new firms.

As a result, China alone, among all the economies in transition, has had sufficient resources of output and productivity growth, and so has not yet needed to address privatization as a matter of urgency. China is only now, after almost 20 years of reforms, undertaking the task of privatizing SOEs. It deliberately chose to start with the simplest tasks and leave the most difficult ones until later. At the beginning of the reforms, the Chinese were wise enough to realize that they did not understand all the possible consequences, thus they began on an experimental basis, trying out different kinds of small changes and seeing what worked best.

Though the Chinese did not have a detailed plan, this does not mean that gradualism was not a strategy. Gradualism was implicit in the Chinese culture and reform approach from the beginning, and became explicit at the start of the urban reforms in 1984. Owing to disagreements among the leadership about how far the reforms should go, official policy was developed in the gradual and tentative manner necessary to maintain a consensus.

Another key factor was that the overall direction of policy remained firm. New problems were addressed by further reforms and not by major retreats. What the Chinese discovered by employing these inductive methods was a process of learning by doing. It was a reform dynamic in which partial reform measures created both significant success and a need for further reforms. China's lessons stand as evidence that it is not necessary to have all major sectors of the economy operating under free markets at the same time in order to obtain rapid increases in efficiency and living standards.

Another apparent advantage of the Chinese approach is that it created a self-sustaining process in which small reforms aimed at relatively easy problems led to economic expansion, which in turn led to increased political support for further reforms. It also limited the amount of change that the Chinese people had to deal with at any one time. Change, especially increased uncertainty, is extremely stressful - as the people of Russia have already discovered. The Chinese idea has been to let people come to the market rather than to force it on them.

Reforms in China have been drastic, gradual, broad and pervasive. They have ranged from agriculture to manufacturing, services and trade, and from price to fiscal and financial matters. They have also addressed government and administration and many other issues. Unlike many East European countries, the original process of reform in China aimed not to overturn the system but primarily to improve productivity by correcting the mistakes of the old central planning system, and introduce mechanisms into the economy that would permit economic players to make rational allocation decisions instead of leaving such decisions to the planners.

At the same time it would be a mistake to state that Russian reformers were completely wrong and that they should follow the Chinese way. Many countries were just not in a position to choose between the gradual and rapid strategies. In Russia economic reform accompanied the dismantling of a repressive political system. It had to overcome huge declines in trade as well as severe macroeconomic imbalances and structural distortions created by central planning. It had not been able to generate the savings necessary to sustain its greatly overbuilt state sector.

Russia faced an extremely difficult choice: rapid systematic reform entailing deep and often painful structural adjustment, or incremental efforts to introduce change while trying to protect the status quo. The latter worked in China, but in Russia it could lead to spiralling inflation and economic and political disarray. Rapid reform has been easier when political change has been rapid and fundamental. Citizens who supported the new political system also supported market-oriented policies. In Russia, quite a large proportion of the population did not support either the political or the economic changes.

China had favourable initial conditions for gradual reform. Its policy-makers did not have to confront the same serious obstacles that Russia faced. China had to devise and implement a set of market-oriented reforms that provided farmers and workers with growth-promotion incentives while maintaining macroeconomic control.

Despite the fact that Russian conditions differed significantly from those in China, the Chinese experience should still be studied for its possible application. The major lesson that policy-makers could learn is the benefit of starting small and focusing on reforming those aspects of the economy that offer the greatest probability of success. These successes can be built by gradually moving on to more difficult problems, thereby maximizing the chance that the vast majority of people will see the reforms as a positive factor in their own lives. Where transition has accompanied rapid and broadly-based growth, as in China, poverty has fallen even though income disparities may have increased. In Russia, declining output and rising inequality caused poverty to rise. What is essential is long-term economic growth, and privatization is just one of many possible tools.

Corporate governance

The results of privatization are closely linked with the privatization approach that was adopted in Russia. The architects of the reform sought to carry out the privatization project in the minimum possible time. They failed to give the people a chance to understand the results of the first stage of the reform, such as the liberalization of prices which caused production and consumption to plummet. Some authors believe that had privatization been effected gradually, the people's response to the changing economic situation might have foiled property reform altogether. Another reason for the hasty approach adopted was to make the reforms irreversible and to create a class of owners. As a result, large amounts of capital were amassed in the shadow economy or through speculation, bribes and embezzlement.

Another problem is the difficulty in establishing the boundaries of the private sector. There are at least two reasons for this: first, official forms of privatization played a relatively minor role until recently. They served either to legalize property rights already gained unofficially or paved the way for further redistributions of property by mass privatization. Secondly, specific methods for developing the private sector have been widely practised. These have included directly expropriating state property and unofficial methods such as legally transferring part of the added value created by state-owned enterprises (SOEs) to the private sector; as well as founding financial holding companies and semi-state-owned banks.

As a result, the whole of the public sector industry privatized to date in Russia has generated a return of US$12 billion. Since management and workers were allowed to retain a large percentage of ownership, there have effectively been few changes in the management of these organizations resulting in a poor response from private sectors or foreign investors in privatization. Overall, management and workers received 51 per cent of the stocks in privatized SOEs at 1.7 per cent of the book value. Consequently, the performance of privatized enterprises has gradually deteriorated since privatization was more political than economic.

Development of market institutions

Sound economic policies alone, without strong, transparent and accountable market institutions to support and implement them, are not sufficient. Inadequate institutions impose high economic costs and institutional development - of legal and financial systems and of government itself - takes many years. The most important facets of such institutions are:

The Government itself must also be restructured and reinvented. Reinventing a government in a transition economy means less government involvement in the economy but it does not mean a weak government. Around the world high budget deficits often lead to high inflation and slow growth. This is particularly so in Russia. Transition demands far-reaching reforms to make the composition of spending and the structure of taxes to finance it consistent with the task of government in a market economy which is conducive to long-term economic growth.

Top priorities for fiscal reform in Russia include continuing to improve the design of the tax system by trimming excessive rates and eliminating widespread exemption; making taxpayer registration mandatory; revamping budget preparation procedures; initiating pension reforms; and reducing the large, hidden financial burden on government in the form of tax arrears, government guarantees, state bank losses, or focused credits.

Legal principles of privatization in Russia.

The general and particular results of privatization in Russia depend largely on their legal support mechanisms, i.e., the state of the normative base, including legislative enactments, state programmes, and also methods of procedure and instructions on various aspects of privatization.

Privatization is being carried out on the basis of the Privatization Act, the President's edicts, the RF Government's decrees and departmental normative enactments. Some aspects of privatization are also being regulated by the RF Civil Code (enacted on 30 November 1994) and the RF Joint-Stock Company Act (24 November 1995). Following the conflict between the President and the Parliament in October 1993, the drafting and adoption of normative enactments on privatization were conducted entirely by the executive power.

The new body of Parliament (State Duma) which was elected in December 1995 at once devoted attention to privatization matters, adopting in February 1996 two special decrees on auditing the course and analysing the results of privatization. Consequently, the differences between the two arms of power on this matter continue.

The normative base of privatization in the Russian Federation requires development and correction. In particular, there is a need to improve the regulations connected with the procedures for forced bankruptcy and voluntary liquidation of enterprises with investment contests and so on. However, certain shortcomings could be eliminated immediately, for example a single legal base could be created for leasing. Two sets of methods confirmed by the SCP (on 14 September 1992 and on 10 June 1994) and a great many procedures worked out in local areas are being used around the country to draw up lease contracts and to assess leasehold payments. Consequently, receipt of individual revenues into the budget is not guaranteed and effective control of the use and safety of property held under Federal ownership is impossible.

Legal instruments to regulate privatization in Russia are to be reviewed and worldwide experience shows that privatization without adequate legal regulation and an effective justice system creates incentives for inefficiency.

The structure of ownership

In 1992-1995, the proportion of persons employed in the non-state sector of the economy doubled to 62 per cent. The proportion of gross domestic product (GDP) produced in this sector increased from 50 per cent to 70 per cent (at current prices).

The level of privatization in industry is higher than it is in the national economy as a whole. In 1995, the proportion of large and medium-size non-state-owned enterprises in industry as a whole was 73.7 per cent of the total number of enterprises, and 84.6 per cent of the total volume of output. For small and joint-venture enterprises, in 1994 these figures were 85 per cent and 79 per cent respectively. Below is the data for 1995 concerning the proportion of large and medium-size non-state-owned enterprises, respectively, from among the total number of enterprises and volume of output of individual branches of industry.

The relative level of privatization of small enterprises is higher than the level of privatization in the national economy as a whole, especially in the sphere of trade and public catering. The proportion of non-state-owned enterprises in the national economy as a whole comes to 96 per cent. In industry, where the proportion of small enterprises is 14 per cent, 93 per cent of these have been privatized. In agriculture, these figures are 1 per cent and 84 per cent respectively; in construction - 14 per cent and 95 per cent; in transport and communications - 2 per cent and 95 per cent; in trade and public catering - 49 per cent and 98 per cent; in housing and public utilities and in everyday services for the population - 1 per cent and 90 per cent; in science and scientific services - 6 per cent and 96 per cent.

A sizeable proportion of state property is currently dispersed among many privatized enterprises, thus reducing the impact of the state on their management on the one hand, and not changing the form of ownership of the largest and most asset-intensive enterprises on the other hand. Joint-stock companies in which the controlling block of shares is held under state or municipal ownership are now very few in Russia - there are some 641, or just over 25 per cent of joint-stock companies with substantial influence from the state. Joint-stock companies with a golden share number 392 or 15.5 per cent (11,36).

The position of employees and their organizations in privatized companies

In 1994-1995, the Research Centre of Russia's Trade Unions, together with the F. Ebert Fund, surveyed 22 enterprises (publicly held joint-stock companies and closed joint-stock companies) in the engineering, chemical, textile and light industries of Moscow, the Moscow region, Tver, Ryazan, Yaroslavl and Ivanovo, in order to assess the trends in the position of employees in privatized companies, and to formulate proposals aimed at improving the protection of the employees working in this sector.

One of the major conclusions of this study (12,90-127) was that privatization as such has made no fundamental changes to the legal labour relations between employees and their enterprises. It has supplemented these relations with property relations. However, the actual conditions for workers in many enterprises have taken a turn for the worse in view of the increasing power of enterprise owners.

The study confirmed that the crucial factor affecting the conditions of employees in privatized enterprises (and non-privatized enterprises) is the enterprises' financial situation and the will of management followed by the state of labour legislation and the activities of trade unions and so on. Russia's labour legislation lags behind present day requirements and fails to solve the many problems connected with liquidation of the state monopoly. The sphere and legal powers of trade unions to influence the regulation of industrial relations are being reduced. There is an ongoing process of decentralizing the legal regulation of labour-management relations: the state retains the right to establish the mandatory minimum level of labour rights and guarantees. These may be raised by collective contracts and other local legal enactments, as well as by individual labour agreements (contracts) at enterprise level. The demand today for more market in labour laws (i.e. the demand for greater, if not unlimited, freedom for employers) is designed not just to ensure greater flexibility for employers, but also to create an attractive business environment for investors, especially foreign investors, who are being lured to Russia by cheap labour and an abundance of raw materials.

The study also showed that the expansion of the freedom of enterprises in industrial relations is, on the one hand, good because it makes it possible to use their production potential more effectively, but, on the other hand, entails a superfluous differentiation in the level of remuneration and labour conditions within different enterprises. This freedom is as a rule used by economically strong enterprises to improve the position of their employees, provided the following conditions are met: i.e. when the manager wants to do so; when the trade union is strong; and when there is a substantial collective agreement. That is why the conditions of employees in rich enterprises are often better than before privatization. However, economically weak enterprises are incapable of this and the conditions of these employees are worse than prior to privatization.

Newly created private enterprises (especially small and individually-owned enterprises) are a group apart. Here, as a rule, labour conditions are determined arbitrarily and the rights and guarantees provided for by labour legislation are not observed. A characteristic example in this respect (something quite inconceivable and incredible for the system of legal labour relations in Russia ten years ago) is provided by the Moscow limited-liability partnership called APIS (24 shareholders and 200 hired workers).

Labour relations in APIS are covered by a contract which does not specify in concrete terms the mutual rights and duties of the parties. An employee merely agrees to work and to be paid at a level at least equivalent to the minimum wage, while the rest is provided for in the enterprise statute.

The trade unions' view of privatization

When considering the stand taken by Russia's trade unions with respect to privatization, one should note that the trade unions in this country are themselves now going through a difficult stage of renaissance. The total number of trade union members in the country has been falling, the unity of the trade union movement has been disrupted, and local (primary) organizations operate separately from the trade union leadership. In view of the manifold increase in the role played by enterprise directors, many local trade union organizations which used to play the part of economic departments under party committees, continue, through sheer habit, to play the same role under the management of privatized enterprises. The trade union committee chairman is now either a salaried employee or a member of the enterprise management.

The privatization of state property and its conversion into private property inevitably entail a substantial change in the position of workers in society, a fact which cannot leave the trade unions indifferent either to the process itself or to discussions focussing on the problem. Moreover, the trade unions of Eastern Europe, the CIS and, of course, Russia itself, are in a special position because privatization in these countries signifies a radical transformation of the economic, social and political system.

The ideological platform of Russia's trade unions concerned with the problem of the workers' growing alienation from the means of production was formulated as follows: the way out seems to lie in the democratization of ownership. The means of production must be in the possession and under the management of those who can and want to do this. It is not right to drive the course of history into the Procrustean bed of theoretical postulates. Individual, family, cooperative and the people's property has every right to exist. This property is in the possession of the people, at the disposal of the Soviets (Councils) and under the management of and used by the leaseholder.

Among the leaseholders one may find individuals, groups, families, public organizations and work collectives vested with the right of buying out the enterprise and putting it under collective ownership. Only the land and its mineral wealth must not be up for purchase or sale. The state must also become a leaseholder through its departments.

The leasehold form of management and economic democracy

As has already been said, the trade unions give preference to the leasehold form of economic management under which the work collective, paying the state rent, taxes and other dues, is given the possibility of independently managing the enterprise and thus becoming its owner in due course. This form of economic management is not only acceptable to the mass consciousness of wage earners, but has already demonstrated in practice that it may well become the simplest and most widespread form of acquisition of property by employees, making it easier for enterprises to enter the market and their destatification painless.

