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Preface

This monograph is part of a series of research studies issued under the ILO's Action Programme on Privatization, Restructuring and Economic Democracy (1996-97). The objective of the Programme is to improve the capacity of ILO constituents, both to adopt a participatory approach to privatization and restructuring, and to better grasp and address the social and labour consequences of those processes. Its publications are primarily for use by governments, workers' and employers' organizations, development assistance agencies, but also consultants, scholars, and others involved in or studying them.

This work has been prepared by the ILO's Department for Sectoral Activities (SECTOR). It reviews the experience with privatization and restructuring of public utilities (water, gas and electricity) in Africa, the Americas, Asia and Europe. In particular, it assesses the extent, modalities and effects of stakeholders' participation in those processes. It also examines the impact of privatization and restructuring on employment levels and employment conditions, the working conditions of staff in the privatized organizations and of those remaining in state enterprises, retraining, redeployment and compensation schemes, industrial relations, and on the access and quality of the services provided by privatized enterprises to society. Lastly, it identifies conditions that facilitate successful reforms in those industries.

Among the general findings are that privatized enterprises do not not a priori perform better or worse than public ones ; that oftentimes partnerships between the public and private sectors are a desirable way to achieve sufficiently developed, effective and cost efficient services ; but that in many cases the circumstances, modalities and consequences of the various types of partnerships are not sufficiently thoughtout. Regulatory reform is advisable, to defend public interest against the threat of monopoly power or an inequitable distribution of the benefits and possible social costs of privatization. Agreements or other formal measures are also necessary, to safeguard employment, working conditions and sound industrial relations ; and these safeguards can be consistent with effective restructuring to increase competitiveness. Finally, full, constructive involvement of trade unions in restructuring and privatization, from the very early stages, is a key element of success ; necessary to minimise the social and labour costs, as well as to smooth those processes and boost the performance of the reformed public utilities.

Max Iacono Valentin Klotz

Coordinator

Action Programme on Privatization, Public and Private Services

Restructuring and Economic Democracy Sectoral Activities Department

November 1997

Preface

Global lessons

1. Privatization of water and electricity in Africa

Patrick Plane

2. Restructuring and privatization of utilities in the Asia Pacific region

Michael Paddon

3. Restructuring and privatization in the public utilities Europe

David Hall

4. Privatization in Latin Americ : Private sector participation in water, gas and electricity utilities

Enrique Saravia

5. Privatization and restructuring of electricity, gas and water utilities in the United States and Canada

Brendan Martin and Nicolas White

Global Lessons

Loretta de Lucas

The last 15 years have witnessed major transformations in water, gas and electricity services, at the national and international levels, mainly linked to their privatization and restructuring. This " umbrella " section draws on the five regional/subregional studies presented in this volume, to provide a synthesis of good practice and stumbling-blocks in public utility privatization and restructuring. Its two focuses are the labour impact of those processes, and the practice and results of a participatory approach.

Public utilities are particularly sensitive industries, as changes in them may have deep consequences not only for those directly involved in those activities, workers and customers, but also for the whole economy, and society at large.

Utilities as strategic public services

A proper supply of water, gas and electricity plays a vital role in the life and development of societies. A sufficiently developed infrastructure and easily accessible distribution constitute the base of the whole economic apparatus. Those 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, from health and sanitation, to the location of human settlements, agricultural production, nutrition, and the maintenance of ecological balance. Electricity is essential in industry, transport and households, as well as in many aspects of modern social life. Gas, albeit less indispensable than the other two, has recently been gaining importance as a cheap and convenient source of energy.

As such, water, gas and electricity distribution are public services, irrespective of ownership. That is, individuals and individual firms receive directly those services, but in so doing they satisfy some important needs of 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. " 1

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, more oriented towards seeking social results.

Combining the public service and natural monopoly nature of those three industries explains why ownership and operation have traditionally been of strategic importance for Governments. Thus, in the public utilities, privatization has started later and is proceeding less quickly than in manufacturing and even telecommunications. Indeed, our studies confirm that it is generally in water, the most vital of the three industries, that privatization endeavours 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 raise the least controversy.

Probably the main challenge in these sectors is to strike a balance between the commercial and business concerns, calling for cost-efficient, profitable operations ; and broader public service values, that emphasise 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.

The consumption of the products of all three utilities is increasing steeply, raising simultaneously challenges in terms of the large volume demanded, rising energy costs and ecological considerations. This is putting pressure to find ways of making available greater and greater quantities, more efficiently, and while keeping an eye on equity and longer-term environmental sustainability. Undoubtedly, the key feature of public utilities at this turn of the century is change.

Privatization and restructuring in particular have been gaining ground rapidly worldwide since the early 1980s, and are still accelerating. They constitute attempts to address those challenges, reduce pressure on public finance, or merely reduce the State's role in the economy. Privatization has taken a variety of forms, going from complete or partial sale of state assets, to contractingout, concession and leasing contracts, to the introduction of market concepts, concerns and work methods in public firms. As for restructuring, it has consisted for instance of a decentralization of operations from national level down to local and even community levels ; or a vertical deintegration of the public utility, separating its production, transportation and distribution stages.

In the wake of these sweeping phenomena, utility firms are also becoming transnational. National utility markets are opening to cross-border competition, as in the case of electricity supply in the European Union since mid-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 1985-95 decade from about US$ 1 billion to US$ 20 billion.

These trends are entailing ever greater pressure to emphasise commercial and profit concerns. Yet, while reforms may be necessary, namely to make services more efficient, effective and economical, the public service raison d'être remains essential.

Human resources, core to performance and change

Utility industries are capital-and knowledge-intensive. As such, they typically are not 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 women's presence 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 their having an 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.

The need to avoid breakdowns in the provision of utilities makes it particularly relevant to prevent and resolve disputes. Four ILO Conventions specifically covering freedom of association and the right to collective bargaining are relevant to this sector.3 Concerning strikes, the ILO Committee on Freedom of Association has expressed the view that these are legitimate means of defence of workers' interests, but that they may be limited or prohibited in essential services. According to it, water and electricity fall into this category of services, and to a lesser extent gas. Where strikes are permitted, legislation or collective agreements usually provide means to ensure continuance of a minimum level of services. Consultation with workers on this issue is essential. Where strikes are not permitted, alternative mechanisms to settle disputes need to be available. In any case, it is clearly desirable to develop a continuous dialogue, so as to prevent such occurrences.

In time of change, characterized by uncertainty and fear of possible costs, such a dialogue becomes essential. Change is more likely to be well-designed and the transition properly managed if both management and workers (and on some aspects users) are involved in shaping it. Reforms are more likely to be accepted and economically, socially and politically acceptable, if their benefits along with the possible costs of the processes are equitably distributed among those actors and society at large.

Given the vital role of these industries and of the human element in them, many Governments retain some oversight on the firms' human resource strategies, irrespective of ownership. Regulation and monitoring span a variety of areas ; typically, the health and safety of utility workers and of communities where firms operate, professional requirements, the volume, structure and conditions of employment and work ; and also competition, quality and accessibility of the services and their price. Although in the wake of privatization and economic liberalization, there is pressure towards deregulation, particularly in the public utilities we should actually talk of re-regulation ; that is, the establishment of regulations better suited to meet the challenges of the new context.

The repercussions of the ongoing transformations on the workforce need to be understood and addressed. For instance, cost-cutting that leads to lower employment, reduced training opportunities, and poorer working conditions can backfire. The best workers may leave and the remaining workforce, demoralized, may reduce its work effort. Many water, gas and electricity services, particularly in developing countries, are experiencing serious shortages of skilled personnel. Retrenchments, sometimes massive, pose particularly serious problems in the current high-unemployment context. Their consequences may be far-reaching, going beyond the economic sphere and even affecting social and political stability.

Human resources should thus be core concerns in the public utilities. Yet the five regional studies in this volume indicate that, by and large, they are not given adequate attention when a company's transformation is being considered, planned or carried out. In many cases it is not until trade unions react vigorously, out of concern about the likely employment losses, and the possible deterioration in conditions of work and employment and in labour-management relations after those changes, that the labour dimensions are considered.

This is reflected in the scant attention paid to labour issues in the literature on privatization and restructuring processes. Such a dearth of readily available information has made the task of the authors of the five studies particularly arduous. They have had to go to great lengths and use considerable imagination to identify and access alternative sources of information, resorting a good deal to interviews with protagonists and close observers of the case studies analysed. This has required a special effort to remain as objective as possible, and to keep a balance between viewpoints. The dearth of data has also meant that information, particularly statistics, is not complete, and not available for all the themes mentioned in the terms of reference of the project (see annex, p. ). The amount and type of information available vary between countries and regions. It is the most scarce for Africa and more abundant for Europe, particularly Western Europe.

Lack of due attention to the human resource dimensions of privatization and restructuring in the public utilities has been the key challenge, but also very much the raison d'être of this project.

The ILO framework

In the public services, as well as for 21 other economic sectors, the ILO follows a three-pronged approach.4 It monitors trends, complementing the existing general information with policy-oriented research on specific aspects. When appropriate, it organizes international sectoral meetings at which representatives of Governments, workers' and employers' organizations (and relevant non-governmental organisations as observers) can discuss topical issues and formulate conclusions and resolutions, mainly addressed to national actors and the ILO, on desirable stances, behaviour and activities. Finally, the ILO provides advisory services to constituents, drawing on the first two activities.

This study, launched in early 1996, is a follow-up to previous ILO sectoral meetings, in particular the Joint Meeting on Employment and Conditions of Work in Water, Gas and Electricity Supply Services (1987), the fifth session of the Joint Committee on the Public Service (1994), and the Joint Meeting on the Impact of Structural Adjustment in the Public Services (1995). It also constitutes an input into a wider ILO " Action Programme on Privatization, Restructuring and Economic Democracy " (1996-97).

The project's objectives and basic methodology

This work reviews experience of privatization and restructuring in the public utilities worldwide to identify good practices and pitfalls. The ultimate goal is to provide guidance, and thus enhance the capacity of ILO constituents, to achieve change that takes into account both the need for enterprises to be competitive and social considerations. Practice assessment concentrates on various areas of concern to the ILO and its constituents (see annex) : changes in employment levels, ways of handling redundancies (internally and externally), retraining opportunities to enhance employability, the emergence of more flexible contractual arrangements, changes in working conditions such as earnings, working time and benefits, and changes in labour-management relations. The participatory approach receives particular attention, namely, assessing the extent, means and impact of social partners' (and utility users') intervention in privatization and restructuring processes.

The focus of our analysis is water, gas and electricity supply services. None the less, since in most countries production, transportation and distribution activities are carried out by the same organization, and given that statistics, analysis and other information usually cover all three stages, in many cases it was not possible to concentrate exclusively on distribution activities.Another challenge, requiring special caution in selecting cases and time-frames of analysis, has been the need to distinguish between the impact of privatization and restructuring processes, and the effects of a number of other processes which might have been occurring at the same time. Among them are the introduction of new technology and the expansion or contraction of the demand for a given public utility.

Our analysis spans the broad range of privatization endeavours, particularly complete or partial sale of state assets, contracting-out, concession and leasing contracts, and the reorganisation of public firms aimed at enhancing efficiency and effectiveness, by introducing practices widespread in the private sector.

Geographically, it covers experience in five regions/subregions : sub-Saharan Africa, Asia, (Western and Eastern) Europe, Latin America, and the United States and Canada. For each of those areas, a specialist or team of specialists (selected on the basis of expertise in the utilities, privatization and its human repercussions, and familiarity with the region) has prepared a study.

The studies have two main components. First, an overview and assessment of the process at the regional/subregional level, including a general review of a given facet of the process, supported by reference to or short presentations of particularly representative illustrations of that facet in a given country, local community or company. Second, in-depth analyses of a limited number of cases that offer particularly interesting lessons (from the viewpoint of the labour issues specified in the annex), and which reveal the dynamics and interaction of the various features of the process, in their social, economic and political context ; a context which, as those studies confirmed, plays a key role.

The approach adopted in each study and the emphasis on one facet or another of the process reflect the specific background of the authors : academia, journalism, economics or public administration. It also reflects their different approaches to analysis and policy orientation. Some formulate explicit advice, while others remain more descriptive and leave readers greater freedom in interpreting findings and drawing lesson from them. We deliberately kept the harmonization of the five presentations to a minimum, so as to provide a sense of the different angles from which privatization and restructuring phenomena may be approached. Also sometimes apparent is the difference in the authors' general stance on the desirable balance between public and private responsibility for public utility services. Particularly in these core services, " objectivity " is elusive. Here too, we intentionally chose to keep a mix of attitudes. The five different studies exemplify the different stances, their main priorities and arguments. We only tried to ensure a representation of the various stance in the volume, and encouraged the authors to maintain as much as possible a balanced view, and base their conclusions on hard evidence.

Despite the diverse angles of analysis and positions on privatization and restructuring, the studies share a number of core findings. The fact that they are found in different contexts and are recognized by authors with different orientations, gives them all the more weight. This umbrella section highlights the main such findings.

Paths to privatization and restructuring

The first general finding is that :

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 replicable in the enterprise of another country or sometimes even within the same country. The in-depth studies in this volume confirm that the social, economic and political context plays a major role, and thus needs to be kept in mind.The paths to privatization and restructuring are many, and decision- makers need to choose the one most appropriate to their specific context. Appropriateness depends on a number of factors, such as development of the dialogue between the social partners, the financial situation and the political culture.

Seeking public-private partnerships

Privatization and restructuring efforts in the public utilities stem from various sources, and pursue a variety of objectives. At the one end there is the ideological presumption that the State should not interfere in the economy ; or the slightly more nuanced belief that States nowadays need to take up other duties and responsibilities, and must delegate some of their previous functions to private agents. Particularly in developing countries and transition economies, these processes are part of wider privatization efforts. Most of these efforts occur within the framework of Structural Adjustment Programmes, and are part of the set of conditions determined by external funding agencies. They may also be the result of pressure from international trading agreements, such as the Asia Pacific Economic Cooperation, pushing for full-cost pricing and competition. In other cases, particularly in industrialized countries, they are undertaken on the State's own initiative.

More widespread objectives include the need to meet the soaring worldwide demand for utility services to support economic and social development. This is compounded by an expectation from the population of better social services. To that we should add a growing request from economic agents for more, better and cheaper services, to step up the efficiency of the national economy in the context of an increasingly competitive international market. To provide an order of magnitude, the study on Latin America reveals that in the mid-1990s the annual need for utility infrastructure investment was around US$60 billion and that for maintenance, US$7 billion. States are finding it harder and harder to face, alone, such mounting pressure.

Further, most public sectors worldwide have been facing, simultaneously, prolonged periods of financial and economic hardship, and a multiplication of the areas calling for state attention. In many cases this is accompanied by the identification of organizational shortcomings, insufficient technical innovation in public enterprises, and a need to revise traditional ways of operating. For instance, particularly in water, the focus was traditionally on coverage, with little attention to cost ; while in the present context, notions such as cost-efficiency and effectiveness need to be introduced. Related to this is the need to introduce in public utility companies a true human resource strategy, linked to the more demanding objectives and tasks that need to be accomplished. In many cases, lack of such a strategy has led to excessive growth of personnel, low productivity, low levels of remuneration, insufficient incentives to attract qualified personnel, and political influences, both in enterprise staffing and general policy.

A broad spectrum of options

There is indeed a great variety of privatization and restructuring models for the public utilities, ranging from minimum to full withdrawal of the State. At one end the State retains ownership and operation of the utility, but introduces modifications in the structure, work organization and human resource strategy, often taken from private enterprise organization and management models. Many municipalities in the United States and Canada have chosen this option for water. And in general worldwide, the special concern for water quality has made governments retain the predominant responsibility for the distribution of water. This is less the case with electricity, and even less with gas. As for the various stages of the industry, overall the private sector appears to be less present in distribution than in generation and transmission.

At the minimum withdrawal end, we find many examples of management privatization, through corporatisation and commercialization. We also find a good deal of decentralization to provinces and the local level. But a key point is to make sure that these levels have indeed the capacity to operate, maintain and develop public service networks, and that they can do it more efficiently than centralized set-ups. In a number of instances this may be a bold assumption, as the studies on Latin America and Europe (particularly Central and Eastern Europe) suggest.

Often restructuring precedes privatization, its aim being to make the companies more attractive to potential buyers or operators.

As we move towards the other end, we come first to schemes such as contracting out of utility operation or parts of it, where governments retain some say in the running of the company.

Going a step further we find leasing contracts and concessions, where private developers have the full responsibility for management and investment. Finance privatization, through BOOT and BOO schemes and variations on them, are perhaps the options spreading the most rapidly these years in the utilities.

Close to the other end of the spectrum we find the partial or full transfer of ownership, through the partial or total sale of shares to the national private sector or international private or public companies.

By and large, the preferred options are partnerships between the public and the private sector, rather than fully public or fully private utility enterprises.

As for the specific option to be chosen, it is worth reiterating that there is no generally optimal option. Identifying the option most appropriate in a given context requires keeping in mind a few a few key elements and undertaking some basic steps :

Private ownership or management of electricity, gas and water service firms is not a priori more (or less) efficient and effective than public ownership or management. Public companies can be competitive. A number of them, such as EdF, Vattenfall and IVO, are competing internationally with success and expanding worldwide.

Keeping an open mind as to the large variety of options available is the first necessary step.

The next logical step suggested by our study is to identify the main motives for change in a given public utility set-up ; then consider, from the whole broad spectrum of options, the most appropriate solution or solutions. A clear, strong link needs to exist between the problems or challenges identified and the options retained.

A thorough, in-depth assessment of the value of each of those options should then follow. This assessment needs to be made against a full range of criteria including financial and budgetary repercussions, cost efficiency, effectiveness and impact on competitiveness of the economy, environmental concerns, sustainable development, the wide spectrum of labour issues (employment, working conditions, industrial relations), the interests of consumers and social welfare. This should deliver to decision-makers the option addressing the best and least costly option permitting to meet the challenges at the origin of the quest for change.

There appears to be, worldwide, a lack of a clear assessment of the benefits and costs of the various processes, and insufficient efforts to seek alternatives. As the study on Asia shows, in many cases, " the process is perceived to be and reacted to essentially as a political issue ". The choice is not based on a clear assessment of the wide range of costs and benefits of privatization and restructuring of a specific utility. It is not the fruit of a comprehensive review of alternative forms. Decisions are or appear to be rushed, taken in an emergency, leaving little room for rationality.

On the budgetary implications of privatization, calculations seem to be marred by important distortions. These are well brought out by David Hall and Michael Paddon. In particular, the debates tend to be based on gross, incomplete figures. These do not fully take into account, in particular, transition costs, monitoring costs, costs arising from unemployment, training and other compensatory measures, transaction costs, losses for assets sold below market value, losses of future streams of dividends, and various financial and other support lent by Government to the new entities.

Some further lessons from our findings are that :

Evaluating the financial impact of privatization requires developing, for all forms of privatization, more accurate and transparent methodologies to capture and measure the wide variety of budgetary implications.

Criteria then need to be set, before implementing the option finally chosen, for monitoring rigorously performance and achievement of goals. The approach can thus be revised or refined at a later stage, and a feedback is obtained for use by the country in similar future endeavours.

Solutions pushed by external entities have less chance of success. There needs to be an internal conviction, in the country and in the enterprise, of the worth of the solution proposed.

The process of privatization and regulation is at least as important as the solution chosen.

Uprightness, transparency, avoiding ambiguity, communication and negotiation among all stakeholders are the elements which are recurrently considered essential when selecting a given option, determining its implementation path and moving along it. Our studies noted, for instance, considerable fear arising from mere uncertainty. They also found that in some cases privatization and restructuring had opened the door to a variety of abuses. The acceptability, credibility and support (or at least non-opposition) for privatization and restructuring undertakings, hence their very success, hinges on these elements.

Before launching the privatization, there needs to be a clear statement of its goal, along with how the option and the path chosen should achieve it, and a full and fully understandable account of the foreseen positive and negative consequences, and ways of alleviating the latter.

Economic performance

From the empirical evidence available on effectiveness and cost-efficiency, it is not possible to draw a straightforward, firm conclusion as to the advantage of private or public firms. On costs, personnel ratios, technical performance and financial comparisons, European public firms do not appear disadvantaged compared to private ones. In Latin America, private companies seem to fare better, in terms of the number of water connections, product per worker, or waste of product (through leakages, etc.). In Africa, the experience is mixed ; privatized firms seem to be coming out of bankruptcy, but it is not entirely clear to what extent that is due to their own operation and to what extent it is linked to external support, from the State or foreign resources.

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 massive. It is not unusual to see the workforce slashed by 30 to 50 per cent. In our research, employment cuts were found to be somewhat more severe under certain forms of privatization, namely contracting out and total privatization ; and when there occurred a combination of privatization and restructuring processes. It also found instances of employment increases after privatization, but these usually followed periods of large-scale retrenchment.

Such sharp employment cuts are particularly worrying as in most cases they have been occurring 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, and generally worsens those problems. In a sense, the substantial costs of privatization and restructuring may be passed on ultimately 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 recognised and treated as the real competitive advantage of companies.

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

By moderating the pace of change, at least part 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 redeployments and retraining schemes for workers to adapt to the different new jobs and tasks that may be needed in the new set-up. In a number of cases, job flexibility could advantageously substitute employment flexibility. A prerequisite to it, though, is social partnership and dialogue, as we will discuss later.

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

Gradual reductions help attenuate the traumatic effect on the enterprise, and also afford more time to Governments and to society to adapt and lend support to the affected workers and their families.

Voluntary separations should be encouraged, for instance through financial and other compensations. Generous compensations render the process less traumatic for those leaving the company and for their families, and at the same time smooth the process of transformation.

Remunerations and other working conditions

The impact of privatization and restructuring in public utility companies on the pay of their employees is less clear. For some occupations and grades it may decline, while 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 pay declines for all, and in others yet no change. Our 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. Patrick Plane depicts it 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 of the new company to its 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 part of its decision-making. In various cases they have been part of the package to encourage employees to move to the new company, and in general it has helped defuse opposition.

As utility demand increases, employment and working conditions are usually less seriously affected by privatization and restructuring.

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

It seems that, as in the case of employment, pay levels should be discussed before the launching of the process, and the outcome of those discussions included in some formal agreement.

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

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

Training

Our study showed that training is the third most important concern of employees, after employment and income security. It is actually closely linked to them. In 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 the following :

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

Industrial relations

Unionization is relatively high in the public utilities, worldwide. The nature of and modifications in 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. But in a good number of cases, unionization and industrial relations come out weakened from privatization and restructuring processes.

The national political context and habits play a key role in determining the pattern of industrial relations, even after privatization. Our studies found 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.

Michael Paddon in particular pushes for greater efforts 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 very important instruments to mitigate the effects of the changes caused by a company's privatization and restructuring on its employees. They typically contain provisions for handling employment reductions and on the employment and working conditions of employees who will transfer to the new company.

The studies indicate that the specific provisions vary considerably. But the area of most concern, which all of them cover, is employment security. They usually specify that the new company must retain the whole workforce or a portion of it. The two other major concerns most frequently covered explicitly 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 instance, requires that workers whose company is undergoing capital privatization or is being contracted out, be automatically transferred to the new structure. Similar protections in that text span working conditions and industrial relation rights. However, this experience is so far rather unique. International codes dealing with privatization contain practically no social provisions.

Agreements and formal undertakings by governments also help considerably in smoothening the process. In the absence of clear agreements, workers often strive to stay with the old company, for lack of guarantees about employment and working conditions in the new company. And trade unions, reflecting those apprehensions, typically oppose the process, through strikes, public campaigns, etc.

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

The credibility of agreements rests heavily on their having been reached at the early stages of privatization and restructuring processes, as opposed to having been rapidly sketched as 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 peaceful negotiations rather than open confrontation.

Agreements' effectiveness hinges on their long-term sustainability. So far, measures stipulated in agreements have, by and large, been time-bound, which causes apprehension about the long run.

The sustainability of agreements is enhanced if tensions 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 to reach the Agreement should have the State as intermediary, and guarantor.

Labour market deregulation that runs in parallel to the setting up 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 hurt by drastic employment reductions and deterioration in working conditions.

Consumers and society

It is important to keep in mind that the ultimate objective of public utilities is to provide sustainable, wide access to their services. This consideration requires that changes in the quality, price and coverage of water, gas and electricity be closely.

Our studies indicate that privatization can mean improvements in the quality of the service offered, although this does not occur systematically.

Concerning coverage, the outcome is also mixed. In some cases it did expand as a result of privatization. In others, though, poorer families and regions, and the countryside were marginalized.

On the issue of prices, the impact of privatization is only slightly more clear-cut. Results vary between countries and regions, as well as between the three utilities. In Europe, water tariffs of privatized companies are at least as high as those of public utility firms ; and for electricity and gas, there is little difference between public and private management. However, in general, utility prices do increase under private management, but more for certain categories of consumers than for others. Typically, large industrial clients experience slight increases or even cuts in tariffs, while residential and small business consumers often suffer sharp increases.

David Hall explains that households are disadvantaged on two grounds. First, even if the utility market is liberalized, households cannot fully benefit from the increased competition because (unlike large industrial clients) they can ill afford to shop around for cheaper rates and obtain lower prices based on it. Second, while public companies tend to practise price equality, the price structures of privatized services reflect the economic costs of supply. Some companies could even go further and raise household tariffs disproportionately, to deter small clients and be able to concentrate on the more profitable large, industrial ones.

Assessing the justification of price increases may be problematic. In some instances, public companies may not have had any tariff adjustment in years. This is the case of water in various African countries, where water was considered a free good and is now becoming an economic good. Another difficulty stems from the fact that operators often supply various types of services, which creates a risk of hidden profits and cross-subsidies.

As for environmental concerns, our studies confirm that public management, more directly accountable to the public, has a greater incentive to maximise environmental quality than private management, which primarily pursues profit.

Privatization, coupled with liberalization at the national and international levels, has also raised fears that mergers, acquisitions and joint ventures between companies would reduce the number of players ; and that the remaining players could then impose their conditions on customers. Such a fear is particularly strong for the water, gas and electricity services, given their natural monopoly nature. Our studies confirm this trend towards concentration and the growth of large to very large companies, some of which with are global in scope.

Paradoxically, the tandem of privatization and liberalization that is meant to offer consumers gains from competition and greater choice can end up actually reducing them. This not only because the remaining players would be fewer and larger, but also because the narrower economic motivation of private companies would give less weight to the welfare of customers and society.

Towards re-regulation

The public interest needs to be actively defended against such a risk as well as against the unequal distribution of the benefits of competition.

Our studies indicate that it is essential to complement the deregulation aimed at dismantling the monopolistic privileges of public companies, with a new regulatory set-up, allowing the emergence of new monopolies and monopoly-type privileges to be kept in check.

Re-regulation of utilities involves at a minimum a legal agreement between the public authorities and the new company, setting price ceilings for customers and basic standards of quality, full access to and global coverage of the services, and environmental protection.

But legal agreements may also have a second side, which stipulates property rights and other prerogatives for the new companies, to protect them against arbitrary behaviour by the public authorities.

In many cases, such agreements are complemented by the establishment of a regulatory body or authority, empowered to set those rules, monitor their implementation, and revise them when necessary. In many cases these bodies have intervened quite frequently and incisively.

It is thus worth highlighting that :

A clear set of regulations needs to be established before privatization. A lack of it creates uncertainty, both among consumers and the private sector, and contributes to develop a climate of distrust and acrimony.

A regulatory body is desirable, as a complement to the regulatory framework, and to give it some flexibility and capacity to respond swiftly to changes in the context.

The effectiveness and credibility of this regulatory body or authority hinges on its independence from the main actors involved : facility operators and facility owners, consumers, and Governments.

Timing, pace and sequencing

A few important lessons on scheduling emerge from our five studies :

The pace of the process needs to be moderate, to allow the actors to consider all possible options and weigh carefully their respective costs and benefits, then to select the one that best answers the specific problems prompting changes in the company's set-up. By adopting a moderate 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 machinery and monitoring devices to be set up. Last, but perhaps most important, it also gives time for consultation and negotiation with all the actors involved, and for the process to be explained to society at large.

Spacing out privatizations 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 re-regulation measures need to be established early. 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.

A participatory approach, the necessary connecting thread

A major conclusion of a recent ILO Sectoral Meeting has been 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. " 5

The evidence from our studies confirms that an 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 those water, gas and electricity services undergoing such changes, holds the key to solving or easing most of the challenges of those processes. Yet, ironically, our evidence also shows that this is the issue on which achievements have so far fallen the furthest short of potential. This is therefore where greater efforts must be concentrated.

The full involvement of employee representatives in the 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. As Patrick Plane puts it, this opens up the possibility of transforming the enterprise into an effective, long-term coalition.

Trade unions are also a source of knowledge and ideas, both at the enterprise and at more macroeconomic levels, to minimise 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 inputs or counter-proposals. This reflected partly their apprehensions vis à vis this new phenomenon, and partly also 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 rehire 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 palatable. In many cases, the distribution of shares to workers in the new company has helped attract workers to the new setting.

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 recognized formally.

A number of general lessons emerge from our empirical results, on this key issue as well :

Fundamental to unblocking tense situations between public utility employees operating in companies undergoing privatization and restructuring and the other parties involved in those processes is recognising and addressing some basic employment and income concerns.

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

The dialogue with trade unions and other stakeholders should start at the very first stages of 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. Early-stage dialogue is severely lacking nowadays.

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

Developing social dialogue mechanisms in multinationals deserves special attention. These are becoming prominent actors in all the regions and their functioning, in many ways different from that of national enterprises, is still ill-known, difficult to follow and to control.

An amenable political and industrial relations climate facilitates and even stimulates a participatory approach.

Conclusions

Evidence from the five studies conducted for this project corroborate two basic ILO beliefs, First, that positive measures to provide employment and income security are consistent with restructuring to increase competitiveness ; and second, that social partnership and constructive dialogue are prerequisites to identify the appropriate transformations and implement them fluidly.

Results dispel two widespread basic images. One is that public companies necessarily perform better, or worse, that private ones. The other is that privatization is a panacea, a cure for all the difficulties faced by a given public enterprise ; or the reverse.

None the less, positive human resource policies and a closer eye on society concerns are generally facilitated by public ownership, largely because of the narrower economic objectives characteristic of privatized utilities.