Employees' support of the leasehold system is due to the following main reasons:

In 1996, the Leontief Centre (St. Petersburg) made a comparative analysis of the results of the activity of three types of enterprises in Russia's industry (state-owned, medium-privatized and heavily privatized). The group of enterprises considered to be equal in accordance with the second variant, which covered most industrial enterprises, is a clear leader in economic and financial indicators. This serves as confirmation of the fact that in Russia it has in practice become the people's privatization and that the variant according to which employees' interests are realized to the greatest extent has turned out to be the most effective one. A comparison was made of 1,419 industrial enterprises. Those which were considered to be equal according to the second variant were ahead of the rest in relation to all the economic and financial indicators (labour productivity, profitability, etc.), except yield per unit of assets because, apparently, they did not sell their property immediately after privatization.

2.2 Workers' share ownership and local economic restructuring in Eastern European Countries

Privatizations in Central and Eastern Europe developed in different ways and at different speeds. Some privatization methods, such as buy-outs, buy-ins and other forms of privatization from inside or from below are of particular interest in terms of both their fairness and efficiency.

The ILO has an ongoing concern with social issues in privatization and with the active participation of workers' and employers' organizations in the formulation and execution of privatization programmes. Participation means improved access to relevant information, building up capacity to analyse effectively such information and to formulate suggestions. Effective participation requires individuals and organizations to identify and mobilize intellectual and material resources needed to overcome problems and to pursue opportunities related to changes in the environment.

Within the framework of the ILO's Action Programme on Privatization, Restructuring and Economic Democracy, case-studies of enterprises are carried out where workers and managers have been actively involved in the privatization process. Poland, like several other Central and Eastern European countries, has given much consideration to employees' involvement in the national privatization programme and uses more than ten different privatization methods. One of the methods, direct privatization (article 37 of the Polish Act on Privatization), means that an enterprise is privatized without first being converted into a state-owned joint-stock company. Instead, the enterprise is simply struck off the register of state enterprises ( liquidated ) and is then either: (1) sold directly; (2) allocated in kind to a new company; or (3) leased. Direct privatization has been applied in more than 1,100 cases in Poland mainly through employee leasing (some 80 per cent of all direct privatization cases). Companies are privatized using a decentralized approach, i.e., the initiative to privatize comes from the company itself, which requests decision-making and through savings from its employees. In many cases, the absence of an outside investor makes this type of privatization difficult.

Other privatization methods applied to larger enterprises also involve some kind of internal ownership. Polish citizens can buy investment vouchers in the so-called mass privatization programme. Employee ownership is also achieved by means of shares given away to employees. But, in these cases, employees do not have a say in the initiation or implementation of the privatization process.

The provision of technical advice to employee councils is an important area of technical assistance to trade unions, particularly in countries where the economy is in transition and where business organizations, trade unions and employers' organizations are being established or are in a process of strategic reorientation and change. A comprehensive understanding of the role of employee councils in privatization is an important step towards institutional capacity building within trade unions. This study distinguishes between the role of the employee council and that of social partners in privatization at company level. From a legal perspective, in Poland only employee councils are directly concerned with privatization at company level.

The role of employee councils in the privatization process

Workforce representatives play an important role in its preparation for company privatization. The main responsibility of employee councils is to define the objectives of the workforce within the framework of the privatization plan and to mediate between the board of directors and the workforce itself throughout the process.

The initiation of privatization and decision-making at enterprise level is intended to be a joint process between the employee council and the board of directors. Employee councils therefore need to know how to develop economic arguments to support their interests and how to formulate realistic demands regarding employment and wage matters. A manual explaining different privatization options in relation to the size of a company, its market potential and its restructuring needs can be a useful tool. A check-list comprising relevant items of enterprise status in order to facilitate collaboration with external advisers could also be useful.

During the negotiation process, there also may be a need for a mediator between the workforce, the board of directors and the regional representative of the privatization agency. The employee council has to make sure that its suggestions are reflected in the positions the company adopts. From the company's perspective, a coherent stance as regards different internal groups is also important in its own negotiation strategy.

Employee councils are also in charge of arranging the financial participation of the workforce, i.e., the subscription of employees to share capital. Wage policies after the take-over, mixed forms of rewards including dividends and the trade-off between wages and corporate investment capacity may also be on the employee council's agenda. Finally, the future share-trading procedures also have to be satisfactorily established.

Trade unions and employers' organizations, other organizations and the employee privatization process

The role of trade unions in employee privatization is based on cooperation between companies, employee councils and regional trade unions' representatives. The influence of the unions also depends, to a large extent, on the relationship between the employee council and the board of directors, since the latter can decide on the degree of information provided to and involvement of the former. Thus, while assuming that the unions play an active role in privatization, this must go hand in hand with a consensus between the board of directors, the employee council and the unions. Of course, union members can also be members of the employee council.

Cooperation between the unions and the representatives of the workforce consists of economic and legal consultations on traditional union issues such as wages, working conditions and lay-offs as well as assistance in negotiations with the privatization agency and specific project-related interventions by regional or national experts. Managerial skills in quality improvement, training and development, and other human resource-management practices relevant to privatization and restructuring are usually scarcely available to employee councils. Financial issues such as the raising of internal funds for acquiring employee shares are also an issue for employee representatives on which assistance is needed.

Employers' organizations in Poland work in the field of labour policy and legislation including participation in tripartite bodies. Management training and small enterprise development programmes are also complemented by the various international contacts which these organizations have. Emphasis is also placed on the promotion of entrepreneurship in Poland and on the perception of entrepreneurs in society at large.

Local employers' organizations assist privatization projects by way of business advisory services, networking, international contacts in the field of foreign investments and skill transfer. The activities of employers' organizations are only indirectly linked to the promotion of employee privatization and relate mainly to the post-privatization phase. Hence, the roles of employers' organizations and unions can be seen as complementary at the different stages.

Structural changes in Poland led to the creation of regional development agencies. They are also involved in training and consulting (enterprise creation), financing at regional level (funds for enterprise creation) and in small-scale infrastructure development (business incubators and technology parks). These programmes help to create integrated and coordinated approaches to achieve balanced structural changes under very difficult conditions. While mainly aimed at the creation of new enterprises, their influence on the development of private sector institutions is also vital and relevant to various forms of newly privatized companies.

Where companies are sold directly through a privatization agency, employee councils will serve mainly to protect workers' interests in terms of the preservation of employment. If privatization is initiated by the enterprise itself, employee councils will look after the social consequences of restructuring and the search for strategic investors. In both cases, the role of the employee representatives should and can be constructive in terms of the contribution it makes to the privatization effort.

The commitment, effort and creativity of all stakeholders can be enhanced through regular consultations which clearly create a sense of ownership. Employee councils also need analytical tools in the form of manuals and guidelines that can be used as check-lists to help design technical assistance for employee privatizations and company restructuring.

There is no legally defined role for unions in employee privatization or even privatization in general. Union activities are generally governed by separate laws which provide for a general legal framework at company level. The role of the unions in privatization depends on cooperation between employees' representatives and trade unions. Some employee representatives in state or private sector companies are unionized, while others are not. Where unions have representatives, especially in large enterprises, these units are considered part of the trade union, not of the company.

As employee councils depend largely on the distribution of information within companies and good relations with the board of directors, the degree of trade union involvement is often a question of the goodwill of the management.

Unions can assist employee councils in the following areas:

As requests for assistance from employee councils increase, unions will be confronted with the need to redefine their role beyond the protection of workers' rights and the preservation of employment, to also encompass worker ownership in capital and profit-sharing schemes.

Up to now, unions have provided more assistance on legal issues than on economic ones such as wages, working conditions and lay-offs. The unions themselves lack staff with specific managerial skills and knowledge relevant to privatization and restructuring such as quality improvement, training and development, and other human resource management issues.

Timing is important: contacts between employee councils and union technical advisers have usually been established at very short notice, sometimes leaving hardly any time to incorporate substantial suggestions from employees. In other cases, employees' expectations were not realistic or union interventions did not live up to these expectations. The provision of assistance is closely related to the responsiveness of partners and to being able to ask for timely advice.

Post-privatization involvement by trade unions is linked to changes in employee representation once a company is privatized. The supervisory board, as the representative body after privatization, represents the owner of the company. Its main task is to supervise the board of directors. It also has a right of veto. However, the supervisory body has no statutory right to make suggestions or take initiatives. Union members' representation on supervisory boards is significantly low and more than 60 per cent of private sector companies are not unionized.

Deficits in terms of skills, knowledge, experience and competence affect union staff required to provide advice on the analysis of financial statements. The development of such skills would enhance the unions' credibility in commenting on privatization proposals.

Legal advice, while generally more readily available, tends to be given in abstract terms, based on references to legal texts; a more case-oriented approach emphasizing the best practices would be more effective. The raising of internal funds to acquire the requested portion of employee share ownership is primarily a question addressed by employee councillors, or by special committees set up under their guidance. This has been an important issue for employee councils where assistance from unions was also needed.

Employers' organizations

The Polish Employers' Confederation consists of 52 local and regional employers' organizations. Employers' organizations are new institutions in Poland with comparatively few full-time staff and limited capacity. Employers' organizations see their role in privatization within the broader context of the legal and institutional transformation of the Polish economy. They seek to have their views reflected in the reporting of the legal environment and in new labour relations practices. An employers' organization representing the interests of free market enterprises is an institutional innovation.

In Poland employers' organizations are active in:

When questioned on employee buy-outs/buy-ins, employers' organizations mentioned a number of problem areas:

Other problems were seen in the legal environment:

Local employers' organizations occasionally provide assistance in employee privatization projects. They provide business advisory services, information on suppliers of goods and services and market-consultancy services. International contacts are also provided in the field of trade, investments and skills.

As regards more direct interventions at corporate level, the contributions of employers' organizations are more focused on post-privatization issues such as networking, market access and influence on the business environment.

2.3 Social dimensions in Africa: consumer protection, golden shares, employee protection, peopleization, shareholders' associations and voucher-based programmes

Economic restructuring undoubtedly highlights the need to protect vulnerable groups and one of the ways to ensure such protection is the integration of poverty alleviation policies and programmes into structural adjustment schemes. For this purpose, Social Dimensions of Adjustment (SDA) programmes have been introduced in Africa.

The overall objectives of SDA programmes are the improvement of macro and sectoral policy management, designing social action programmes, strengthening national information systems and stepping up training and institutional development. The SDA has designed a framework which incorporates the social aspects of structural adjustment into development programmes. The framework seeks to achieve the following:

Consumer protection

In cases where privatization turns a public monopoly into a private monopoly, there is a need for some form of regulation in order to ensure the successful management of a market-based economy. Some governments have therefore put in place regulatory mechanisms to protect public interests, guard against the abuse of monopoly power and ensure that minimum coverage of services is provided. The regulation of monopoly power of privatized companies and the establishment of an appropriate environment enabling competition forces to flourish are essential adjuncts to privatization. Especially in the case of utilities where it is often difficult to have competition, it is essential to ensure that the market power of privatized companies is not deployed to the disadvantage of consumers. Thus, Sri Lanka and Malaysia have set up structures stipulating the forms of regulatory systems. For these two countries, the regulatory rule is based on the RPI-X formula applied in the United Kingdom which links permissible price increases to the consumer price index⁽¹⁾.

Another means of protecting consumers is through the setting up of watchdog bodies as is done in the United Kingdom, e.g. Office of Electricity Regulation (OFFER), Office of Gas Regulation (OFGAS), Office of Telecommunications Regulation (OFTEL) and the Office of Water Regulation (OFWAT). OFTEL has a large staff whose task is to investigate complaints by the public and to deal with technical problems and complex regulatory issues. OFFER supervises 19 separate electricity companies and its duty is to ensure that there is no collusion between them through price-fixing or cross subsidies. OFFER can also order compensation be paid to customers affected in cases of below-standard services by the regional distribution companies. For example, in January 1997 OFWAT forced 11 companies to reimburse customers for underspending.

Golden shares

The ownership of a golden share, or strategic share, constitutes another regulatory apparatus. A golden share works like a preference share although it is more powerful and more undemocratic. A golden share is used to enforce codes and rules imposed on newly privatized company by their own articles of association. A golden share can also be used to place stringent restrictions on other shareholders, particularly in relation to their right to sell their holdings. For example, in Malaysia the golden share gives the Government the right to veto the acquisition of Malaysian Airlines by a third party, the acquisition of other companies by the Malaysian Airline System (MAS) and any major assets. The golden share also gives the Malaysian Government the right to appoint six out of the 11 MAS board members.

In Nigeria, the golden share monitoring mechanism is used in the insurance industry since the insurance sector is regarded as crucial for capital formation as well as resource mobilization. The ownership of golden shares provides the government with rights of access to information necessary for protecting national interests. Furthermore, it guarantees stability in the ownership and management of the companies concerned.

The following are some aspects of the golden share as applied in Nigeria:

A holder of the golden share has the right to consultation on the following issues:

Initially, the Nigerian Insurance Association was opposed to the idea of the golden share, but all parties are now satisfied with the situation.

Employee protection

In Zambia the job market nowadays is quite flexible. One of the reasons for the poor performance of public enterprises is over-staffing. It was observed that some public enterprises in Africa employ ghost workers who exist officially on the payroll, but who are either entirely fictitious or else have retired long before but whose salaries continue to go to corrupt officials.

However, with the cooperation of the World Bank, some governments have given the issue of redundancies serious consideration. For example, in Togo alternative employment opportunities are examined using funds provided by the Bank. There is a staff reconversion/retraining programme and laid-off workers are offered access to credit to start small businesses. In Senegal, a Reintegration Fund has been established to ease the transition of workers laid off. The fund refinances loans offered by participating commercial banks for the establishment of small-scale business by employees who have been laid-off. In Benin, there is a Training and Redeployment Programme which screens laid-off workers and assigns them to retraining programmes or provides them with credit for agricultural investments .

There are certain more elaborate schemes in South-East Asian countries. For example, in Sri Lanka an attractive compensation package was previously paid but when it became too expensive the policy was changed (in 1990) to allow early retirement with attractive severance pay. In 1991, the policy was changed again and early retirement was granted only where the level of redundancies did not permit divestiture. In addition, the privatized enterprises agreed with the Government to keep their employees in employment for at least two years. This practice was again changed in May 1992 and privatized companies now have to continue to provide employment for all employees up to the retirement age of 55 years. Obviously, such a provision affects pricing bids or else it would be difficult to find buyers.

In Malaysia, during the privatization of the Klang Container Terminal (KCT) and the Klang Port Authority (KPA), employees were offered three options: (a) retirement with generous lump-sum severance pay together with entitlement to early pension benefits; (b) a choice not to join KCT in which case KPA would be obliged to retain such employees without loss of pay, reduction in employment conditions, grade, etc.; (c) termination of contract with KPA and joining KCT on terms no less favourable than previously. With regard to option (c), the Malaysian Government amended the Pension Act of 1980 to ensure that employees in the new company benefited from accumulated civil service pension rights.

For employees in privatized companies, the strategy of share-owning democracy has been used to boost their morale and win their loyalty. When a worker sees himself as an owner he is more likely to take care of his property. His ownership of shares and his stake in a capitalist enterprise are bound to have a positive effect on him. For example, with regard to state banks in Nigeria, the federal Government gave instructions that 10 per cent of the shares on offer should be allocated to staff of the affected banks, provided that where staff already owned shares the maximum permitted would be 10 per cent. The Government also encourages employers to grant special loans to their staff to enable them to purchase shares in the privatized companies. Some privatized companies like the United Bank for Africa (UBA) have set up staff rehabilitation loan schemes to encourage laid-off employees to set up small business ventures.

Peopleization

Governments are often eager to ensure that privatization brings about a maximization of the welfare of people through broad-based ownership schemes. This phenomenon is known by different names; popular capitalism or people's capitalism or taking capitalism to the people. In Sri Lanka, the term peopleization is popularly used to describe the popular participation process in privatization. In Nigeria, the Bureau of Public Enterprises (BPE) makes an effort to attract low-income groups and students by setting the minimum order amount of shares at only 100. Likewise, as an encouragement to small investors the BPE adopts an allocation procedure which reserves from 40 to 60 per cent of shares available for those investors purchasing 100 to 5,000 such shares. For example, of 39,428 applications for shares received in Flour Mills Nigeria Ltd., 35,186 came from low income groups, i.e. 89 per cent to which 74.3 per cent of the total shares on offer were allocated. In the case of African Petroleum 117,544 out of a total of 130,476 valid applications, i.e. 90 per cent, came from low income groups and 68.02 per cent of all shares were actually allocated to this group. The low income group comprises those who applied for between 200 and 1,000 shares.

However, privatization can also adversely affect the rural population in such areas as transport, electricity, banking and health. Public utility extends to the rural population as a social service with no profit motive. After privatization, the continuation of such services to rural areas often proves unprofitable. It has therefore been suggested that, as in the case of transport, rather than governments subsidizing the entire transport system after privatization, any subsidy should cover only the lines covering poorer regions. For other services such as banking and health, there could be built-in tax breaks and subsidies so as to ensure that the services are profitable.

Shareholders' Association

In Nigeria there is a well-organized Shareholders' Association. Its duties include:

The Association was initially funded by the Bureau of Public Enterprises (BPE) from interest earned on the deposit of shares pending allocation. It is now funded from quoted companies through a per capita levy determined by the Securities and Exchange Commission and the Nigerian Stock Exchange, based on the number of shareholders in each company. The levy is collected and administered by the Stock Exchange.

The activities of the Association are determined and carried out solely by its members in accordance with its Constitution. It obtains professional guidance from the Nigerian Stock Exchange.

Given the size of the country, the Association is divided into seven zones and each zone keeps a register of shareholders in the existing and recently privatized publicly quoted companies. The Association serves the interests of the investing public as shareholders who have the opportunity to contribute to the formulation of broad corporate policies, thereby enhancing management accountability.

Voucher-based programmes

Vouchers are coupons with monetary value which entitle their holders to buy shares at a subsidized rate in companies of their choice. Such voucher privatizations are another example of popular capitalism as it benefits mainly the poorer segment of the population. In countries such as the Czech Republic, Russia and Slovakia, voucher holders can use their vouchers to buy shares in privatized companies. In Poland, voucher holders can buy certificates issued by investment funds but cannot use the vouchers to purchase shares in privatized companies. In some cases, vouchers can also be traded for cash.

However, the use of vouchers is inappropriate where voucher distribution and trading centres are not easily accessible and where the administrative system is not capable of undertaking voucher registration and distribution. In most African countries with weak institutional capacity, the voucher-based programme would create logistical and administrative difficulties.

Social partners

Another issue in privatization concerns the involvement of employers' and workers' organizations in the formulation of privatization policies. In almost all African countries employers' organizations consult with governments regarding certain economic reforms of benefit to the private sector. Privatization is usually undertaken within the range of structural adjustment reforms and liberalization, and employers' organizations often do not specifically initiate discussions with governments on the handing-over of specific state companies to the private sector. There was, however, a case in Botswana where the business community did actually put pressure on the Government to push ahead with privatization in order to sustain the driving force of the private sector towards economic expansion. Nevertheless, what private employers usually do demand from governments is a level playing-field in their activities vis-à-vis state-owned companies in the same sector.

The business community in Nigeria was openly critical of the action taken by the federal Government in 1981 to establish a state trading company, the Nigerian National Supply Company Limited (NNSC). At the 1983 Annual Luncheon of the Distributive Trade Group of the Lagos Chamber of Commerce and Industry, it was stressed that state trading involves the misallocation of capital resources, since such state organization lacks the initiative, flexibility and dynamism necessary for dealing with problems of the market place; it was also emphasized that the Government would have been better advised to encourage indigenous entrepreneurs to undertake nationwide distribution, through sound credit policies, government-purchasing policies and the like, rather than establish its own distribution company.

Since a large part of the business community benefits from the import substitution regime that shelters it from outside competition, it is bound to feel uncomfortable about some aspects of liberalization and other economic reforms, including privatization. This has little to do with the private sector embracing those economic incentives flowing from liberalization that promote their businesses. The divestiture decision-making process is bureaucratic and political. Private sector involvement is therefore often confined to the final stages of negotiation for bids.

However, since the announcement of the 1997 federal government budget, the Nigerian business community has been vocal in its support for privatization. The 1997 budget speech by the Head of State underlined the need for government to take the Organized Private Sector into its confidence in matters relating to the privatization and commercialization of public enterprises. By extension, the Manufacturers Association of Nigeria (MAN) requested the government to set a timetable for the start of the privatization programme, while at a post-budget workshop early in 1997 the Institute of Chartered Accountants of Nigeria (ICAN) called on the government to resume the privatization of vital public corporations in order to boost their efficiency, adding that this was necessary for an ambitious economy wishing to attract vast foreign and domestic investment.

The situation of trade unions is somewhat different. As governments are the largest employers in most African countries, public sector trade unions constitute a vital organ of advocacy for workers' interests nationwide and their strength in numbers forces governments to take them seriously. In Ghana, for example, while employers are not represented on the Divestiture Implementation Committee, the trade unions are generally opposed to privatization owing to the redundancies that result. As has been noted, few workers can be persuaded to accept the bird-in-the-bush notion underlying future employment generation in an expanding private sector over the bird-in-the-hand notion underpinning secure public employment . For example, in Nigeria the Agricultural and Allied Senior Staff Association (ANSSA) has urged the federal Government to involve trade unions in the commercialization and privatization of key public enterprises so as to ensure adequate consideration for the interests of the workforce. It further requested that trade unions should be included in the high-powered committees set up to examine the various options open to the government before further privatization could be undertaken.

2.4. The impact of privatization in Latin America

Privatization is carried out in Latin America because there are expected gains for society as a whole. As in any process, these benefits involve costs. In the case of privatization, there was a consensus that costs generally tend to fall on workers made redundant and, in very few cases, on those workers that remain in privatized enterprises in less satisfactory working conditions.

A fundamental principle of social justice calls for the losers, who are relatively few and perfectly easy to identify, - to be fully compensated for their losses; this is possible in financial terms, and even relatively easy, given that privatization yields net gains for society; it also follows that it should be society as a whole, represented primarily by the State, that pays.

In macroeconomic terms the main beneficiaries of privatization are the users of goods and services together with the State. The first group gains because production by a privatized entity is more efficient, of better quality or costs less. The State gains because it stops subsidizing enterprises that accumulate losses and it also acquires, at least potentially, new corporate taxpayers. In turn, these positive fiscal effects create an additional benefit: a decrease in inflationary pressure resulting from a reduction in the aggregated public deficit. It may therefore be asserted that one of the primary beneficiaries is the State.

Purchasers and consumers are also winners and there was consensus that the lower price paid previously reflected the inefficiency of the enterprise at the time of sale and the low quality of their goods and services.

There was also a consensus that in the vast majority of cases, workers that remain in privatized enterprises tend to be winners. This is true insofar as they benefit from processes of improvement in quality and productivity in modern enterprises requiring highly skilled and motivated workforces trained through internal company programmes, well paid and with clear career prospects and good working conditions. As was the case with other issues, there were instances of diversity here too and cases in which this was far from true.

The clear losers were those workers declared surplus to requirements and made redundant. Also observed were instances of an increase in overall employment after privatization. However, even in such cases this involved a double process of initial terminations followed by subsequent sub-contracting of different workers with different profiles, i.e. younger age, higher formal qualifications and with different specializations. This implies that in most cases those terminated were older workers, with lower skills and qualifications and a high degree of specialization in tasks specific to the enterprise and hence virtually unemployable or difficult to retrain and redeploy.

As in other instances, experiences were wide-ranging. In general, the privatizing governments offered some kind of benefit to these workers. However, in others, particularly those characterized by weak or non-existent functioning of national democratic institutions, such workers were dismissed at short notice and received little or no compensation.

Compensation and measures for retrenched workers have varied widely. The process involved two main difficulties. The first was that workers are not easily exchangeable or convertible. Where it may be a matter of trying to convert a salaried worker with long experience in specific tasks into an entrepreneur who should take decisions, this is not a simple process. Similarly, it may be difficult to set up one's own business with the amount of the severance package and certainly such a microbusiness would provide goods or services that have little to do with the privatized company. In many cases these new microcompanies failed, which led to a waste of resources and to some redundant workers ending up with no compensation at all. In this context in Latin America, the main issue or problem that arises in privatization from the ILO's perspective is how to assist retrenched or redundant workers.

Privatization is only one leg or element of the economic transformation process. It occurs concurrently with other macroprocesses of an economic nature. Globalization, trade liberalization, government fiscal adjustments in tax systems, wage bills, subsidies to state companies or banks and to social security systems, inflation and domestic stabilization programmes are taking place at the same time. Also concurrently information technology is being introduced, sectoral modernization in capital equipment and work methods is taking place, as is the automation of the processes involved. Consequently, there are multiple forces at work which generate a reduction in the workforce and the need for labour levels and skills adaptations. One should not attribute to privatization solely, or the need to privatize, the short-term adverse impact that may occur as a result of the totality of these broader economic context processes (some of which are inevitable). For example, it is clear that since government debt has, at this point in time, reached unacceptably high levels and public subsidy of inefficient enterprises is no longer acceptable, that even if privatization were not considered, personnel, financial and operational restructuring would have to occur anyway in enterprises within the public sector.

Public enterprise reform would inevitably result in workforce reduction or streamlining, (particularly if coupled with modernization and automation), some of the undesirable impacts on workers would therefore have to occur anyway (if not, taxpayers and the public treasury would be cross subsidizing a segment of unproductive workers). It is important to understand this in explaining and providing information on privatization in Latin America. In addition, besides macroprocesses of an economic nature other macroprocesses of a political or an institutional nature, such as democratization, decentralization and deregulation, are also taking place in the context of society as a whole.

2.5 The impact on employment of privatization and enterprise restructuring in selected transition economies

Considering the need to restructure state-owned enterprises across Eastern and Central Europe, Saul Estrin has commented:

Probably the most important reason for the treacherous political waters in which reform politicians are swimming is that, at least at the outset, there is only a limited constituency of people who benefit from the transitional process. Reforms, it is true, bring in their train the eradication of shortage, the availability of goods, including Western goods, and the ability to travel. But they also bring lower real wages (sometimes markedly so), the destruction of savings through inflation and the threat of unemployment.

In early privatization programmes, governments usually had economic objectives foremost in their minds. Social objectives were rarely given the same weight as economic objectives. However, they are increasingly becoming a standard consideration in many privatization programmes, albeit with varying degrees of priority.

UNCTAD indicates that the social objectives shared by most governments fall into four categories:

This list suggests that governments have responded to past failures to address the social dimension in two main ways: firstly, by promoting a more equitable distribution of the benefits of economic policies; and, secondly, by stressing the social benefits of those policies. It also suggests, however, that major gaps remain, particularly from the standpoint of the ILO s concerns. In relation to participatory objectives, in particular, it is striking that the UNCTAD list expresses these only in terms of property rights; for the ILO, a participatory approach enabling employees to be appropriately involved in restructuring and privatization decisions is justified by employment rights and a sound approach to industrial relations, regardless of arrangements, however desirable, for employees also to have shares in the ownership of their enterprises.

Impact on employment levels

The problems mentioned earlier of distinguishing between the effects of privatization, wider structural adjustment programmes, transition as a whole and the legacy of communism cause particular difficulties in the area of employment. It is clear that countries with no recent experience of unemployment were suddenly exposed to the shock of redundancy and job insecurity. It is also clear that pre- and post-privatization restructuring has been associated with these problems. However, the transition to market-guided allocation of capital and labour can be seen as an essential part of the cure for rather than the cause of these problems. Indeed, in overcoming the legacies of command economies, it has a crucial role in creating conditions for sustainable employment over the long term, since maintaining unnecessarily high levels of unproductive employment in the state sector can have the effect not only of wasting scarce assets but also of distorting labour market incentives and deterring investment, whereas more productive use of assets can have the opposite effects.