In a large number of cases, some form of public-private partnership may be desirable, or indeed necessary. Our results call for greater attention and openness to the wide spectrum of possible paths to reform, and a full appreciation of the costs and benefits of each, in order to select the one most appropriate to tackle the challenges faced by a given water, gas or electricity company, in its specific national or local context.

The form and results of privatization and restructuring in water, gas and electricity services are not the result of " natural laws ". Rather, the quality of results depends largely on the quality of policy makers' decisions and of the dialogue and negotiations among all stakeholders.

Whatever the form of privatization chosen, the State remains ultimately responsible for the delivery of water, gas and electricity, as these are public services. It is the duty of the State to examine the possible options and select the appropriate one (with the involvement of the social partners), to set the rules and regulations of the transformation, to provide an enabling environment for the process and the new set-up, and to monitor the outcome.

This project confirms the central role of the labour dimensions and societal concerns in privatization and restructuring of the water, gas and electricity public services, and provides a few basic keys to tackle these aspects more effectively. But it also reveals the complexity of those aspects, and the persistence of information gaps. Well aware of the urgency to fill them, the ILO Department of Sectoral Activities will be investing substantial effort over the next couple of years on sharpening knowledge in this area, and disseminating it to constituents so as to build up their capacity to the handle the challenges of those processes. Preparations are now under way for an ILO " Joint Meeting on Managing the Privatization and Restructuring of Public Utilities ", scheduled for early 1999. This Meeting will take stock of relevant experience and, based on it, highlight policy options for successful restructuring in terms of human resource development and service delivery. In that sense, this work can also be seen as constituting the first building blocks for that event.

Notes

#1 Communication from the Commission : Services of general interest (Brussels, Commission of the European Union, 11 Sep. 1996), p. 3.

2 Figures from Dillon, Read & Co., quoted in D. Lascelles : " Power groups in overseas charge ", in Financial Times 5 Mar. 1996, p. 17.

3 Conventions on Freedom of Association and Protection of the Right to Organise, 1948 (No. 87) ; Right to Organise and Collective Bargaining, 1949 (No. 98) ; Labour Relations (in the Public Service), 1978 (No. 151) ; and Collective Bargaining, 1981 (No. 154).

#4 See the Briefing Kit on ILO Sectoral Activities (Geneva, ILO, 1997), available in English, French and Spanish.

#5 Final Report of the Joint Meeting on the Impact of Structural Adjustment in the Public Services (Efficiency, Quality Improvement and Working Conditions) (Geneva, ILO, 24-30 May 1995), p. 20.

ANNEX

Terms of reference

I. Typology of restructuring/privatization processes

(a) Stated purpose of restructuring/privatization (reduce pressure on public finance, improve service quality, service profitability, redefine State's role in the economy, etc.)

(b) Forms of restructuring/privatization (e.g. complete or partial sale of state assets, contracting-out, concession and leasing contracts, introduction of market concepts, concerns and work methods in public firms)

(c) Regulatory frameworks (withdrawing monopoly/liberalization within the country, regionally (e.g. EU and NAFTA) or worldwide ; setting up supervisory bodies, minimum standards for service coverage and quality, for employment and working conditions, maximum user fees, etc.)

II. Changes in employment levels/employment conditions

(a) Trends in employment levels (in general and by occupation).

(b) Handling redundancies and redeployments ; internal versus external adjustments :

internal : reduction in hours of work, redeployment within the firm, etc.# ;

external : natural attrition (resignation, retirement, invalidity, death) and freeze on recruitment, " voluntary " separation with incentives (early retirement schemes, " buyouts " and other lump-sum separations, job-creation loans, outplacement and other external redeployment assistance, other special social programmes), retrenchments without compensation.

(c) Employment status :

changes in public service status# ;

emergence of more " flexible " contractual agreements (part-time, fixed term, etc.), and extent to which regular workers are retrenched and re-hired with " flexible " contractual agreements.

(d) Retraining opportunities :

for internal redeployment# ;

for external redeployment#.

(e) Overall employment and human resource strategy (training, horizontal and upward mobility, etc.).

III. Changes in working conditions

(a) Earning levels (in general and by occupation).

(b) Components of earnings (basic salary, profit sharing, fixed benefits (health insurance, pension, etc.), salary and benefits linked to individual merit, etc.).

(c) In-kind benefits (social services, vacations, etc.).

(d) Working time (levels and patterns).

(e) Other working conditions (safety, health, etc.).

(f) Overall working conditions strategy.

IV. Participation in the restructuring process

(a) Social partners' role in the restructuring process : at what stage do they intervene, on what issues, with what impact ?

(b) Labour relations :

forms and degrees of labour-management dialogue on the restructuring process : at what stages does it occur, in what form, on what issues, with what results ?#

changes in collective bargaining# ;

changes in unionization ;

implications of restructuring for the unions ;#

implications of restructuring for employers' organizations.#

V. Service delivery

(a) Insurance of universal access to the service (cost to consumers, scope of the delivery network, etc.).

(b) Quality of the service (quality of water/energy, continuity of delivery, rapidity of repairs, assistance to users, etc.).

(c) Cost efficiency of the services.

VI. Budgetary repercussions of restructuring/privatization for Governments

(a) Short term.

(b) Longer term.

1.Privatization of water and electricity in Africa

Initial constraints, methods of implementation and evaluation of processes

Patrick Plane

CERDI-CRNS

Centre d'Etude et de Recherches

sur le Développement International

Executive summary

From the industrialized countries, the privatization movement has spread to the developing countries. Water and electricity utilities, long regarded as a State preserve, are now part of the movement. The three main reasons that appear to lie behind this change in attitudes are examined in the first chapter of this study. They are : lack of public finance, technological and organizational innovations, and the limited efficiency of service when ownership and management are in the public sector. In Africa, privatization has so far not involved any transfer of shares or capital. A number of alternative forms of privatization have been explored, however, ranging from the most embryonic to forms in which there is a genuine withdrawal of the State from management of the activity in question.

Of these various forms, the performance contract is one of the most tenuous. It is debatable, in fact, whether withdrawal of the State is even a distant aim in this case. Nevertheless, this type of contract is intended to strengthen competition, so it does lay the ground for bolder reforms. In sub-Saharan Africa, where the World Bank has campaigned for the performance contract, the net result is rather disappointing. Contracting activities out to the private sector has also not been very conclusive, even when the entire management operation was concerned. With this procedure, the State assumes most of the commercial risk but pays a contractor and provides him with the technical means needed for the service. The unequal sharing of risk has usually been a stumbling-block. It encourages public-sector interference in an activity that is intended to be private. As the remuneration is fixed or dependent only to a small extent on results, the contractor may not put up much resistance to this interference. He may in fact slacken off in his efforts, knowing that his fee is not performance-linked, while the impecunious State, as owner, will be doing its best to avoid maintenance work and equipment replacement. The weakness of incentives and the disparity in the amount of information each side possesses on the results obtainable, culminates in economic inefficiency.

Leasing contracts and concessions are more promising arrangements which provide a better answer to the above-mentioned motivations for privatization. In the case of leasing, the private developer is wholly responsible for his management. With a concession, his responsibility also extends to the investments made. These types of contract provide an inducement in that they place an appreciable part of the risk on the private operator. Build-operate-

transfer (BOT) projects may precede or accompany a more conventional type of concession for all the facilities of a public utility.

Sub-Saharan Africa already provides some examples of these forms of privatization. In the case of leasing contracts or concessions, extensive negotiation is first needed with the workforce, whose situation is inevitably affected by the institutional change. Governments see the reforms as an opportunity to improve services and widen their geographical coverage. They also gain financially. Their first concern is to ensure that privatization does not entail steep price increases. This is difficult to negotiate for several reasons. Sometimes there have been no tariff adjustments for years, particularly for water, which has always been regarded as a free good but now becomes an economic good. Their second concern is not to let the private operator keep too much information. In implementing the contract, the operator obviously becomes a supplier of more than one product, which gives him scope for cross-subsidies and hidden profits. As far as the workers are concerned, initial apprehensions regarding employment and pay are justified. The change of contract usually means losing a status resembling that of a civil servant.

In the new context of production, the maintenance of employment and real pay levels has to be negotiated. In most instances, privatization has none the less brought social costs. Reducing the workforce in the short term was no doubt necessitated by the financial situation and overstaffing in the public company. The number of jobs lost was however limited. By encouraging voluntary separations retrenchments were generally minimized, while wage levels were in fact maintained. In order to foster allegiance to the new organization when an operating company was created, the base shareholder usually encouraged employees to acquire shares in the new company. What lessons can be drawn from these case-studies ?

In Côte d'Ivoire, the electricity utility concession was signed in 1990. The private developer was initially given two assignments : to restore an operating balance and to raise technical efficiency so as to lower energy prices. These aims were achieved. CIE also kept its promise to the President of Côte d'Ivoire and to the trade unions, to maintain nominal wages and avoid retrenchments. Reduction of the workforce to the level required by operations is thus taking place gradually. This adds to the initial effect of the voluntary separations which were financed in part by the concessionaire. The system of management was completely restructured. Training activities were considerably expanded, as was the corresponding budget. It now represents about 4 per cent of the wage bill, which brings it into line with the percentages observed in the electricity companies of industrialized countries.

In Guinea, the privatization of water took place in 1989 in the form of a leasing contract awarded to a private international consortium. As in Côte d'Ivoire, the reform consisted of bringing about a legal separation between asset-management activities (SONEG) and operating activities (SEEG). Tariffs were raised gradually in such a way as to arrive at an operating balance that consumers could bear, but accepting the principle that water is wholly an economic good. Only a part of the workforce of the former public company was re-employed by the new companies (SONEG and SEEG), following an appraisal process in which only half of the unskilled and manual workers took part. The results of privatization were mixed. The number of employees returned to its pre-reform level and the number of consumers rose. Sales of water expressed in Guinean francs also rose, but largely thanks to tariff adjustments, a better rate of payments collection, and the increasing amount of engineering work invoiced (in somewhat ambiguous terms) to SONEG. Despite privatization, there are still substantial problems concerning the relative institutional positions of the three main actors : the State, SONEG and SEEG.

In the Central African Republic, the privatization of water in 1991 took place along similar lines, with the creation of an operating company (SODECA) and an asset-owning company (SNE). The vast majority of the former public-sector workers were re-employed, with a guarantee that wages would be maintained. The number of employees nevertheless dropped sharply because of voluntary separations and natural wastage. In 1995, it was at only 79 per cent of its 1991 level after the personnel of SNE and SODECA had been merged. The indicators of apparent productivity of labour point to an improvement in performance compared with the situation before privatization. The financial indicators also denote recovery from a starting-point of near-bankruptcy in 1991. As in the case of Guinea, however, the recovery needs to be looked at closely. Engineering work has grown in importance compared with the basic task of supplying water. Such work is no doubt essential to the sound development of the utility. It must not, however, involve excess costs that could be charged to the State, the consumer or external funding sources.

All in all, the privatization of public utilities calls for consultation and agreement between the private developer and workforce representatives, with the State acting as intermediary. Bringing the matter into the enterprise is essential to dispel misunderstandings. It opens up the possibility of transforming the enterprise into an effective, long-term coalition. At the time privatization comes into effect, questions of pay and employment must already have been debated and settled. When it is decided that the workforce is too large, the necessary correction can be made by encouraging voluntary separations. But it can also be achieved gradually, helped by a return to economic growth and an increase in consumer demand. Maintaining a workforce intact engenders trust, and with it values of cooperation and loyalty. Wage discussions are also justified. The loss of a protective status, the demand for greater productivity, and the need to be more multi-functional are all factors that lend weight to wage claims. A guarantee that nominal wages will be maintained is only of value in the short term. As the recovery operation proceeds, the private developer must be able to guarantee first a stabilization and then an increase of purchasing power. The desire to replace a salary scale by a more flexible and more individualized system of remuneration can be appreciated when the goal is recovery. The change must, however, be discussed by management and labour, and understood by all.

Maintaining the existing workforce can help mould a team more aware than ever before that the common interest lies in values of solidarity and efficiency. True, the private contractor has no control over recruitment and can rightly point out the ensuing constraints. The importance of recruitment and promotion policy in modern organizations is undeniable. But paradoxically, that constraint can translate into an advantage for the firm. Easier dismissal in cases of serious failure to comply with obligations, counterbalanced by job security for those who show qualities of loyalty to the organization, are factors that cement internal cooperation. Whenever possible, it is advisable in the long run to eliminate excess labour. This not only limits the social costs of the changeover but also makes employees readier to make the human investments necessary for more efficient performance.

Contents

Summary

Introduction

1. Privatization as an outcome of constraints

The new financial constraints

Opportunities deriving from technical and organizational innovation

Need for greater efficiency of public utilities

2. Institutional procedures and the implementation of privatization in Africa

The range of privatization policies

"Creeping" privatization

Contracting out

Management contracts

Leasing contracts and concessions

A panorama of African privatizations

3. Retrospective assessment of utility privatizations

Electricity privatization in Côte d'Ivoire : An exemplary reform ?

Water supply in Guinea : Privatization and persistence of institutional problems

Water supply in the Central African Republic : Privatization as an alternative to bankruptcy

Conclusion

Bibliography

List of abbreviations

ABB Asea Brown Boveri

BOO Build, own, operate

BOT Build, operate, transfer

CFD Caisse française de développement

CGE Compagnie générale des eaux

CIE Compagnie ivoirienne d'électricité

#CIPREL Compagnie ivoirienne de production de l'électricité

CMS Consumer Michigan Services

DEG Distribution des eaux de Guinée

EAGB Electricité et eau de Guineé-Bissau

ECG Electricity Corporation of Ghana

EDF Electricité de France

EDM Energie du Mali

EECI Energie électrique de la Côte d'Ivoire

#ENELGUI Energie électrique de Guinée

#GTHE Grands travaux hydrauliques et d'équipement

#IDA International Development Association

ILO International Labour Office

IMF International Monetary Fund

#KPLC Kenya Power and Lighting Company

#NED Northern Electricity Department

#ONE Office national de l'électricité

#ONEP Office national de l'eau potable

#RAD Régie autonome de distribution

#SAUR Société d'aménagement urbain et rural

#SDE Sénégalaise des eaux

#SEEG Société d'exploitation des eaux de Guinée

#SEEG Société des eaux et de l'électricit du Gabon

SNDE Société nationale des eaux du Congo

SNE Société nationale des eaux de Centrafrique

#SNIEGECI Syndicat national des industries gazières et eau de Côte d'Ivoire

SOCAGI Société africaine de gestion et d'investissement

SODECA Société de distribution d'eau de Centrafrique

SOGEL Société guinéenne d'lectricit

SONEES Société nationale d'exploitation des eaux du Sénégal

SONEG Société nationale des eaux de Guine

#SONES Société nationale des eaux du Sngal

#SYNASEG Syndicat national des agents du secteur de l'électricité et du gaz

#SYNATCIE Syndicat national des agents de la CIE

#UGTCI Union générale des travailleurs de Côte d'Ivoire

Introduction

Throughout the world, the move towards privatization is the subject of lively economic, political and social debate. The only limit to this reform, with its institutional and organizational implications, now seems to be the extent of the public sector itself. In the middle of the 1980s, under the influence of structural adjustment policies supported financially by the World Bank and the International Monetary Fund, the African countries we shall be dealing with in this study were simply asked to clarify their intentions in the medium term towards what was deemed to be a outsized public sector.

The recommended approach was to classify public enterprises in order of their economic and financial viability and their strategic importance to the economy. This came at a time when public services were generally regarded as not being transferable to the private sector. The impression was that public ownership and operation were a guarantee of the proper functioning and expansion of these infrastructures that are at the base of a country's economic development, as well as being essential attributes of a young State's sovereignty.

The 1990s saw an upheaval of this situation. Infrastructural services not only entered into the privatization movement, they became its prime mover. Proof is contained in the statistics of the Privatization International Yearbook : the world value of these transactions rose from some $2.5 billion in 1988 to more than $23 billion in 1992. Africa stood aside from this world movement for a while but is now gradually joining in, although the various forms of privatization have so far stopped short of the complete transfer of ownership to private interests. The aim of this study is to throw as much light as possible on the changes under way in that region.

The first part deals with the factors that have made the reform necessary. We shall see that the combination of financing needs and technological innovations together with the economic frustrations born of the present inefficiency of public services in many countries argues for private sector intervention in this sector. In the second part of the study, we show that disengagement by the State is taking place along institutional paths that have already been explored in Africa. The third part focuses on three case studies in three different countries : Côte d'Ivoire (electricity), Guinea (water) and the Central African Republic (water).

The experience in these cases is instructive. The choice of countries was dictated by the small number of privatizations that were sufficiently long established for their economic and social effects to be viably assessed. We shall look in particular at the extent to which performance has improved but shall also highlight the labour impact of these institutional reforms, with the emphasis on job numbers and pay. Lastly, we shall attempt to identify the degree of participation and support shown by both employers and workers. It would have been interesting to include a gas company in this list but the fact of the matter is that, in African countries, the gas industry is either non-existent or publicly owned and operated in a way that has not changed much in the past ten years.

Three types of factor are said to account for the current interest in utility privatization. The first derives from the shortage of public finance ; the second relates to recent innovations in technology and organization ; and the third is a reflection of the criticism that public companies are inefficient and incapable of satisfying demand, both quantitatively and qualitatively.

1. Privatization as an outcome of constraints

The new financial constraints

A first indication of a country's ability to finance infrastructure investments can be obtained from the State's budget and its external debt overhang. As far as the budget is concerned, a retrospective study by the World Bank (1994) on structural adjustment in Africa showed that there was something of an improvement between 1981-86 and 1990-91. During that time, almost 70 per cent of the 26 countries considered managed to improve their overall balance (including grants) from a median deficit of 6.4 per cent of GDP to one of 5.2 per cent. Budget deficits did actually shrink and this was even more marked in terms of the primary deficit (from -3.2 to -1.4 per cent), but the drop was none the less limited, reflecting the fragility of the present situation.

It should be added that the fall in budget deficits was the result not of increased tax revenue, which in fact remained at its median level for the period 1981-86, but of a selective curtailment of total expenditure, with a noticeable drop in resources allocated to public investment programmes. How can these decisions not be seen as a structural evolution of expenditure acting to the detriment of infrastructure ?

The room for manoeuvre created by the external debt was largely used up, at least as far as the debt contracted or guaranteed by the State was concerned. In the case of sub-Saharan countries, which all have low incomes, we come here to the crux of the question of available financing. The weighted average of the total external debt, expressed as a percentage of GNP, was 78.7 in 1993, compared with 37.6 in the developing countries as a whole. Record levels were recorded in some States, such as the Congo (454 per cent), Mozambique (450 per cent), Côte d'Ivoire (339 per cent) and Guinea-Bissau (341 per cent). In this context of over indebtedness in Africa, can it still be hoped that new concessionary resources will help to loosen the financial constraints ?

Budgets are under pressure everywhere, including the industrialized countries. Budget policy here has been a major factor in slowing economic growth. The result has been higher deficits and significantly higher debt. In the European Union, for example, the deficits and debt ratios have adversely affected efforts to meet the Maastricht convergence criteria. Meeting these criteria is a precondition for price and exchange rate stability and hence for achievement of economic and monetary union. Few countries now satisfy the requirement concerning the budget deficit, which must be less than 3 per cent of GDP, and public debt, which must not exceed 60 per cent of the same figure. In order to comply with sustainable budget discipline, compatible with lower taxation, a radical rethinking of expenditure is required. Other things being equal, and bearing in mind the inexorable trend of social welfare expenditure, the options chosen by governments are not to the benefit of official development assistance.

This observation is valid well beyond the bounds of Europe. Over recent years, aid flows as a proportion of GNP have declined sharply, not to say disturbingly. In 1995, this proportion fell to its lowest level since 1970 (0.27 per cent of GNP for OECD countries as a whole), well below the 0.7 per cent target set then by the United Nations. From 1994 to 1995, Italy cut its aid by 46 per cent, while the United States Congress, on deficit reduction grounds, reduced that country's aid by 25 per cent, which places the United States (at 0.10 per cent) last among the industrialized countries. Official development assistance has traditionally been a major source of finance for basic infrastructure projects. While private capital, of local or more often of foreign origin, can take up the slack, considerable changes in the legal status of the public companies are first required for it to be usable.

These new inflows of private capital from abroad have the dimensions of a direct investment flow. Their movement is closely dependent on the presence of certain ownership rights that provide management control of the new or privatized utilities. These investments may moreover obtain the support of some national development aid agencies, which are more inclined to put their faith in a private project than in one initiated by a public enterprise whose restructuring efficiency often turns out to be less reliable.

In short, on the overall subject of financing, it would seem that insufficient public money is forthcoming, with the result that African governments are unable to set their public services in order. The interaction of payments arrears accumulated by public departments and reprisals by enterprises through unpaid taxes and social security contributions brings this home forcefully. This puts African governments in difficulty, in financing the development of utilities. For electricity alone, however, according to the World Bank, those governments will need to invest a total of US$17 billion between now and the year 2005. African States themselves will not be able to provide more than US$5 billion and funding sources US$2 billion. Only partnership with the private sector can provide the remaining US$10 billion, which means that new laws and regulations will be required.

Opportunities deriving from technological and organizational innovation

There is a second set of reasons for the urge to privatize. They spring from innovations in both technology and organization which date from the 1980s and which, as they spread, restricted the validity of the natural monopoly concept.1 It is worth noting that, for the public utilities we are discussing, the original technical arguments for a natural monopoly were usually accompanied by institutional measures. In most countries, whatever their level of economic development, the monopoly in question is protected by law. In the interests of consumers, this protection was designed within a framework of public management and ownership. What were the innovations that shook this belief ?

In some cases, there were interactions between the technological factor and the organizational factor. Because of the former, the argument that investment is indivisible became less pertinent while the rise of information systems created alternatives for the satisfaction of a given economic need. The potential competition between different ways of providing a service therefore increased. Certain services that had been provided in a monopoly situation and long regarded as purely internal came into the scope of activities open to international competition.

The best example of these technological changes comes from the telecommunications sector. A range of new services may be grafted on to the existing infrastructure, and may even entail a rethinking of the way the network itself is organized. Radio-relay links partly dispense with the need to use the basic cable network. As far as utilities are concerned, it is not so much the technological factor as the organizational and institutional factor that comes into play. The principal innovation has been to limit legal protection to those aspects of the activity that justify the " natural " monopoly, i.e. the network for transport and distribution from the producer to the end-user.

The view of the monopoly as a single block containing within it all the transactions along a vertically integrated chain is therefore superseded by an exploded view of the enterprise. The rules of market competition will have to be revived whenever high fixed-cost activities cease to justify the presence of a single regulated firm. To use the expressions of Curien and Gensollen (1992), a distinction should henceforth be made between the main infrastructure, i.e. the supporting network whose duplication would mean a loss of economic efficiency, and the value added infrastructure or service network, which lends itself to an open market. The organizational and institutional reform is thus based on an economic analysis aimed at identifying the links in the technical chain where the cost function is under-additive and the market is not contestable (see Bouttes and Haag, 1993).2

Table 1 shows how each public utility tends to be split between activities deriving from the natural monopoly and those that fall into the ambit of competition.

As far as electricity is concerned, competition can apply at the production stage, not to hydroelectric dams or nuclear power stations, which are elements of an infrastructure which is considered to be non-redundant, but to smaller alternative facilities such as gas turbines, microturbines, wind generators and even small thermal plants. Competition in this sphere can develop between private operators, who will be charged for access to the transmission and distribution network. There is already a great deal of literature on the optimal level of this access charge (see Laffont and Tirole, 1994 ; Baumol and Sidak, 1994).

Drawing up tariffs in these conditions is obviously not an easy matter. Nor is it easy to apply them properly, which in many ways limits their economic impact. Price control in these circumstances is aimed at simplifying and is inevitably a source of dispute between the regulator, the producer-transporter and third parties. The foregoing suggests that, in this form, the introduction of competition into a subdivided market is not necessarily the ideal solution for African countries that are not too familiar with the workings of regulation and whose judicial systems are not yet sufficiently developed (see Finon, 1993). On the other hand, competition for the undivided market does not have these complications and may be easier to introduce, with the same effect as regards acceptance in principle of privatization. The State then creates the competitive conditions for granting the right to supply the market, for example by organizing periodic bidding.

The above remarks concerning electricity also apply to the gas industry, which can be opened up to competition for or in the market. Here again, private operators may offer services and thus create a form of privatization that will merit further exploration from the institutional point of view. Lastly, the provision of mains drinking water, like the above-mentioned utilities, corresponds to the definition of a private good. Not only can a user be deprived of consumption, which is the principle of exclusion, but when consumption takes place it reduces proportionally the amount available to others, which is the principle of rivalry. As a private good, water supply thus lends itself to commercial management with a tariff structure that provides a " reasonable " coverage of costs.

One restriction that should be mentioned at this point and which may be seen as an impediment to privatization relates to the public service aspects of these services. The level of losses, both physical and commercial, as a percentage of total output is an illustration. In the few African countries for which loss figures are available for water and electricity production and distribution, the percentages for water are systematically higher, and sometimes much higher, which demonstrates the worn-out state of the facilities and the difficulties of billing (see table 2).

Transformations have been taking place in the economic environment. First observed in the United States and then in the United Kingdom, the stimulation of competition is prompting wide-ranging deregulation everywhere. With technical progress but also with organizational innovations, the traditional idea of a natural monopoly has shrunk in scope. This stimulus to competition for or in the market carries with it forms of privatization that are not yet clearly defined. An improvement in technical and allocative efficiency is expected. In the case of Africa, it is no doubt imperative to improve public utilities, considering how seldom economic agents are satisfied with the service.

Need for greater efficiency of public utilities

A lengthy description of the technical and financial weaknesses of African utilities is not called for here. We have seen that there have been instances of exceptionally poor performance, despite the remedial strategies applied since the early 1980s (see Lesueur and Plane, 1994a, 1994b). The system losses of electricity and especially of water bear witness to these deficiencies, which have been commented on by United Nations agencies, often in the course of more general studies on public sector management.

In its first Human development report (1990), the United Nations Development Programme already advocated privatization of the production functions in cases where the private sector might prove more efficient. Without singling out utilities, the report suggested that the role of the State should be confined to building the infrastructure and providing social services. This is an implicit go-ahead for a minimum degree of privatization of management functions hitherto regarded as being a matter for the public sector. The 1993 edition of the report expatiated on the theme. It noted the rising trend towards disengagement of the State in a large number of countries, where privatization extends not only to industrial production but also to some public services (p. 44). The report goes on to say that " the final nail in the coffin of most public enterprises has been their demonstrable inefficiency and above all their enormous financial losses, which have drained the public purse of funds that could have been put to better use elsewhere " (p. 48).

The philosophy of the World Bank itself changed radically, as can be seen from its Report on world development. In 1993, the report simply drew attention to the need to improve business management and to promote a more balanced macroeconomic climate with fewer price distortions. In 1994, there was extensive coverage of the recent experience of developing countries where the privatization of utilities had led to significant economic gains.

The basic diagnosis is clear. There is widespread disappointment with public enterprises in Africa, even though they have had the advantage of an unconstrained economic environment, particularly in the form of easy access to credit. Privatization is partly the response to this analysis, with the classical problems anticipated of monopolies which have been described by ILO economists on more than one occasion (see Chavane, 1996 ; Rondinelli and Iacono, 1996).

It should be pointed out at this stage that public enterprises in Africa have fallen short both in terms of economic performance and in their task of social redistribution. The lack of efficiency may be attributed to the limited management skills, the unsatisfactory institutional relations with supervisory ministries, and the insufficient inducement provided by the internal and external economic environment. Taking each of these key points in turn, we shall see from a few examples that a permanent solution was not found for any of them in the remedial measures of the 1980s.

The management weaknesses stem in part from the choice of appointees to head public organizations. They are mostly government officials on secondment. Having studied at local colleges of public administration or at big universities in the West, they have not had the management training that would enable them to create an enterprise culture. However capable a person may be, it is never easy to make the transition from heading a department to managing a commercial concern. The lack of entrepreneurs, which was the argument widely used in the 1970s to justify expansion of partly State-owned activities, does not explain everything.

In Senegal, for example, the World Bank provided financial support as far back as 1977 for the establishment of an African centre for advanced management studies. Among its stated ambitions was the strengthening of management in the semi-public sector. In June 1989, when the centre had already acquired an excellent reputation throughout the region, our interviews with 56 public companies revealed that a senior official was at the helm in 32 of them, including the major utilities SONEES (water) and SONELEC (electricity). Their boards of directors were also made up of senior officials, some of whom were poorly informed and intent more than anything on defending the interests of their ministries rather than those of the enterprise.

This weakness in management is related to the second source of inefficiency mentioned above, namely, the ambiguity of the institutional relationship between the enterprises and the State. Appointing a senior official as general manager puts that person in a very delicate position vis--vis the political apparatus, which is likely to try and exert influence in matters that should be the manager's preserve. The performance contract formula, which we shall come back to later, has only produced a marginal improvement in this relationship. In an appreciable number of African utilities, friction between the general manager and the supervisory ministries has been the source of an endless turnover of senior staff, largely irrespective of performance.

Illustrating a persistent institutional problem, executives were on occasions dismissed even though this was specifically precluded by the performance contract except in cases of serious misconduct, which was seldom proven. The contract did not provide protection in actual practice and the fact that the dismissals did not lead to recourse proceedings is due to the legally non-binding nature of the contract. It specifies the rights and duties of each side but the undertaking to respect them is only a moral one by two inevitably unequal parties. Thus African States have often built up sizeable payments arrears in their dealings with water and electricity utilities. Even when these arrears were drawn down the State has tended to let them accumulate again and the utilities have no real power to retaliate.

The contract system has thus failed to bring about a decisive improvement in institutional relations. In many instances, the utilities have remained offshoots of the central government, with the same bureaucratic attitude. They have eluded the requirements of independence and responsibility for results that are characteristic of private-law companies. In response to the political influence exerted over everyday decisions, management has tended to hide the real economic and financial situation of the enterprise so as to satisfy its own aims.

Basically, the failure to establish sound institutional relations has amplified the shortcomings of incentives, i.e. the inefficiency of the rewards and penalties system. Utilities are in no danger of going bankrupt because they know they can rely on the support of the State or external funding sources. This whole system of access to finance has maintained what the economist Janos Kornaï called the soft budget constraint, which, in transition countries of eastern Europe, has been primarily to blame for the lacklustre performance of some public enterprises.