However, particularly at a time of growth in the number of jobless, and even in the number of jobs lost, privatization is typically associated with reduction and reorganization of the labour force, either during preparation for privatization or soon afterwards. Moreover, even where expansion and investment can be expected to absorb labour and even facilitate growth of the labour force in the long term, there is frequently a short-term decline. In addition, some employees find the cultural and organizational changes which tend to accompany privatization and restructuring much harder to deal with than others, and may wish or need to retire or move on.

According to Rolph van der Hoeven and Gyorgy Sziraczki (ILO), who synthesized the results of a number of detailed studies in Bulgaria, the Czech Republic, Germany and Hungary:

In Central and Eastern Europe, cuts in subsidies, collapse of the EMEA market and trade liberalization have left most firms in a hopelessly uncompetitive situation because of their obsolete technology and the poor quality of their products. The success of privatization depends largely on whether it is accompanied by restructuring and modernization of enterprises.

The catch is that fear of mass redundancies and their social and political fall-out has remained an obstacle to much-needed restructuring to create more favourable employment and social conditions for the longer term. That fear is based on real experience. Van der Hoeven and Sziraczki again:

In most Eastern European countries privatization accompanied by redundancies and the introduction of hard budget constraints on enterprises has resulted in large-scale job losses. This has created a pool of unemployed workers which often cannot be absorbed by other privatized firms or new firms. Furthermore, as has been demonstrated clearly in the case of the former Soviet Union, many workers never appear in the unemployment statistics because, either before or after the privatization process, they are sent on leave without pay or with very much reduced pay. It is, therefore, not surprising that in many Eastern European countries the speed of privatization has been slowed because of the fear of its social and political consequences.

Large-scale job losses have been associated with privatization in most transition countries, and new private sector growth has not been sufficient to absorb labour retrenched by formerly state-owned enterprises. The following examples give a flavour of the employment challenge associated with privatization:

Bulgaria: Between December 1989 and December 1991, industrial employment in Bulgaria fell by 31.3 per cent; employment in privatized firms fell from 4 million to 1 million people.

Czech Republic: A government survey of 572 companies - 101 in food, 159 in engineering, 184 in manufacturing and 128 in construction - revealed a significant decline in employment, with engineering (12 per cent) showing the sharpest drop, manufacturing and construction each cutting jobs by 10 per cent, and the food sector by 4 per cent.

Hungary: From 1992 to 1993, employment in engineering dropped by 12 per cent, in manufacturing by 10 per cent, in construction by 10 per cent and in food processing by 4 per cent. The lighting company Tungsram employed 35,000 people until that figure was halved to 17,640 in preparation for its sale to General Electric, which soon almost halved the workforce again to 9,500 by 1993. This was done mainly through early retirement and voluntary redundancy, together with a freeze on recruitment. Many of the jobs were lost as a result of administrative operations being centralized with the new owner s offices outside Hungary. As a result, non-manual grades were affected disproportionately by the Tungsram job losses.

East Germany: The number of workers in employment fell from 9 million before transition to 6.3 million by the end of 1992; the number of workers employed in enterprises under the privatization agency, the Treuhandanstalt, fell from 4.1 million to 1.2 million during that period.

Poland: Government research into 130 companies (24 per cent in manufacturing, 45 per cent in construction and 31 per cent in trade and services), each employing an average of 285 workers, showed that employment fell by 15 per cent in the first year and by 25 per cent over the first two years after privatization, levelling off in the third year with a drop of approximately a further 2 per cent. A study of ten privatized Polish industrial and trade companies indicated decreases in employment averaging around 12.5 per cent. In the Bialystok Municipal Refuse Collection Enterprises, privatized with a large employee stake, employment halved over the first year and, as a result of being shareholders, the workers received no severance pay.

Russian Federation: Uralmash, the heavy machinery manufacturer in the Urals, reduced its number of employees from 70,000 to 20,000, while at the Shatura Furniture Company introduction of an electronic data management system enabled nearly half the 3,700 jobs to be cut.

Viet Nam: 1.5 million workers, equivalent to 20 per cent of the urban labour force, were retrenched from state enterprises and the civil service between 1988 and 1992.

In some cases, the true scale of unemployment has been concealed by the practice of state-owned enterprises keeping workers at home on some proportion of their pay. Workers have also been badly affected by the practice of some managers in some Eastern European countries of carrying out a series of small-scale redundancies rather than one large retrenchment. Although this might appear to be a way to soften the social impact, the motive has, in fact, sometimes been to evade regulations applicable only to mass redundancies. As a result, many workers lost entitlement and the social impact was worse.

Even where unemployment levels have remained relatively low, a new phenomenon has emerged - that of long-term unemployment. In the Czech Republic, for example, despite low levels of unemployment, by the end of 1994 over a third of all job applicants had been without work for more than one year. Only those firms which have managed to gain access to resources and modern technology have been surviving.

However, the foreign investment that can play a key part in resolving these challenges can also bring other problems. As privatization enables formerly closed economies to join the globalizing trend, employment opportunities can erode, as the Tungsram example in Hungary demonstrates.

Another example of how a global approach can impact on local employment comes from the Romanian town of Brasov, where IKEA bought a furniture factory, one of 20 the Swedish firm took over in that country. According to sources in the Romanian privatization agency, the factory had a workforce of 1,500 and a long history of craft furniture-making for the local market, dating back to the nineteenth century. IKEA moved rapidly away from the existing techniques and markets in favour of producing standard items for its global range. When IKEA announced a decision to reduce the number of employees by 600, the employees staged a sit-in and were issued with notice of dismissal. Only after the privatization agency stepped in to mediate was a compromise settlement negotiated.

Impact on pay and conditions

As with employment numbers, the impact of privatization per se on pay and conditions of work is not easily established and, even when the cause and effect have been clear, experiences have varied. Privatization can be followed immediately by worse terms and conditions, but such an initial impact can be reversed later when a restructured company is able to reward employees for their contribution to its success with improvements in pay and conditions. However, the converse - initial improvement followed by later deterioration - has also occurred.

In post-reform Viet Nam, the wages of civil servants and state enterprise employees declined by 60 per cent from 1985 to 1991, followed by a partial reversal of that trend in 1993. In 1989, a Vietnamese civil servant s salary could buy 2.3 kg of rice a day and that of a state enterprise worker 3.3 kg, so that, at most, only one person apart from the principal breadwinner could be supported by the wage, compared to four people in 1985. In addition, health and education subsidies declined.

In Poland, average wages and salaries fell by 27 per cent between 1989 and 1992, opening up inequalities in income. A study of ten privatized Polish companies revealed a tendency for wages to increase sharply immediately after privatization but to stop doing so soon afterwards in favour of performance-related pay incentives.

In Estonia, unions report that foreign owners have blocked pay increases. A law on collective bargaining, which took effect in 1993, forbids new private owners from unilaterally scrapping collective agreements; it does, however, allow them to be renegotiated.

In Kazakstan, according to a labour ministry official at an ILO seminar, while the ministry has aimed to ensure that the principles of the ILO on fair wages are followed, external pressures have pushed policy in another direction:

It is the consultants of the World Bank and IMF who are dictating policies of restraint to our Government, including that of minimum wages, so that real wages are falling. The cheap labour of the Soviet Union, which was criticized for being cheap, therefore remains cheap and is getting cheaper. The experts of the IMF calmly ignore these principles and as there are more of these experts in our country, so the policies of the ILO in this field have a rather small impact and a low profile.

Non-payment of wages, sometimes for months at a time, has also caused great hardship for employees. Sometimes this has been caused by government subsidies being cut or simply not paid as failure to restructure has become unsustainable. But there is also anecdotal evidence that, in some cases, managers have deliberately withheld wages due to employees in the hope of financially forcing them to sell (to the managers) their privatization vouchers at knock-down prices.

In the Russian Federation, labour conditions have been affected by the marginal state of the economy, in transition from a planned economy to a market system, according to Russian labour ministry official Evgeny Katulsky:

Eighty-eight per cent of equipment in Russian factories is obsolete, 400,000 work in unhealthy conditions, 8,000 every year (more than died in Afghanistan) die because of working conditions, and 14,000 become handicapped. We made an inspection of newly privatized companies to see how labour conventions were being respected the conditions there were real slavery, not human conditions. A slave owner says you must work from morning to evening, no choice, without trade unions.

In Hungary, while some privatization contracts have committed foreign companies to retaining staff levels for a set period of time, there have been other adverse effects, such as cuts in staff training. However, the same country has also had the opposite experience. In the General Electric take-over of Tungsram, for example, although jobs and pay were cut, the company quickly put in place a number of environmental and health and safety measures. These included monitoring factory air and noise pollution levels, fixing the worst problems immediately and adopting plans to make further gradual improvements. New safety devices were installed and comprehensive worker-training programmes introduced. As a result, the number of serious work-related injuries has been substantially reduced.

Impact on economic democracy

Privatization can open up gaps in income distribution, as unemployment rises and real wage levels for those in employment fall, but it also offers opportunities for a redistribution of wealth. Voucher privatization and special shares for employees have been among the techniques used to share assets more widely than would otherwise have been the case. However, the experiment has had mixed results. In general, it appears fair to say that neither the benefits nor the costs of privatization and other transition measures have been equitably shared.

Whatever the long-term potential value of privatization vouchers, poor people with an urgent need for cash are likely to sell to those well enough off to be able to buy, and that has been the tendency on the secondary market. Similarly, several studies have shown that many employees have sold their stakes following buy-outs, enabling either internal management or outside institutions to concentrate ownership. This is not necessarily socially negative; many believe that it is essential for effective corporate governance and that that in turn is essential to secure long-term employment; however, it puts into perspective the potential for wide property ownership arising from privatization. An UNCTAD survey report noted:

While privatization has broadened the base of share ownership in a number of countries, more research is needed on the income distribution effects. Mass privatization, as a means of sharing national wealth, has been applied more successfully in some countries in transition (Czech Republic, Lithuania and Slovakia) than in some other such countries (Russian Federation).

3. Management, small enterprise development and cooperatives as a strategy for strengthening competitiveness and reducing social costs

3.1 Management development policies

Management development is usually defined as the attempt to improve managerial effectiveness through a planned and deliberate learning process. Management development in transforming economies may be viewed as an open-ended process, which not only involves managers themselves, but also prospective managers (that is, newcomers to the market of managerial positions) and the enterprises over which they exercise control. Governmental and non-governmental organizations also play an important role in management development by designing, regulating, supporting and performing a number of activities designed to support management development.

The experience of developed economies suggests that the massive transformation of management techniques and managerial culture will neither be easy nor quick. A recent survey of 160 large multinational companies revealed that a change in managerial initiatives required, on average, approximately four years. Moreover, the transformation of such crucial aspects of an enterprise as training/development, workforce composition, leadership style and career development may take as long as eight years or more. In the case of an economy undergoing transformation, managerial change is complicated by a general ambiguity as regards the direction, agents and objects of change.

In general, a successful transition to a market-based economy requires a large number of people to learn completely new commercial, financial and managerial skills. In transforming economies, millions of managers, entrepreneurs and administrators are restructuring enterprises, creating small businesses, operating new banks and transforming public finance and administration. This transformation has created an overwhelming need for managerial development as a means of filling the enormous and ever-increasing demand for managerial skills in many critical areas. Given these factors, it is impossible for a single study to encompass all of the peculiarities of management development in every area of a transforming economy. The scope of this part is therefore limited to an evaluation of the trends in managerial development in enterprise management. These trends are illustrated by selected cases of best practices in this area.

It is necessary to distinguish three types of learning in organizations:

In the context of enterprise development in transforming economies, the essence of individual learning is the acquisition of knowledge, i.e. how to work and how to orient oneself in new market conditions.

Group learning amongst managers in a transforming economy includes several interrelated social processes, including:

Together, individual learning and group learning comprise the core of management development processes in a transforming economy. The shell of managerial development, on the other hand, is organizational learning. Organizational learning manifests itself in the ability to cope successfully with perilous situations through the implementation of recovery strategies. Such strategies can only be realized through the transformation of pre-existing structures, the establishment of performance goals and the reallocation of resources; in other words, through major organizational change.

This understanding of management development as one particular aspect of organizational learning leads us to accept a rather opportunistic approach in our overview of managerial development in transforming economies. It is our honest belief that, in the pragmatic world of business, development for development's sake does not exist. While in many Western countries it is currently fashionable to peruse corporate development through such programmes as total learning partnerships or permanently unfrozen organizations, such measures are simply partial responses to the challenges presented by a hostile environment, rapid technological change and the often unpredictable fluctuations in market conditions. Moreover, it has previously been established that organizations in hostile environments face new problems and are often forced to develop new niches, but their possibilities to learn are often restricted by scarce resources and limited strategic opportunities.

Management development policies and enterprise practices

As far as management development processes are concerned, it is possible to distinguish several types of activities which, directly or indirectly, aim at improving managerial effectiveness through training and learning. These include:

Development processes within the company often include some forms that are not perceived as training in its proper sense. However, some routine changes in jobs and job content may be assessed as a powerful means of informal training. Among the different types of informal training, the following may be mentioned:

An agenda for action

The clear lesson of management development in transforming economies is that international assistance should be subordinated to the overall targets of economic reform and should, therefore, be very specifically and selectively applied to each transforming economy.

In Russia, as in the other transforming economies of Eastern Europe and the CIS countries, which are still struggling with post-reform economic recession, the key to management development is in-house training and counselling. These two forms of management development should be used intensively so as to perform two related tasks simultaneously: the rebuilding of managers' self-confidence so as softly and smoothly to institutionalize new mentalities and patterns of conduct in enterprise management. An ILO study enabled us to draw up some recommendations for three specific groups involved in management development processes: enterprise managers, management development consultants and trainers, and domestic and international policy-makers.

Recommendations for enterprise managers

Enterprise managers should recognize that management development is the key instrument for the improvement of performance. The resources to be spent on in-house training and counselling have the highest return on investment not only in the long-term but also in the short-term. In-house training should be used primarily as a means of improving internal communications in a company, and of promoting teamwork and mutual understanding between managers in different operational areas.