Internal incentives such as those contained in work contracts have been no more successful. The fact that senior management salaries are not linked to performance, the hollowness of the threat of dismissal for gross negligence in a situation where the number of employees is already greater than required, and the alignment of pay scales with those of the civil service, including automatic promotion with seniority, are all factors that have undermined the efficiency of public utilities in Africa.

In the case of electricity, evaluations have highlighted the economic cost of poor service. To take the example of Nigeria, a country that has been the focus of numerous studies because of its disorganized production and frequent power cuts, an evaluation mentioned by Kerf and Smith (1996) values losses at more than $800 million a year, or about 2.5 per cent of gross national product. A similar evaluation for Pakistan situated the loss of earnings at around 1.8 per cent of GNP for 1985 alone.

These figures are to be compared with the old and admittedly questionable percentages given for the cost of the allocative inefficiency resulting from the operation of private monopolies. With the notable exception of the work of Kammerschen (1966), the evaluations of the Harberger (1959) " deadweight " losses have very rarely estimated the loss at more than 1 per cent of GNP (see Killick, 1981), whatever the country's level of development.3 In other words, on the basis of static analyses, malfunctioning of an essential public utility such as electricity may cost the community more than the loss of allocative efficiency occasioned by unregulated private monopolies. Some will see this as a convincing argument against rejecting privatization out of hand, especially as African public services themselves have often not achieved their objectives of social redistribution.

A consensus seems to be emerging among economists that the utility sector currently works to the disadvantage of lower-income groups and even more so the destitute, who normally have no access to these commercial services.4 This theory does not appear to be at odds with the statistics gathered from Senegalese enterprises. Taking an eight-member household as reference, in 1987 50 per cent of urban households had their own low-voltage electricity meter, compared with only 5 per cent in the countryside. For mains water, the figures were 25 and 5 per cent, respectively. Extending the analysis to average consumption levels would magnify these spatial inequalities.

Thus charging low domestic tariffs for high levels of consumption has in the end benefited higher-income brackets. Similarly, restoring the operating balance of enterprises by drawing on the national budget has saddled taxpayers as a whole with the added cost of higher-income households' consumption. As Chavane (1996) points out, taxation, farm prices and utility tariffs should be the State's instruments for redistribution in Africa. To achieve this, however, particularly as concerns utilities, the services would have to be extended widely over the national territory, which is not the case in these countries.

2. Institutional procedures and the implementation of privatization in Africa

In these circumstances, the question of privatizing utilities seems in the 1990s to have lost much of the emotional content that previously doomed it to heated controversy. In Africa, as elsewhere, a new pragmatism has sprung from new economic and financial realities. Penniless States no longer have the means to rehabilitate and develop their public utilities. What is more, technological and organizational innovations widen the scope for private enterprise by curtailing the rights of public monopolies. Competition has come into its own, either with the disaggregation of utilities or through entry into the market of new operators, less exposed to the problems of indivisibility of investments and infrastructure risk. The arrival of private enterprise is in fact all the more welcome as African States are having great difficulty in reconciling economic efficiency and social redistribution.

Although much has been written on the subject of privatization, there is still a certain vagueness as to what it actually involves. The narrow definition that comes to mind first is that privatization denotes a transfer of ownership. If all the capital is transferred, the private developer acquires the exclusivity and transferability of the hitherto public assets. In this strict sense, African States have not distanced themselves from their public utilities. Such a move would not have been popular, even assuming the existence of private-sector interest considering the size of the sums at stake and the risks inherent in a context of political instability and judicial fragility.

Privatization only corresponds to any reality in Africa if it is defined more loosely, albeit somewhat ambiguously, as a process of actual or even potential strengthening of the private sector. In this chapter, we shall review the possible institutional arrangements, starting with their strong and weak points in the light of African experience (section A). A very general picture will then be painted of developments in various regions (section B).

A. The range of privatization policies

" Creeping " privatization

This includes the more subtle forms of privatization in which the private sector strengthens its position among the utilities without any transfer of ownership from the public sector. The concept can be widened considerably according to each author's preferences, but it loses clarity in the process. In a review of possible definitions, Pirie (1986) identified no less than 22. Vickers and Wright (1988) performed a similar exercise and listed 14, as quoted by Oestmann (1994).

Briefly, " creeping " privatization consists of erasing many of the differences that previously marked the public enterprise off from its private counterpart. This is usually done by changing the legal status in such a way that private company law is extended to the public enterprise, with greater economic and financial autonomy as the goal. Costs are better covered as a result, and investment decisions are guided more by considerations of profitability.

Because of its social role as a public service, the public enterprise may be obliged to diverge from these principles but in return it will receive an operating subsidy from the State. The subsidy is usually provided for under the terms of

what is known as a performance contract or programme contract. Theoretically, these contracts are intended to clarify the rights and duties of the State and the enterprise. Valid for a period of three to five years, they are by definition the instrument that assures the enterprise's autonomy. Management can then be judged on its performance.

As we saw earlier, the contract formula was not a success in Africa, mainly for financial reasons. Only in exceptional cases did the budget situation allow for the contract payments to be made, while the State continued to apply pressure for the public service obligations to be met at the expense of the enterprise. Thus the institutional problem was seldom solved, although the performance contract did pave the way for a more advanced form of privatization later.

Corporatization did not come up to expectations therefore, but it is not the only road to privatization. The liberalization of public utilities by opening them up to competition may help to spur the process of privatization. This is part of the whole question of deregulation, in which the easing of positive law is accompanied by the necessary introduction of new forms of regulation.

The energy sector in Africa provides a number of examples of privatizations that were limited for a long time to production for own consumption. In the Central African Republic, for example, agro-industries such as cotton ginning and logging that are located far from urban centres have their own water supply from wells. Similarly, for electricity, in most sub-Saharan African countries the sugar companies purchase practically no energy from outside. Electricity is generated by burning bagasse.

Another case in point is that of the Nigerian Electric Power Authority (NEPA). At the end of the 1980s, the NEPA enjoyed a monopoly of distribution but industrial consumers were dissatisfied with the quality of its service. The price of the kilowatt-hour was low but cuts were frequent and voltage fluctuations very detrimental to equipment. The upshot was that, of a sample of 179 manufacturers surveyed by Anas and Lee (1989), only 14 were without a generator of their own.

The above two examples are cases of privatization in action ; a share of the overall demand a growing share in the case of Nigeria is produced and consumed by the industries themselves. This implicit shift in market share would be more marked if deregulation allowed surplus private production of energy to be sold. Because of the indivisibility of investment, relaxation of the regulation in this way would enhance the allocative and technical efficiency of manufacturing. It would allow large firms to dispose of their excess power and at the same time improve the availability of supply to small firms that do not have their own capacity (see Baumol and Lee, 1991).

Some authors have referred to this shift in market share, which is a result solely of deregulation, as bonsaï privatization (see Mallon, 1994). The image is one of a decline in a public enterprise's production that is only perceptible over time and that may end in the demise of the State-owned company, bereft of its commercial activity. The institutional change, in this case abolition of a monopoly, governs a joint process of privatization and competition. It would be difficult to say what gains in efficiency may result from each of the two types of reform. They are like two sides of the same structural adjustment coin.

Contracting out

With contracting out, the private sector penetrates into the public enterprise's field of activity, while the latter retains in essence the same legal status. The exclusivity of rights is only marginally modified, through contracts which delegate certain operations hitherto carried out within the enterprise. The need for improved performance in a context of growing competition, the instability of the macroeconomic climate, and the quickening pace of technological innovation have brought to the forefront the question of whether to do a job or have it done. The thinking in new institutional economics is that contracting out is perhaps not so much part of the privatization problem as of a desire to rationalize production by seeking greater organizational flexibility.

The relationship between the giver and receiver of an order is usually couched in terms of production costs. In other words, can the public enterprise produce more cheaply by delegating some operations to outside parties ? It has been a fairly well-known fact since the days of Adam Smith that specialization reduces costs thanks to economies of scale, but also thanks to apprenticeship and innovation. There is still, however, the proviso that the economies realized should not be offset by the disadvantages of relying on an outside supplier.

Most analysts agree that salaries in large firms, particularly in the commercially protected public sector, are higher than in the small, competitively oriented contracting firms. This would seem to be particularly true for Africa, where the modern sector coexists with an informal private sector functioning on the basis of a very flexible labour market. For purposes of efficiency, it is in the interests of a public enterprise to delegate activities whenever such action holds out the prospect of lastingly lower costs. For that to be the case, the transactions must take place in a sufficiently competitive market so that the delegating party is protected from the risk of opportunism.5 This is the neoinstitutionalists' argument, based on the pioneer work of Coase (1937).

With Coase (1937), the firm appears as a substitute for the market. The former is preferable to the latter when the transaction and information costs involved in using the market exceed those of carrying out the activity internally. Williamson (1985) was the first to draw up a complete typology of the cases where economic reason dictates the choice between doing or delegating. His analysis, which has already given rise to a copious amount of literature, proposes a number of essential parameters, such as the frequency with which the transaction is repeated, the specificity of the assets required, and the degree and kind of uncertainty entailed in going to the market.

Public enterprises in Africa have in fact used contracting, either for recurrent activities with a low specific-asset content (such as guard services and maintenance) or for highly specialized, occasional tasks (such as project design, power station overhaul, or the listing of water supply consumers). In both cases, situations where neoinstitutional economics predict the superiority of the market over in-house operation are carefully identified (see Riordan and Williamson, 1985). In actual practice, privatization through contracting out has not produced conclusive results and has in no case provided a solution to the problem of organizational inefficiency.

Let us consider for a moment what lay behind the delegation of recurrent, low specific-asset activities. If competition eliminates the risk of opportunism, a large public firm may go to the market as a means of trimming its wage bill. In reality, the reason has more often been of a social nature. In most societies, contracting out has offered a way of curbing the cost of arriving at an optimal payroll level for a given output. Through payment of compensation, employees are induced to leave and are then given a pre-emptive right over the activities contracted out. In this way, the preference given to freely negotiated agreement on the basis of social considerations more or less brings the cost of services back up to its previous level, whereas a tendering procedure would have brought the benefits of competition from the informal sector.

With regard to infrequent, high specific-asset transactions, once again delegation has not always produced the desired results. Evidence of this comes from the fact that, in cases where entire management operations were privatized, the contracts entered into by the public entity were often broken off. In Côte d'Ivoire, for example, the new Compagnie ivoirienne d'électricité (CIE) contracts out much less than its predecessor, the EECI. Thus electrical firms, which were often set up by members of the public enterprise's staff (moonlighting), have collapsed after enjoying prosperous years when the process of privatization had not yet started.

Of all the sectors of activity, that of training has been the most affected. The CIE has insisted greatly on conducting itself all activities related to enhancing staff quality. Similarly, the creation in 1991 of the Société privée de distribution d'eau du Centrafrique (SODECA) triggered the end of the training contracts that the previous Société nationale des eaux (SNE) had concluded with the chamber of commerce. This move can be partly explained by the need to bring workers' proficiency up to standard. It also reflects the will to endow the entire workforce with new values and new know-how. At the same time, the budget allocation for this activity was increased.

Management contracts

Under such contracts, the public authorities transfer the entire management operation to the private sector but retain ownership of the assets. In return for its services, the managing entity receives a fee which is either fixed or indexed to a parameter such as turnover, sales, operating profit or a combination of these. Obviously the more closely the private operator's remuneration is linked to performance, the greater the incentive for efficiency.

With the management contract, the State still assumes the trading risks of the activity. The private operator can then be seen as an owner of know-how whose services are engaged for a specified period of time, usually no longer than five years (see d'Almeida, 1986). His responsibility for the conservation of physical assets is limited to the upkeep of equipment. Charges for maintenance and for the renewal and extension of investments fall to the State. First introduced for hotel management (see Rondinelli and Iacono, 1996), and later for urban transport companies encountering difficulties in imposing their monopoly in town centres, this institutional arrangement has seldom been applied to water and electricity utilities (see Lesueur and Plane, 1994).

The unequal sharing of risk has usually been a stumbling-block. It fosters public interference in a management operation that is supposed to be completely private. As remuneration depends only partly on results, the contractor may not put up any real resistance to this interference. Also, the lack of incentive in a context of information asymmetry leads to moral hazard and adverse selection.6

The private manager will consequently use the information to which he has privileged access to boost his remuneration, by exaggerating his overheads for example. Another pitfall, which brings us back to the financial difficulties of the State and the weakness of the performance contract, is that the owner tends to shun equipment maintenance and replacement. This has led some private operators to break off management contracts which, it must be said, have generally not come up to expectations.

Leasing contracts and concessions

Of the various contracting arrangements, leasing contracts and especially concessions seem to offer more economic and financial promise. With leasing, the lessee takes over the management and maintenance of the facility but bears the full risk of operation. He also provides the floating capital and replaces minor items of equipment that can be depreciated within the contract period, normally of five to ten years. At the end of the contract, the operator returns the leased assets to the lessor.

Leasing contracts may be awarded by tendering or through direct negotiation with the State. In the first case, the contract is awarded to the lowest bidder, provided he has the required reputation and technical qualifications. A price revision formula is usually included in the contract to allow for increased production and distribution costs, which may be offset by a productivity gain factor specific to the enterprise.

Concessions go a step further than leasing contracts. The concessionaire finances and carries out the investments. For this reason the contract term is generally more than ten years, with the possibility of renewal. Bearing in mind the financial situation of African States, the private investment aspect of concessions is an attraction.

A sufficiently motivating contract also makes it possible to test the theory that the private contractor is a better manager than his public counterpart. It also makes the structural reform more acceptable politically ; although the management is entirely privatized, the authorities retain ownership of an infrastructure of commercial services that is often regarded as a traditional attribute of sovereignty.

The extension of private sector involvement to investment is likely to require an organizational strengthening of regulation. This may entail bolstering the public structure but there is then a definite risk of inefficiency or collusion in African countries where the workings of the administration are deficient. It may also be based on regular international audits. No matter what procedure is adopted, however, there are other obstacles.

Is the offer of a concession involving a programme of investment liable to interest many bidders ? In order to benefit from the play of competition, the State should proceed by tendering. In view of the economic and political risks present in a continent enduring a state of crisis, however, the parties may gradually turn to direct negotiation. The government's lack of expertise leaves it little room for manoeuvre when the private bidder is a specialist in the matter and is armed with financial and technical arguments that may be difficult to counter (see d'Almeida, 1986).

Another point is that, to be politically feasible, a concession must enjoy a favourable consensus within the enterprise. If the employees are excluded from the decision-making process, the reform may founder (see Adrito, 1995 ; Venkata, 1991). They have a primary interest in the affair. Unlike the management contract, which guarantees them a status similar to that of the civil service, i.e. with no risk of dismissal except in case of gross negligence, the concession changes their legal status. Under the labour code, the often bloated workforce is exposed to the risk of retrenchments (see Van der Hoeven and Sziraczki, 1995). Wages and related advantages in kind may also be adjusted. These points must be clearly laid in the tender documents or in the course of negotiation between the State, the potential concessionaire and the workers' representatives.

Apart from the conventional type of public utility concession which provides not only for equipment maintenance but also for replacement and expansion investments, a more narrowly defined type has emerged over recent years and will be described only in broad lines here. With BOO (build, own, operate) and BOT (build, operate, transfer) arrangements, the private sector funds, implements and operates a project and may transfer full ownership to the State at the end of the depreciation period. This type of concession comes much closer to the Anglo-Saxon way of thinking than the previous procedure, which has stronger overtones of French law. The object of the concession is not an enterprise but a future investment project to be opened to tender. The advantages of these independent production projects are well known.

BOO and BOT arrangements reflect the underlying reasons for utility privatization : structural inefficiency and poor service in a context of growing financial stringency (see Chapter I). International calls for tenders attract bidders in greater number and variety than for a conventional type of concession for a whole enterprise. Competition is thus enhanced, reducing the probability of collusion. Also, the risk assumed by the private operator is smaller, though not negligible. The concessionaire does not have to reform an organization with a workforce set in its ways. An enterprise culture can be instilled more easily through judicious recruitment, training and remuneration, all of which can be freely decided by the operator. The transaction costs are also lower because under most contracts the whole of the output is bought by one firm, public or private, which does the distribution.

There are still risks however. If there is no " take or pay " clause in the contract, problems of purchase and payment may arise if many of the distributor's customers downstream build up payments arrears. The purchase price paid to the producer may also be the subject of dispute and renegotiation, with possible repercussions on profitability. The moral of this is that a legal system capable of settling uncertainties is ultimately a necessity when contracts are incomplete (see Finon, 1993).

B. A panorama

of African privatizations

In sub-Saharan Africa, there are no instances of countries that have applied a policy of privatization in the narrow sense to water and electricity utilities. There has been no granting of exclusivity and transferability of rights over the assets as a whole. The region has, however, experimented with the other forms of disengagement mentioned above, ranging from deregulation of the public monopoly and contracting out, to the more ambitious procedures that will now be described.

Table 3 summarizes the situation in mid-1996 regarding institutional changes. The date is of importance, bearing in mind that reforms are accelerating for the very reasons mentioned above. The information is exhaustive as far as concession, leasing and management contracts are concerned. It is incomplete, however, for the more restricted forms of privatization, which are publicized in a very dispersed manner, if at all.

A number of important conclusions can be drawn from the table. One is that the privatization process is well under way in about ten African countries, chiefly in the form of management and leasing arrangements and even concessions. With the exception of Côte d'Ivoire where, in a way, water distribution by SODECI in Abidjan has always been done by the private sector, it can be seen that institutional change did not really take shape until the early 1990s. In all cases, the management operation was transferred to a small number of international operators either competing for the market or working together as an operating company to minimize risk.

Apart from Hydro Quebec International (HQI), these operators are mostly French (SAUR, Compagnie générale des eaux, Lyonnaise des eaux, and EDF). Financial support is often provided by the Caisse française de développement (CFD). The idea of a small number of operators joining together in an ambiguous kind of relationship might presage collusion, an agreed share-up of the African market. However, in industry, " horizontal " cooperation or cooperation between rivals is common. In Africa, risk is no doubt the motivation for a convenient partnership.

Although it is not evident from the table, in a considerable number of cases the private operator had previous contacts with the public enterprise through technical assistance contracts. As Girod and Percebois (1995) point out, we have here a scenario that is almost peculiar to Africa, where stepwise institutional change was fostered in parallel with a learning process in which the State gauged the foreign operator's ability and assessed the advantages of taking privatization further. The method cannot be faulted from the legal point of view ; nevertheless, the contracting company will use its technical assistance team to glean " private " information which will stand it in good stead in the subsequent tendering procedure.

This is part of the more general problem of periodically renewing the bidding for monopoly franchises (see Demetz, 1968). The first contract holder will have a clearer idea than his potential competitors of the uncertainty inherent in the operation. He will also have specific assets that could thwart creation of the contestable market sought by the authorities (see Williamson, 1985). His strategy will be one of taking root, by which he tries to increase the value of the investments, themselves specific to him in nature, particularly by building up an organizational capital.

Côte d'Ivoire provided the original privatization model that was later applied to other public utilities in Africa. Both for water (1960) and for electricity (1990), the scheme involved splitting ownership away from management. For electricity, the State, as owner of the facilities, withdrew into an asset-owning company (EECI), while operation was leased out to a private company in which two international operators, SAUR and EDF, held a majority share.

We shall come back to an evaluation of this experiment ; at this stage, it should be pointed out that privatization of the management was carried out avoiding any kind of local breakdown of the process. The negotiations were conducted by the Office of the President of the Republic in broad consultation with union leaders. President Houphouet-Boigny gave the workforce his personal assurances. There would be no retrenchments and former pay levels would be maintained even when new contracts were signed. Although 51 per cent of the operating company's capital is at present held by an international company, private Ivorian investors will ultimately have 49 per cent and the prospect of taking over the leasing contract.

The scenario in Guinea is very similar, again for water and electricity. With regard to water, the Entreprise nationale de distribution des eaux de Guine (DEG) was responsible for all technical and commercial operations up to the end of the 1980s. From 1976 to 1985, the World Bank provided a restructuring loan, the results of which were extremely disappointing in spite of extensive technical assistance from abroad. In 1987, the Bank finally recommended that a radical institutional reform be carried out, with financial support from the IDA, transferring management and risk to the private sector.7

Two new companies were established. One, the Société nationale des eaux de Guinée (SONEG), is responsible for conserving and enhancing the public assets, but also for servicing the debt by levying a fee on the managing entity ; the other, the Société d'exploitation des eaux de Guine (SEEG), has the task of supplying water in Conakry and smaller cities for a period of 10 years, renewable.

In contrast to the electricity scheme in Côte d'Ivoire, it is intended that the State should always remain associated with the foreign operators in the capitalization of the operating company. Also, the choice of managing contractor was made by tendering. Six companies qualified initially, and finally two consortia were formed. The contract went to the partnership of the Compagnie générale des eaux and SAUR, whose offer was 22 per cent lower than that of the Lyonnaise and SOGEA. A closer look at this case study shows that privatization did have repercussions on the workforce. As in Côte d'Ivoire, the social cost was settled internally at the tendering stage. It was the bidders' duty then to spell out what private management would entail.

The broad lines of this institutional reform were again followed in 1994 for electricity. In July 1990, technical assistance from Hydro Quebec and Price Waterhouse was granted to ENELGUI to start rehabilitating the enterprise. In 1994, the privatization process was spurred. The asset-owning company (ENELGUI) was split off from the operating company (SOGEL), a majority share (of 51 per cent) in which went by international tender to the Franco-Canadian group, HQI-EDF-SAUR. The State, with 33.4 per cent, retains a minority threshold while Guinean shareholders account for 15.6 per cent.

As mentioned previously, the basic question underlying this changeover from simple technical assistance to privatization of management brings us back to the phenomena of adverse selection and moral hazard.8 Through technical assistance experts placed in key posts, a fund of private information can be constituted on the feasibility of lowering costs, which gives the contractor an advantage in tendering.

The consequences may be more far-reaching, especially if the technical assistant has a contract that does not encourage efficiency and knows that he may later be able to obtain a management or leasing contract or concession. Opportunism would tell him to make less effort and show less zeal because his lack of success, far from being sanctioned, could be interpreted as proof that further privatization is needed, with him as the beneficiary.9

#The withdrawal of the State from water supply operations in the Central African Republic throws more light on some of these issues. In 1988, the Société nationale des eaux (SNE) was virtually bankrupt, with a negative equity equivalent to 50 per cent of sales. At the beginning of 1989, SAUR-Afrique was engaged to carry out an account audit, and draw up both a recovery plan and a performance contract. In September 1991, after pressure from the funding sources in favour of privatization and after tendering, a protocol and a leasing contract for the public supply of drinking water were signed by the Central African Republic and SAUR-Afrique. The Société de distribution des eaux de Centrafrique (SODECA) thus came into being and started operations on 1 December 1991. It is a semipublic limited liability company in which the State holds a minority share of 25 per cent, and it has a 15-year term. SNE continues to exist as an asset-holding company. Under the authority of the ministry responsible for water, SNE and SODECA fix tariffs and modify them according to an agreed formula.

In Guinea-Bissau, EDF and the Lyonnaise des eaux have provided assistance for water and electricity management since 1991 in order to improve the technical and financial performance of the public enterprise, EAGB. Unlike the situation with leasing contracts, the private operator has not assumed all the consequences of his operation. The contract does provide incentives, however, as the foreign operators receive a remuneration that is 75 per cent fixed and 25 per cent performance-linked. In practice, the agreement has only been semi-satisfactory. Because of budgetary problems, the State's payments arrears continued and its promised investments did not materialize. At the same time, tariffs were not adjusted to make operation viable.

The above brief picture of privatization in Africa only covers agreements that have been in place long enough for a first appraisal to be made. In the following section, we shall take a closer look at the lessons to be drawn, examining the efficiency gains and labour implications. First, however, we shall give a more general description of the companies that are currently undergoing institutional change or have undergone such change too recently for results to be assessed at this stage.

In Mali, the Government in October 1994 signed a four-year delegated management contract for water and electricity. The SHEC group, which won the international invitation to tender, comprises SAUR (30 per cent), EDF (30 per cent), Hydro-Quebec (30 per cent) and CRC-SOGEMA (10 per cent). The international operators bear none of the risk for operating results. They receive a fixed fee based on the time spent and adjusted upwards or downwards depending on the achievement of certain agreed objectives.

The private sector intervention here is reminiscent of a technical assistance activity expanded to embrace the entire management operation. Another striking difference, especially with respect to the concession contract, is that, in taking over the EDM workforce, SHEC undertook to maintain its status and at the very least its pay levels. In practice, performance bonuses were introduced and the trade unions have welcomed the experiment in general. The State has been assured that there will be no requests for tariff adjustments either for water or for electricity.

These were obviously decisive elements in overcoming national resistance to privatization. The private developer's strategy comprises four areas of action : taking over direction of the operation, extending computer use in management, improving payments collection and providing EDM employees with better training. In connection with the last point, active steps are being taken to improve staff proficiency, particularly through periods of training abroad. A training programme costing 18 million francs has been established, which represents 8 per cent of the company's turnover. The appointment of experts to key posts takes into account the wish expressed by the State and by EDM that nationals should gradually take over the commands of the firm.

In Senegal, the Government privatized water in 1996. The institutional arrangement was very similar to that described for Côte d'Ivoire and Guinea. The public enterprise was broken up into an asset-owning company which retained the former utility's name (SONES) but with a new, clearly defined mandate, and a private operating company, the Sngalaise des eaux (SDE). The latter started operations in February 1996. Fifty-one per cent of the capital was subscribed by SAUR International and a group of local civil engineering firms (GTHE). The remaining 49 per cent came from Senegalese investors (35 per cent), the State (5 per cent) and the employees (9 per cent). The State's share is minimal but is symbolic of its will to keep the company's activities under scrutiny.

The ten-year leasing contract was awarded after an international tendering procedure composed of several stages. After an information meeting, prequalification was decided on the basis of a call for tenders issued in June 1995, which specifically excluded any retrenchments. Bids were received from four companies. In parallel more or less with the procedure followed for water privatization in Buenos Aires, Argentina, the technical bids were then discussed by an ad hoc committee in the presence of the bidders. This reduced the number of candidates to two and the award finally went to SAUR and its local partner, GTHE.

The employees, who were somewhat hostile to this institutional reform, were extensively consulted on the content of the leasing contract through trade unions and staff associations. The promise to take on all the employees not engaged by the asset-owning company (SONES) and to maintain existing wage levels was a decisive factor in circumscribing the initial unrest, which the authorities feared would escalate. SDE is now bound to the State of Senegal through a performance contract which sets ambitious targets for improvement of the service. The performance criteria relate to technical aspects, facility maintenance, water quality and commercial management, and efforts to meet those criteria will be monitored by SONES.

Apart from Morocco, the Maghreb has so far remained untouched by the movement to privatize utilities. In the electricity sector, the Moroccan Government in May 1996 finalized the Jorf Lasfar operation. This involved a more complex contract arrangement than those examined above, requiring a well-structured and efficient type of judicial system which is often lacking in less developed sub-Saharan countries.

The arrangement in fact consists of a number of interlocking contracts. It hinges on a concession entrusting operation of the Jorf Lasfar coal-fired station to an international partnership between a United States power company, Consumer Michigan Services, and the Swiss-Swedish group, Asea Brown-Boveri (ABB). The contract entitles the consortium to operate the existing facilities for a period of 30 years for a fee of $1.6 billion.

The consortium also undertakes to expand capacity by constructing new plant. This plant will be operated free of charge but will become the property of the Office national de l'électricité (ONE) upon start-up. The concession is thus a partial one, accompanied by a mechanism that has something in common as regards legal form with a BOOT (build-own-operate-transfer) contract. A coal storage and supply contract was concluded, together with a power purchase agreement defining the generating commitments on the part of the operator and the payment commitments of ONE. The only obligation imposed on ONE is that it must purchase the entire power output of the Jorf Lasfar Energy Company, the company established by the consortium under Moroccan law.

The price of a kilowatt is governed by an agreed formula which takes external factors into account. If, for instance, corporation tax is cut then the tariff is also reduced, and similarly in the case of coal taxes. The social provisions were considered to be an innovation. Employees were asked to choose between remaining with ONE or transferring to the private developer with no change of status. Among the funding agencies, the World Bank will play the lead, thus catalysing the participation of the United States Eximbank, OPEC and a syndicate of international commercial banks. Granted without sovereign guarantee, these investments prompted by institutional developments in the electricity sector are regarded as a source of indirect relief to the State budget.

It was suggested above that this type of privatization was perhaps better suited to middle-income countries than to the less developed type of economy found south of the Sahara. Up to the early 1980s, in fact, electricity sectors were generally integrated whatever the level of development. One public operator was responsible for generation, transmission and distribution. The reasons for this lay in the magnitude of the specific assets, to quote Williamson's (1985) term, and doubts as to whether the disaggregated sector could meet the final demand, bearing in mind the non-storable nature of the product (see Finon, 1993).

In a situation where supply and demand are both subject to uncertainties, it can easily be imagined that failure to comply with contract commitments may give rise to disputes that would be difficult to resolve in the absence of an efficient and upright legal system. The attraction of vertical integration or something approaching it is hence very strong. As Cremer (1995) states, a deficient legal system poses problems whatever the structure chosen but the problems are greater when operations are disaggregated. When there is a reliable legal system, on the other hand, when the competition mechanism works or can potentially work properly thanks to a high degree of contestability in the market, or when an efficient system of regulation can replace competition, the risks of relational lock-in and hence transactional opportunism diminish (see Williamson, 1985).10

Apart from the Jorf Lasfar arrangement, after a year and a half of negotiation, an international group headed by the Lyonnaise des eaux secured in 1996 the concession for water and electricity distribution to Casablanca urban area. An entity bearing the name Maghrbienne des eaux was established under Moroccan law. The capital was subscribed by the Lyonnaise (35 per cent), its Moroccan subsidiary Elyo (24 per cent), EDF (18 per cent), the Spanish power company ENDESA (18 per cent), and Aguas de Barcelona (5 per cent). The remainder was shared between SFI and its Moroccan partners.

The concession is for 30 years. Under the contract, the developer undertakes to invest about 19 billion dirhams. The price rises proposed for water range between 5 and 7 per cent, net of inflation. The concessionaire will have to deal with the problem of unauthorized connections and unpaid bills, particularly those of local authorities, which were largely to blame for the financial burden borne in the past by the Rgie autonome de distribution (RAD).