In this respect, top executives should ask external trainers and consultants to pay attention primarily to integrated courses which should be given to all middle managers, especially in the areas of business economics, marketing and personnel management.

For themselves, top managers should pay attention primarily to improving their knowledge of corporate law, financial management, strategic marketing and social psychology, and to developing their negotiating and coaching skills. Top managers should ask trainers and consultants to provide them with guided self-education courses. That means establishing long-term relations between a top manager and a consultant, with the latter serving as a private tutor.

In selecting prospective candidates for external retraining courses or for MBA programmes, top managers should take into account the present and potential capabilities of a candidate to serve as a disseminator of new knowledge and as a coach for his/her colleagues and subordinates.

Special attention should be given to the people presently occupying the position of chief engineer. Taking into account the usual underutilization of their innovative potential, top executives may consider the expansion of the area of chief engineers' authority towards marketing management.

Recommendations for development trainers and consultants

Development trainers and consultants should subordinate their activities to specific enterprise needs and focus such activities on the following areas: developing top managers' integration skills, expanding the general knowledge and horizons of middle and shop-floor managers.

Trainers and consultants should try to integrate in-house training and counselling in a united developing consultancy interactive process. Therefore, the attention of trainers and consultants should be devoted to a maximal involvement of middle and, if possible, shop-floor managers to every stage of consultancy process.

As regards the exploration and development of the market for in-house training and consultancy, trainers should avoid the dumping approach, broadly used in various technical assistance programmes. While the use of foreign financial resources to minimize the burden of consultancy services on enterprises may be considered appropriate in many cases, the provision of training and consultancy completely free of charge may diminish their value as perceived by company managers.

In selecting particular industries and locations, the use of foreign or domestic aids in the form of training and management consultancy should follow the usual rules and criteria of competition policy. In this respect, the design of any assistance programme should be oriented towards equal access to those services for all enterprises in a particular region and line of business.

Recommendations for policy-makers

Domestic policy-makers, involved in the design and implementation of management development policy in Russia, now face a number of choices to be made in two relatively separate areas: the development of managers already employed and the strengthening of pre-employment management education.

In the first of these two areas, policy-makers should choose the best way of promoting the expansion of in-house training and counselling. One possibility is greater use of centralized financial resources to subsidize such activities. Different forms of subsidies may be appropriate (governmental grants, local development initiatives, etc.). Another possibility is to decentralize government assistance for management development. In this way, various kinds of tax exemptions for companies' resources really spent on in-house training, executive education and counselling may be highly relevant.

In the second of the two areas, domestic policy-makers should make a much harder choice regarding the regulation of the standards for pre-employment management education. Indeed, the general aim of pre-employment education in Russia is to raise standards towards international levels. However, only a very small fraction of educational institutions may now meet such standards. In this respect, it is proposed to demarcate two types of management education: free education geared towards obtaining a first degree and advanced management education at MBA or M.Sc. level. For the first type of programmes a gradual increase in the standards required may be appropriate. For the second type of programmes, a sharp increase in standards appears to be necessary.

An ILO study showed some of the best examples of management development programmes in Russia and the areas of the highest demand for international assistance: self-education, distance learning, in-house training and counselling. The main problem of international assistance in the area of management development is the fragmentation and duplication of efforts. These factors have an especially negative impact on the implementation of capital-intensive projects (satellite systems for distance learning, the development of interactive software and educational multimedia). In this respect, one recommendation may be the creation of a united data bank containing all internationally assisted management-development programmes and initiatives in Russia. The creation of such a data bank may prove its validity and usefulness only if it is managed by highly respected politically neutral non-governmental international organizations such as the International Labour Organization. A properly maintained and updated data bank of management-development initiatives will serve as a repository for all international and governmental institutions (the World Bank, USAID, the European Commission, EBRD, OECD and so on), in order to coordinate their activities and to improve the allocation of their resources.

3.2 Small businesses and empowerment

Small businesses vs self-employment

The Business Start-Up Scheme that was operating in the United Kingdom in the early 1990s under the Training and Enterprise Councils aimed to support people who had been made redundant and were entering self-employment with an enterprise allowance and business advice and training. The scheme was criticized for the high failure rate of the businesses thus supported; the feeling was, however, that at least some of the resources could have been put to better use in supporting growth-oriented businesses. In 1993, the expected number of new businesses started in the United Kingdom was 350,000, creating an average of 1.5 jobs in addition to the owner; however, the number of businesses failing was 50,000 per year. Self-employment is not only precarious, it also results in low incomes. Evidence taken from US studies of different approaches to job creation for retrenched workers suggests that the demonstration project offering business training geared to self-employment compared favourably with projects offering retraining for re-employment, but that the average income resulting from self-employment was lower than the wage needed to survive.

While low initial incomes and high failure rates are to be expected from any kind of business start-up, it would be desirable for the businesses that did survive to include some with a high potential for growth. Studies from the United States demonstrate that one ingredient for success is team work: almost two-thirds of the youngest of the Inc. 500 companies started in the 1980s were set up by teams. Brockaw also quotes a study of hyper-growth businesses which found that only 6 per cent of the ventures concerned were founded by a single person, whereas 54 per cent had two founders and 40 per cent three or more.

Accepting that high growth-potential businesses are often started by management teams, it is still unclear how management teams come together, or how their formation can be assisted by outside agencies. However, where a group of people attempting to start a business have already had the experience of working well together in their former employment, some elements of teamwork have already been established. This situation can arise when management teams have been made redundant following the restructuring of a business and often takes place during management buy-outs of part of a restructured firm, or spin-offs of small businesses from a core enterprise.

In the following pages, attention will be focused on whether the measures that have been used to stimulate small businesses have been successful in promoting growth-oriented small businesses as well as self-employment. What follows is a number of examples from the United Kingdom of types of support programmes for redundant employees which have been adopted by specific companies or agencies, and the results these programmes have produced.

Business support agencies

The London Enterprise Agency (LENTA) is a private sector organization which was set up in 1979 and, from that time, has been involved in the provision of business workspace in the capital. In 1994, LENTA launched Investment Saturday, which was a day-long introduction to running your own business and was followed by help in preparing a business plan together with business advice. Investment Saturday was aimed at managerial-grade employees and many of the 400 people who received this training have been funded by their current employers, who are undergoing retrenchments. For example, London Dockland Development Corporation have financed the training of 36 of their employees, while London Underground Jubilee Line Extension team have sent 30 of their employees for training.

A recent evaluation of Investment Saturday showed that 33 per cent had already started a business, 21 per cent were currently working on their business plan and 25 per cent had made no progress in starting a business. LENTA also provides business consultancy services and direct small businesses with growth prospects towards sources of venture capital.

Another example of an agency is MADE, a private sector company supported by public funding, which has a number of offices based in the coal-mining valleys of south Wales and was formed in 1984 when pit closures were first starting, following a period of industrial action. Previously, coal mining provided 40,000 jobs, while only one pit is now still operational and employs 300 people. Male unemployment still stands at 25 per cent in the region and is even higher in some of the former mining towns.

MADE provides free business advice for start-ups, helps in the writing of business plans, arranges business training, provides workspace for small businesses, refers start-ups to sources of funding, including local authority seed capital (,1,000-,5,000), maintains an equity fund and advises larger businesses on how to obtain larger amounts of money from banks and venture capital, including potential private investors (business angels).

MADE claims that in 1996 through its professional advice it was able to assist in the creation or safeguarding of about 1,200 jobs. This agency covers a region where the former British Coal Enterprise and British Steel (Industry) operate their business finance schemes; it helped a number of businesses to secure funding from these sources, which together with local authority and bank funding amounted to ,3 million in 1996. Since it was set up in 1984, MADE has assisted businesses in obtaining over ,17 million in investment in the region and has played a part in creating or saving nearly 10,000 jobs.

MADE is now funded largely through its property portfolio (renting out business units) and partly through its contract to the Mid-Glamorgan TEC to provide business start-up advice and training. Periodically, it bids for European assistance. MADE has also been able to share its experience of working in a declining coal-mining area, by hosting a staff member of the Hungarian Foundation for Enterprise Promotion.

Indicators of success: in 1996, MADE gave 2,010 business advice sessions for start-ups and, in this relatively minor way, helped 301 businesses employing 372 people to start up. According to MADE's analysis of business start-ups in 1995, the survival rates were 84 per cent for those receiving Business Start-up Scheme funding and 81 per cent for those without it (assessed 12 months after the start of trading). These rates are fairly high. However, some caution has to be exercised, since the Mid-Glamorgan TEC's analysis for an overlapping area gives business survival rates in 1996 of 78 per cent for the first year and 65 per cent for the first 18 months. Differences between the figures can often be attributed to regional variations or to periods of recession affecting the businesses.

Of greater interest is the interpretation of the figures by the organizations themselves. One innovation that is about to be introduced by the Mid-Glamorgan TEC as a result of observing impressive business survival rates from another support organization, the Prince of Wales Business Trust, is the mentoring of new businesses. Instead of all the training and business planning taking place at the MADE office, business advisers will visit the site of a new business, where it is anticipated more of the problems facing the business will become apparent.

Business Links

This initiative is aimed at small and medium-size enterprises (SMEs) with growth potential (typically with ten to 200 employees), rather than at micro-enterprises. The emphasis is on help with innovation, technology upgrading and exporting (all key concerns for businesses hoping to expand) together with providing more employment, rather than micro-enterprises providing a single, low income in a business area in which there is considerable competition. Each business is provided with a Personal Business Adviser (PBA), who helps to refer SMEs to a range of services such as: innovation and technology counsellors; export development counsellors; access to the Regional Supply Network and linking businesses with local suppliers; training courses; business health checks; and referrals for business funding, including venture capital. PBAs can advise on local and regional assistance, such as pump-priming grants, assistance with the purchase of capital equipment, or supporting an initiative to take on more employees. Such assistance varies according to the part of the country: highest priority is given to certain regions suffering from high unemployment such as north-east England where much heavy industry has been restructured and closed down; these regions also receive European funding support. Businesses, including SMEs, moving into such areas may qualify for rate and rent holidays or other incentives.

Subcontracting

Throughout Europe, in countries such as France, Italy, Spain, United Kingdom and others, linkages between large and small industries industrial capacities have been fostered and promoted through instruments such as subcontracting exchanges, registers of potential suppliers and exhibitions where large firms display purchasing requirements and items they wish to purchase, as well as demonstrating the capabilities of SMEs to meet these needs.

By the end of 1987, one year after an exchange (Borsa dell Subfornitura) was set up by Genoa Chamber of Commerce, a database of 500 firms from the mechanical, electronic and engineering sectors had been set up. The data included company organizational structures, market outlets, produce range and/or services, and office and other relevant information such as turnover, number of employees, equipment and support staff and facilities. The Genoa Borsa has also been interested in cooperating with similar exchanges or initiatives in other regions of Italy and in other European countries. The Borsa achieved a significant expansion of subcontracting in the Ligurian region (around Genoa) in part through cooperation between groups of small firms enabling the fulfilment of subcontracting orders beyond the means of a single enterprise. The Borsa has also attained a second objective in setting down conditions within the subcontracting agreements and defining more clearly the respective obligations of the partners involved.

The Borsa was created with the cooperation of DITGL (Ligurian Centre for Technology Diffusion) which has enabled it to offer a special quality-control service so that SME subcontractors can achieve a higher level of quality conformity and a range of technological improvements.

The Genoa Borsa is only one example of similar exchanges set up by chambers of commerce or other business associations elsewhere in Italy, France (the first country to develop such exchanges in the 1960s), Spain and other European countries, and also now in several developing countries such as India, Philippines, Latin America, Morocco and so on.

The EDWAA Job-Creation Demonstration

EDWAA is the United States Economic Dislocation and Worker Adjustment Assistance Act which provides retraining and re-employment services for workers who have lost their jobs due to retrenchments and closures. These people were typically defence employees or agricultural workers, but also included those made redundant from manufacturing and other industries.

In recent years, assistance with re-employment has been broadened to include a Job-Creation Demonstration aimed at providing entrepreneurial training to those people who wished to start their own business rather than seek re-employment. In 1991, the US Department of Labor (DOL) awarded grants to six community development organizations (CDCs) specializing in business start-up training as an alternative to training for re-employment; in 1993, an evaluation of this three-year demonstration was published. The evaluation examined the success of the Job-Creation Demonstration compared to the standard EDWAA re-employment programme and, by monitoring the programme participants, was able to arrive at comparisons of business start-up rates in relation to placement rates; business survival rates; the number of jobs created and the average income generated by new businesses. Apart from providing useful feedback on the methods employed by the CDCs involved in the demonstration, this type of data from any country on the results of small business-creation schemes is fairly rare and so the evaluation is useful from a more general perspective.

How the Job-Creation Demonstration was run

The CDCs undertaking the demonstration project used a variety of methods and operated in very different areas: some rural, some inner city. However, there was some convergence in the methods used during the three-year period. A degree of selection among the participants was found to be essential, in order to avoid large numbers of them dropping out during the programme. Participants were required to discuss their business ideas and to demonstrate certain entrepreneurial qualities as well as sufficient financial resources for starting up a business before they were admitted to the programme.

Those who were admitted to the programme were generally better educated, rather more experienced and slightly older than their counterparts undergoing retraining for re-employment under the mainstream EDWAA programme, this difference probably arises partly as a result of the screening. It should be remembered, however, that efforts to increase the success of the programme in terms of high business start-up and survival rates inevitably led to a higher dead-weight effect, i.e., a greater proportion of people receiving assistance who would have been able to start a business without receiving any help.

Participants were usually expected to attend classroom training over periods of ten to 13 weeks and, during this time, they received help in preparing a business plan as well as individual technical assistance that continued during business start-up and the early months of operation.