With production and distribution separated, water and electricity supply is now governed by contracts with the Office national de l'eau potable (ONEP) and the Office national de l'électricité (ONE), respectively. The contract specifies quality, timing, and supply and payments arrangements. It also obliges the consortium to retain the 4000 employees who were on the payroll of the former public company as of 1 October 1994, with unchanged status and pay. A joint committee was set up with representatives of the supervisory authority and the municipality to monitor contract performance, particularly with regard to employment.

In addition to these privatization measures, some of which are very recent, numerous projects are at the development stage. A number are sufficiently advanced to be worth describing briefly here.

The Société des eaux et de l'électricité du Gabon (SEEG) has been on the official list of privatizable enterprises since 1993. The Government is, however, reluctant to proceed, even though it has recognized that the private operator would contribute a significant amount of capital to the company, in return for a concession. In 1996, Gabon was still in a wait-and-see position, which appears to be compatible with the stand-by agreement signed in 1995 with IMF, since the agreement provides for privatization or continued restructuring. The latter is being effected under the terms of a delegated management contract with the Société africaine de gestion et d'investissement (SOCAGI), a group comprising the Lyonnaise des eaux (43 per cent), Hydro Quebec (34 per cent) and EDF (23 per cent). According to Lettre Afrique Energies (No. 291, 1996), the company was virtually bankrupt in 1994, with a loss of CFAF 14 billion, but a profit of CFAF 2 billion is expected for 1996. Cost-cutting is difficult, however, with a large excess workforce apparently opposed to further privatization.

In the Congo, the scenario regarding water and electricity privatization offers some differences but also some similarities with the above case. As far as the national water company, the Société nationale des eaux (SNDE) is concerned, the situation could hardly be worse. The company is in a very precarious position and has difficulty in financing the purchase of treatment products needed to ensure appropriate water quality. The reciprocal effects of payments arrears prevent the company even from paying wages regularly. Arrears of several months have gradually been built up, taking the edge off union hostility to privatization. Logically enough, the staff begin to wonder what protection their contract affords when they have no assurance of being paid within a " reasonable " time.

The Congolese electricity company, Société nationale de l'électricité (SNE), is not in such a dire situation. This explains why in January 1996 the Government, which had to accept the idea of privatizing the company under pressure from IMF and the World Bank, was faced with bitter politico-social protests, which spread to the other public enterprises involved in the privatization programme. Officially. the outcome of these protests was 122 dismissals, including 21 in the electricity company, some of them for " sabotage of equipment ".

The authorities later promised the trade unions a broad debate on the probable consequences of privatization, but only after the evaluation of SNE assets by Paribas and Lahmayer consultants and the selection of private contractors. In the six companies concerned by privatization, 6,000 job losses are expected, representing half of the total workforce. This is in addition to the 10,000 jobs already lost as a result of restructuring in the public sector. The social costs will weigh heavily in the overall cost of privatization, which will probably include an early retirement programme for all employees over 50 years of age.

3. Retrospective assessment of utility privatization

In Kenya, commercial electricity generation is shared by a number of public companies and one main semipublic company, the Kenya Power and Lighting Company (KPLC). With 60 per cent public capital and 40 per cent private, KPLC is responsible for power supply throughout the country. As of mid-1996, an institutional reform project was quite well advanced. Its aims consisted of reorganizing the sector, promoting private investment and restructuring KPLC (see Lettre Afrique Energies, Nos. 295, 301).

#With regard to the first aim, generating and distribution operations are to be separated without delay. The electricity sector will be opened to private developers through two BOT contracts concluded in the usual way after international tendering. As for reforming KPLC, the World Bank has reportedly pressed the Government not to participate fully in the increase of capital, so as to bring its share down to 30 per cent. Important developments are thus under way, showing that the movement towards privatization is vigorous and multifaceted.

In Ghana, a public company, the Volta River Authority, does most of the electricity generating while two other public companies, the Electricity Corporation of Ghana (ECG) and the Northern Electricity Department (NED), have a near-monopoly of distribution in the south and the north of the country, respectively. A vast privatization and deregulation process is under way, despite politico-social resistance. In 1994, a four-year contract for partial delegation of commercial management was signed by ECG and the EDF-SAUR group. The group has the task of setting up a customer services department and taking over the commercial management, which has frequently been a weak point in African public utilities.

The above review shows that infrastructure privatization is gradually making headway in Africa. In various forms, it is already in action in a significant number of countries (see graph). Looking at the whole range of possible institutional arrangements, which holds the most promise of success ? The answer is no doubt the concession. It is more beneficial to the State budget, at a time when the opportunity cost of public funds has never been so high. It also provides the conditions for greater technical efficiency on the part of the enterprises.

For a given system of regulation, the private operator is made responsible for his managerial performance. As a residual claimant, he is naturally encouraged to cultivate the art of good management. However, the arrangement can only work if it is accepted by all the social and political parties concerned, hence the need for broad-based consultation. A fair and effective judicial system is also a necessity. There is no reason for the private sector to accept the risks of the rule of law being flouted. In these circumstances, a gradual approach may be the best solution, rather than rushing into a contract that is theoretically ideal but badly implemented.

The privatization of management appears at first glance to be a contractual type of relationship between the State, as the conceding party, and a private operator. It is obvious, however, that an enterprise is not the sum of its material parts. The contracting parties must also take into account the aspirations of the employees and their representatives. Failure to do so would jeopardize the efficiency of the reform. The role of the trade unions is important. In Africa, despite the low per capita income, there is no doubt that the unions are representative. In both water and electricity sectors, over 70 per cent of the workers are unionized and look to the union to defend their interests at a time when economic change is giving rise to legitimate worries. Successful privatization depends therefore on the readiness to negotiate and to reach compromises that are acceptable to the State, as guarantor of the people's interests, the private operator and the public sector employees.

In the three case-studies that follow, privatization was launched at the beginning of the 1980s in the form of a leasing contract. With hindsight, we can now draw a number of lessons that should be instructive for the growing number of African countries now engaged in the same process. In all three cases, the State was not only the party conceding the utility but also the intermediary between the private concessionaire and the workers. It was the State that negotiated the conditions of transfer of the workforce, specifying not only the private contractor's obligations but also certain moral constraints not covered by the terms and conditions. It achieved this by remaining attentive to the personnel's views on both sides, public and private, without bringing the two parties into direct discussion. The situation is expressed in the following diagram.

Of the three cases we are concerned with, that of Côte d'Ivoire stands out. Here the privatization process was conducted by a State that was resolute. The only trade union represented in the enterprise was initially very hostile. A patient, well-ordered dialogue was needed to lower the tone and overcome objections of principle. An important feature was that the considerations of the international funding sources were not the driving force for the institutional change. EECI was privatized even though it was not on the list of companies recommended for privatization under the World Bank structural adjustment programme. In the two other countries, Guinea and the Central African Republic, privatization was carried out under pressure from those sources. An effort was made to avoid human cost. The unions did participate but the dialogue was not of the same quality as in Côte d'Ivoire. That is a key factor to be borne in mind in comparing the three cases.

Electricity privatization in Côte d'Ivoire :

#An exemplary reform ?

When operation of the electricity utility in Côte d'Ivoire was privatized in 1990, all the technical indicators suggested that the public enterprise, EECI, was in a good state of health. With 600 kWh per employee per year and over 100 consumers per employee, its performance was among the best in sub-Saharan Africa, not far behind that of utilities in the Maghreb (see Lesueur and Plane, 1994a, 1994B).

This technical feat masked serious financial difficulties, however. EECI was running a large deficit. Results for the last year of public operation show a loss of 34 billion CFAF for the year 1989/90 alone, equivalent to roughly 34 per cent of turnover. From 1987 onwards, in fact, the company was practically bankrupt. The investment grants and allowances outweighed the negative balance brought forward plus the additional losses each year, which totalled 70 billion CFAF for the period 1986-1990. The need for reorganization and for financial restructuring opened the door to privatization, but it remained to be seen how this would be done. The Ivorian Government, which held 92.7 per cent of the capital, could not bail out the company because its debt burden combined with the strains caused by the collapse of commodity prices (for coffee and cocoa) forced it to cut expenditure.

The State took action in 1990, granting a 15-year concession renewable twice for periods of three years. Under the arrangement, EECI continues to exist but only as an asset-owning and regulatory company. In other words, the State entrusts this company with the task of conserving the transmission and distribution facilities. It retains complete control of this strategic sector and, through EECI, provides a structure to protect consumer interests. The private contractor for its part is responsible for operation of the new Compagnie ivoirienne d'électricité (CIE) and assumes all the trading risks associated with it.

Fifty-one per cent of the capital of CIE was subscribed by an international utility company and 49 per cent by Ivorian investors. The latter percentage includes a reserve of 5 per cent for the employees, who have thus become shareholders in the company. The mechanism for this is a wage deduction which goes into a collective investment fund. The original intention was to make deductions compulsory but, on union insistence, they finally became optional. In providing for employee participation, the major shareholders wished to bring home the idea that an enterprise is first and foremost a community of interests, a long-term coalition, in which all the partners have a stake.

At the heart of this institutional reform lay two aims, both of which reflected the ailments of the previous public enterprise : to restore a financial balance and to improve technical efficiency so as to cut the cost of energy to consumers. To what extent did CIE fulfil these aims ? Table 4 shows that the large operating deficit gave way to a surplus of the order of 1.5 per cent of turnover. Admittedly, the domestic macroeconomic climate was less adverse from 1990 to 1995 than in the period preceding the changeover, but that was not a decisive factor.

From table 4, a significant improvement in key performance ratios emerges, particularly in those relating to worker output, even though the enterprise avoided dismissals except for gross negligence. Compared with 1990, the kWh-to-employee ratio rose by 28.8 per cent and the consumer-to-employee ratio by 22 per cent. At the same time, the percentage of technical losses in generation and transmission, not to mention distribution, fell from 15.3 per cent in 1990 to 13 per cent in 1995. The average power-cut time similarly fell from 50 hours per year at the time CIE was created to 20 hours in 1995. Collection of bill payments by the last permitted date has now reached 87 per cent, and 97 per cent on follow-up compared with 77.5 per cent in 1990.

This improvement in technical parameters enabled the company to generate an operating profit, despite the erosion of electricity prices in real terms compared with the movement of consumer prices in Abidjan. In 1995, the year in which the impact of tariff changes and much of the inflationary pressure created by the 50 per cent devaluation of the CFA franc was felt, the real price of the kWh was well below its pre-privatization level for all categories of consumption. This trend, which did not prevent operation from being viable, helped reduce the social cost of stabilization for households. It also stimulated supply and thus aided the structural adjustment process by curbing the foreign exchange cost of this factor of production.

What was the effect of privatization on human resources ? Table 5 shows that there was a sharp drop (of 14 per cent) in workforce numbers between 1989 and 1990. This was a trend that had started when operation was still in public hands. Early in 1990, EECI had decided to encourage voluntary separations (through early retirement and resignations) by offering an allowance of six months' to two years' pay, depending on length of service. Once all contracts had been cancelled and about 50 people dismissed for gross negligence, CIE took 3,250 former EECI employees back on new contracts, with their seniority maintained. Redundancy allowances and additional retirement benefits will in future be proportional to the length of service in each of the two companies, which will each fund the payments accordingly.

It can be seen from table 5 that the workforce was reduced without greatly altering the breakdown by socioeconomic category. The structure basically reflects the macroeconomic environment (with weak demand for electricity) and the promise made by the major shareholders (SAUR-EDF) not to impose any retrenchments. This promise was vital to acceptance of the State's disengagement. The concessionaire adopted a gradual approach to achieving a better workforce balance through natural wastage and dismissals for gross negligence (around 20 per year), but at the same time reducing the relative size of the management category.

These developments were in line with the private contractor's wish to move towards a less hierarchical structure. In a desire to foster the spirit of initiative and responsibility, CIE in 1990 cut the number of grades in the hierarchy from 18 to 9. There are now five. Management by objectives is a faithful reflection of this philosophy. Each grade defines a series of tasks to be carried out and progress is monitored by computer. These objectives shape the company's incentives policy, particularly the size of the bonus award, which may amount to more than one month's pay in the best of cases.

The incentive is aimed partly at the output of the individual but more specifically at the performance of his group, which may for example be a cost centre consisting of some 30 employees. The annual bonus is in the region of 0.75 to 1.25 times a month's pay. It is based on progress in achieving the objectives assigned to the department and, to a lesser extent (10 per cent), on the individual's performance. The purely individual variation in pay within a department thus represents only 0.6 to 1.3 per cent of annual income.

The geographic decentralization of distribution is an illustration of this effort to make individuals responsible within their group. CIE is divided into a number of fully autonomous regional boards. They in turn are subdivided into geographical sectors, each managing about 15,000 consumers. These sectors have great freedom of initiative, so they can be regarded as profit centres. By means of computerized comparative analyses, management can detect immediately where gains in economic efficiency can be made. Through privatization, the whole internal organization of the firm has been metamorphosed.

The arrival of the concessionaire was accompanied by a transfer of technical and organizational know-how. New work procedures codifying the duties of employees at their post were introduced and helped raise the efficiency of the firm's operations. In support of this strategy, a great deal of effort was put into training further the already proficient workers. In the first years after privatization, the somewhat aimless incentive inherited from EECI and the requirement to take on all former employees wishing to share in the new endeavour constituted a challenge. In some technical categories there were not enough workers whereas in office jobs and on low-skilled posts there were often too many.

A protocol originally provided that CIE would contract its training activities out to EECI, which was the owner of the Centre des mtiers de l'électricité (CME) [Electricity Trades Centre] at Bingerville. The private developer was, however, opposed to the idea of delegating an activity it regarded as vital to the creation of the new enterprise culture it had already sketched out. In May 1991, management of CME was finally handed over to CIE. The centre provides a two-year course open to all African companies in the electricity sector. A vocational training certificate in public utility management approved by the Ministry of Higher Education was introduced. The centre also organizes shorter periods of continuing eduction. As of 30 September 1994, it had received 2,268 trainees from CIE for selected courses. Overall expenditure on training has grown steadily, representing 4 per cent of the wage bill in 1994. This percentage puts CIE in the same class as electrical companies in the industrialized countries.

Apart from these purely work-related activities, CIE also provides inducement in the form of three funds. The aim is to propagate the new corporate culture and help employees adapt to a new style and unfamiliar management methods. Firstly, there is a social fund designed to provide allowances for family events. Hundreds of workers have benefited from it each year since 1991. Then there is a savings and loan fund, which offers interest-free loans over periods of 12 to 15 months to workers who have saved for at least four months. Finally there is a collective investment fund by means of which compulsory wage deductions finance the acquisition of CIE shares. The shares are kept in an account which remains blocked until the employee leaves. The funds were widely shunned at the outstart because the unions saw them as a kind of paternalistic balsam. However, the annual report for 1995 talks of growing use. The savings and loan fund alone has made 9,000 loans.

How have the unions reacted to privatization in other respects ? In 1989, the Syndicat national des industries gazires et eau de Côte d'Ivoire (SNIEGECI) [National Union of Côte d'Ivoire Gas and Water Industry Workers], which was the only representative union, denounced the proposed change of structure. It expressed this view in spectacular fashion at a meeting between the former head of State and some hundreds of workers who had come to vent their anger. The CIE workers are now represented by three unions, the membership rate of 75 per cent being now similar to what it was in the days of public ownership. This stability conceals a strong drift towards two new organizations, the Syndicat national des agents de la CIE (SYNATCIE) [National Union of CIE Employees], which represents 40 per cent of the workforce, and the Syndicat national des agents du secteur de l'électricité et du gaz (SYNASEG) [National Union of Electricity and Gas Sector Workers], with 30 per cent. SNIEGECI now has the support of only 5 per cent of the workforce. The first of the two new unions, which is close to the regime in power, is affiliated to the Union générale des travailleurs de Côte d'Ivoire (UGTCI) [General Union of Côte d'Ivoire Workers]. The second, closer to opposition circles, is a member of the Dignit group. It would be simplistic to blame privatization for the decline of SNIEGECI. As with most public utilities in Africa, the arrival of multi-party rule prompted a reaction against the old trade-union order, which was condemned for its failure to defend past grievances regarding wages, jobs and status in general. As the official union, SNIEGECI was more or less swept away by the effects of the structural adjustment and stabilization policies.

The concessionaire's view is that relations with the unions have gradually returned to normal. According to the 1995 annual report, SYNASEG representatives even commended management at their last congress. However, even though the mood is indeed more relaxed than it was just after privatization, both sides agree that it could change. Against a background of conflict and cooperation, there has been and will be tension. Since 1990, there have been no strikes involving widespread work stoppages. At the end of 1993, however, a strike notice was given by SYNASEG. Although annulled by the Ministry of Labour, the strike was followed by a hundred or so workers calling for higher pay and protesting against a new method of fixing wages.

The concessionaire had promised to keep wages at their nominal level, and the promise was respected. However, it lost much of its economic significance because of the inflationary effects of the 50 per cent devaluation of the CFA franc in January 1994. In spite of the raises granted within the limits recommended by the State (5 to 15 per cent), workers suffered a loss in purchasing power that may be estimated from consumer price trends at 25 per cent. To put the situation into perspective, however, it should be pointed out that a loss of the same order was felt throughout the modern sector of the country's economy and that it was slightly less than that suffered by government employees. In the civil service, salaries rose by no more than 10 per cent on average, representing a drop of 30 per cent in purchasing power. At present, pay and career structures are the main subjects of grievance. SYNASEG protested strenuously against abandonment of the former structure governing promotion according to seniority and initial qualifications, and its replacement by a more flexible system with changes in steps and more individualized grades.

In retrospect, this conflict brought to light an adjustment cost borne by the employees. It revealed the difficulty of changing from a culture steeped in considerations of public service and career paths predetermined by initial training and length of service, to a private sector culture oriented towards profitability and productivity. In broader terms, it may be said that reorganizing working relationships within a company seems to lead to a subtle change in the role of the unions, with fewer straight confrontations and more participation in management through collective bargaining. With a lighter hierarchy and the delegation of responsibilities to individuals or small groups, and with workers becoming more multi-skilled thanks to training, it clearly becomes more difficult to rally workers round general slogans of protest. The level of membership shows that unions have so far managed to maintain their influence but they realise that the structural changes under way will tend to undermine the exclusivity of their position.

Electricity privatization in Côte d'Ivoire thus seems to have been a success, both financially and technically. Some social cost was unavoidable in restructuring, whether there was privatization or not. But thanks to its financial solidity and its ability to see the adjustment operation through gradually, the private developer probably limited that cost. Moreover, the international funding sources were more kindly disposed towards a reform that looked convincing. There are still problems, however, relating to the division of responsibilities as defined in the concession agreement.

The word " concession " is in fact misused because CIE is not responsible for new investments or indeed for facility replacement. The truth of the matter is that the electricity price was fixed in such a way as to include a revenue for the Ivorian Government in exchange for the right acquired by CIE to operate the utility. Theoretically, the revenue is allocated to reimbursement of the energy sector debt as well as to funding renovation and development work in the sector. In practice, as government departments accumulate arrears in payments due to CIE, the company offsets this with the component of remuneration intended to cover the cost of using the public facilities. In the long run, the State's prospects of restoring the sector's financial balance are therefore dimmed. This in turn argues for the extension of privatization to generation, as already evidenced by the CIPREL build-operate-transfer project.

Another source of tension between the asset-owning and operating companies is the fact that the concessionaire carries out work that is assigned to EECI in the agreement. CIE is no doubt better placed to do this work, in keeping with the need to provide a quality service. However, considering that the work is reimbursed by the State and is carried out by the company itself for its own purposes or by contractors engaged through direct negotiation, the risks of overbilling are obvious. We shall take this point up in greater detail in connection with water privatization in Guinea.

Water supply in Guinea : Privatization and persistence of institutional problems

In 1989, the Guinean Government privatized water by signing a leasing contract with a foreign private consortium composed of SAUR and the Compagnie générale des eaux (CGE). As stated earlier, this reform was largely the outcome of pressure from the international funding sources, after a technical assistance project conducted by the Lyonnaise des eaux had demonstrated the limitations of contracts that are too narrow in scope.

In 1984 and 1985, the shortcomings of the national water utility (DEG) in Guinea were considerable. The urban water supply system in Guinea was one of the least developed in West Africa. The utility was short of funds and saddled with an inappropriate and rigid institutional framework, which did not provide sufficient autonomy. The utility functioned like a department of its supervisory ministry. Beyond questions of facility use and consumer management, it had no autonomy in matters of personnel management. It had no control over investment or the loans needed to finance it, or over debt servicing. There was not even a minimum level of facility maintenance.

Even with foreign technical assistance, DEG was unable to restore the viable operation and financial balance required for an improvement in service. In the late 1980s, the idea that radical restructuring was needed in order to remedy the problems once and for all gained acceptance. The technical assistance experts of the Lyonnaise des eaux supported the idea without subsequently seeing their company derive any benefit from it. In 1989, the leasing contract was awarded to CGE and SAUR, their direct competitors on many African markets.

The number of workers employed by DEG has remained steady at about 500, after a steep rise from 365 to 516 in 1981. Table 6 illustrates the changes in numbers and composition of the workforce over the years 1986-88, the last three years of public management. The numbers given for casual workers are unreliable. A figure of 101 is sometimes quoted instead of the 133 given in the table. To specialists on water supply matters in sub-Saharan Africa, the size of the workforce may seem excessive in comparison with the extent of the company's activities. The number of employees per thousand consumers was 20 in 1975, the actual statistics being 168 employees and 8,598 consumers. The ratio doubled to 40 per thousand in 10 years and then remained steady at about that level. A ratio of 6 to 12 is considered normal, taking into account the level of development and labour productivity in the region (see Lesueur and Plane, 1994).

What is the nature of the new institutional arrangement introduced in 1989 ? The reform consisted basically of separating the asset management activities (SONEG) from the operating activities (SEEG). SONEG is the owner of the facilities. As such, it plans development in the sector ; it arranges financing and carries out investment projects. All of its activities are defined in its terms and conditions and in a three-year performance contract. It derives its income from a fee paid by SEEG. The latter, for its part, operates the water supply facilities. It also carries out maintenance of the facilities and replaces smaller items of equipment. Lastly, it takes care of all aspects of consumer relations.

The water tariff was fixed in the light of the tenders received on the basis of a remuneration for operation and an allowance for depreciation and debt interest payments. It became immediately clear that modification of the tariff would create problems because water had never been regarded as an economic good. The Guinean authorities therefore decided upon a six-year transition period during which the rate actually paid by the consumer would be lower than the full rate, thanks to subsidies from the State and from external sources (IDA loan).

What was the labour impact of the reform ? The selection of workers taken back from DEG and their assignment to either SEEG or SONEG was guided by tests. This method of " sorting " employees was condemned by the union. The test results gave rise to some discontent because of the large number of employees who were not retained. SONEG made an attempt to remedy this situation by offering rejected employees a period of training designed to qualify them for subsequent renovation work on infrastructure at Conakry. The project did not quite come up to expectations. Work on renovating or expanding the system did provide jobs for lowly qualified workers or help them find a place in subcontracting cooperatives, but the process was gradual and there was no training plan to foster other forms of reintegration.

The change in legal form of the operating entity did therefore entail social costs, but these were the outcome more of the urgency of the utility's problems than of privatization as such. Be that as it may, retraining was financed only in part. How many workers were actually taken back by the two companies ?

With regard to SONEG, the State and, to an even greater extent, the international funding sources were in favour of a lightly manned structure. The optimal number of employees was said to be 52, divided between two departments, one in charge of administrative and financial matters and the other dealing with design and works. Recruitment was limited initially to 37 selected applicants because of the shortage of office space. SEEG for its part took back 189 applicants. Table 7 provides a picture of the selection process.

It can be seen from table 7 that the managerial staff and skilled workers all went through the appraisal test. The other categories of personnel were less cooperative only 50 per cent in the case of unskilled workers. For them, there was thus a kind of autoselection. Anticipating that there was little chance of being recruited, they themselves opted not to undergo the test. This suggests that recruitment at DEG had not always corresponded to the needs of production and, above all, had been done without paying sufficient attention to initial training. The few (5.7 per cent) casual workers who applied to SEEG, on the other hand, were those who considered themselves suitably qualified. It seems likely that their integration into the company in the past had been prevented by the fact that the number of workers was alreay too great for a company in financial difficulty.

#Another interesting point is that the failure rate among managerial staff (categories A and B) was high. This may have been the consequence of unwarranted promotions and graduate recruitments pressed on the enterprise by the authorities. Another explanation may lie in the replacement of local managers by expatriates. The effect would then be more conspicuous for the operating company, SEEG. In connection with this second explanation, which does not exclude the first, it is worth noting that in December 1996 SEEG employed five expatriate managers, all at senior executive level.

Before analysing in more detail the economic and financial consequences of privatization, attention should be directed to table 8, and in particular the row of figures relating to workforce numbers. The figures show an initial plunge, which would tend to confirm the widespread belief that disengagement of the State destroys jobs (see Van Der Hoeven and Sziraczki, 1995). In its quest for greater productivity, the private company logically enough raised fears among the employees' representatives. However, considerations of efficiency do not furnish a full explanation. The differences in objectives of the two types of enterprise must also be taken into account. As mentioned in chapter 1, the main aim of private business is to obtain a return on capital. Public companies, in contrast, have a multitude of social functions to fulfil. Some of these functions employ a lot of people, weighing on profits but perhaps ensuring social benefits. Even if the performance of DEG in this respect was far from satisfactory because of management weaknesses, the differences in objectives mentioned above must have played some role in the sharp drop in the workforce. In comparison with the experience in Côte d'Ivoire, the drop is all the more striking because DEG, before privatization, had refrained from any rehabilitation measures that would entail using workforce numbers as a variable.

Over the longer term, the situation was not so grim. Between 1993 and 1996, the number of employees rose steadily until it reached the pre-privatization level. One wonders, therefore, whether the social cost of the changeover could not have been avoided by maintaining the 1993 workforce and compensating the private operator for the cost of transient overstaffing (from 1993 to 1995). This procedure would have eased internal tensions and fostered a more cooperative atmosphere between workers and management. SEEG executives reject this argument. They point out that, although the number of workers rose again to the previous level, there had been significant changes in the composition of the workforce, with a smaller proportion of managerial staff in particular. The above procedure would also have deprived the company of its freedom of selection in recruitment. Lastly, and this argument has a connection with certain institutional problems that subsist, the private operator considers that the number of unskilled workers is still too high at present. This partly reflects the conversion not always willingly done of fixed-term contracts to permanent contracts.

At this stage of events, has the leasing contract awarded to SEEG been a success ? The answer is perhaps less clear-cut than in the case of CIE in Côte d'Ivoire. Table 8 confirms this to some extent. Before going on to an overall economic interpretation, let us first take a look at the figures, bearing in mind that they are not always reliable.

From 1986 to 1988, the legal personality of DEG was sufficiently tenuous for its difficulties to be only partially visible in its operating results. Depreciation allowances were only made in part and payment collection was jeopardized by arrears. Doubt therefore surrounds the net profit after tax at the end of the 1980s. It appeared to improve from 1993 to 1995, but was expressed in current prices ; tariffs had been raised appreciably so that drinking water would be regarded as an economic good, with the implication that most of the marginal cost of treatment and distribution must be covered. A substantial part of the profit came from works carried out. These were charged to SONEG and may have been inflated, given the absence of a tendering process and the informational advantages of the operator.

As far as the bill collection ratio is concerned, there is no question about the improvement recorded. From less than 50 per cent in the years 1986-88, it rose steadily to 75 per cent in 1995. This result was obtained partly by cutting off unscrupulous consumers ; the fact remains, however, that the number of consumers grew more quickly than in the last three years of operation by DEG and the consumers in question paid their bills.

From an organizational point of view, SEEG has started to split its activities up by geographical regions, thus promoting initiative and a sense of responsibility on the part of employees. The city of Conakry, for example, which accounted for 75 per cent of consumers and 88 per cent of the water supplied in 1995, has been divided up into three sectors corresponding to the existing administrative districts. This approach, which is reminiscent of the subdivided structure of CIE in Côte d'Ivoire, fosters the spirit of competition. The employees, it should be added, have had the benefit of various forms of training. In that connection, an internal audit was carried out in 1993. Three main goals were defined : to provide workers with new skills, to make posts more multi-functional, and to integrate the objectives of management and organization into everyday working life. More than 200 employees, or about 40 per cent of the workforce, were involved in these activities.

The number of workers increased irregularly, in a way that bore no real relationship to the number of consumers or the volume of water sold. The works activities, whose value-added is not included on the output side of the two productivity ratios, may account for this. Compulsory redundancies were very rare while real pay levels (indexed to inflation) were maintained. The company still applies a fixed pay scale, indicating the category and grade of each employee. However, it is trying to introduce gradually a system of incentives in the form of individual bonuses. The scheme started modestly in 1994, with the award of bonuses to the three most deserving members among the lower grades of staff. In 1995 and even more in 1996, with decentralization and the distribution of responsibilities, each department endeavoured to reward its best elements. So far, SEEG has not known any labour disputes ending in a strike but the unions are still very much concerned with job creation, promotion and pay.

These somewhat mixed results provide the occasion for a review of the main problems that were not entirely solved by the contractual arrangement. The question is essentially an institutional one, concerning the relative positions of the State, the asset-owning company (SONEG) and the operating company (SEEG). It is a fact that, although there are obvious similarities in this respect with the situation when the electricity sector in Côte d'Ivoire was restructured, the contract was not drafted in the same spirit in Guinea. A close look at the institutional aspects reveals subtle distinctions which add up to a real difference.

In contrast to the approach in Côte d'Ivoire, the Guinean Government has always maintained its intention to be a permanent part of the private operating company. Its 49 per cent share gives it some control over decisions. This leads to a confusion of roles, which existed already under DEG but which privatization was meant to cure. The problem is compounded by the fact that the State is represented on the SEEG board by officials from the asset-owning company, the party that signed the leasing agreement. In Côte d'Ivoire, the whole operation was steered through at the highest level of government, and the State has continued to keep a firm hold on the project, which it rightly considers sensitive.