Results of the Job-Creation Demonstration

The Job-Creation Demonstration was successful in promoting new businesses at least in the short term. Of the 645 participants in the six CDC self-employment programmes, 45 per cent had started up businesses in the course of the demonstration. Although this does not appear to be very high, it is comparable with start-up rates from other micro-enterprise programmes in Washington and Massachusetts (which ranged from 30 to 60 per cent). Also, many participants were successful in finding employment rather than starting their own business (29 per cent); and when the figures for self-employment and salaried employment are taken together, 74 per cent compares well with the 67 per cent finding the latter form of employment from mainstream EDWAA programmes. Clearly the job-creation programmes did not in all cases lead to the creation of new businesses, but it is probable that they improved the marketable skills of their participants. For businesses contacted six months after start-up, the survival rate was 74 per cent and, for the earlier cohort eligible for a 12-month follow-up, 76 per cent were still in business after one year.

As regards earnings from self-employment, the findings were less encouraging. Many businesses did not operate full time, and even after 12 months' operation did not provide a subsistence wage. Business earnings varied widely, averaging $1,193 per month for the six-month follow-up and $582 for the 12-month cohort; however, in both cases monthly earnings were considerably below the average monthly salary of mainstream EDWAA participants ($1,815 per month). Self-employment earnings were also lower than the average monthly salary that participants had enjoyed prior to being made redundant ($2,135).

Service businesses were particularly prominent: although only 22 per cent of participants had been made redundant from this sector, 46 per cent started businesses in the service sector.

Employee stock ownership plans

The philosophy behind employee stock ownership plans (ESOPs) is that if employees are provided with the means to buy shares in their own company, not only will they have a greater incentive to improve the productivity of the company, but they will have greater control over its future, especially when the current owners sell up. When a company changes hands, the purchasers may only be interested in the company's assets, and restructuring may be carried out with the intention not so much of improving the company's efficiency, but of closing down operations and laying off the entire workforce. ESOPs can be used to prevent such hostile take-overs.

How ESOPs are set up in the United States

Usually the company and sometimes the employees and their union decide to set up an ESOP trust to manage the ESOP. The latter uses the company's credit status to borrow funds on behalf of its employees. It uses this money to buy either new shares in the company's stock or old shares from the existing owners (private or public). The ESOP then holds these shares in trust for the employees.

The company then repays the loan out of its profits. The loan repayments are treated as a payroll expense, just like pension contributions, and so both the interest on and principal of the loan are deductible from taxable corporate income. As the loan is paid off, shares of the company's stock are allocated to each employee's account in the ESOP trust. In this way, employees gain shares in their company's stock, the company enjoys tax savings and both sides enjoy the benefit of an increased level of commitment on the part of the employees. When employees retire or leave the company, they can either take their stock with them, or sell it back to the company or in the market place.

How ESOPs have been used in the United States and Canada

Owing to the tax advantages for a company forming an ESOP trust, ESOPs have grown to an impressive number since they were first set up in 1974. Approximately 12 million workers, or 10 per cent of the workforce, benefit from employee ownership in 11,000 ESOPs. The main reasons given for starting ESOPs are to create an additional, popular employee benefit (about 40 per cent are set up for this purpose) and so that workers can buy their own company from departing owners (about 45 per cent). A small proportion of ESOPs have also been set up so that the workers can buy their own company during privatization, so that workers can prevent the firm being closed and jobs lost for economic reasons, and as a management defence against hostile take-over bids.

Companies tend to use ESOPs to reward their workers for loyalty, so it is no surprise that in those industries where a low turnover of skilled staff is more important than manufacturing and finance there is a high proportion of ESOPs. Companies that have established ESOPs also find that they perform better, which means that as well as giving employees shares they also allow them to contribute to decision-making at all levels. It has been found that ESOP firms in America grew 3 to 4 per cent faster per year than they would have without the ESOP, and that this growth created almost 50 per cent more jobs in the ESOP companies.

Surveys show ESOPs to be popular with employees and the financial gains they represent are, in some cases, very significant. In terms of increasing worker control, they have not yet managed to own a large share of productive capital in the United States (3 per cent in 1993); however, this proportion is likely to continue to grow. Of particular interest to this study, however, is the fact that, if ESOPs are combined with a participatory management style, they can result in higher levels of productivity and more jobs.

There have been a number of cases in the United States of acting firms being bought out by employees to try and save their jobs. In the United States the record of troubled firms purchased by employees has been surprisingly good with only five failures recorded in 1986.An acting plant in Weirton, West Virginia bought by its employees in 1984 was regarded in the 1980s as one of the successes of the steel industry. The company set up a series of mini steel plants. Consultants estimated that a 32 per cent cut in labour costs would be needed, but this was later reduced to 18 per cent as output exceeded projected levels. Sales rose by 20 per cent and new investments helped to modernize the plant after the buy-out. According to Bradley and Gelb, Weirton also moved from a traditional management style to a more participatory approach with support from both union and management.

Some general comments on buy-outs have been made. Small buy-outs tend to be concentrated in areas of high unemployment, i.e. in isolated company towns where the cost of closure is high, both financially and socially. There is usually strong political pressure for public assistance and governments are more likely to intervene and offer support. The aim is to minimize job losses, although practically all buy-outs involve substantial reductions in numbers of employees. In the United Kingdom some buy-outs have involved workforce reductions as high as 50 per cent, while in the United States they have usually been around 30 per cent at the outset although in several cases there has been some increase in employment as business improved.

An interesting example is given in the case of a Canadian firm demonstrating the readiness of employees and management in a buy-out to reduce employment. During the prolonged negotiations on the buy-out, the workers were asked to estimate the minimum workforce they needed to run the business which previously employed 450. After some discussion they suggested around 130; however, this proved to be too low and the plant finally employed 150.

There have also been significant improvements in productivity following buy-outs. Particularly after MBOs, there are fewer quality rejects and less material waste. The Canadian firm mentioned above was able to reduce quality control personnel from 57 to 10 without increasing the number of defective products. However, it should be remembered that the main aim of buy-outs, in the vast majority of cases, is to save jobs resulting from plant closure. If plants raise product quality and productivity there are prospects of employment creation in the future.

Self-employment schemes

In common with most western European countries, in 1992 Poland's Ministry of Labour and Social Policy (MOLSP) operated a scheme aimed at encouraging unemployed people to move into self-employment. The PNIDZ programme, comprising loans for individual economic activity, was aimed at individuals who were either unemployed or had received notice from their employers of an impending lay-off. The scheme took into account the difficulties experienced in Poland by such people in obtaining start-up capital and, rather than providing a regular allowance as in other countries, it offered a lump-sum loan at the start of the programme.

In view of this attractive sum, participants in the scheme were obliged to undergo a certain amount of screening. First, they were interviewed by a local labour office representative who would only issue an application form if the interviewee answered his questions about the nature of the proposed enterprise satisfactorily. The application form asked further questions about the nature of the enterprise, the financial plan and the size of the loan requested. The completed form was then assessed by the Local Labour Councils. Those passing this screening stage were

then obliged to attend a period of business training undertaken by a contracted business advisory organization. The quality of such service providers often varied, particularly in the regions where these services have only recently become established.

Further capacity problems arose in relation to the disbursement and monitoring of the loans which were released to applicants once they had successfully completed their training; in 1992, MOLSP was beginning to transfer these functions to private sector organizations specializing in business advice and training.

The business loan itself had the following features: it was a maximum of 54 million zloty (US$4,000), which was as much as 20 times the average monthly salary, with a maximum term of four years. No collateral was necessary, though two guarantors were required, and the interest rate was subsidized. One feature helped to increase the payback rates: borrowers who kept up with their instalments for the first 24 months could ask to have the remaining 50 per cent of the loan waived. Some offices reported payback rates of 90 per cent; in other regions these were 60-70 per cent.

This loan scheme made the PNIDZ programme relatively generous compared to similar schemes in other OECD countries and compared well to unemployment benefit (the amount of the loan was on average three times greater than the benefits which were paid for the period). The justification for this was that there were few alternative sources of start-up funding for the unemployed in Poland. Interestingly, in spite of the attractiveness of the loan sum, even when participation in the PNIDZ programme has been at its highest, under 3 per cent of the unemployed have opted to join the scheme. This may be attributed to the screening process which loan applicants have to undergo.

Very little information is available on business survival rates or numbers of jobs created for participants in the PNIDZ programme, compared to similar programmes in OECD countries. However, certain points may be raised in relation to participation levels. The PNIDZ programme was funded, along with other employment assistance measures, from the Labour Fund, the main part of which is directed towards paying unemployment benefits. In 1991, unemployment was low and the PNIDZ programme received almost 14 per cent of the budget, with 32,000 participants being funded. By 1993, however, unemployment had risen sharply and benefits to the unemployed were crowding out the PNIDZ programme share of the Labour Fund's budget, which dropped to 1 per cent. This budgetary constraint on a self-employment scheme might have been reduced if the PNIDZ programme had been separated from the Labour Fund.

Credit for SMEs

In Hungary, the banks' normal reluctance to lend to this sector is coupled with collateral requirements for SME loans of, typically, 100 per cent of the capital of the loan plus the interest and often 300 per cent of the value of the loan for enterprises thought to be risky. Loan guarantee schemes have been introduced to reduce the risk element as it is perceived by the banks.

The preferential credit schemes aimed at SMEs are:

Subcontracting links

In most developing countries, subcontracting linkages between large and small enterprises are very weak. In the least industrialized African and Asian countries, this is mainly due to the lack of the type of large manufacturing firms that could help generate suppliers of components and services. Even in countries that are more developed industrially, where large vehicle, appliance and machinery manufacturers exist, and which in developed countries would expect to subcontract a considerable part of their production, such enterprises either depend on imported inputs or are virtually integrated (i.e. produce all items in-house). In fact, in developing countries it is more usual to find subcontracting in traditional industries such as the production of garments, shoes and furniture where medium-size and larger firms provide work in cottage industries and micro-enterprises in order to take advantage of much lower labour costs.

Larger firms tend to have little confidence in the reliability of SME suppliers as regards quality, delivery and in many cases even price (compared with imported items). There are even many instances of MNCs encouraging their regular international suppliers to set up production in the developing countries concerned (Malaysia and Thailand have several examples of Japanese component producers setting up in these countries). Specialization among local SMEs in these countries is still rare.

As more developing countries liberalize their trade and import regimes, there are signs that the competition of overseas suppliers is driving the traditional SMEs out of business. Governments need to be aware of this development and should adopt measures to promote supplier relationships between SMEs and large firms by helping to develop greater competitiveness.

Policy-makers must try to identify firms considered to be capable of upgrading their performance to compete with imported items, even if for a certain period these SMEs may need special help from public agencies and large firms (preferably the potential contracting or parent firm) which should be persuaded to offer assistance. In some developing countries, it has been found that where SMEs that are potential suppliers with competitive advantages form part of sectoral/regional clusters, they can benefit from a range of positive effects generated by working with other similar small firms. There is strong evidence that the encouragement of such clusters can prove effective, making it easier to direct specific measures to assist them. In the case of the manufacturer of the Malaysian car Proton special efforts were made to match local firms with reputable foreign manufacturers in order to upgrade their technical capabilities so that they could manufacture high-tech automotive components. Altenburg sets out possible policies for the promotion of ancillary industries. He recommends providing information on subsidies for hiring specialized consultants (which should be made available), access to data on potential subcontracting through subcontracting exchanges that match supply and demand and on sources of advice and technical assistance.

Apart from these, exchange fairs or exhibitions can be arranged, as was the case in Mexico, where large manufacturing firms exhibited reduced-price parts of their final products, from electronics to garments, to SMEs which were invited to bid to supply components and sub-assemblies.

It is important not to hinder the emergence of local suppliers and subcontractors with inappropriate fiscal incentives such as are often given to firms in export processing or free trade zones, where these firms are allowed to import tax-free goods while the same items from local firms are subject to tax. Taxes on the total sales value of products encourage foreign firms to concentrate on as many stages of value added tax as possible in house. A value added tax will at best create equal treatment for local and foreign suppliers.

Local content requirements have been used by governments to encourage foreign investors to use local suppliers, whereas quality considerations and pressure to liberalize trade have forced governments to reduce such policies.

Some countries have offered incentives, benefits, subsidies, tax deductions or preferential treatment in public procurement to large firms willing to invest in the upgrading of supplier firms that provide supplies from local SMEs. However, these incentives do not appear to have produced significant results. The Indonesian Government has tried a Foster Business Partner Linkage where a large foster firm helps an adopted SME with management and technology, acts as a guarantor for bank loans and helps with marketing the SME's products. However, this scheme also has had only limited success. An interesting case is that of Mexico's Supplier Development Programme set up by NAFIN, the Nacional Financieria. In cases where potential suppliers can present viable projects NAFIN will cover 50 per cent of the credits. A factor scheme also enables suppliers to provide discounts on bills issued by contractors. In turn, NAFIN guarantees up to 50 per cent of losses suffered by contracting firms due to the defective performance of their suppliers, and makes available low-interest funding to large companies to finance credit, training and technical assistance for their suppliers.

Finally, some large contracting firms with a high number of subcontractors and suppliers may actually help set up special industrial estates for ancillary industries. This has been done in India, Singapore and Mexico, mostly in the vicinity of large car or machine tool manufacturers.

Financial assistance to small businesses

Business development in the form of both start-ups and business expansion is essential. As large firms, either through privatization or restructuring, shed part of the workforce, parent enterprises undergoing employee retrenchment must be encouraged to introduce and implement programmes to provide alternative livelihoods for those made redundant.

The South African experience demonstrates that the creation of a small business unit (SBU) or division, with the active support of senior management can be a most important step forward. Subcontracting or outsourcing the purchase of services, together with other inputs from smaller businesses, should be the first fields of activity of the SBU; it is important, however, that the unit does not in the longer term confine itself to these areas. As is the case in some of the larger corporations in South Africa, these firms should be made to understand by the government and local authorities that major businesses and employers in an area are expected to contribute to the welfare of the community from which they obtain their workforce and much of their commercial support. Helping to set up appropriate business support centres and possibly a local equity fund, together with participation in a business incubator or industrial estate, are just a few of the ways in which the major corporations can assist in local business development and help to create new employment opportunities in start-ups and expanding small enterprises.

In some situations (e.g. British Coal and British Steel), the parent company's eventual complete withdrawal from an area has meant that large-small supplier and subcontracting linkages were impracticable; however, the continuing involvement of the investment company (British Coal Enterprise and British Steel Industry) in attracting small businesses with growth potential into an affected region has produced many employment opportunities.

In many countries the parent company does not have the resources available to set up a local investment fund, and it is in these situations (for example, in CEE/FSU and developing countries) that governments or international donors may have to provide the investment. A concept common to all such funds is the fact that it takes time to achieve results. The hundreds of investments and thousands of jobs created or saved by companies like Elf-Aquitaine's SOFREA or British Coal have taken place over ten or 20 years. New funds, such as the Equity Investment Fund in Poland, may take two years to make only two investments, since experience is needed if successful local investments are to be made. Similarly, it takes time for credit guarantee companies to build up a basis of trust with local banks. In principle, however, established credit guarantee funds should be able, in due course, to leverage five to ten times their volume in small-business loans from the participating banks. Faster results are sometimes achieved with direct lines of credit (for example, the EBRD's Russia Small Business Fund, which has managed to disburse 10,000 loans in three years), but without the leverage possible with credit guarantee schemes.

Management buy-outs

In Western Europe and North America, management buy-outs (MBOs) have taken over larger plants that have faced closure with the possibility of large numbers of job losses. In these cases, the MBOs, consisting of all contributing employees (as in the case of ESOPs) or groups of managers and professional employees, aided by other investors and leveraged by large bank loans, have taken over ownership and have managed to continue operations on a much reduced scale, generally with less than 50 per cent of the former employees. Earlier leveraged MBOs have only been partially successful: according to one estimate, fewer than 50 per cent have survived under management ownership for more than a few years. However, this is now the most common vehicle for investment designed to revive loss-making corporations by means of venture capital funds in Western Europe. More recently MBOs have had a better success rate. Greater sustainability of MBOs may be achieved if a project is adequately capitalized with equity funding and not leveraged too highly with loans.

The purchasing of shares by employees through ESOPs is an increasingly popular strategy in the United States for management buy-outs to take place and to avoid hostile take-over bids and plant closures. Evidence shows that businesses owned by ESOPs are no more reluctant to consider job losses than other businesses. However, sometimes they also perform better than other businesses and this can result in new jobs arising subsequently. ESOPs that combine employee ownership with a participatory form of management are also shown to perform better. ESOPs are also being used in the privatization process in countries in transition (e.g. Hungary) and here they have the important effect of increasing economic democracy and involving employees in the ownership of the companies for which they work.

Self-employment schemes

There is greater potential for a diverse local economy and for more secure jobs through investing in business expansions (with a success rate of over 80 per cent in the case of British Coal Enterprise) than through supporting self-employment (which has a success rate of 64 per cent). Also, the numbers of jobs created by growth-oriented businesses, an average of 24 per business funded by SOFREA, compares favourably with the one or two jobs that might be created in a typical micro-enterprise.

With many industries, however, redundancies may be spread throughout the country, making a regional investment policy difficult. Self-employment may be a preferable alternative to unemployment for many redundant workers from these or other industries, or it may be a temporary solution until a better job opportunity arises. Such people should be given suitable assistance. Investment fund managers from parent companies are often not interested in financing self-employment ventures because of their lack of profitability, and it is here that governments should play a greater role.

Schemes that provide financial support for the early days of self-employment, or a lump sum to help with the purchase of equipment, usually have a positive effect on business success rates, provided that they are combined with business advice services (64 per cent success rate as compared to 40 for all business start-ups).Business training and follow-up should be provided by local private sector development agencies, with funding allocated by governments. Such agencies play the essential role of screening out applicants whose business propositions look set for failure, thereby reducing unnecessary wastage of public funds and also dissuading the applicants from embarking on a course that might lead to overwhelming debts.

3.3. The cooperative as a possible solution

The need for certain basic and essential services "of general interest" does not necessarily disappear if the State abandons them. The question therefore arises: who is willing to provide these services and who is capable of doing so?

A possible answer lies in the establishment of cooperatives.

What can cooperatives offer to the community when services of general interest are being privatized? The organizational form of cooperatives provides the opportunity to mobilize funding in the community through joint efforts, incur expenditure for social and non-profit making purposes, control and monitor spending on a joint and regular basis, and create joint responsibility and solidarity in the community.

Once the privatization and restructuring processes have been launched, research and analysis of practical experience is required. The development of longstanding cooperative experiences in the areas of utilities, insurance and medical services as well as innovative approaches and health care provides many reasons to see cooperatives as playing a significant role in services of general interest.

For the purposes of analysis, it is necessary to distinguish between cooperatives which are established by consumers and those set up by providers. Consumer cooperatives of the consumers have emerged predominantly when the services of other providers have been geographically or financially inaccessible, or where a service is not otherwise available. The best known cases are the electricity cooperatives in the USA, Argentina, Brazil, Bolivia and Chile. In Argentina, over 500 cooperatives distribute about 10% of the country's electrical energy and reach 15% of all consumers. In rural areas they provide almost all the electricity. The economic and social advantages of such cooperatives lie mostly in their contribution to local employment creation, local economic development and decentralization. Furthermore, they provide consumers with a direct voice in the quality and delivery of services, and also provide opportunities for diversifying services. Consumer cooperatives also exist in the areas of health care and insurance.

Nowadays, cooperatives set up by providers are frequently the result of employee buy-outs or of people without salaried employment discovering niches in the supply of services of general interest. However, they also have older traditions such as the medical cooperatives in Brazil (UNIMED). They can be found in areas like transport, insurance, health and social services. In countries which have a tradition or new laws on decentralization of public authority to local units (for example Italy and UK), they provide particular ground for such cooperatives. The local authorities contract out or purchase services from such cooperatives, for example the workers' cooperative which won the contract to run leisure services in Bristol (UK). There are various kinds of workers' cooperatives providing services of general interest. There are small cooperative businesses with under 10 members, medium-size ones such as the above-mentioned workers' cooperative in Bristol with 230 members and very large cooperative federations such as UNIMED in Brazil with over 60,000 members.

Attempts have also been made to combine private and public interests and those of consumers and providers in the form of so-called "multi-stakeholder cooperatives". The Italian Act of 1991 provides inter alia for social cooperative societies offering membership of different stakeholder groups which may even include local governments. Experience with such organizational forms is, however, still in its initial stages and only practice will show whether they are feasible or of use in the future.

Examples of successful cooperatives providing services of general interest are manifold. In the context of the World Bank Report for 1997, such cooperatives can provide opportunities for citizens to make their voices heard and introduce greater competitiveness into an area which is mostly dominated by public or private interests.

Past experience has shown that cooperatives can provide some and/or all services of general interest. They can, however, modify their structure and mandate to promote the interests of their members so as not to be held responsible for covering the whole of the national services sector. They can be an interesting addition to the delivery market but they cannot and should not gain exclusive rights to delivery. They also underlie public regulations or services of general interest but cannot be expected to produce goods at lower costs than other providers. Nevertheless, they can serve to open up the delivery market to greater competition.

It appears that much practical experience has been acquired recently. However, more action-oriented research appears to be required on the part of cooperatives and also the promoters of privatization of services of general interest such as the World Bank and the Commission of the European Communities. It would be desirable to strive to achieve guidelines for best practice in order to form a realistic picture of the potential and shortcomings of cooperative solutions to privatization.

Appendix III

THE DYNAMICS OF THE PRESENT TECHNICAL, SOCIAL AND ECONOMIC ENVIRONMENT FOR PRIVATIZATION

1. The changing world economy

The end of the millennium offers a challenging perspective for humanity. The world population has quadrupled in a hundred years. Although living conditions have greatly improved among and within nations, duality - that is to say, integration as opposed to fragmentation - is deepening. Technological breakthroughs have created a new competitive landscape as the world of education and labour is rapidly changing.

The forces of integration and fragmentation are occurring simultaneously. Environmental degradation, chronic malnutrition, underground economies, terrorism, child labour and wars are symptoms of fragmentation. The expansion of world trade, technology transfer, access to knowledge and the search for world citizenship are manifestations of the phenomenon of integration.

For business, an integrated global market is a major source of opportunities. The generation and distribution of income increase purchasing power in relation to products and services, and increase demand, while profits and savings are the source of new investment for expansion, thus creating a movement towards an integrated world financial market that promotes capital mobility. Institutional investors are decision-makers who promote economic rationality but at the same time induce short-sighted speculation.

One-third of humanity is making considerable efforts to enter the market economy. Eastern European countries and China are examples of such societies eager to see business flourish. World economic changes offer a challenging horizon for those entrepreneurs who are prepared to face turmoil and are equipped with adequate skills and values. Customers' attitudes are also changing, as buyers become more spontaneous and innovative, with higher expectations as regards quality and price. They are more eager to try new products and services. At the same time, they demand basic standards from the producers and providers of services. In most countries, buyers form non-profit, non-governmental organizations in order to improve their leverage vis-à-vis the world of business.

The world of work is also changing with the increasing participation of women. More time is spent on education and lifelong learning. Capital-labour relations have been transformed. Changes in the world economy and international relations have to be understood in order to achieve the effective performance of trade unions, employee associations and employers' federations.

Population Growth, Urbanization, and Duality

The uniqueness of the present time lies in the fact that human society is the most numerous, the most integrated and simultaneously the most fragmented in the history of humanity. Five centuries ago, when the Americas were discovered and the printed word was just beginning to appear, human society comprised 425 million inhabitants. At the beginning of the nineteenth century, during the Industrial Revolution, the world population had reached 900 million. By the beginning of our century it was 1,625 million. By the end of the same century, a hundred years later, it will reach 6,300 million, an extraordinary growth with an intense impact on the social, political and economic structure of society. World population trends show a continuing high rate of growth of 18.3 percent between 1990 and 2000. Nevertheless, growth is slowing, and the forecast of 10 billion inhabitants by the first half of the next century is being reconsidered. Recent projections point to the world's population stabilizing at 8 billion in the next millennium, and then possibly decreasing.

The reasons for such stabilization include a decrease in child mortality, which increases parents' sense of responsibility. In addition, urbanization has altered family values, while contraceptive techniques have been improved. Also, the higher educational levels being reached by women, mainly in developing countries, have caused fertility rates to decline by more than a third in the past two decades.

Since migration to the cities has increased, most forecasts predict that in a few decades half the world population will be living in large cities, including 27 megalopolises each containing between 10 and 28 million inhabitants. While the world today is much wealthier, disparities are increasing. From 1950 to 1992, world income increased from US$4 trillion to US$23 trillion. The world average per capita income has tripled. Yet, while three quarters of the population enjoy 16 percent of the world's income, the richest 20 percent have access to 85 percent of global wealth.

We must ask ourselves: Can the global economy discard poor countries and depressed areas as economically irrelevant and uninteresting? If so, can the global economy avoid the social and political consequences of worldwide upheavals?

The anticipated stabilization of the world's population, together with recent globalization, are positive trends which can reduce the growing disparities among nations. While duality is a source of unrest, technological breakthroughs and globalization could bring to the market up to six billion consumers. Obviously, this is an encouraging prospect for business.

Technological Breakthroughs, Impact on Labour and the Natural Environment

The exponential growth of the world's population parallels a scientific and technological revolution. In the 16^th and 17^th centuries, the world witnessed with Galileo and Newton the beginning of the scientific revolution in physics, anatomy, astronomy, and mathematics. Since then, several technological findings have changed the profile of human society: railroads (1800); photography (1826); electric telegraph (1837); combustion engine and telephone (1876); phonograph (1877); movies and radio (1895); aircraft (1903); plastic (1909); television (1926); transistors (1947).

The profound impact these inventions have had on human society gives us an idea of the magnitude of change to come with the advent of new technologies. We are currently witnessing new discoveries in computing, telecommunications, and biotechnology. Printed symbols (letters and numbers) are being replaced by digital attributes, with a significant improvement in the accumulation, processing, mobility and access to information.

Global communication through television already has a major influence on human mentalities and values. Satellites circling the world and communicating planetary events, such as the Olympic Games or the World Cup, bring together more than half of the world's population. People receive instant images and information in real time. Obviously, these images are not neutral. They transmit values, beliefs and patterns of behaviour which in many cases create a worldwide standard. Even though recent technologies can be used to educate citizens, they have been used for news broadcasting, leisure and advertising.

Since it is impossible for the workforce to keep pace with technological developments, technology is squeezing human labour out of its traditional role of providing goods and services. New activities are absorbing new professionals, but economic growth has not been sufficient to absorb the available workforce. This lies at the root of social and political unrest and problems in many regions of the world.

Several species of animals and plants are disappearing as a result of human factors. The biosphere is being impoverished. The pollution of water, land and air is now a well established fact. Five million hectares of land are lost annually to the ocean through deforestation and lack of conservation. The incorrect use of fertilizers and pesticides contaminates soil and water, threatening their availability to future generations. Drinking water may well become one of the planet's most precious resources in the near future and its scarcity may lead to regional conflicts, most probably in arid or semi-arid regions of the globe. Nuclear catastrophes, chemical and oil accidents, and an increase in CO₂ emissions are threatening climatic stability.

Demographic trends, economic development and ecological aggression are all linked. A new balance has to be found in the consumption of non-renewable resources by present generations. Science and technology can help, but the prime responsibility in achieving a new balance between population, technology, consumption and distribution of wealth is political and social. Governments, business and unions have a major role to play in facing new challenges to prepare the future.

Improvement in Life Expectancy and Quality of Life

Over the past few decades, life expectancy and quality of life have generally improved throughout the world. Unfortunately, this does not mean that disparities are disappearing. Rather, it means that education, access to safe water, health measures, availability of food, telecommunications and international cooperation have provided positive results for some sectors of humanity. During the period 1960-92, life expectancy increased by more than a third in developing countries. By 1996, thirty developing countries had achieved a life expectancy of more than 70 years and twenty-four developed countries a life expectancy of more than 75 years. BR WP="BR1">

Several technological breakthroughs, mainly in the areas of information, communications, medicine and agriculture, are contributing to human development. According to UNDP, the improvement in life expectancy (representing a long and healthy life), in educational attainment (representing knowledge) and in real GDP (representing access to products and services) raised the level of the human development index. It is assumed that a high standard of human development will result from high productivity in the process of income generation, access to equal opportunities to participate in, and share the benefits of, economic growth, and being involved in the collective decision-making process to shape human life.