The situation in Guinea is one of judge and judged. SONEG regulates operation normally in such a way that the best interests of the community are preserved, but at the same time it intrudes into the affairs of SEEG. If the public entity was efficient, its intervention could enhance " supervision " and encourage the concessionaire to minimize costs. Unfortunately, SONEG is apparently more interested in making large investments than in regulating operation. Incentives are thus weakened and there is a temptation to place the burden of cost increases on the consumer (through a cost-plus mechanism). Another potential source of economic inefficiency stems from the fact that SEEG is a multiproduct supplier.

Apart from its chief function of supplying water, the concessionaire carries out renovation and extension work on the mains system for SONEG. The lack of any bookkeeping distinction between the two types of activity encourages cross-subsidization. If, for instance, the regulator refuses to sanction the tariff increases requested by the concessionaire, or if the latter is saddled with too many unpaid water bills, the operator will tend to adjust the balance of activities. Instead of high-risk commercial activities, he will concentrate as far as possible on engineering work which gives more scope for discreet inflation of costs. The likelihood that the public enterprise will remain neutral in such circumstances, or even complaisant, is all the greater if the work is to be paid for by an international aid agency, which may not be in a position to ascertain the true costs.

In view of the mixed results obtained so far in Guinea, some authors have suggested replacing the asset-owning company by a regulatory body. The body in question would be located in the supervisory ministry and would receive technical assistance in the form of more frequent international audits (see Brook Cowen, 1996).

Water supply in the Central African Republic : #Privatization as an alternative to bankruptcy

As mentioned in chapter 2, SAUR-Afrique was awarded the water supply contract in 1991, after tendering. The new private operating company was given two objectives : to cut water rates and to restore the sector's financial balance securely. Considering that the State, as sole shareholder in the asset-owning company, was not able to find the resources necessary to renovate the supply system, these two aims could appear contradictory. This was borne out by the first few years of operation.

In 1992, SODECA was authorized to increase the water rates, which had remained unchanged since 1984. The rate for the first segment of consumption was doubled, while for hydrants it was increased by 16 per cent. For large consumers there was a rise of 65 per cent. This presents privatization in a very poor light but, in truth, the rates were initially low. Had there been no change in structure, the State would probably have been obliged to take the same action. The rate for the first segment of consumption nevertheless lost its " social " character, which casts doubts on the coherence of subsidizing prices and connections in rural areas.

As far as the labour impact of the privatization is concerned, in August and September 1991 SODECA (which only started up officially in December 1991) submitted the whole workforce to appraisal tests. This operation came before the recruitment phase. All the former employees, with the exception of five absorbed into the new asset-owning company (SNE), were first of all laid off with effect from 1 December 1991. Out of an end-of-year total of 251 workers, excluding casuals, 203 (or 81 per cent) were re-employed by SODECA. Of the 44 who were not engaged, 10 chose to retire and only one opted for voluntary separation.

Redundancy allowances calculated in accordance with the rules set out in the SNE agreement of June 1991 were paid to all those not retained, except for the five who went to SNE. The allowance varied from 0 to several months' pay, depending on length of service. Table 9 recapitulates the method of calculation. The example quoted shows that an employee with 16 years' service would receive an allowance equivalent to 31 weeks of his last year's pay. Considering the country's level of development, these provisions may seem favourable but they are still much less attractive than those applied in the industrialized countries.

In France, the allowance is of the order of 17 weeks for an individual redundancy. To this must be added the compensation guaranteed after two years of service under the terms of a collective redundancy, which brings the total up to the European average of 16 months. In Germany, a law enacted in 1969 specifies that a redundancy is not valid unless it is justified from the social point of view. As this wording is rather vague, the parties usually come to a compromise involving half a month's pay per year of service. The legislation in Spain is among the most favourable in Europe. Since 1994, a company has had to pay 45 days' wages per year of service, with the result that the sums in question may reach the equivalent of 42 months' pay.

Although the allowances paid in the Central African Republic were reasonable, the institutional change did entail a certain minimum social cost. The employees tried to avert this in 1991 by threatening strikes, but with only partial success. Retrenched workers who were not taken on by the new companies (SODECA and SNE), together with those who chose early retirement or voluntary separation, did receive allowances financed by the Caisse française de développement on their last day of employment. For former SNE workers redeployed to SODECA, there was a three-year plan to be financed from the fee paid to SNE by SODECA. By and large, these measures, although criticized by the employees, were more generous than required by the country's labour code.

The atmosphere within SODECA is still strained. The employees consider that the early promises were not kept in regard to such sensitive matters as vocational training, promotion and improvement of living conditions. The company for its part reproaches employees for their " opportunism " in the months preceding the changeover.

In June 1991, when the tenderers had already submitted their bids and privatization was imminent, employees' representatives negotiated a new and very generous collective agreement with the public company. Nominal wages were raised by 44 per cent. The cost to SNE of redundancy allowances and to the future SODECA soared correspondingly. As the consumer price index barely moved from 1984 to 1992, the pay rise represented a similar increase in purchasing power. With a company facing bankruptcy and an economy in crisis, this was not the time to force wages up.

Conclusion

Table 10 lends weight to the above remarks. It shows that the proportion of personnel costs to turnover (in terms of water sales) was 38.5 per cent in 1987. With the 1991 wage rise and wave of redundancies, it rose to 75.8 per cent in the last year of public operation. Personnel costs per African employee come to almost 10 times the guaranteed minimum wage and over 20 times the per capita GDP

How has privatization changed the way the enterprise functions and what are the tangible results ? The number of workers fell from 1992 to 1995, to stabilize at 190 in 1996. Thee were no dismissals except in cases of gross negligence. The adjustment was achieved through natural wastage. Table 10 shows that the downward trend had already started at the end of the 1980s, before privatization had become a talking-point. The overall drop in numbers of 45 per cent between 1987 and 1995 was, however, huge. A first sharp reduction took place in 1988 (28 per cent) and this was followed by a second (14 per cent) when SODECA started operations. The number of supervisory staff, taken in the broad sense of managers and supervisors, as a proportion of the total workforce rose by nearly 15 per cent from 1990 to 1993. This suggests that overstaffing had affected subordinate levels in particular.

The years 1987-95 also saw an increase in the number of consumers and the volume of water sold. A rise in labour productivity followed as can be seen from the ratios quoted in table 10, which more than doubled over the period. Although foreign companies have a majority holding in SODECA, expatriate staff make up less than 25 per cent of management. SAUR considers that this number is not sufficient to control key posts effectively. SODECA started delegating responsibilities to local African nationals in August 1993.

Re-employment of the bulk of the SNE workforce was accompanied by training. The contract between the former public enterprise and the chamber of commerce to train administrative staff was broken off. Article 16 of the operating terms and conditions specifies that SODECA is responsible for designing and conducting training programmes for its employees. It is not remunerated for these activities. For certain longer-term training periods outside the Central African Republic, it may request funding from international agencies.

SODECA has not revolutionized management at its head office. It is a small company and has retained a hierarchical system of governance. However, the principles of decentralization and delegation that existed under public management were reinforced in order to overcome the problems caused by the unsatisfactory flow of information between centres. On the assumption that the employees themselves are not always infallibly right, decentralization is now accompanied by constraints with respect to procedures and more frequent spot checks. Unlike the case of CIE in Côte d'Ivoire, SODECA has not concentrated attention on compiling a procedures manual. For all work done by computer, procedures are imposed by the system. In the commercial department, however, management and staff have together laid down rules as to how tasks are to be performed. In other departments, the procedures are implicit. They vary depending on the chief's mood, which apparently gives them an air of subjectivity that has given rise to staff complaints.

Other than the productivity indicators already mentioned, the principal operating indicators also show a marked improvement, although this observation has to be qualified. The turnover from water sales soared to around 2.5 billion CFAF in 1995, from 1.5 billion in 1992, the first year of private management. This rise stems partly from the tariff increase, which dated only from May 1992, but mostly from works carried out for the account of the asset-owning company, amounting to approximately 1 billion francs in 1995.

SODECA may act as prime contractor for engineering work requested by SNE. It may also perform renovation and pipelaying work itself, in which case it bills the work, usually to the Caisse française de développement. This large volume of engineering work sometimes comes in for criticism, the impression being that its main purpose is to boost profits. The fact remains that the operating account is at present in profit and that the company is once again a net contributor to the national budget.

Privatization is now at the core of the structural adjustment process in Africa. Under pressure from the funding sources but also because of economic and financial constraints, this reform, which is both organizational and institutional in nature, now affects all public utilities, led by those covered in this study, namely, water and electricity. Bearing in mind the economic and political risk involved in taking over a utility, it is not surprising that the reform has so far been confined to a partial transfer of ownership. In its most radical form, privatization has only entailed a transfer of management to the private sector, with or without responsibility for the operating profit, and with or without the obligation to carry out development work and investments.

#Compared with other arrangements, leasing contracts and concessions and even BOT-type projects seem to have the advantage that they tackle simultaneously the three problems that have given impetus to privatization and that were discussed in depth in the first part of this study, namely, financial constraints, technological innovations and the demand for greater efficiency on the part of public utilities. Such contracts also help to defuse the hostility of those who see privatization as national interests being sold off on the cheap. It should be recalled that in some countries, matters of infrastructure are constitutionally matters of State. One major obstacle with these contracts is that they oblige the private sector to assume risks that it does not necessarily wish to assume in the current context of African economies. For example, there is always the risk of " premature " expropriation of investments that still have far to go before producing a profit.

If privatization does bring real gains in efficiency, there is hope that the enterprise can be rehabilitated permanently. The constraint of outside financing can then be eased. In an environment of keen international competition for concessionary funding, official development assistance will be more likely to find its way to Africa if donors have the impression that the resources will be allocated and managed efficiently.

Notes

1 A monopoly is " natural " when the cost of the factors needed to produce a given quantity is a minimum when one sole enterprise is present in the market. Economic efficiency therefore requires that the demand be met by a single supplier. The waste of resources involved in the duplication of infrastructures by several operators can thus be avoided.

2 A cost function is under-additive when it is cheaper for the total output of an industry to be produced by one firm than by more than one. A market is contestable when entry into it is perfectly free and exit does not involve sunk costs. In these conditions, the monopoly holder is always exposed to the threat of a potential competitor and must behave as if that competitor was already present on the market.

3 The " deadweight " loss is the absolute loss of welfare resulting from the unregulated private management of an activity in a situation of monopoly.

4 Intuition tells us that, as regards the consumption of utilities, developing societies function differently to those of the industrialized countries. In rich countries, the consumption pattern of households with rapidly rising incomes moves more towards high-value goods than that of low-income households. In poorer economies, the redistribution dimension of utility tariffs is ambiguous. The more affluent class is only at the stage of increasing its use of utilities, which may not have reached rural areas. A socially oriented tariff policy may thus protect the purchasing power of those who can afford " modern consumption ".

5 There is a risk of opportunism when the supplier of a good is aware that the number of potential bidders is very small. He can then exercise monopoly power vis-à-vis the purchaser. In those circumstances, it is better for the purchaser to retain the activity.

6 Moral hazard refers to a situation where either the buyer or the seller in a deal cannot observe the behaviour of the other. This is termed hidden behaviour. An example would be amanager who does not behave conscientiously because his contract protects him against poor results. Adverse selection refers to a situation where one of the parties to the deal cannot observe the type or quality of the other side's goods. In recruiting, for example, an employer has less information than the candidate on the latter's true abilities. In both cases, the market does not provide the two parties with the same information.

7 World Bank : Project Completion Report, Republic of Guinea, Conakry Water Supply and Sanitation Project (Credit 870-GUI), 31 August 1987, p. 23.

8 See footnote 6.

9 New microeconomics has largely captured this subject-matter. It constantly refers to individuals and organizations immersed in a world where the availability of information is not perfect, where economic agents interact strategically and coordinate more through contracts than through Walrasian market mechanisms (see Cahuc, 1933). This comment does not necessarily reflect the privatization scenarios we have just been examining but it none the less highlights the potential risks of institutional reform in which few operatos capable of participating in the whole range of privatization procedures are on the starting-line.

10 When, for example, a customer depends on the specific activity of his supplier, he may find himself locked in to a bilateral relationship. In such a situation, the supplier may resort to extortion. Given his position of strength, he can act with opportunism.

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#Finon, N.D. : " Les formes intermédiaires de concurrence dans des industries électriques : concessions, enchères concurrentielles en production, accès des tiers au réseau ", Libreville International Seminar, 1993.

#Girod, J. and J. Percebois : " Les réformes institutionnelles en cours dans le secteur de l'électricité en Afrique subsaharienne ", working document, CREDEN, University of Montpellier, 1995.

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#Kerf, M. and W. Smith : " Privatizing Africa's infrastructure : Promise and challenge ", World Bank Technical Paper No. 337, Africa Region Series, Washington, 1996.

#Killick, T. : Policy economics : A textbook of applied economics on developing countries, Heinemann, London, 1983.

#Kornai, J. : " Resource-constrained versus demand-constrained systems ", in Econometrica, 47, No. 4, pp. 801-819, 1979.

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#Lesueur, J.Y. and P. Plane : Les services publics africains l'épreuve de la réhabilitation : une évaluation économique et sociale, L'Harmattan, Collection Les cahiers du développement, Paris, 314 pp., 1994a.

idem : " La gestion des ressources humaines et la restructuration des services publics : l'eau et l'électricité en Afrique ", in Revue internationale du travail, Vol. 133, No. 3, 1994b.

#Lettre Afrique Energies, Indigo Publications, various issues.

Mallon, R.D. : " State-owned enterprise reform through performance contracts : The Bolivian experiment ", in World Development, Vol. 22, No. 6, pp. 925-934, 1994.

##Oestmann, C. : " Privatization of public services and public utilities ", Sectoral Activities Programme, ILO working papers, Geneva, 1994.

#Pirie, M. : Privatization in theory and practice, Adam Smith Institute, London, 1986.

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#idem : Les institutions de l'économie, Interdition, Paris, 404 pp., 1994.

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##idem : World development report : Infrastructure for development, World Bank, Oxford University Press, 254 pp., 1994.

#idem : Project completion report, Republic of Guinea, Conakry Water Supply and Sanitation Project (Credit 870-GUI), Aug. 1987.

What was the impact of these transfers of management on the public-sector employees ? On this important topic, by and large, the literature is remarkably sparse. There are few studies on which to base an opinion or make reliable forecasts. Attention usually dwells on the upsurge of risks involved in refocusing an organization exclusively on profit.

The reforms give rise to legitimate worries on the part of the employees, not to mention the consumers, who see a public monopoly passing into private hands with all the uncertainty that implies as regards tariffs and the availability of unprofitable services. Abandonment of the social functions and the reduction of payrolls to the strict level required for current production may presage job losses. In the short term, opinion of the changeover is generally negative while in the medium or long term it is more or less neutral. The effect on wages is no clearer. This explains why authors are undecided. Losing a protected status similar to that of civil servants and seeing pay scales individualized raises fears of a cut in real wages. The cut may, however, be offset by output incentives.

In an economy in crisis, where the chances in Africa of finding a new job in the modern sector are slim, these doubts may be enough to stall the situation in the enterprise. Misunderstandings can only be dissipated through negotiation between the private operator and workers' representatives, under the auspices of that interested intermediary, the State. While continuing as owner of the infrastructure, the State has the duty to protect an asset that belongs to the public, defend consumers' interests and identify guarantees that will facilitate acceptance of the reform by the employees. If there is excess labour, corrective measures should whenever possible be the subject of extensive consultation between employees and management. The reduction may be achieved through agreed separations accompanied by severance allowances and retraining. But the need for reduction may dwindle with time, if the utility's services expand. Maintenance of a workforce loyal to the organization encourages individual and collective investment in new and more efficient working procedures.

Of the three reform processes studied, the case of electricity in Côte d'Ivoire is the one which provides the most lessons for the future of privatization in Africa. The reform was accepted within the enterprise and the direct intervention of the Chief of State was instrumental in establishing confidence. Job cuts were made without excessive social cost and were even under way before the private operator took over, using all the possible variants of voluntary separation. Nominal wages were maintained at their pre-privatization level. This strategy did not prevent the recording of much-improved financial results and performance indicators, despite a sharp drop in GDP.

Relations between workers and management remain delicate, however. The strikes of 1993 were symptomatic. The employees' grievances switched from employment to pay. After the January 1994 devaluation, the unions tried in vain to recover the purchasing power thus lost. Another potential source of conflict was the change in the way wages are calculated. Individualizing wages was a discreet part of the profit-sharing policy centred on the individual or his immediate group (cost centre, workshop, etc.). This strategy is a demonstration of the organizational changes that accompany the change from a public sector culture based on values of solidarity to a private corporate culture in which merit is measured by an employee's contribution to profit. In the long run, this process leads to a dispersal of grievances and saps union strength in collective bargaining.

Water privatization in the Central African Republic (SNE) and in Guinea (DEG) followed the same path as in Côte d'Ivoire, i.e. that of leasing contracts, but with more mixed results. There was a real improvement in economic and financial performance in both cases but it was not sufficient to warrant a definite judgement. The two scenarios were similar, to the extent that privatization seemed to be induced by the funding sources rather than desired by the regime in power. This lack of enthusiasm for reform translated into a lack of commitment to consulting the workforce. The level of economic development of the country and of the enterprises may also have had some effect. The Ivorian company had a history, a level of technical ability and a trade union tradition superior to those of the other two African companies. Moreover, water does not lend itself to privatization as well as electricity. The reasons are as much economic as they are sociological. In most African countries, water is deemed to be a " free " commodity and the idea that it is an economic good with distribution costs that have to be paid is difficult to accept.

Apart from these differences, which partly account for the mixed outcome of the institutional reform, it should be noted that, in the Central African Republic as well as in Guinea, the private concessionaire obliged the former public-sector employees to undergo selection tests. This procedure, which was not appreciated by the employees' representatives, resulted in the rejection of between 10 per cent (SODECA, Central African Republic) and 20 per cent (SEEG, Guinea) of the previous workforce. The redundancies were accompanied by allowances that were more generous than those provided for in the labour code. These workforce adjustments were financed chiefly from credit lines established by the international funding sources. A guarantee was given that no wages would be cut. Although the guarantee has been applied, for example in Côte d'Ivoire, its significance has dwindled with the years. For purchasing power to be strictly maintained, periodic adjustments in line with inflation would have been necessary.

2.

Restructuring and privatization of utilities in the Asia Pacific region

Michael Paddon

Public Sector Research Centre

University of New South Wales

Executive summary

Introduction

This report surveys the restructuring and privatization of utilities in the Asia Pacific region, to analyse the impact of these processes on labour issues (employment, working conditions and industrial relations), and the role of social partners in them.

Its review of the water, waste and sewerage industries draws on information from Australia, Japan, New Zealand, Bangladesh, India, Malaysia, Thailand, the Philippines; and that of electricity and gas includes as well Pakistan and the Republic of Korea.

The rationale and forms of privatization

In all Asian economies restructuring and privatization of utilities have been part of wider privatization programmes. Thus, reforms have usually been articulated in terms of the general benefits deemed to flow from privatization and the wider stated objectives of these programmes.

Defining privatization "as a transformation or participation process designed either to secure involvement of private investors or to introduce more market like spirit into public activities" (Oestmann, 1994, p. 5), we can identify five main utility privatization processes in the region:

Management privatization: through corporatization and commercialisation;

Capital privatization: through the sale or partial sale of assets;

Contracting out: including concession or leasing contracts;

Finance privatization: through private funding of public infrastructure;

Deregulation: through removal of regulations governing entry to, or operations within, an industry.

International bodies in privatization and deregulation

For many countries in the region, including Bangladesh, India and Pakistan, structural adjustment programmes (SAPs) under the supervision of the International Monetary Fund and the World Bank have been a major impetus for privatization. In addition, deregulation through international trading agreements, such as APEC, will become of increasing significance for future policies relating to utilities. Water, electricity and gas utilities are all covered by the APEC policy on infrastructure, which is for competition, full cost pricing and removal of subsidies and private investment, with some attention given to environmental issues. APEC also has specific policies for energy, which include open energy markets, energy security and environmental objectives, a mix of market-based and regulatory policies, progressive reduction of price subsidies and use of economic cost pricing, and promotion of capital flows. Its emphasis on competition and full cost pricing facilitates private investment.

Restructuring and privatization of water, electricity and gas

Water

Across the region, water, water supply, waste management and sewage, are predominantly the responsibility of local authorities or State bodies. There have been no instance of capital privatization through the sale of assets; and also little deregulation of the industry, reflecting a concern for water quality. The main patterns of reform and privatization have been:

Management privatization, namely in Bangladesh, Pakistan, Australian States, the Philippines;

Contracting out, with most utilities seeing "partial" privatization through the contracting out of specific activities or functions, as in Bangladesh, Japan, Australia and Thailand. The three major privatizations of water and waste in the region, in South Australia, Malaysia and the Philippines, have been through the award of long-term contracts for managing facilities;

Finance privatization, with an increasing involvement of private companies in developing water infrastructure, through Build-Own-Operate-Transfer (BOOT) and Build-Own-Operate (BOO) projects, which are subsequently managed on contract.

Electricity

In every Asian country, the public sector also takes the major responsibility for generating and providing electricity. One of the main pressures on public provision of electricity in the future will be the projected demand and the need to fund additional infrastructure to meet that demand. There is also an emerging pattern of restructuring, deregulation of key parts of the industry and increasing private sector involvement through some sales or transfers of assets, or more extensively though private investment in infrastructure, particularly in electricity generation. The main channels of electricity privatization and restructuring in Asia (with those processes often conducted simultaneously) have been:

Management privatization, which has taken place across Australian States, Bangladesh, New Zealand, the Philippines and Thailand, and is proposed for several State Electricity Boards (SEBs) in India;

Breakup of vertically integrated organizations and systems, through the separation of generation/transmission/ distribution. This has already occurred, or is planned, in Australian States, Bangladesh, for some SEBs in India, New Zealand, Pakistan and the Philippines;

Capital privatization, which, through still limited and "partial", has seen a sale of shares in publicly run electricity companies in Malaysia and the Republic of Korea, and is planned for the Philippines, Pakistan and Malaysia. Full privatization has taken place in the State of Victoria in Australia and is proceeding plant by plant in Pakistan;

Finance privatization, through BOO and BOOT developments, that is occurring in all Asian countries;

Deregulation, through licensing independent, privately owned power plants (IPPs), is occurring in Bangladesh, the Republic of Korea, Malaysia, Pakistan and the Philippines.

Gas

Gas usage across the Asia Pacific region is uneven. The advanced economies of Australia, New Zealand and Japan have developed gas infrastructure over many years, in the first two with significant public involvement. For the developing and rapidly developing countries of the region, interest in gas in relatively recent. State involvement in the gas industry in Asia has tended to be in development and exploration. State bodies have been involved in exploration and development in Japan, the Republic of Korea, Malaysia, Pakistan and Thailand. The limited development of gas as a power source in the region and limited role of governments has meant that there has been little active privatization. Its mains forms have been:

Capital privatization, with gas pipelines sold by all Australian Governments, and State owned development companies sold or being sold in Pakistan and New Zealand;

Deregulation, now the major reform taking place in New Zealand.

Finance privatization through private funding of infrastructure

In all economies, the private funding of infrastructure (finance privatization) is emerging as the most significant mechanism for privatization, through BOOT and BOO, or variations on them. Private project funding is being promoted as the answer to the mounting infrastructure needs of the region, particularly in electricity and gas. In practice, its net financial contribution needs to be examined more carefully. At present, the development and execution of such schemes does not seem to be part of any discussion or negotiation between governments and other stakeholders, particularly trade unions. Monitoring the impact of these schemes on labour and other social concerns requires constructing avenues for social dialogue.

Direct consequences for labour

Labour and privatization

A number of factors determine the extent of the impact of privatization on labour, including:

Whether there is a change of employer

The extent to which privatization is associated with technological changes, organizational changes or management changes

The extent and pace of privatization in the overall economy

Changes in a country's legal framework concurrent with privatization

Changes in the nature of agreements, collective bargaining and the "culture"of bargaining which invariably accompany privatization

Any specific agreements made between the Government, the new private company and trade unions

The industrial relations framework and the role and recognition of trade unions

The level of competition with industry

The nature of the new company

Employment

In water and electricity, the most widespread form of privatization, that of management (through corporation and commercialization), is almost invariably accompanied by or is part of a process of reduction in the overall number of employees. As for contracting out, the other form applied extensively in water and waste utilities, evidence from Asia is consistent with the international literature on contracting out of government services across industries, indicating substantial direct employment reductions.

Working conditions

The main forms of privatization other than of management imply a change in employer, and a new contract which does not automatically contain all the conditions of previous agreements. In general, agreements in publicly owned utilities are both extensive and exhaustive. Where no agreements are reached to guarantee the rights of workers to transfer these conditions into their new employment, privatization leads to detrimental changes in most of them.

The impact of privatization on pay in not always clear cut, however. There are indications that in some circumstances and for some occupational grades, those who remain employed after privatization may benefit from increases in wages and salaries.

Labour protection through agreements and undertakings

In many instances of capital privatization or contracting out of utilities, the impact on employment and working conditions has been mitigated by undertakings or guarantees given by governments, or by agreements signed between trade unions and governments and/or the new employing body. At their most general, these agreements or undertakings have covered all privatizations in a country, as in Pakistan and Malaysia. More widespread in the region have been those covering privatization of specific water, gas or electricity utilities. We can also distinguish broadly between government undertakings covering the whole privatization process, and agreements signed between trade unions and government and/or the new employing company, specifically relating to employment and working conditions. The latter agreements are often the culmination of industrial disputes or campaigns.

It would appear that agreements reached by consultation or negotiation are given greater credibility by most stakeholders than unilateral statements of guarantee or intent by governments. Greater credibility is also afforded where agreements are sought and reached before commencement processes rather than appearing to be a response to disputes and campaigns.

While agreements provide significant protection to employees, they have limitations. One is that employment protection is invariably time limited. Also, agreements providing protected terms may generate tension with the understandings or requirements of contractors or concessionaires. Another is that where retraining packages are offered to employees who do not transfer, the appropriateness of training and the real potential for redeployment and career opportunities are crucial.

Industrial relations frameworks and reforms

In those Asia Pacific countries allowing the unionization of public sector workers, union density is relatively high in public utilities. The nature of and changes to the overall industrial relations framework is fundamental in determining the labour effects of privatization. In the Republic of Korea, the impact of privatization varies between categories of public sector employees because of the different rights to unionize, methods of setting pay, and forms of guaranteeing minimum labour standards. For public utility employees in New Zealand, employment levels and working conditions have been altered by the combined effect of labour market deregulation and privatization, with the former having as significant an impact as the latter.

Women workers

Women make up a relatively small, though increasing proportion of the total workforce in the Asia Pacific's water, electricity and gas industries. While information is insufficient to make it a central focus of this report, it is likely that the effects of privatization on labour described in this report are particularly detrimental for women workers; among others because of the relatively widespread use of contracting out as a form of privatization, as well as the greater attention paid in many public sector agreements covering the utilities to employment and working conditions of particular significance for women workers.

Transnational corporations

The private companies which purchase assets, take on contracts and concessions, and finance BOO and BOOT schemes are transnational corporations (TNCs), subsidiaries of TNCs, or consortia in which they are major partners. This has implications for the longer-term impact of privatization on employment, working conditions and industrial relations, because of the forms of bargaining, recognition of union representatives and related issues in TNCs.The transnational nature of TNCs requires structures and modes of industrial relations appropriate to their operations and the international strategies of diversification and development which they pursue.

Indirect labour consequences

It is argued by privatization advocates that the negative direct effects on the employees of State-owned companies, may be outweighed by the indirect positive impact on total employment in the economy, which is said to derive from increases in overall investment, the greater efficiencies following micro-economic reform, and multiplier effects in subnational economies.

Critics have observed that it cannot be assumed investment funding could not have been made available through government borrowing, and that the sale of assets removes a flow of income to the government. The extent to which net investment, properly calculated, and other microeconomic reform processes generate efficiencies that translate into future employment is largely related to the assumptions of the economic model chosen.

An attempt was made in one of the major water privatizations, in South Australia, to link the contract to the potential indirect employment benefits that might flow to the State; but critics question the likelihood that theses benefits will materialize.

Privatization and the provision of services

A rationale given for utility privatization in the region has been the need for additional resources to extend access to the service and improve its quality, as in the case of the privatization of water and sewerage in Manila (the Philippines). While there is little substantive evidence in Asia on the quality of utility services after privatization, questions have been raised about the guarantees for adequate quality written into privatization arrangements.

In each of the utilities, privatization and restructuring are associated with increases in prices and charges for some if not all consumers. Three related processes are at work:

"Rebalancing" of pricing, consisting of reductions in cross subsidies between types or categories of consumers, and moves toward full cost pricing;

Disaggregation of generation, supply, transmission, entailing changes in intermediate prices paid, which have a significant impact on the charges paid by eventual customers and users;

Deregulation, that by removing previous agreements between suppliers and distributors produces substantial differences in charges between areas.

The nature, form and content of the continuing State involvement in the regulation of utilities after privatization is a key determinant of the extent of, and equity in, price rises.

Budgetary implications

There is no straightforward methodology for assessing the budgetary implications of any form of privatization for the utilities. Public policy discussion of the immediate financial outcome of privatization tends to be dominated by statements of gross figures for the overall transaction. These are the total contract values and any associated projected savings, for contracting out; the total, gross asset value, for capital privatization; and the gross value of projects, for finance privatization. These gross figures provide an inaccurate assessment of the true implications of schemes for governments' financial transactions and budgeting:

In assessing the overall impact on government income and expenditure of contracting out, full costs will include: "transaction" costs; "transition" costs; "monitoring costs"; and any indirect social costs arising from unemployment, retraining needs and multiplier effects;

Assessment of total net cost or benefit where capital is privatized, should include transition and transaction costs; the possibility that assets may be sold for less than their market value; and the estimated loss of the future stream of income from dividends or any differential taxation arrangements;

The net contribution to government financing of finance privatization needs also to take account of the full range of financial support and underwriting provided by Governments.