Economic and Political Interdependency

The world has become increasingly interdependent. Exports are growing faster than world output. The consequences of environmental spill-over transcend state boundaries. Political and social unrest compels many families to look for protection and assistance in other countries.

From 1992 to 1997, exports increased by an average of 5.7 percent, while world output increased only by 1.7 percent. The role of transnational companies (TNCs) is a reflection of the growth in world trade. TNCs account for around one third of all transactions between subsidiaries in different countries.

The solution to environmental problems depends on multilateral cooperation. The protection of freshwater resources and the conservation of biodiversity, the combat against desertification and the protection of forests, the prevention of chemical pollution, and the management of industrial wastes all require the coordination of worldwide efforts. The planetary system and its dynamics must and do transcend national priorities. The protection of oceans and all kinds of seas demands the concerted worldwide rational use and development of living resources. Similarly, climate monitoring and forecasting, which have an important effect on agricultural output, require interdependency among and within nations to be better recognized.

At the same time as interdependency is being recognized and integration promoted, duality, unemployment, and inequity are also inducing fragmentation. Wars, ethnic violence, terror, xenophobia and oppression are but a few symptoms of fragmentation. The growth of clandestine economies, gangsterism, the rise of fundamentalism and the erosion of nation-states are also evidence of that process.

Nation-states are being rapidly eroded and even collapsing (e.g., Somalia, Zaire, Afghanistan, Yugoslavia, etc.). On the one hand, the State is criticized for too much interference. Yet, on the other hand, there is a growing demand for law and order. While there is increasing demand for market freedom, public authorities are also expected to represent the public interest. Among the questions we must consider are the following: How can a balance be achieved between a market-oriented economy and the minimization of social and environmental injustices? How should the State be structured to promote the distribution of wealth and ensure a minimum of income and welfare for all? James D. Wolfensohn, World Bank President, observes that state dominated development has failed, just as stateless development has, for example in Liberia and Somalia where the agony of the people is obvious. Good government is a vital necessity. Without an effective state, sustainable development is impossible.

Even though today many countries are democratic, the participation of the people in politics and the political process is in many cases declining. Elections are monitored by opinion polls, the results of which are magnified by the media. Proposals for structural change rapidly become electoral suicide. Electors and elected agree on immediate and attractive solutions to problems which are not necessarily the most essential. The resulting frustration after elections leads almost inexorably to the alienation of people from politics. Thus, politics is run under the pressure of a limited number of specific interest groups.

Clandestine Economies and Gangsterism

The "white belt" in South America, together with the "golden crescent" and "golden triangle" in Asia, are prime areas for the production of cocaine, heroin and cannabis. Demand for low-priced drugs is inducing unemployed professionals in chemistry to produce, in industrialized countries, synthetic products like the Chinese ephedrine, crack, benzodiazepine and methamphetamine.

It is estimated that US$500 billion are spent each year on illegal drugs. Half of this amount comes from the traffic in traditional drugs and the other half from new synthetic drugs.

It is suspected that 20 percent of the profit is spent to launder drug money. The laundered money is generally invested in real estate, travel agencies, currency exchange offices and gambling. It is known that an existing market for the trade of winning lottery tickets allows the laundering of drug money and corruption money.

Gambling includes casinos, lotteries, horse and dog races and, more recently, "virtual casinos" on Internet. Most of the gambling is done with the approval of State authorities wishing to increase government income and private taxes can be as high as 50 percent. An overall estimate of spending on gambling in 1994 was US$217 billion. Drug trafficking and gambling are examples of parallel economies that generally flourish in depressed areas. They provide job opportunities, but at the same time they develop a power structure which in most cases confronts the State and threatens the public interest.

Religious Fundamentalism

The rise of fundamentalism in traditional religions is a way of building a refuge to preserve values and beliefs threatened by change. The decline and fall of traditional religions is being compensated for by the growth of some militantly sectarian religions and cults. Some are secret, others discreet and many use electronic media to disseminate their message. In many cases they are a refuge from a world of growing exclusion and marginalization, where a majority neither understands nor controls the rhythm and direction of change. In depressed areas there is a search for a simple, stable world which is easier to understand. In some ways, it is a rejection of an unacceptable present.

Rapid population growth and the media revolution demand the restructuring of political and religious institutions in favour of a renewed democracy which revives the feeling of belonging, respect for others and a willingness to participate. It requires a culture of dialogue based on self-esteem, ethics, consciousness and justice. Social scientists make a valuable contribution to the understanding of the crisis of democracy. Nevertheless, few alternatives have been presented to strengthen democratic institutions and electoral processes. Religious fundamentalism has filled the breach. In the face of these changes, we must ask ourselves: How can interactive telecommunications facilitate the dissemination of information, the public debate on structural issues and wider participation for the benefit of the political process? How can political institutions and the election process be strengthened to consolidate democracy for the benefit of the people?

The Changing Business Landscape

The increasing rate of technological change and dissemination, the information era and the increase in the intensity of knowledge create a new competitive landscape for business. Access to global communications has increased as a result of a drastic decline in the cost of the technology involved. In the near future, with thousands of communication satellites, costs could drop to 15 US cents per hour for a transatlantic call. A combination of optic fibres, wireless equipment and electronic networks is already leading to the convergence of the telecommunications, informatics and media industries. This convergence is transforming the business environment, labour relations and education systems. We are beginning to witness a

new duality between an integrated community and the majority excluded from the cybernetic network.

Decreases in communication costs allow for the adoption of new paradigms. Design and process engineering is increasingly centralized. Mass customized production is decentralized, with direct links to retail outlets. This implies changes in organizational design, capabilities, resources, inter- and intra-organizational coordination and business cultures.

A global market allows major economic players to take higher risks that will be offset by the size of the market. A global web distributes new products. Such a web, from production to distribution and photo services, includes large, medium-size, small and micro-businesses in almost every part of the world. The modular nature of research and development, design, production, distribution and sales services is transforming capital-labour relations. A new managerial mind set is needed to design new strategies for the new competitive landscape. Learning and unlearning are increasingly required so as to respond more quickly to market demand. Strategic flexibility, competition with cooperation, work in a horizontal decentralized structure and intensive/permanent communication are the parameters of managerial activity in the global marketplace.

In the new world, human beings cannot be left out of the development process. Access to a healthy and productive life in harmony with nature is needed for sustainable growth. Science and technology have achieved impressive advances in recent decades. It is up to the social players, including business managers, to conceive a new vision for a global society. This must, of necessity, be a broadly based and inclusive entity: a pragmatic vision which includes the new political, social and economic institutions; a vision based on knowledge, freedom, empowerment, equity and justice; a vision which can transform despair into hope and generate new ideals and human values; and finally, and perhaps most importantly, a vision to honour our civilization for centuries to come.

2. The impact of globalization on workers and labour institutions

It is difficult to determine the impact of globalization on the trade union movement in the industrialized and newly industrialized countries that are unambiguously participating in this process. Part of the problem in attempting to assess the consequences of globalization arises from the fact that this process has been superimposed on other fundamental cyclical and structural changes that were already generating significant challenges and causing trade unions to adjust. These included a prolonged period of slow economic and employment growth; rapid technological change; significant demographic changes and associated challenges to the social welfare system in many countries; the expansion of the services sector in industrialized countries and the continued growth of the informal sector developing in transition economies; an explosion of non-traditional forms of employment, including part-time, casual and contract labour, homework and tele-working; the feminization of the labour force; the increasing importance of labour migration; and the emphasis placed on numerical and functional flexibility in all labour markets.

Some of these factors are desirable in their own right, but clearly they have altered our perspective of the average worker and complicated the task of a trade union movement attempting to attract and service potential members. It is difficult to dispute the fact that, in the short term at least, this combination of factors has exerted a negative influence on the density

of trade union membership, the coverage of collective bargaining and the strength of trade unions as regards industrial relations.

If we go beyond these factors and consider the impact of increased competition in product markets, the liberalization of capital markets, the expansion of trade and the growth of foreign direct investment, we can fully appreciate that the environment in which trade unions must now operate is more complicated than that which prevailed twenty or thirty years ago. In many cases, globalization has no doubt encouraged employers and certain governments to adopt a more hostile attitude to the claims unions make on behalf of their members, and even actively to oppose the traditional functions of trade unions.

This process began with moves by governments to decentralize collective bargaining systems, remove administrative extensions to collective agreements and weaken minimum wage regulation. These initial developments have been overtaken by more extreme measures which aim to inhibit collective bargaining at all levels while expanding managerial prerogative and the scope for employers to determine employment conditions unilaterally including, in some countries, the promotion of individual employment contracts.

In many countries the influence of trade unions has been further eroded by government neglect or the abolition of tripartite forums for consultation on broad economic and social issues. In extreme cases, the continued existence of trade unions is being attacked more directly through stringent constraints placed on the organizational activities of unions and the erosion of their financial base.

A more elementary factor undermining the bargaining strength of trade unions, and contributing to the prevailing militant industrial relations milieu, stems from the reduced opportunity for trade unions to limit the extent of competition over wages and employment conditions in the interdependent world economy. Today labour costs are seen as a key indicator of competitiveness by employers and investors in traditional manufacturing or services industries that are still dominated by Taylorist forms of production. The financial markets virtually demand that enterprises in these industries adopt aggressive and continuous cost-cutting measures.

By comparison, in previous decades when national economic borders were less porous, employers saw some virtue in accepting collective bargaining at industry or even national level because it provided a degree of certainty, particularly when skilled labour was in short supply and helped to equalize labour costs across companies. In countries where enterprise bargaining was the norm, such as the United States and Canada, pattern bargaining was widely practised. As a result, wage adjustments and employment conditions between competing enterprises in the same industry were relatively similar and income differentials were narrow.

In economies that were at least partly sheltered from foreign competition, employers were able to pass labour cost increases to the consumer in the form of higher prices, especially if industry-wide collective bargaining resulted in similar wage increases among major firms. Since an increase in labour costs was unlikely to lead to a distinct competitive disadvantage for individual enterprises, employers were more likely to recognize that productivity could be increased in a harmonious industrial relations environment and that trade unions could help channel worker grievances in a constructive manner. This made the settlement of labour disputes less costly.

This strategy was attractive to employers when markets were fixed within national boundaries and companies were immobile. With global competition, the possibilities for collusion between employers in their approach to trade unions has vanished and labour costs have become a more important component in the competitive strategy of most enterprises. For trade unions this has meant the end of the era of certainty regarding collective bargaining and increased concern for their members as regards the continuity of employment relationships.

Another inhibiting factor for trade unions derives directly from the increased importance of multinational enterprises in domestic economies which has exacerbated power imbalances between labour and capital. In this sense the decentralization process, which involves closing a production unit in a relatively high cost location, followed by the establishment or expansion of the same company's facilities in a low cost location is a major concern because the bargaining power of employers is enhanced and trade unions are constantly confronted by executives threatening companies with closure, unless labour costs are reduced. The exceptions are those companies which place emphasis on innovation and knowledge.

3. The changing role of the social players: the state, enterprises and trade unions

The role of the various social players is changing due to the new dynamics of the technical, social and economic environment. The increased involvement of all social players in the privatization process is needed. Just as a political system will quickly fall into disrepute if a sizeable proportion of society is excluded, so a market economy cannot be expected to survive peacefully, much less thrive, if a large number of people are effectively excluded from contributing to and benefiting from it. Consequently, an issue of fundamental importance to the privatization debate, and in a consideration of its social dimension, is the extent to which the macro-economic reform programme of which it is part is designed to achieve such full participation. Plans which assume a high level of long term unemployment, even with a safety net to maintain social stability, fail that test, by definition.

Participation is not achieved by democratic political processes alone, important and fundamental though they are. Nor is it satisfied by an economic policy giving priority to employment as a goal, although that too is a necessary condition. Voting and engaging in the economy (as an entrepreneur or employee) are the starting points of political and industrial democracy- participation means more and must operate at every level, including that of the workplace, if people are to feel they are truly stakeholders in change. It requires structures in which genuine consultation and involvement can take place, from tripartite bodies at state level to effective industrial relations machinery at plant or office level. These structures need to be effective forums for consultation in matters not only of pay and conditions, but of the nature and speed of change itself. It follows that labour and trade unions need to be just as ready to embrace change as other players are - it is a genuine concern that consultation should not be abused to achieve unfair advantage for vested interests.

Endnote 1. In the United Kingdom, the RPI-X regulation is adopted in the case of telecommunications, gas and airports. The regulator establishes a price cap which can yield reasonable profits if a utility performs efficiently. Where the utility exceeds the efficiency limit set by the regulator, it retains the extra profit as a reward to be used for the benefit of customers. However, when the price cap is reviewed once every five years the regulator has a chance to determine a new reasonable level of performance. Thus, when the price cap period expires, the regulator can set a new cap with a fresh X for the following period. When the new price cap is set the benefit of lower costs can be passed on to consumers in the form of lower prices.

Depending on the specific industrial sector, the regulating formula can take the form:

RPI X+Y or RPI+K or RPI X(GPI I)+E

where: RPI = Retail Price Index

X = Percentage fixed by regulator

Y = Percentage increase in price of certain basic inputs

K = Percentage fixed by regulator over and above RPI

GPI = Gas Price Index

E = Efficiency factor-cost of improvement in energy efficiency/savings.

For example, electricity companies in the United Kingdom are regulated by means of the price formula RPI minus X plus Y plus Z (RPI-X+Y+Z) over a five-year period. The X factor is based on an estimate of the company's scope for reducing controllable costs; Y is the local authority-rate levy; Z is an index of the average cost of the company's purchasing power weighted for the load factor. The resulting prices would be adjusted annually but at the end of five years the formula is revised and X is reset taking into consideration the average performance of the distribution companies in reducing their costs during the period

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