Contents

Executive summary

Acknowledgements

Liste of abbreviations

Introduction

Part I: An overview of privatisation of water, electricity and gas utilities in the Asia Pacific

1. Introduction

2. The rationale and forms of privatisation

The rationale of privatisation

Forms of privatisation

3. The role of international bodies in privatisation and deregulation

Structural Adjustment Programmes

International trading agreements and Asia Pacific economic cooperation (APEC)

4. Restructuring and privatization of water, electricity and gas

Water

Privatisation of water

Electricity

Privatisation of electricity

Gas

Privatisation of gas

Finance privatisation through BOO and BOOT schemes, and private funding of infrastructure

5. The direct labour consequences of restructuring and privatisation

Labour and privatisation

Employment

Working conditions

Employment protection through agreements and guarantees

The significance of the industrial relations framework and reforms

Employment of women

Transnational corporations

6. Indirect employment consequences of privatisation and restructuring

7. Privatisation and the provision of services

Service quality and access

Prices and charges to customers

8. Budgetary repercussions of restructuring and privatisation

Part II: Case-studie

1: Privatisation of water supply in Adelaide, South Australia

2: Privatisation of the water and sewerage system in Manil, Philippines

3: Contracting out of meter reading by Sydney water, New South Wales, Australia

4: Privatisation of the Republic of Korea Electric Power Corporation

5: Privatisation of electricity in Pakistan

6: Restructuring of electricity in the State of Orissa, India

7: Privatisation of the Gas Pipeline Authority in Australia

8: Privatisation of electricity and gas in New Zealand

Conclusions and recommendations

Exchange rates against the US dollar

Bibliography

Acknowledgements

This report is based on material written by Troels Andersen, John Martino, Michael Paddon, Pat Ranald and Rai Small. Richard Thorowgood and Ariadne Vromen also provided assistance in preparing material.

June 1997

List of abbreviations

AB Asian Business

ADB Asian Development Bank

AFR Australian financial Revies

AGE The Age

AGL Australian Gas and Light Company. A private sector company which established gas supply to customers in the State of New South Wales, Australia.

APEC Asia Pacific Economic Cooperation. A free trading arrangement of 18 economies bordering the Pacific.

BOO Build-Own-Operate. A method of private funding of infrastructure under which the private developer or consortium funds, builds, owns, operates and maintains a facility and can charge users through fees or other appropriate means.

BOOT Build-Own-Operate-Transfer. A method of private funding of infrastructure under which the private developer or consortium funds, builds, owns, operates and maintains a facility and can charge users through fees or other appropriate means. At the end of the fixed term the facility is transferred to the government or agency.

BPDB Bangladesh Power Development Board. Responsible for planning, constructing and operating electricity power generating facilities and transmission systems in urban areas.

BWDB Bangladesh Water Development Board. Responsible for construction of dams and reservoirs, irrigation, and provision of rural water from rivers and canals.

DESA Dhaka Electricity Supply Authority. Responsible for end-user distribution of electricity in the capital city of Dhaka and the greater Dhaka area, Bangladesh.

EAPL East-Aust Pipeline Limited. A company owned by AGL Pipelines (NSW) Ltd (51%) and by Gasinvest Australia Pty Ltd (49%) set up to run the privatized gas pipeline.

ECON The Economist.

EGAT Electricity Generation Authority of Thailand. The largest generator of electricity in Thailand also responsible for electricity transmission to the whole country and distribution to a few large consumers.

ERIP Early Retirement Incentives Plan. A programme for retirement and retrenchment implemented form 1996 by MWSS, in the Philippines.

ES Electricity Supply Magazine, ESAA Newsletter.

FEER Far Eastern Review

FT Financial Times

GTE Government Trading Enterprise. A corporatised Government body in the States of Australia.

GRIDCO Grid Corporation of Orissa. An autonomous enterprises: set up to purchase electricity from generating companies, transmit it through the State grid and distribute it to consumers, in the Indian State of Orissa.

Gw Gigawatt.

ILO International Labour Office.

IFC International Finance Corporation. The private sector financing arm of the World Bank.

IMF International Monetary Fund.

IPP Independent power producer. Private power station authorised to generate electricity outside main Government operated generation.

KCTU Korean Centre for Trade Unions.

KEPCO Korean Electric Power Corporation. A government enterprise wholly responsible for generation, transmission and distribution of electricity in South Korea.

KESCO Karachi Electricity Supply Company. Responsible for generation, transmission and distribution of electricity in the Karachi area of Pakistan.

MEA Metropolitan Electricity Authority. Responsible for distribution of electricity in Thailand's capital, Bangkok, and in two adjacent provinces, Nonthaburi and Samut Prakan.

MWSS Manila Metropolitan Waterworks and Sewerage System . The largest water supply agency in the Philippines which services 11 million people in the metropolitan area.

Mw Megawatt.

NAPOCOR National Power Corporation. Responsible for generation and distribution of electricity to the majority of the Philippine islands.

NGC National Gas Corporation. New Zealand's wholesale natural gas supplier which provides high pressure pipeline transmission in the North Island.

OECD Organization of Economic Co-operation and Development.

OGDC Oil and Gas Development Corporation, Pakistan.

OHPC Orissa Hydro Power Corporation. An autonomous enterprise established to operate all the State owned hydro electric power plants in the Indian State of Orissa.

OPGC Orissa Power Generation Corporation. An autonomous enterprise established to construct and operate thermal power stations in the Indian State of Orissa.

PSPRU Public Sector Privatization Research Unit. UK research organization.

PSRC Public Sector Research Centre. Australian research organization at the University of New South Wales , Sydney.

PIH Power in Asia, Financial Times newsletter.

PrIn Privatization International.

REB Regional Electricity Board. 5 Boards coordinate regional electricity production in India.

SAP Structural Adjustment Program. Program to restructure an economy, often part of a funding agreement with the IMF or World Bank

SEB Sabah Electricity Board. Responsible electricity generation and distribution on the Island of Sabah, Malaysia.

SEB State Electricity Board. The 32 State Boards are the main organizations for generating and distributing electricity in India.

SESCO Sarawak Electricity Supply Corporation. Responsible for electricity generation and distribution on the Island of Sarawak, Malaysia.

TNB Tenaga Nasional Berhad. The biggest producer of electricity in Malaysia responsible for generation, transmission and distribution on the peninsular.

TNC Transnational corporation.

WAPDA Water and Power Authority Board . Pakistan's major electricity generation, transmission and distribution organization responsible for the whole country outside the Karachi area.

WASA Water and Sewerage Authority. Responsible for water supplies in cities and towns in Bangladesh and, with Municipal Authorities for sanitation, sewerage and water purification.

WHO World Health Organization.

Introduction

This report surveys the restructuring and privatization of utilities in the Asia Pacific region, to analyse their impact on labour issues (employment, working conditions and industrial relations), and the role of social partners in these processes.

It covers water, waste and sewerage, electricity and gas, and is based on detailed reviews of various economies. The survey of the water, waste and sewerage industries focuses on eight economies: three industrial ones (Australia, Japan and New Zealand); two developing ones in the Indian subcontinent (Bangladesh and India); two rapidly developing, in South-East Asia (Malaysia and Thailand); and the developing Pacific economy of the Philippines. The survey of electricity and gas covers ten economies: the three industrial ones (Australia, Japan and New Zealand); two developing ones in the Indian subcontinent (Bangladesh, India and Pakistan); three rapidly developing, in South-East Asia (Republic of Korea, Malaysia and Thailand); and the Philippines. This selection is meant to ensure adequate coverage of the diversity of economies within the region, but is also linked to the availability of adequate and reliable sources of information.

The survey does not include the largest and most populous economy in the region, China. The size of its economy, together with the particular and specific issues involved in the introduction of markets and competition through privatization in this command economy, make it unique in the region. A detailed, specific review would be necessary to do justice to the complexity of issues involved. Further, its uniqueness makes it impossible to draw conclusions extendable to other economies in the region.

Information has been drawn from published sources, including extensive reviews of periodicals and serial publications on water, electricity and gas; electronic media on the Internet; and two surveys (one of water, the other of electricity), conducted under the auspices of the international trade union secretariat for public sector trade unions, Public Services International (PSI).

The report comprises two parts:

Part I summarizes the main characteristics of the public utilities in the three industries in the region, the forms of privatization taking place, and the role of international bodies and agreements in promoting or facilitating these changes. It then examines in some detail the effects of privatization on labour, namely on employment (employment levels and status), working conditions and industrial relations. It reviews approaches taken to provide employment protection to those employees immediately affected. An assessment is also made of some of the financial and service quality implications of privatization.

Part II provides selected case studies:

Two review the largest instances of privatization in the region through the award of concessions in water and waste: the contract for water supply in the City of Adelaide (South Australia); and the concession awarded for management of the water supply in Manila (Philippines).

One deals with the contracting out of a specific service, water meter reading, by Sydney Water in New South Wales (Australia).

Two, on Republik of Korea and Pakistan, examine electricity privatization in the context of the nature of the overall industrial relations framework and of specific agreements reached around privatization.

A further case study of electricity reviews the most extensive restructuring of a State Electricity Board in India, in Orissa.

Another case study focuses on one of the very few instances of gas infrastructure privatization in the region, the Pipeline Authority in Australia; examining the labour protection provided by an Agreement with the company acquiring the Authority. The Pipeline Authority, like several of the other case studies, illustrates the use of an agreed arrangement between the Government, employers and trade unions to provide some labour protection to workers immediately affected by privatization.

The final case study looks at the changes taking place in water, electricity and gas industries in New Zealand, where privatization and deregulation have been extensive there,a systematic approach to the management of labour issues during restructuring and privatization was not possible there given the scale and pace of privatizations, and labour market deregulation through the introduction of individual contracts.

A comprehensive bibliography of material available on the privatization of utilities in Asia is provided, including all items referenced in the Report.

Part I: An overview of privatization of water, electricity and gas utilities in the Asia Pacific

1. Introduction

Over the past decade privatization has become so internationally widespread that it is characterised as a global phenomenon (Rondelli and Iacono, 1996). Even within a specific region or subregion, however, there is no single or general form of privatization. In the Asia Pacific region we can identify economies at different stages of economic development which have adopted different development strategies, assigning greater or less significance to the role of the State; and which, therefore, have embraced privatization as a reform agenda with varying degrees of enthusiasm or urgency.

2. The rationale and forms of privatization

The rationale of privatization

In all Asia Pacific economies, restructuring and privatization of water, electricity and gas utilities have been pursued as part of wider privatization programmes. Reforms have, thus, usually been articulated in terms of the general benefits deemed to flow from privatization and the wider stated objectives of these programmes. While these objectives may differ between economies, a number of common themes and claims recur (PSRC 1997a and 1997b; Oestmann, 1994):

Macroeconomic and fiscal pressures. It is assumed that public ownership and extensive State intervention impede savings, investment, productivity and hence growth in the wider economy.

Public finance and fiscal pressures within state enterprises. The sale of public assets is seen as directly contributing resources for further public expenditure or as a mechanism for eliminating government debt and charges.

Microeconomic reform and efficiency. It is claimed that privatization improves operating efficiency and hence increases profitability and productivity.

Extension of share ownership. In some instances, particularly where it is achieved through public sale of shares in public enterprises, privatization is intended to provide the basis for the creation or building up of private ownership and stock markets.

Forms of privatization

There is an extensive literature on the definitions and forms of privatization. For the purposes of this report, the following broad interpretation has been adopted to ensure maximum coverage: "Privatization can be described as a transformation or participation process designed either to secure involvement of private investors or to introduce more market like spirit into public activities" (Oestmann, 1994, p. 5)

This report identifies five main processes of utility privatization in the Asia Pacific region (adapted from Oestmann, 1994, p. 5; see also Rondelli and Iacono, 1996):

Management privatization: through corporatization and commercialization of public services. Corporatization refers to changes in the legal form of utilities by incorporation under a different legal and accounting code to that of the public service. It may be linked to or precede the sale of assets. Commercialisation is a broader term referring to the importation of accounting and management practices devised in private companies into public organizations, including, for example, moves to transfer a greater responsibility for payment of services from government to service users.

Capital privatization: through the sale of whole operating units, plants or industries; or the partial sale of a utility, usually by selling a proportion of its shares.

Contracting out: including concession or leasing contracts. The State normally retains ownership of the assets and continues to fund the service, but the operation utility is transferred to a private operator or contractor, with the result that labour is the main factor privatized.

Finance privatization: private funding of public infrastructure through such schemes as Build-Own-Operate-and-Transfer (BOOT) and Build-Own-Operate (BOO). Under BOOT schemes the private developer/consortium funds, builds, owns, operates and maintains a facility. It operates the facility over a fixed term, during which it can charge users through fees or other appropriate means. At the end of the fixed term the facility is transferred to the government or agency. BOO schemes are similar, with the exception that the facility is not transferred back to the Government at the end of the contract. In both schemes the developer may assign operation and maintenance to a facility operator.

Deregulation: whereby State regulations governing or limiting the terms of entry to or operations within an industry are removed or reduced.

While these are logically and operationally distinct processes, in practice, they may be used sequentially (thus, corporatization often precedes asset sales) or in combination (such as the linking of BOOT/BOO schemes to leases or contracts for operating facilities).

3. The role of international bodies in privatization and deregulation

A major pressure for privatization in the region has come through the funding operation of international agencies, notably the International Monetary Fund (IMF) and World Bank. In addition, deregulation through international trading agreements, such as APEC, are gaining significance for future policies relating to utilities.

Structural Adjustment Programmes

For many countries in the region, Structural Adjustment Programmes (SAPs) under the supervision of the IMF and World Bank have been a major impetus for privatization (Johnson, 1994, PSRC 1997a and 1997b). There have been three SAPs in Bangladesh, and the one operating since 1991 includes an extensive programme of privatization, commercialization and cost cutting in government. India has been in a similar position since 1991; and so has Pakistan, with three SAPs: in 1978, 1988 and 1992.

International trading agreements and Asia Pacific economic cooperation (APEC)

The liberalisation of investment and trade in services, including infrastructure, has been part of the APEC agenda since a 1994 declaration setting the deadlines for achieving free trade and investment: 2010 for developing countries and 2020 for industrialized countries (APEC, 1994).

APEC consists of 18 diverse economies: the USA, Canada, Japan, Australia, New Zealand, China, Hong Kong, Taiwan, Republic of Korea, Singapore, Malaysia, Thailand, Indonesia, Philippines, Brunei, Mexico, Chile and Papua New Guinea.

Water, electricity and gas utilities are all, in principle, covered by general APEC policies on infrastructure. In addition, APEC has dealt specifically with energy.

The APEC agenda for infrastructure is for competition, full cost pricing, removal of subsidies and private investment, with some attention given to environmental issues (APEC 1995 and 1996). This agenda is being pressed by transnational corporations (TNCs) seeking investment opportunities and member governments like the USA and Australia seeking export opportunities. The stance of other member governments is more varied, as they balance the need for investment funds with perceived national priorities and a tradition of more interventionist national policies.

The Osaka Action Plan, adopted at the Economic Leaders' meeting in 1995, established a series of specific objectives for facilitating investment in electricity infrastructure by the end of 1996. These included identification of institutional, regulatory and procedural impediments affecting investment in electricity infrastructure; setting a guidance framework to facilitate investment; facilitating transborder infrastructure; and harmonization of energy standards, including mutual recognition of testing protocols. The action plan implied, but did not specifically state, that much of this investment would be private.

The Osaka meeting was followed by officials' working group meetings on energy and an APEC Energy Ministers' meeting in Sydney in 1996. The latter mooted that, between 1996 and 2010, electricity demand in the region is projected to increase by 50 to 80 per cent, and that some US$1.6 trillions in investment capital would be required for power infrastructure to match demand. It argued that this sum cannot be raised by governments alone, and thus private investment is essential. The challenge for governments is to find ways of reducing risks, costs and impediments for private investment; this includes facilitating project approval, regulatory processes and financial conditions. It also mentioned the need to reduce adverse environmental impacts (APEC, 1996, p. 3). The meeting adopted a set of Non-Binding Energy Policy Principles, "to be pursued in a flexible manner in line with each member's domestic circumstances". They include open energy markets, for achieving rational energy consumption, energy security and environmental objectives, a mix of market-based and regulatory policies, progressive reduction of price subsidies and use of economic cost pricing, and promotion of capital flows through progressive removal of impediments (APEC, 1996, p. 7). The emphasis on competition and full cost pricing will facilitate private investment.

4. Restructuring and privatization of water, electricity and gas

Water

Across the Asia Pacific region, water, water supply, waste management and sewerage, are predominantly the responsibility of public bodies (PSRC, 1997a). In most countries, local or State authorities, rather than national bodies, provide and manage water supply. Japan, for example, has nearly 2,000 separate enterprises providing water. In water and sewerage, despite variations in the pattern of public ownership and management, the public sector retains the major responsibility for environmental protection and the setting of standards.

Privatization of water

Water and waste facilities have not been targeted for full scale privatization across most of the Asia Pacific region, even where governments have pursued very extensive privatization programmes. The country by country survey, summarised in table 1 indicates that the following have been the main patterns of reform and privatization.

Management privatization. Many countries have undertaken extensivereforms in the public water industry to introduce more commercially based and market-driven practices. This has been through reorganization, such as the division of the Bangladesh Water Development Board into three separate organizations; corporatization, as with the Water and Power Development Authority in Pakistan and the Australian States of New South Wales and Western Australia; and through Government's establishment of other quasi-corporations, such as local water authorities in the Philippines.

Contracting out. This has been the most frequent form of privatization of water and waste facilities in the region. Public water and waste utilities have mainly been "partially" privatized; through the contracting out of specific activities, such as billing and fee collection in Bangladesh and Japan and various maintenance operations in Australia, or the management of specific plants, as in Thailand. The three major privatizations of water and waste in Asia, in South Australia, the Philippines and Malaysia (the first two are discussed in more details in Part II) have been through the award of long term contracts for managing facilities.

Extensive monitoring of the operations of the main TNCs involved in privatization of water and waste in Europe and the Americas by the British Public Sector Privatization Research Unit (PSPRU) has confirmed that delegated management is the preferred form of privatization by the major private interests (PSPRU, 1996). Public authorities retain some notional overall responsibility for water supply or waste and sewerage, but contract operations to the private company, usually with relatively long-term contracts. In the Asia Pacific, as elsewhere in the world, this is increasingly being linked to construction and development projects orchestrated by the TNC which subsequently operates the scheme.

Finance privatization. Private companies are increasingly involved in the development of water infrastructure projects which are subsequently managed on contract by the private company. These investment projects are generally described as BOO and BOOT.

In the Asia Pacific region, there have been no instances of capital privatization through the sale of assets and little deregulation of the industry. The latter reflects the concern across the region for water quality.

Electricity

In every country of the region, the public sector also takes the major responsibility for generating and providing electricity. As a recent review published by the OECD comments: "In most of the (countries of East and South Asia), the electricity supply industry is publicly owned and perceived both by governments and consumers to be a public service" (Birol and Inui, 1996).

One of the main pressures on public provision of electricity in the future will be the projected steep increase in demand and need to fund additional infrastructure to meet that demand. According to OECD statistics, total energy demand in East and South Asia plus China is predicted to rise from 18 per cent of the total world demand in 1993 to 26 per cent in 2010. To meet this demand, the OECD estimates that the output of electricity should increase from 15 per cent of the world's output to 23 per cent; and the total generating capacity by around 580 Gw, necessitating an investment of at least US$450 billions. This pressure for greater generating capacity has already resulted in the extensive development of privately funded and built BOO and BOOT schemes in all the countries covered in this report. These schemes are now one of the major processes of electricity privatization at work in the region.

Privatization of electricity

As with the water and waste industries, across the region there has not yet been extensive capital privatization through sales of public electricity assets or transfer from public to private ownership of major parts of the electricity supply industry. However, there is an emerging pattern of restructuring and deregulation of key parts of the industry; and of increasing private sector involvement through some sales or transfers of assets, or more extensively through private investment in infrastructure, particularly in electricity generation (summarized in table 2). The following are the main channels through which electricity is being privatized and restructured throughout the region. In many cases the processes are conducted simultaneously:

Management privatization. Corporatization has established electricity generating and distribution companies as entities autonomous from Government and more directly linked to commercial imperatives. This has occurred across the Australian States; in Bangladesh, with two of the three State utilities providing generation, transmission and urban distribution; it is now proposed for several State Electricity Boards (SEBs) in India; has occurred with distribution companies in New Zealand; as well as in the Philippines, with the generation, transmission and distribution company NAPOCOR; and in Thailand with the main generation and distribution company, EGAT.

Breakup of vertically integrated organizations and systems. The other most widespread reform to the industry in the Asia Pacific is the separation of functions or stages in the electricity supply process, generation/transmission/distribution, previously integrated. This has already occurred, or is planned, in Australian States; for BPDB in Bangladesh; in those SEBs in India which are following the model of reform being pursued in the State of Orissa; has already taken place in New Zealand; and is planned for the main Pakistan utility, WAPDA. In the Philippines, the reorganization of NAPOCOR will combine separation from transmission operations, then a disaggregation into regional companies.

Capital privatization. Though still limited, it has proceeded "partially" with the sale of proportions of shares in publicly run electricity companies in Malaysia and Republic of Korea. Partial sales are planned for NAPOCOR in the Philippines, KESC in Pakistan, and for the two island distribution Boards in Malaysia. Full sales of individual operating plants or distribution facilities have taken place in the Australian State of Victoria, are proposed in the State of New South Wales, and are proceeding on a plant by plant basis in Pakistan.

Finance privatization. It is occurring through BOO and BOOT developments in every Asian country. Examples include the 86 separate projects planned in India; large projects in Japan; the proposed Bakun hydro-electric scheme in Malaysia; and various schemes in Pakistan and the Philippines.

Deregulation. The licensing of independent, privately owned power plants (IPPs), alongside the State-run system, has occurred in Bangladesh, Republic of Korea, Malaysia, Pakistan and the Philippines.

Gas

The usage of gas across the Asia Pacific region is uneven. Industrialized countries such as Australia, New Zealand and Japan have developed gas infrastructure over many years and have the capacity to supply directly consumers. In the developing and rapidly developing countries, interest in gas is relatively recent. While many of them have substantial gas reserves, they lack the infrastructure and technology required to access and utilize those reserves has been absent. However, recently many countries in the region have been investigating and investing in energy generation possibilities associated with natural gas. It is likely that liquid petroleum gas imports and other gas imports to Asia will continue to expand in the next five years, as demand growth will be greater than regional supply expansion (Haun et al, 1995, p. 56). It is estimated that the total average oil production in South-East Asia will fall by 24 per cent between 1995 and 2002, while the region's gas production is expected to rise by 54 per cent in the same period (Oil and Gas Journal, 18/9/1991, p. 88).

State involvement in the gas industry in Asia has mainly been in development and exploration. As summarized in table 3, State bodies are involved in exploration and development in Japan, Republic of Korea, Malaysia, Pakistan, and Thailand. The Malaysian and Thai state-owned companies have also been involved in joint venture projects. Only in Australia and New Zealand, where the industry is more established, has the State taken a wide role. The infrastructure to transport gas from privately developed and owned fields in Australia has largely been built by the public sector, with the exception of New South Wales. Federal and State governments have invested in gas pipelines.

In all countries in the region the rapid expansion of gas development, production and distribution is being undertaken by private developers, mainly TNCs.

Privatization of gas

The limited development of gas as a power source in the region, and the limited role of the State, have meant little active privatization (see table 3). Privatization has taken place or is planned in the two economies with the largest Government role in the industry, Australia and New Zealand, and for Government agencies of these and other countries involved in development and exploration. It has followed two main patterns:

Capital privatization. The recent interest by all Australian Governmentsin privatization has entailed the sale of gas pipelines and other infrastructure to the private sector. In 1994, the Moomba to Sydney gas pipeline, owned by the Commonwealth Government, was sold to a consortium headed by Australian Gas Light (AGL) (see the more detailed case study in part II). The Queensland Government sold its 600 kilometre long gas pipeline stretching from Wallumbilla to Mackay to the United States company, Pacific Gas & Electric. The South Australian Gas Pipeline Authority was sold to Tenneco (United States Department of Energy, Oct 1996, p. 3). The Western Australian Government has also explored the idea of selling the 1,600 kilometre Dampier-Bunbury pipeline.

In Pakistan, the state-owned Oil and Gas Development Corporation plays a major role in developing the industry. In 1996, the Government planned to convert the Corporation into a joint-stock company and reduce its holdings in natural gas pipeline companies.

The New Zealand State development company Petrocorp was sold in 1988. The Government has also sold all other state interests in plant and development.

Deregulation. The major reform now taking place in the New Zealand gas industry is deregulation. Until April 1993 all parts of the industry, from wellhead to the consumer supply, were monopolies. Between 1986 and 1993, wholesale and retail prices were controlled. Distribution gave retail utilities sole right to sell gas in a particular region, with a requirement that they sell gas to any customer requesting it (CS First Boston, 1994, p. 37). Legislation passed in 1992, covering all aspects of the energy industry, aimed to initiate a more commercial approach to the distribution and supply of gas, and promote competition in the parts of the gas industry that are not natural monopolies. This deregulation involved three major changes: the ending in 1993 of gas price control regulations, of exclusive right of supply through gas area franchises, and of the "obligation to supply". The natural monopoly aspects of gas transmission are now dealt with through regulations requiring access to transmission networks by competing wholesalers and retailers (CS First Boston, 1994, p. 37). It was anticipated that the abolition of the obligation to supply gas would disadvantage consumers in isolated areas, although at this stage there is little extensive information on which to judge this.

Finance privatization through BOO and BOOT schemes, and private funding of infrastructure

In all the utilities, private funding of infrastructure is emerging as the most significant privatization mechanism and therefore deserves more detailed examination.

As mentioned earlier, the main mechanisms for finance privatization in the Asia Pacific region are BOOT and BOO schemes, or variations of them. Variations include Build-Transfer-Operate (BTO) schemes, under which the building of a facility is contracted out to a private entity on a turnkey basis. When ownership of the facility transfers to the Government, the facility is operated by a private entity under an agreement. Another variation is Rehabilitate-Operate-and-Transfer (ROT), under which the developer/consortium refurbishes, operates and maintains an existing facility over a franchise period. At the end of that period the facility transfers the Government. These are best thought of as alternatives for organizing the funding and operation of projects, to either public ownership or privatization in the conventional sense of selling existing infrastructure. They are somewhere between the purely public and purely private approach. This is shown in table 4, presenting five dimensions of infrastructure schemes: design/construction, operation and maintenance, ownership of the assets, who pays for using the service, who is responsible for regulation; and indicating how the different forms of infrastructure provision divide responsibility between the private sector, Government and consumers or customers.

There are numerous examples of BOO and BOOT schemes from around the region. For example, at the end of 1996 there were in the Philippines (PSRC 1997 b):

24 recently completed projects, many in power and energy (8 BOT, 4 BTO, 1 BOO), with a total value of US$4.1 billions;

17 projects under construction (7 BOT, 1 BTO, 4 BOO), with a combined value of US$4.1 billions;

6 projects, valued at US$4 billions, for which bidding is currently underway;

2 projects for building power plants (1 BOO, 1 BOT/ROT), with a total value of US$75 billions, initiated by private developers and now under consideration by the government;

6 water projects under negotiation, with a combined value of US$ billions;

2 BOT projects for new power plants, valued at US$100 millions, beingprepared for tendering.

Such arrangements are increasingly significant in all Asian countries. For instance, the Indian Government has planned so far 86 power projects with private involvement through BOO and BOT schemes. Of these, eight have been given high priority, and contracts have been finalized in most of them.

BOO, BOOT and similar schemes have the following characteristics (PSRC, 1997 a and b):

They are project based, involving the private sector in one-off projects rather than in a network of generation, distribution, etc.;

The profit made on the individual project is heavily influenced by Governments' decisions, particularly on how an overall network is developed;

They are capital intensive;

They are long term, extending over substantial periods;

They involve complex legal and financial arrangements, first between the private sector companies forming a consortium and then between the consortium and the Government. This, even when the project itself may not be technically very complex.

These forms of project funding are now promoted and favoured by international funding agencies, including the World Bank, as well as by the developers and contractors themselves. They are promoted as the answer to the mounting infrastructure needs in Asia and other regions.

The World Bank's assessment is that (World Bank, 1994):

Governments do not have and cannot raise sufficient resources. Even though the credit ratings of most governments are such that, in principle, they can borrow or raise money more cheaply than private developers, financial restrictions, either self-imposed or by an external body such as the IMF, prevent such borrowing.

There have been problems with the performance and pricing of government-sponsored schemes. A World Bank review of urban water supply and sanitation schemes pointed out serious cost overruns, with schemes eventually costing 33 per cent more that appraisal estimates; and time overruns, with 46 per cent of projects taking two to four extra years to complete.

As a result, the World Bank claims there are potentially higher costs when projects are developed and run by Governments.

In its view, the private sector also brings greater efficiency to projects.

Finally, Government monopoly may have been appropriate at a particular stage of the development of an industry, but where technological advances have removed the monopoly character of some operations (as in electricity generation and distribution), it is no longer necessary. Government no longer needs to be in a monopoly position to regulate electricity generation and distribution, or other utilities.

In practice, the net financial contribution made by such projects needs to be examined more carefully, as indicated in section I.8. At the same time, the planning, development and execution of such schemes does not seem to be part of any discussion or negotiation between governments and other stakeholders, particularly trade unions. There appears to be no instance in the region where finance privatization has been subject to any joint discussion or consultation. To monitor the effects of such schemes on employment and other social programs, avenues for social dialogue need to be constructed.-

5. The direct labour consequences of restructuring and privatization

Labour and privatization

Despite the extent of privatization worldwide, little attention has yet been paid in policy and the academic literature to its impact on labour (Oestmann, 1996). The focus of most studies is the efficiency and profitability of the privatized business and, to a lesser extent, the quality of the services it delivers (Hodge, 1996). However, largely through the practical documentation provided by trade unions, it is widely accepted that privatization will usually see a decline in the number of employees, as well as changes in work organization, pay and other working conditions.

Combining the existing academic literature on the employment effects of privatization in general, with studies of privatization in sectors and industries other than the utilities in the Asia Pacific region, we can point to a number of factors which will determine the extent of that impact. These include (Ferner and Colling, 1993):

Whether there is a change of employer. Capital and finance privatizations as defined in this report (BOO, BOOT, etc.) and contracting out, imply changes in employer and different employment contracts for employees. This is not the case with management privatization or deregulation.

The extent to which privatization is associated with technological changes, organizational changes (such as disaggregation of electricity utilities) and management changes (such as decentralization of decision-making); all of which affect levels of employment and working conditions.

The extent and pace of privatization. Where privatization is planned a number of years, the number of employees may be reduced by natural attrition and redeployment. In other instances, such as in New Zealand, the important pace and scale of privatization make it difficult to use those measures only.

Changes in a country's legal framework concurrent with privatization. As is discussed below for New Zealand, changes in the industrial relations framework may make it harder to prepare transfer and transition agreements for employees and working conditions, or provide the adequate organizational structure for negotiation and consultation with trade unions.

Changes in the nature of agreements, collective bargaining, and the "culture" of bargaining, which invariably accompany privatization.

Any specific agreements made between the government, the new private company and trade unions at the time of privatization, or any agreements or policy relating to privatization in general. Agreements may relate to bans on lay offs for a period of time or redeployment opportunities.

The industrial relations framework and the role and recognition of trade unions. Examples from India and Thailand show that trade union activity can alter Government decisions concerning privatization; and if privatization takes place, it will have more favourable results for employees than would otherwise be the case. Other industrial relations actors, such as tribunals, also play a role in overseeing privatization and may influence its impact. In Japan, labour commissions found that workers from particular unions had been discriminated against when Japanese National Railways were corporatised in preparation for privatization.

The level of competition within the industry. This may contribute to pressure on labour costs and, hence, on pay and terms and conditions of employment. It will also impact on management decisions regarding labour and industrial relations. Actual or perceived strong competition is likely to generate a management style more focused on cutting labour and other costs, and oriented towards confrontation with trade unions.

The nature of the new company, reflected in the agreements on employment, pay and other working conditions. For instance, a common characteristic of privatized utilities internationally is their diversification into new areas of activities. In almost all cases of capital, labour and finance privatization of utilities in the Asia Pacific region, the private operator is either a TNC or a venture involving a TNC. Such companies have well developed management strategies, as well as the ability to transfer former public sector employees into other sectors in order to avoid the legacy of public sector standards. In the United Kingdom, the owners of privatized utilities have also sought to diversify their operations and in some cases have expanded overseas. Increased competition in core utility services through deregulation has encouraged diversification. Companies will attempt to set up new interests in other, often related, fields, and in so doing will "free" industrial relations arrangements from the legacy of public sector traditions. For example, water companies in the United Kingdom have diversified into plumbing services and have used subcontracted self-employed workers to perform the work.

Employment

In water and electricity utilities, as mentioned earlier, the most widespread form of privatization in the Asia Pacific has been privatization of management (through corporatization and commercialization); almost invariably accompanied by, or part of, a process of employment reduction.

Thus, in the Philippines the public electricity company, NAPOCOR, has gone through a corporatization process, in preparation for more extensive privatization, involving contracting out of power plants' management and major staff reductions. Under 1992 legislation, the president was empowered to reorganizse the company, including abolishing posts and transferring employees. The same law removed NAPOCOR from the legislative control of salaries and conditions governing the public sector through the Salary Standardizations Law. The management of NAPOCOR was allowed to upgrade pay rates to make them comparable to those in privately owned utilities. Under current plans, employment is to be reduced by 15 per cent from the 1994 figure of 16,557 to 14,073, with a restriction on the hiring of new staff (Amante, 1995).

Large employment reductions also accompanied the corporatization and restructuring of the Manila Waterworks and Sewerage System (MWSS) (Philippines). Employment was reduced in various phases. The 1995 National Water Crisis Act provided for the reorganization of MWSS and of the Local Waterworks and Utilities Administration (LWUA). The Executive Order implementing reorganization provided for separation pay for any employees "phased out" through that process. The units were required to prepare a voluntary retirement scheme with associated benefits, including acceleration of the compensation package available in the Philippines under existing legislation. The first part of the Early Retirement Incentive Plan (ERIP) was implemented in 1996, with 2,200 employees taking early retirement, resulting in a 28 per cent decrease in MWSS employment.

The other form of privatization applied extensively in water and waste utilities has been contracting out. The international literature on contracting out of Government services across a range of industries indicates that it produces substantial reductions in direct employment (see Paddon and Thanki, 1995). One of the case studies prepared for this report, the contracting out of water meter reading service by Sydney Water (Australia), documents the impact on employment in the absence of agreements or undertakings concerning the employees whose work was contracted. It is estimated that between 80-90 per cent of the employees lost their job with the contracting out of that service. This followed a period of substantial reorganization of Sydney Water (1984-94), in which employment had already been halved from 12,776 to 6,774.

In one of the three major instances of contracting out of the whole water supply system, in South Australia, employment by United Water, the company awarded the contract, provided only 400 jobs, compared with the previous employment level of 700. This followed a 43 per cent reduction in employment by the State Government between 1991 and 1994, prior to privatization (see case study in Part II).

Working Conditions

All main forms of privatization, with the exception of corporatization and commercialization, imply a change in employer; hence a different employment contract which does not automatically contain all the conditions of previous agreements and awards. In general agreements in publicly owned utilities are both extensive and exhaustive (PSRC 1997 a and b; ILO, 1987).

There appear to be five general types of Agreement now covering employees in

the public utilities:

National agreements or Acts covering all public sector workers, as in Malaysia and Thailand;

National agreements specific to the water or electricity industry, as in Bangladesh;

Pay commission awards covering specific States or municipalities, as in India;

Enterprise-level agreements, as is currently the case in Japan and will increasingly be the case in Australia;

Individual contracts, as in New Zealand.

Each type of collective Agreement (other than the last) covers an extensive array of working conditions in addition to payment and hours of work, including maternity leave, training, equality of opportunity for different ethnic groups, and occupational pensions (except in Thailand and Japan) (PSRC 1997a and b).

Where no agreements are reached to guarantee workers' rights to transfer these conditions into their new employment, privatization leads to changes in most working conditions which are detrimental to employees. The clearest illustration is the contracting out of water meter readers in Sydney Water (Australia), which, consistent with international experience in other industries (Paddon and Thanki, 1995), removed employment continuity (thus reducing income) and reduced leave entitlement and sick leave (see case study in Part II).

The impact of privatization on pay is not always clear-cut, however. There are indications that in some circumstances and for some occupational levels, those who remain employed after privatization may benefit from increases in wages and salaries. Under the pay regrading that followed corporatization of the Philippines' public electricity company, NAPOCOR, the pay rates of employees who remained were moved closer to those in three sets of private utility firms. Pay levels for most grades were considerably increased: by 100-150 per cent for professional and technical workers, and 80-90 per cent for entry-level professional and technical workers. For non-professionals, the new pay grades meant decreases in pay for some categories of employees of 50 per cent, as well as increases for other categories of 40 per cent (Amante, 1995). Even after these changes, pay for NAPOCOR employees was still 28-42 per cent lower than the rates for equivalent grades in privately owned companies.

Employment protection through agreements and guarantees

In many of the instances of capital privatization or contracting out of utilities in the Asia Pacific, the potential impact on employment and working conditions has been mitigated by undertakings/ guarantees given by governments, or by agreements signed between trade unions and governments and/or the new employing body (see Part II, for further details of all the agreements summarised here; see also ILO, 1987).

At their most general, these agreements or undertakings have covered all privatizations implemented in a country. Thus, the general agreement signed in 1991 in Pakistan between the Government and the All Pakistan State Enterprises Workers' Action Committee to protect employees in privatized industries, provided for no lay-offs and no decline in wages and other working conditions during the first year of privatization. A severance package was put in place for employees choosing not to work for the private company. Surplus laid off employees were to be retrained, so as to absorb them into other units. Employees were also to be encouraged to make bids for the purchase of privatized bodies through the preparation of management and financial plans (Bokhari, 1994, p. 53; ILO-SAAT, 1996). In Malaysia, policy decisions have prohibited retrenchments within the first five years of privatization except on disciplinary grounds (Oestmann, 1994).

More widespread in the region have been undertakings or agreements covering privatization of specific water, gas or electricity utilities. These are of two broad types: undertakings made by governments to cover the whole privatization process; and agreements signed between trade unions and government and/or the new employing company, often the culmination of industrial disputes or campaigns. It would appear that agreements reached by consultation or negotiation are given greater credibility by the full range of stakeholders than unilateral statements of guarantee or intent by governments. Greater credibility is also afforded where agreements are sought and reached before processes begin rather than appearing solely as the product of disputes and campaigns.

An agreement signed in Pakistan in 1996 by the Privatization Commission, the Government of Pakistan and Pakistan WAPDA Hydro Electric Central Labour Union (CBA), covers employees transferred with thermal power stations as they are sold. The agreement provides for no retrenchments on privatization, and that transferred workers will receive employment security. It also increases basic pay by 35 per cent and stipulates allowances are to be paid on the new rate. Finally, existing terms and conditions for leave and pensions are protected, as are access to facilities and other benefits (see the more detailed case-study in Part II).

In the privatization of the water system in South Australia, separate agreements were reached by trade unions representing staff in the public water company, with the State Government, and with the new company, United Water. As a result, staff who transferred to the new employer achieved continuity in employment conditions and some additional payments; those remaining were covered by agreements on redeployment; and there was provision for redundancy payments for those choosing to leave. However, it is claimed that these agreements with the new company and the state employer were reached only because of trade union initiatives, and following a community campaign against that privatization. They were not part of the contracting out agreement, and were not undertakings made by the Government in the prelude to privatization.

The Philippines Government has given an undertaking that employees of the privatized Manila Waterworks and Supply Services (MWSS) who have not taken the voluntary redundancy/ early retirement package, will be employed by the concessionaires at salaries and benefits not lower than those they had received in the public sector. Employees will be on six month contracts, and at the end of that period those displaying satisfactory performance will be retained by the concessionaires at salary and benefit levels equivalent to those paid in the private sector utility infrastructure industry. The concessionaires have also agreed to recognize the trade unions which covered the MWSS. Employees who do not accept employment at the end of the six-month period are still entitled to the Early Retirement Incentive Package. At the end of that period, employees accepting regular employment with the companies will also be allowed to participate in an Employee Stock Option Programme. Annual bonuses equivalent to one month salary will be granted, to allow them to purchase stock in the concessionaire company.

With the sale in 1994 of the gas Pipeline Authority by the Commonwealth Government in Australia, the trade union reached an agreement with the new employer, EAPL, after industrial action and Industrial Relations Commission hearings. The agreement provided for the transfer of the existing agreement covering the workplace and preservation of all conditions contained in it. Working conditions, such as long-service leave and maternity, contained in legislation applying only to public sector employees, were also preserved and staff were guaranteed an equivalent superannuation payment. Pipeline Authority employees were to be offered "equivalent employment" by EAPL. Those not offered equivalent employment were entitled to redundancy payments, and a tripartite appeal mechanism was established to determine, in disputes, whether employment was equivalent. EAPL also gave a separate written Undertaking that it would not retrench transferring staff for 12 months after the sale date. A further separate agreement on enhanced redundancy provisions for those few staff made redundant as a result of the sale process was reached with the government.

The 35,000 staff of the two sState companies in the Orissa State Electricity Board (India) have been given an undertaking by the State Government that they will not be retrenched during the processes of disaggregation, corporatization and privatization.

While these agreements have afforded significant protection to employees, they have limitations. Employment protection for staff transferring to the new private employer is invariably time limited. Further, in some instances the agreements providing protected terms may generate a tension with the understandings or requirements of contractors or concessionaires (as it appears may be the case in Orissa). As indicated earlier, all forms of privatization are associated employment cuts, with the corollary that not all employees transfer to the new owner/operator. Where retraining packages are offered to employees who do not transfer, the important considerations will be the appropriateness of the training offered and the real potential for redeployment and career opportunities within the public sector. As the country case studies conducted for this report illustrate, utility privatization is invariably being conducted as part of more general programs to reduce the size and scope of the public sector, which restricts the possibilities of developing a meaningful career within the public sector after retraining or redeployment.

Transferring agreements or transferring staff between equivalent agreements becomes much more problematic if there is variation in provisions for workers' organization and representation between or within the public and private sectors, as in Republic of Korea; or where labour market deregulation is removing the overall significance of agreements and workers' organization, as in New Zealand.

The significance of the industrial relations framework and reforms

In those Asia Pacific countries allowing union membership among public sector workers, unionization is also relatively high in public utilities. In water utilities, for example, the average union membership is just over 70 per cent, ranging from 100 per cent in Japan to 50 per cent in India (PSRC, 1997a). The case studies of Republic of Korea and New Zealand, in Part II, illustrate that the nature of and changes to the overall industrial relations framework will be crucial in determining the labour effects of privatization.

In the Republic of Korea, the impact of privatization varies between different categories of public sector employees. Public servants have had very limited unionization rights. Pay levels, set by central Government bodies, have also tended to be significantly lower than private sector equivalents and legal minimum labour standards, such as overtime premiums, are not guaranteed for public servants (Park, 1993, p. 7). By contrast, employees in public authorities (essentially corporatized bodies) have the same rights to join trade unions as private sector employees. That group of employees is also covered by the Labour Standard Act, guaranteeing certain minimum labour standards. Wages for employees of public authorities are often higher on average than those in the private sector, and are considerably higher than the wages paid to public servants. Other working conditions are also superior (Park, 1993, p. 8-10). Workers in the water, gas and electricity industries, however, are classified as 'essential workers', and are thus subject to emergency mediation and/or compulsory arbitration in the event of severe strikes. In this context, the impact of privatization on employees is complex.

As Government departments become essentially corporatised public enterprises, employees who transfer receive higher wages and greater industrial freedom. Privatization may benefit employees in government department/authorities in the sense that the private sector pays higher wages. However, it is rare for government authorities to privatized. The usual scenario is to privatise public authorities. When this occurs, employees are disadvantaged as they face lower wages and working conditions, and reductions in employment security. Furthermore, in the event of privatization, employees of government departments or public enterprises have no guaranteed employment or social rights, despite the application of the Labour Standard Act. The law allows retrenchments in the event of restructuring (Park, 1993, p. 11).

Labour market deregulation has been an integral part of a radical but entirely internally generated SAP in New Zealand. In the public utilities, employment levels and working conditions have been altered by the combined, equally significant impact of labour market deregulation and privatization. The initial fundamental change in working conditions in the public sector occurred under the State Services Conditions of Employment Act 1988, which introduced private sector practices (Kelsey, 1995, p. 123). In 1991, the Employment Contracts Act significantly changed the fabric of both public and private sector industrial relations. Its focus was on individual contracts, and involved a campaign to de-unionise the workforce. The Government applied this legislation stringently to its own workforce (Kelsey, 1995, p. 183). In this case, legislative change concurrent with privatization meant that employees employment, wages and other working conditions would not have been protected even if they had remained in the public sector (Kelsey, 1995).

The scale and pace of the SAP has arguably placed additional problems for staff displaced following utility privatization. Eighteen privatizations occurred in New Zealand between 1986 and 1990 (Kelsey, 1995, p. 129). The speed at which these projects were carried out meant that there was no opportunity to reduce employment levels by natural attrition. The rate at which the public sector was contracting in size also meant that there was no opportunity to redeploy significant numbers of employees. And while the Employment Contracts Act has had a major effect across the economy, it has also had a particular effect in the public sector, resulting there in falling real wages, increases in part-time and casual employment, curtailment of equal employment opportunity programmes and reductions in training (Douglas, 1995).

Employment of women

Women make up a relatively small proportion of the total workforce in the Asia Pacific water, electricity and gas industries. However, their presence seems to have been increasing over time; so that by the mid 1980s between 3 and 15 per cent of employment in the utilities in Asian countries were women (ILO, 1987).

While there has been insufficient information to make it a central focus of this report, it is likely that the effects of privatization on labour described in this report will have been particularly detrimental for women workers. agreements in the public water and electricity industries almost invariably contain provisions of specific relevance to women workers, notably maternity leave, as well as a general provision for equality of employment opportunity (PSRC 1997 a and b). When utilities are privatized, some of the agreements covering employment and working conditions under the private employer have included maternity leave provisions, for instance, as with the Pipeline Authority in Australia. But it is anticipated that this is not the case for all agreements or undertakings on transfers. Thus, privatization may effectively remove access for women to working conditions or facilities which were available through agreements in the publicly owned utilities.

International evidence across industries also suggests that women employees are particularly adversely affected by contracting out; a major mechanism for privatization, particularly in the region's water industry (Paddon and Thanki, 1995; Industry Commission, 1996). Adverse effects have included a disproportionate impact on women's employment levels and working conditions, including pay levels and benefits such as access to leave.

Transnational corporations

The private companies which purchase assets, take on contracts and concessions, and finance BOO and BOOT schemes, are transnational corporations (TNCs), subsidiaries of TNCs, or consortia in which TNCs are major partners. This has implications for the longer-term impact of privatization on employment, working conditions and industrial relations, because of the forms of bargaining, recognition of union representatives and related issues typical of those organizations.

This project has identified eight TNCs involved in water projects across seven Asia-Pacific countries, which fall into three groups (PSRC 1997a):

Two French TNCs (out of the three dominating the world's water industry) involved in the two largest privatizations in the region, the contracting out/leasing of water in South Australia and the Philippines;

Three water-based TNCs originating from the privatization of British water utilities in the 1980s; involved as partners, one in South Australia and the other in one of the Philippines concessions;

Various TNCs (less important in terms of number of projects in which they are engaged) with a broad portfolio of activities but no specific base within the water or waste industries.

In electricity, there are fourteen TNCs involved in three or more privatizations or privately funded development projects in the ten countries of the region considered (PSRC 1997b). Six are European based (including the two British privatized utilities, National Power and Power General), five are based in the United States, and three in Asia itself. The companies broadly fall into four groups:

Corporations operating electricity or energy utilities as their core business;

Corporations focusing on heavy industry, engineering and construction;

Corporations based in energy exploration and supply;

Broadly based multinationals with interests crossing a wide range of service and manufacturing industries.

The international nature of TNCs requires the development of structures and modes of industrial relations appropriate to their specific character. However, international experience suggests that there are limitations for labour in plant by plant or utility by utility agreements on employment and working conditions. The diversity of operations of TNCs may also imply that the company's profitability is not immediately or directly related to the operations of a specific utility, plant or industry. Thus, TNCs may divest themselves of certain operations as part of international strategies, with consequences for contracts on which they are the concessionaire and the employees working in those operations.

6. Indirect employment consequences of privatization and restructuring

Proponents of privatization argue that while there may be negative, direct employment effects on the employees of State owned companies, these may be outweighed by its indirect positive impact on total employment in the economy. The positive impact is said to derive from three elements. First, increases in overall investment which are either part of the privatization process (with BOO and BOOT schemes) or may follow from increased access to private capital markets. Second, the greater efficiencies which may result from microeconomic reform, releasing resources for use in the wider economy (see for instance the Industry Commission, 1995). Third, at a subnational level, the expectation that privatized companies will be used as a base for export and expansion, generating a multiplier effect in other regional industries.

There is no material available at a disaggregated level to allow assessing the indirect employment impact of privatization of a particular industry or utility. None the less, critics of these general assertions have observed that it would be erroneous to assume that investment funding could not have been made available through government borrowing. Also, the sale of assets removes a flow of income to the government. Thus, the value of BOO and BOOT schemes and the total value of assets sold cannot be assumed to constitute net investments in the economy. The extent to which net investment, properly calculated, and other micro economic reform processes generate efficiencies which translate into future employment is largely a function of the assumptions of the economic model chosen (on both these points see Quiggin, 1996).

On the third process, at the subnational level, an attempt was made in one of the region's major water privatizations, in South Australia, to link the contracting out of the service to the potential indirect employment benefits that might flow to the State. As described in greater detail in the case study in Part II, the South Australian Government aimed to use contracting out to achieve international best practice as regards water and wastewater services, substantial cost savings, and sustainable economic growth. According to the Government, attaining these goals would result in the creation of 1,100 new jobs, savings of A$150 millions, and A$630 millions of exports to Asia, contributing to employment generation in the State (Regional Research Network, 1996, p. 47). The contribution to the State's economy was to be built around two requirements, which it had ostensibly included in the tendering process for the contract: that the winning bidder should be a majority Australian-owned firm within 12 months; and that tenderers specify, as part of their bid, how they would use the contract as the basis for development into Asia, and export potential and employment generation among South Australian based suppliers associated with it (Kennedy, 1997).

Critics have questioned the likelihood that the projected indirect employment benefits would materialise. First, they argue that the expected increase in employment levels relies on questionable assumptions about increases in exports and economic activity (Regional Research Network, 1996, pp. 47-48). Second, the export target of A$627 millions includes dividends repatriated to the parent companies of consortium members, in France and England (Altmann, Kelton, and Murphy, 1997; Kennedy, 1997). Third, it appears unlikely that there will be any move to Australian ownership of the company in the short or medium term.

7. Privatization and the provision of services

Service quality and access

One rationale given for utility privatization in the region has been the need to introduce the additional resources necessary to extend access to the service and improve service quality. Thus, one objective of the privatization of water and sewerage in Manila (the Philippines), has been to assist in providing virtual universal access by 2021 (see the case study in part II). An important determinant of access, in practice, is the price charged for water, electricity or gas after privatization, since price will determine the use made of a utility (Oestmann, 1994).

The potentially negative impact of privatization on the quality of services is consistently raised by critics. While there is little substantive evidence in the region of an improvement in the quality of utility services after privatization, questions have been raised about the guarantees for adequate service quality written into privatization arrangements. In Manila, NGOs claim that the arrangements with concessionaries as part of the contracting out provide for inadequate health standards compared to World Health Organization benchmarks, and lack appropriate environmental standards.

Privatization and deregulation of electricity in New Zealand has also brought criticism from consumer organizations because of deficiencies in contracts between the new distribution companies and consumers, and the lack of standardized dispute resolution procedures. A ranking of its electricity companies on the basis of the quality of their consumer contracts reveals significant variations between companies (see the case study in Part II).

Prices and charges to customers

In each of the utilities, the evidence from across the region is that privatization and restructuring are associated with increases in prices and charges for some, if not all, consumers.

Electricity prices have doubled in Pakistan within a year, as a direct result of restructuring. In the Indian State of Orissa, tariffs have risen by 17 per cent in each of two annual rises, in 1995 and 1996, and further rises are anticipated with the plans for restructuring and privatization. The precise link between privatization and price rises is sometimes difficult to isolate, particularly where, as in Orissa, tariff changes may have been implemented in the period immediately before privatization technically took place. There appear to be three related processes at work:

"Rebalancing" of pricing. Management privatization (commercialization and corporatisation), as a distinctive form of privatization or linked to other change is associated with reductions in cross-subsidies between types or categories of consumers and moves toward full cost pricing. In the Indian States of Orissa and Uttar Pradesh, elimination of cross subsidies in electricity and a move to full user cost pricing would result in substantial tariff increase for domestic users and the agricultural sector. In Australia, it is anticipated that without cross-subsidies for electricity, rural consumers will either pay more for at service or, if pricing controls are maintained, the higher costs may translate into a reduced standard of maintenance and service on rural lines (Crawford, 1997).

Disaggregation. Where generation, supply and transmission are disaggregated, in the electricity industry, and supply and distribution separated, as in the gas industry, changes in the intermediate prices paid will have a significant impact on the charges paid by eventual customers and users. In Pakistan, it appears that to induce private investment in IPPs in the electricity industry, unnecessarily high minimum tariffs to generators have been established and guarantees have been given that electricity will be purchased to ensure at least 60 per cent capacity usage; both measures will raise prices to consumers (see the case study in part II).

Deregulation. This may remove previous agreements between suppliers and distributors in gas and electricity, and produce substantial differences in charges and tariffs between different areas. In New Zealand, electricity prices have risen for domestic consumers, although no corresponding fall has occurred in the charges paid by commercial consumers. There are also now considerable price variations between electricity companies. For medium-sized domestic consumers, the most expensive supplier charges 70 per cent more than the cheapest one. That difference is over 60 per cent for smaller households (Consumer, 1997, p. 8). While the effects of deregulation have varied, they have generally been disadvantageous to domestic consumers.

Further, deregulation of the gas industry in New Zealand prompted a series of changes in arrangements between suppliers and distributors which produced some increases in prices to consumers. In the wake of deregulation in 1993, the main wholesale supplier, NGC, increased its charges to the main distribution companies by about 6 per cent. The major distributor on the North Island, Enerco, responded by raising its prices by 13 per cent 14 per cent for residential consumers and 3-4 per cent for other consumers. Subsequent supply contracts have reversed the 6 per cent rise but incorporated other increases over a five year period, including higher rates for distributors operating at a distance from NGC's hub network. The effects of deregulation are varied, but generally disadvantageous to domestic consumers.

It would appear that the nature, form and content of the continuing state involvement in regulation of utilities after privatization is one key determinant of the extent and equity in price rises.

8. Budgetary repercussions of restructuring and privatization

There is no straightforward methodology for assessing the budgetary implications of any form of utility privatization. Public policy discussion of the immediate financial outcome of privatizations tends to be dominated by statements of gross figures for the overall transaction. Thus:

For contracting out, financial significance is stated in terms of the total value of the contract and the assumed savings this may bring on previous operating costs. For example, the 15 year contract for Adelaide's water system in Australia is valued at A$2 billions.

Where capital is privatized, the headline figure is the payment offered or made for the asset or the total value of shares sold. New Zealand Government's sale of the state-owned energy enterprise, Petrocorp, is thus expressed in terms of the overall payment of NZ$801 millions.

Finance privatization is expressed in terms of the total gross estimated value of the projects, such as the two projects for building power plants as BOO and BOOT schemes under consideration by the Philippine Government, valued at US$750,000, and the six water projects under negotiation with a combined value of US$41 billions.

However, these gross figures are a very inaccurate assessment of the true contribution of schemes to government financial transactions and budgeting:

Where contracting out occurs, payments to the contractor or concessionaire are made over the term of the contract; but in assessing the overall impact on Government income and expenditure, other costs should also be included. The most important will be: the "transaction" costs of setting up and administering the contract; "transition" costs of moving from Government provision to provision under contract, mainly the costs to Government of the redundancies accompanying privatization; "monitoring costs" of ensuring that all the terms of the contract are met; and any indirect social costs arising from unemployment, retraining needs and multiplier effects (Paddon and Thanki, 1995; Whitfield, 1996).

Part II: Case-studies

Where capital is privatized, the calculation should include transition- and transaction costs; the possibility that assets may be sold for less than their market value; and the estimated loss of the future stream of income from dividends or any differential taxation arrangements (Quiggin, 1996).

The net contribution to Government and budget financing from finance privatization must take account of the extent to which BOO, BOOT and similar schemes to fund water and electricity infrastructure are often underwritten or supported financially, or through other mechanisms, by governments. Support mechanisms include: government guarantees of loans and provision of tax and other concessions; long term contractual commitments or undertakings, including predetermined pricing arrangements; providing public resources such as land at no cost or subsidized cost; direct payments and subsidies including establishment and other costs.

Further, it has been estimated that privately funded BOOT and similar schemes cost between 1-66 per cent more than schemes built as conventional government funded projects (watts). Costs are higher for three reasons. First, the costs of borrowing are higher for private companies than Governments. Second, the cost of funding one-off projects are higher than those of funding ongoing networks or similar provision. Third, BOOT schemes have disproportionately high overhead costs because of how funding has to be put together, tendering costs, etc., and the risks of involving several partners in a consortium.

1: Privatization of water supply in Adelaide, South Australia (under contract):

Employment agreements negotiated directly between trade unions, the new employer and the State Government

State Government reform in south Australia

In Australia, the supply of water, and treatment of waste and sewerage are functions of State Governments (Johnson and Rix, 1993). Like a number of other State Governments, the Liberal-National Government in South Australia has pursued an agenda of corporatization, contracting out, private sector involvement in capital works, capital planning and pricing reform in water services.

In 1994, a Commission of Audit established by the Government reported on the operations of the Engineering and Water Supply Department in Adelaide, the State's capital. It found that the Department had improved its operational and financial performance over the preceding two and a half years and was as efficient in service provision as any other water authority in Australia. However, the Commission argued that further improvements could be made through restructuring and private sector involvement in service delivery (South Australian Government, 1995, p. 19).

On the basis of that report the Government corporatized the Engineering and Water Supply Department and decided to contract out:

Operation and maintenance of metropolitan water and sewerage treatment;

Operation and maintenance of the metropolitan water and sewer main network;

Provision of logistic support services based in the metropolitan area.

In addition to contracting out water and sewerage services, the South Australian Government's restructuring agenda includes private sector involvement in capital projects. New water treatment plants are planned for a number of urban areas outside the metropolitan area of Adelaide, that still receive untreated Murray River water. The Government has explored the use of BOO schemes to supply the facilities (South Australian Government, 1995, p. 24).

Privatization of Adelaide water through contracting out

In contracting out Adelaide's water and sewerage system, the Government sought a large water/wastewater organization with experience in operating large urban systems and significant presence in the Asia Pacific region. The Boston Consulting Group and Price Waterhouse Urwick were engaged to advise on strategic and management issues. Four TNCs were selected by the Government as having the size, experience and regional presence required: Compagnie Générale des Eaux (France), Lyonnaise des Eaux (France), North West Water (United Kingdom) and Thames Water (United Kingdom).

The trade unions representing workers at South Australia Water were vehemently opposed to privatization and undertook sustained lobbying of political parties in an attempt to prevent it. There was also strong support in the community for public ownership and management of water services. The trade union and community campaign, though, was not successful in stopping Government's decision to privatizate.

The 15 year contract for the management of Adelaide's water system, valued at A$2 billions, was finally awarded to the United Water consortium, made up of Thames Water and Compagnie Gnrale des Eaux, with a small, 5 per cent stake held by the local engineering firm, Kinhill Engineering, to commence in 1996. At the time it was awarded, the contract was promoted as an illustration of an innovative approach to privatization through out sourcing, and endorsed for international application by the World Bank and other organizations. Controversy has surrounded the signing of the contract because of alleged irregularities in the tendering process. The resulting inquiries, by various national and state authorities, found no evidence of corruption, but suggested that those irregularities raised serious technical questions about the procedures used (Kennedy, 1997).

The direct impact on employment and working conditions

When the political campaign to halt the privatization failed, trade unions with members in the public water industry undertook a protracted industrial campaign to ensure the best possible conditions for affected employees. Trade union sources state that they experienced considerable resistance to their demands, and it was only through persevering that they achieved a satisfactory outcome for members. When the South Australian Government failed to respond to workers' concerns in a manner judged satisfactory by trade unions, these approached South Australia Water and United Water directly and, as they claim, were largely instrumental in achieving a relatively favourable outcome for transferred employees at United Water.

Privatization resulted, none the less, in important employment reductions. Some 400 employees, out of a total of 700 staff at South Australia Water, were transferred to United Water. This reduction is particularly substantial if examined in the context of a previous reduction in the water services workforce of 43 per cent, between 1991 and 1994. The employees transferred to the new employer were chosen by the contractor from a list of available staff. Although there is no information about the breakdown of employees chosen, other case studies suggest that older workers tend to be disadvantaged by this type of process (Ascher, 1987).

On the whole, the impact of privatization on transferred employees has been relatively modest in terms of wages and other working conditions. Employment may have become less secure than in the public sector, although this is difficult to gauge with certainty given a broader agenda of public sector downsizing. Their wages and working conditions are comparable with pre-contract levels. Employment and working conditions have been maintained through an interim award governing employment with United Water, and superannuation entitlements have been protected. Transferred employees have seen their employment guaranteed for two years. Accumulated sick leave has been transferred and long-service leave entitlements have either been paid out or transferred. Employees received a tax-free incentive payment from the Government of between A$2,500 and A$10,000; and trade unions representing transferred employees negotiated an additional A$2,500, paid by United Water.

agreements were also reached between the government and trade unions, as a result of union pressure, for those former employees who did not transfer to the new company. Employment security in meaningful jobs was assured for redeployed workers, and substantial redundancy packages obtained for employees who chose to leave. There were no forced redundancies during the process of privatization.

The transfer of employment conditions, redundancy payments, redeployment and other positive measures, none the less, add considerably to the costs of contracting out. Many of these costs, borne by the Government, are not reflected in the contract price. Thus, claims about the financial savings resulting from privatization must be treated with caution as they are likely to be overestimates (Regional Research Network, 1996, p. 48).

Indirect employment effects in the regional economy

The South Australian Government's stated intention was to use contracting out to achieve international best practice levels in water and wastewater services, with substantial cost savings and sustainable economic growth. According to it, achieving these goals would result in the creation of 1,100 new jobs, savings of A$150 millions, and generation of A$630 millions in exports to Asia which would contribute indirectly to employment generation in the State (Regional Research Network, 1996, p. 47).

The indirect contribution to the State's economy was to be built around two requirements which the State Government had ostensibly included in the tendering process for the contract. The first was that the winning bidder should be a majority Australian-owned company within 12 months. The second was that tenderers were required to submit, as part of their bid, an indication of how they would use the contract as the basis for development into Asia, and what would be the associated export potential and employment generation among South Australia-based suppliers (Kennedy, 1997).

Critics have questioned the likelihood that the projected indirect employment benefits will materialize. It has been argued that the claim of an increase in employment levels relies on dubious assumptions about increases in exports and economic activity. The estimated exports of A$627 millions forecasted by the Government, based on the figures provided by the successful contractor, is also questioned. However, A$160 millions of the projected "exports" figure consist of dividends repatriated to the parent companies of the consortium members, in France and United Kingdom (Altmann, Kelton and Murphy, 1997; Kennedy, 1997). The Government also revised downwards its claim that the contract would generate A$38 millions in exports in its first year to only A$9.5 millions, the figure specified in the contract. As for the requirement that United Water be 60 per cent Australian owned within 12 months, there has been no progress toward this ownership structure as of mid-1997 (Regional Research Network, 1996, pp. 47-48).

Commentary and issues for further consideration

At the time of completion, the contracting out of Adelaide's water and sewerage was the largest water privatization project in the region and was being promoted as a model for wider application. The size of the contract, the public disquiet and campaign directed against privatization, along with concerns about the process of awarding the tender have made political considerations dominate the evaluation of this contracting out experience. Worth highlighting, none the less, is that separate agreements were reached between trade unions representing staff in the public water company and the Government, and between them and the new company, United Water. These agreements were reached only because of trade union initiatives, and following the community campaign. They were not part of the contracting out agreement, or of undertakings made by the Government in the prelude to privatization.

Also, as a counterbalance to any negative direct employment consequences of privatization, the State Government has claimed that the contract and the process by which it was awarded provide the potential for significant export-led, indirect employment creation in the State. However, critics have argued that the factors which were to contribute to this indirect employment generation are unlikely to materialize, particularly given the transnational character of the majority partners in United Water.

2: Privatization of the water and sewerage system in Manila, Philippines (under contract):

Restructuring and privatization with Government Undertakings

Privatization in the Philippines

Since the 1980s the Philippines has been subject to a series of structural adjustments under the direction of global monetary authorities such as the IMF and the World Bank. Like most of the developing world, the Philippines has had a strong tradition of public sector involvement in infrastructure and service provision by the various levels of Government. It is only in the past decade that pressure to reform the economy through structural adjustment policies has been consistently acted upon.

An immediate consequence of those policies has been the privatization or partial privatization of various State-owned enterprises. The 1970s saw a large number of them "corporatized" into government business, as a prelude to privatization. By 1986, there were 301, accounting for 2.4 per cent of production (GNP) and a much larger share of national investment (Macapagal and Beltran, 1992, p. 41). A total of 123 were approved for privatization by 1991, with 78 retained and the rest merged with Government departments, consolidated or abolished. Of the 123 marked for privatization, only 69 had been partially or completely sold by 1991, generating P42 billions of revenues for the Government, which also assumed the debts of the Philippines National Bank (PNB) of P45 billions to prepare it for privatization. The assets were privatized under a Government proclamation, "Proclamation 50", which also terminated the existing employer-labour relationships on privatization. This resulted in large scale redundancies and a consequent pressure to reform Proclamation 50.

However, further privatization is planned and being actively promoted by some commentators (Macapagal and Beltran, 1992). Recent examples of proposed privatization in the Philippines include the sale of part of the PNB; of up to 25 per cent of the National Steel Corporation; DHL's purchase of 13 per cent of Philippine Airline; and Nonoc Nickel refinery to be sold to Pacific Nickel Holdings.

According to the Asia Development Bank (ADB), privatization generated revenues of US$1.9 billions in 1994 and US$1.7 billions in 1995. However, the ADB has expressed concern that many large privatization projects had been completed without the Government establishing a sustainable source of revenue (Reuter, 1996).

Privatization of the public infrastructure firms, the National Power Corporation (NAPOCOR) and the Metropolitan Water Works and Sewerage System (MWSS), is being referred to by the Philippines Government as the second phase of privatization; to be followed by a third phase, involving privatization of the country's state run pension funds (Reuters, 1996).

Privatization of the MWSS

The largest water supply agency in the Philippines is the Manila Metropolitan Waterworks and Sewerage System (MWSS), servicing 11 millions people in the metropolitan area. It claims to be the oldest water system in Asia, constructed in 1878. The process of reorganizing MWSS in preparation for privatization commenced in 1995 with the Republic Act No 8041, known as the National Water Crisis Act; a title signalling the main rationale given by Government for privatization. In effect, the overriding objective is said to be improving the standards of service and, in particular, access to water and sewerage services in Metro Manila. MWSS statistics show that in 1996 only 67 per cent of the population had access to water services and 9 per cent to sanitation and sewerage. It is claimed that privatization will assist in raising these proportions to 87 and 46 per cent respectively by 2001, and 98 and 83 per cent by 2021. Through the introduction of around US$7 billions in investment in water and waste, it is argued that there will be particular benefits to the 30 per cent of the population now not connected to the water system who are estimated to pay ten times the price for water paid by connected customers (Lazarro, 1996).

Privatization of the MWSS has been through a 25-year concession involving distribution, metering, expansion and improvement of the water system and sewerage. With advice from the International Finance Corporation (IFC), the private sector financing arm of the World Bank MWSS reviewed a number of options for privatization, including BOOT/BOO and ROT, sales of shares and sales of assets. Under the concessions scheme chosen, the system is divided into two separate geographical zones. Also, MWSS retains ownership of fixed assets, but responsibility for operations management and investment is transferred to the private operator.

Four groups were invited to bid for the US$5 billions privatization concessions. Each of the bids involved a local company with a foreign partner: Compagnie Gnrale des Eaux, with Aboitiz Equity Ventures; a joint venture between the American construction company Bechtel and North West Water (as United Utilities), with Ayala Land Inc.; Lyonnaise des Eaux with Benpres Holding Company; and Anglia Water with the Metro Pacific Corp. MWSS set requirements for the equity breakdown of the concessionaires. The Filipino content must total at least 60 per cent of equity, with the main local sponsor providing at least 20 per cent and employees being offered 10 per cent. Of the 40 per cent foreign component, at least half must come from the international operator (Lazaro, 1996). The bidding process ended in early 1997. The East Zone bid was awarded to the consortium of Bechtel (American), United Utilities (British) and Ayala (Filipino). The West Zone bid went to the consortium of Lyonnaise des Eaux (French) and Benpres (Filipino).

The direct impact on employment and working conditions

Employment in MWSS has been reduced in a series of phases, starting with reorganization in 1995. The Philippine Government has instituted arrangements for early retirement to facilitate the process.

The 1995 National Water Crisis Act provided for the reorganization of MWSS and the Local Waterworks and Utilities Administration (LWUA). The Executive Order implementing it provided for separation pay for any employees "phased out" through this process. The organizations were required to prepare a voluntary retirement scheme with associated benefits, including acceleration of the compensation package available in the Philippines under existing legislation and enhancement of the legal minimum. The first part of the Early Retirement Incentive Plan (ERIP) was implemented in 1996 and saw 2,200 employees take early retirement, resulting in a 28 per cent decrease in overall MWSS employment. A second phase was implemented after the final decisions on privatization, in 1997. Thirty days prior to the date of privatization, remaining employees were offered a voluntary Early Retirement Incentive Package equivalent to two weeks salary per year of service, in addition to any retirement or separation benefits.

For those not taking early retirement, the Government has given undertakings about employment with the concessionaires. These were required to give employees who declined the package six-month contract, at salaries and benefits not less than those they had received in the public sector. At the end of the six-month period, concessionaires world retain those with satisfactory performance, at salary and benefit levels equivalent to those paid in the private sector utilities/ infrastructure industry. Concessionaires also agreed to recognize the trade unions covering the MWSS. Employees who did not accept employment at the end of the six-month period would still be entitled to the Early Retirement Incentive Package.

At the end of the six month period, employees accepting regular employment with the companies would participate in an Employee Stock Option Programme, receiving annual bonuses equivalent to one month salary, to purchase stock in the concessionaire company. Employees would be entitled to purchase a proportion of the company's stocks which, according to different reports, will be 6-10 per cent of the overall stock (Government report: The Ten Most-Asked Questions About the Privatization of the MWSS).

Trade unions representing MWSS employees have been concerned about the lack of consultation and negotiation in preparing the Government's undertakings. Another concern, which they shared with NGOs, have been the likely effects of privatization on water quality and price.

Privatization and the quality and price of water

There is contradictory information on the likely impact of privatization on prices. The current MWSS Administrator claims that universal water service will be achieved without any real increases in water tariffs over the first ten years (Lazaro, 1996). However, IFC foresees possible increases in water charges after the first five years of the new arrangements (material provided by the Confederation of Independent Unions in the Public Sector).

It appears from the contract for the concessions that the nature of regulation will be crucial in determining price increases. The contract says that the bidding price will be bound for ten years, and only in an unexpected event and with the approval of the industry regulator, can tariffs increase. The regulator can also change the price after 5 years if it feels it could go down. However, at the time of privatization, neither the nature nor the terms of reference for regulation had been established.

NGOs representing environmental and labour groups have raised a number of concerns about the water quality and price aspects of this privatization. In particular:

The contract reflects the Philippine water and health standards, but does not for example reflect World Health Organization (WHO) standards. Thus, it indicates that all wastewater must be treated but does not specify the kind of treatment (i.e. primary, secondary or tertiary).

Environmental standards in the concessionaire's contract lack targets for water conservation; targets for sewage treatment (not just sewerage); water quality monitoring; enforcement mechanisms; and a water management resource plan. The IFC acknowledged that the contract does not address theseissues and indicated these had not been brought up with them.

The contract allows cutting off water for the poor who cannot pay the bills. There are no allowances or special considerations given to poor consumers in the Metro Manila area.

The concerns of trade unions and NGOs about the possible effects of the privatization on water quality, price and access have been acerbated by the lack of a regulatory framework at the time of privatization.

Regulation of the privatized concessions

Because of pressure (linked to the 1998 presidential election) to complete this privatization quickly, regulations to govern the concessions were not developed before privatization took place. Once completed, regulations will define how the regulating body will operate as well as concessionaires' obligations and reporting requirements. MWSS has also approved public performance audit systems for the regulating body to use, that will allow it to publish information about how well the concessionaires are meeting the terms of their contract in providing services, meeting standards, etc. The IFC believes that making this information public will pressure concessionaires to comply with those terms, and take the sole responsibility/enforcement burden away from the regulating body. It is understood that this body will have 5 regulators, appointed by the President.

Commentary and issues for further consideration

The water concession for MWSS is the largest water privatization in the region (after the one in South Australia). It has been promoted as an illustration of contracting out or "delegated management" operated by the major TNC in the international water industry. However, the process has been contentious because of the opposition from trade unions and NGOs, who have not been involved in any negotiation or agreement. As a result, while employment issues have been managed within the arrangements for early retirement previously devised for MWSS and with Government's guarantees of employment with the concessionaires for those not taking early retirement, trade unions have continued their opposition to this privatization.

The absence of an adequate regulatory framework at the time of privatization has also raised continuing doubts about various aspects of water quality, pricing and the services to some less advantaged groups in the community. This, despite the overall rationale given for privatization, that it will eventually extend access to water services to the whole population.

3: Contracting out of meter reading by Sydney Water, New South Wales, Australia

Employment effects where no agreements cover staff or transfers

Privatization of the water industry in New South Wales

Restructuring of the water and waste industries in the State of New South Wales has three facets: Corporatization of the major water supply companies, the Hunter Water Board and the Sydney Water Board (now Sydney Water); Private sector investment in the industry through BOO and BOOT schemes; Contracting out of specific functions and activities. This case-study provides a detailed account of the impact on employment of the contracting out of one function, water meter reading, by Sydney Water, after corporatization.

The Sydney Water Board was the sixth Government Trading Enterprises (GTE) to be corporatized under general legislation introduced in 1989 by the State's Liberal-National government (Johnson and Paddon, 1995, p 8). Prior to corporatization, the Board was restructured to include four divisions: Utilities, Transwater, the Holding Company and Australian Water Technologies. On being corporatised in 1994, the Board became Sydney Water Corporation Ltd. Although Sydney Water had not engaged in wholesale privatization was through the selling of assets, in privatization was introduced through private investment in new projects and contracting out of functions.

BOO and BOOT schemes involving the major TNCs in the water industry were developed for water treatment plants (Johnson and Paddon, 1995, p. 17):

Prospect reservoir, a A$205 million water treatment plant operated by a consortium of the French company Lyonnaise des Eaux, Lend Lease and P & O Australia, with finance arranged by the Bankers Trust;

Macarthur reservoir, a A$130 millions project involving a consortium of the British company North West Water and Transfield Australia.

Water treatment plants at Woronora and Illawarra, operated by a consortium of the French water company Générale des Eaux, Kinhill Engineers, Concrete Construction and the Australian Industrial Development Corporation.

Contracting out of water meter reading

Sydney Water has also contracted out functions. The contracting out of water meter reading first occurred in 1988, and was the forerunner of other contracting out schemes which have multiplied since corporatization. A factor in the decision to contract out was the interest of a former Water Board employee in providing the service. The ex-employee now owns one of the meter reading companies operating in Sydney (Small, 1996, pp. 48-49). Initially, in-house teams were permitted to tender for meter reading contracts and such teams were sometimes successful. However, in subsequent rounds of tendering, in-house teams were not permitted to compete and blanket contracting out occurred.

The impact of contracting out on labour

Employment

Contracting has been part of a long period of reorganization at Sydney Water, which resulted in the number of employees declining from 12,776 to 6,774 between 1984 and 1994 (Johnson and Paddon, 1995, p. 17). When contracting out of water meter readers occurred, all employees were offered the choice of redundancy or redeployment within Sydney Water. However, the trade union covering Sydney Water argues that redeployment was seen as only a short-term option by both management and staff, and that most employees took redundancy packages. There was no requirement for contracting companies to take on Sydney Water employees, and only 10 to 20 per cent of Sydney Water meter readers gained employment with the private companies (Small, 1996, p. 51).

Working conditions

The most significant change has been the loss employment continuity for meter readers. Meter reading is undertaken in an eight-week period which is followed by a five-week period during which Sydney Water deals with administrative matters. No meter reading occurs in this period. Prior to contracting out, Sydney Water employees were redeployed to other work, such as maintenance, during this period. However, generally contracting companies do not have scope for redeployment; and can terminate workers at the end of each work period and re-hire them after those five weeks.

Lack of employment continuity has a dramatic impact on workers' income. Even in a company (surveyed in detail by Small, 1996) displaying a relatively good record of employee relations when compared with other meter reading companies, employees were found to be greatly disadvantaged by contracting out. Their base income level is calculated on a 32-week working year, and equals approximately A$16,000 (including paid annual leave). Employees are granted a bonus when they meet performance targets, and up to 90 per cent of them receive it at the end of each work period. This bonus equals up to two to three weeks pay, and when its maximum level available is factored in, employees receive A$20,674 per year. This is a low pay rate, even discounting the periodic employment system. On this rate, a full time employee would receive approximately A$24,200 per year before bonuses; while, equivalent full time employees at Sydney Water receive between A$31,849 and A$33,801. The fact that contractors' employees are working full time for significant periods undermines the possibility to undertake a second job. Further, unlike conventional privatization, contracting out means that a company is only assured of work until the end of the contract period; translating in less secure employment than under a traditional privatization situation. Most employees lose their jobs if the company does not win the next contract, as there are usually very limited opportunities for absorbing employees into other areas of the company (Small, 1996, pp. 65-66).

The periodic employment structure in water meter reading also impacts on employees' leave entitlements. Annual leave entitlements in Australia are accrued on a yearly basis but are paid on a pro rata basis in the event of termination. Periodic employment arrangements mean that an employee never becomes entitled to take annual leave but rather is paid out at the end of each work period. While such an employee experiences 20 weeks without work per year, these breaks are unpaid and may not correspond with his or her family's holiday times. By contrast, Sydney Water employees are entitled to four weeks paid annual leave, and also receive a leave loading payment in addition to their usual pay, equivalent to 17.5 per cent of their wage or salary.

Long-service leave entitlements are also affected by periodic employment. Employees at Sydney Water are entitled to 44 days leave on full pay after ten years of continuous service. The position of employees on periodic work arrangements is unclear. According to the 1955 Long Service Leave Act (NSW), small breaks in employment do not impact on long service-leave eligibility. However, it is not clear whether this provision covers recurrent terminations. But, even if an employee is not disqualified because of breaks in employment, other obstacles exist in gaining long-service leave. First, the breaks between employment periods are not taken into account in calculating entitlements; thus an employee would have to work for a company for sixteen years and three months before accumulating the equivalent of ten years' full-time service. Second, contracts between the meter reading companies and Sydney Water are for one year with options for renewal by Sydney Water. In such an uncertain industry it is highly unlikely that an employee would become entitled to long-service leave (Small, 1996, pp. 59-60).

Sick leave is also adversely affected by contracting out. Employees at Sydney Water are entitled to 20 days sick leave per year, while employees of the surveyed company are entitled to one week only. Even on a pro rata basis, Sydney Water employees are entitled to more leave, 12 days compared with five over 32 weeks (Small, 1996, p. 59). Sydney Water employees are also entitled to parental leave, which includes a paid component for women with more than one year's service. Employees engaged in periodic employment do not become entitled to parental leave because the relevant legislation for the private sector requires one year's service (Small, 1996, p. 60).

The industrial relations framework in New South Wales

The industrial relations framework in which contracting out of water meter reading took place also impacted on the position of workers. In 1995, the level of unionization in the Australian public sector was 62.1 per cent, while in the private sector it was 28 per cent (ABS, 1995, p. 31). It is evident that the move from public to private sector service provision places downward pressure on unionization. This pressure is exacerbated when public sector unions lose coverage of workers on their transfer to the private sector. In the case of water meter reading, a number of factors militated against significant union involvement in the contractors' companies. First, these companies were generally formed, or at least specific divisions were formed, as a response to the contracting out of water meter reading. Thus, they had no unionization tradition and, as unionisation levels decline in Australia, new companies are less likely to become unionised than in the past. Second, as few employees were drawn from (highly unionized) Sydney Water, employees of the contracting companies generally did not have personal expectations about a central role for unionism. Finally, a change in the legal framework applicable to industrial relations in New South Wales, which occurred around the time of contracting out, reduced the significance of trade union organization.

The New South Wales 1991 represented a shift away from the traditional Australian model of centralized bargaining and facilitated bargaining at the enterprise level. In the entreprise level bargaining that followed, it has been used by water meter reading companies to avoid award conditions in the industry and introduce periodic employment (Small, 1996, p. 66). The legislation also allows agreements to be negotiated by a non-union works committee, contributing to the marginalization of trade unions in the bargaining process. One of the owners of the contracting company surveyed (Small, 1996, p. 64) stated that the system encourages contractors to compete on the basis of labour cutting; that puts reputable employers at a considerable disadvantage. As illustrated above, even in this company (which offered better employment and working conditions than some other contracting firms) employees were significantly disadvantaged by privatization.

Commentary and issues for further consideration

The documentation presented above is consistent with national and international research pointing out the detrimental impact of contracting out on those employees immediately affected.

In the case considered, there were no specific or general agreements on labour issues, either with Sydney Water or the new employers, except in terms of the redeployment offer. Contractors were not required to absorb workers displaced by contracting out, nor was there any agreement protecting the wages and other working conditions of employees who moved to contractors. This confirms the generally detrimental impact of privatization on the employees concerned when no undertakings are given or agreements reached on the reservation of labour conditions.

4: Privatization of the Republic of Korea Electric Power Corporation

The impact of changes in industrial relations coverage on employees in privatized utilities

Privatization in Republik of Korea

Privatization in Republic of Korea has taken three forms: the transformation of "Government Authorities" (GAs); into "Public Authorities" (PAs), a change in categories of Government ownership which is effectively a corporatization; partial privatization, with the sale of a proportion of Government shares in a public enterprise to the private sector; and total sale. Three phases have occurred:

The first, part of the country's second five year development plan (1968-73), saw the reorganization of 18 public enterprises and the sale to private firms and financial institutions of eight. Most of the enterprises still held a monopoly after privatization and were subject to extensive regulation.

The second privatization programme, implemented as part of a general program of liberalization accompanying the birth of the Fifth Republic, resulted in the sale of four major banks through the sale of assets; and the transformation of two Government enterprises, in telecommunications and tobacco, into Government invested enterprises (a form of corporatised public enterprise).

The third phase commenced in 1987, with the setting up of a Privatization Proceeding Committee to oversee privatization of selected public enterprises. The Committee scheduled 11 public enterprises for total or partial privatization, including the Republic of Korea Electric Power Corporation (KEPCO). 49 per cent of it was to be sold in two tranches: 25 per cent in 1990 and 24 per cent after 1991. Government Invested Enterprises, a specific category of public enterprise in which the central Government holds at least 50 per cent of the equity, were also encouraged to privatise their subsidiaries.

In total, the Republik of Korea Government was planning to sell Government held shares in public enterprises worth 5 trillions won (approximately US$7.1 billions) over the 1988-92 period. One of the main mechanisms to be used was the People's Share Programme, announced in November 1987, under which 75 per cent of shares were to be set aside for low income buyers, 20 per cent for employees of the enterprise and 5 per cent for the general public.

Government's stated objectives for the third phase of privatization were: reducing the overall role of government in the national economy; enhancing economic performance in the partially privatized public enterprises by expanding private sector involvement in their management; reducing Government's financial involvement in public enterprises; and boosting the stock exchange through the People's Share Programme.

The People's Share Programme was suspended in 1990 because of major stock market problems, and has not been reactivated. As a result, no steps were taken to privatize the subsidiaries of Government Invested Enterprises, and the partial privatizations to be undertaken through the Programme, such as KEPCO, only went part way.

The privatization program was reactivated in 1994. Of 133 public enterprises, 58 are planned for complete or partial privatization, and 10 are to be broken up prior to privatization. In addition, larger public monopolies, including the Republic of Korea Electric Power Corporation KEPCO, are to be partially privatized, probably through public tender (FEER, 24.3.94). The Government now plans to use three privatization methods: selling shares directly into the stock market; initial public offers, with delayed stock market listing; and public tenders.

Privatization of electricity

KEPCO has overall responsibility for generation, transmission and distribution of electricity in South Republic of Korea. It was established in 1981 as a Government invested enterprise, wholly owned by the Republic of Korean Government, to improve the financial structure of the industry replacing the Republic of Korean Electricity Corporation (KECO), set up in 1961 by a merger of three private electric utilities.

The Republic of Korean electricity industry has three categories of operators:

KEPCO, involved in generation, transmission and distribution, which has assets of about US$35 billions and 30,767 employees. It is the sole transmission and distribution company and operates 89 per cent of the country's overall generating capacity (APEC Electricity Regulators Forum, 1996).

Independent Power Producers (IPPs), licensed to generate power and sell exclusively to KEPCO (on supply and demand contracts). In 1996 there were three IPPs; one, the Republic of Korean Water Resource Corporation (KWRC), is a public utility with multi-purpose dams, and the other two are privately owned. The three IPPs operate around 4.7 per cent of Republic of Korea's generating capacity.

Non-utilities such as co-generators and self-generators, selling their surplus power to KEPCO. This category of generators operates just under 6 per cent of the country's generating capacity.

The Government regulates the industry, including the wholesale and retail markets and their pricing, through the Ministry of Trade, Industry and Energy (MOTIE).

The Republic of Korea Government has taken two privatization initiatives. First, 21 per cent of in KEPCO's shares were sold in 1990, with individual stock owners taking up most of the shares put out for sale (FEER, 25.5.89; KEPCO World Wide Web homepage). While, as indicated above, the stock market problems prevented a more extensive privatization at that stage, there are now plans to proceed further. The current overall policy in Republic of Korea, however, means that private ownership would not exceed 49 per cent. Second, the Republic of Korea Government has taken steps to deregulate and reorganise the generation market, through expanding the role of IPPs. As part of this process, in addition to the existing IPPs two 250Mw plants and two 400Mw plants have been put out for bidding (KEPCO World Wide Web homepage). Its introduction of private power has three objectives: improving the industry's overall efficiency by introducing competition into generation; reducing funding and other constraints on KEPCO; improving the international competitiveness of private companies.

The direct labour impact of privatization

The impact of privatization on employees is mediated by the industrial relations system and the differential rights of union association and action given to groups of workers. Thus, the impact of privatization in the economy varies between different categories of public sector employees. Specifically, employees of GAs and PAs have different rights. Freedom of association is severely curtailed for employees of GAs and teachers (KCTU, 1997). The right to join a trade union only applies to specified occupations, and in 1991 only 6.1 per cent of all public servants enjoyed that right. Wage levels are set by Central Government bodies which also control the budgets of departments. As a result, in the late 1980s salaries for private sector positions were over 40 per cent higher than their public sector equivalents. Legal minimum labour standards, such as overtime premiums, are not guaranteed for public servants (Park, 1993; p. 7). Industrial action in early 1997 attempted to pressure the Government to amend the elements of its labour legislation preventing the vast majority of public servants from organizing.

By contrast, employees in PAs (essentially, as mentioned earlier, corporatised bodies) have the same rights to join trade unions as private sector employees. In 1991, union membership in public enterprises averaged 60 per cent, and 83.6 per cent of PAs were organised. This group of employees is also covered by the Labour Standard Act, which applies to private sector employees and guarantees certain minimum labour standards. Wages for employees of PAs are higher on average than those in the private sector, and considerably higher than those paid to public servants. In 1990, gross wages for male employees of public enterprises were 40 per cent higher than their private sector equivalents, and the differential for female employees was 56 per cent. Other conditions of employment were also superior (Park, 1993, pp. 8-10).

Workers in the Republic of Korea water, gas and electricity industries are classified as essential workers' and are subject to emergency mediation and/or compulsory arbitration in the event of severe strikes. This specific feature, though, is common to many countries, and both to the public and private sectors. The ILO's Committee on Freedom of Association has considered it possible to limit the right to strike in essential services; that is, where the interruption of the service would endanger the life, safety and health of the population. It requires, however, that there exist adequate, impartial and speedy conciliatory procedures, in which both parties are involved (Report III (4B) at the 69th Session of the International Labour Conference, Geneva, 1983, para. 214).

In this context, the impact of privatization on labour is complex. As Government departments become somewhat corporatized public enterprises, employees who are transferred receive higher wages and greater industrial freedom. However, it is rare for GAs to be privatized. The usual scenario is to privatize PAs. When this occurs, employees are disadvantaged, facing lower wages and other working conditions, and reductions in employment security. Furthermore, in the event of privatization, employees of Government departments or public enterprises have no guaranteed employment or social rights, despite the application of the Labour Standard Act. They may, for instance, be dismissed in restructuring processes (Park, 1993, p. 11); although due to the expanding Republic of Korea's economy up to the early 1990s, retrenchment has not been a significant problem during privatization (Park, 1993, p. 22).

Commentary and issues for further consideration

Privatization of electricity in the Republic of Korea has thus far been undertaken through partial sale of shares, and the encouragement of independent power production.

The nature of industrial relations laws in the Republic of Korea makes it difficult to identify the specific impact of privatization, since this becomes intimately linked to the wider industrial relations issues of limitations of the right to organise in independent trade unions and unions' right to negotiate and take industrial action, in that country. These limitations have been highlighted by the ILO's Government Body's Committee on Freedom of Association on various occasions (see, most recently, its 307th Report, June 1997, Case 1865, paras 177-236).

However, it appears that the likely effect of corporatization has been a reduction in employment conditions and pay. There may also have been an indirect labour impact, in two senses. First, it is often claimed that the economy was stimulated through the recirculation of the proceeds of asset sales or of any greater efficiencies which might have occurred in the enterprises. However, it is impossible to disentangle these from other factors likely to have contributed, more directly, to the period of economic growth experienced in the Republic of Korea. Second, KEPCO being one of a handful of privatized or corporatized electricity utilities now involved in development projects in other Asian countries, it provides exports for the Republic of Korea's economy (both visible and invisible), with potentially positive consequences for overall employment.

5: Privatization of electricity in Pakistan

General and specific employment agreements between Government and trade unions to secure labour rights

Privatization in Pakistan:

There have been two phases of privatization in Pakistan. The first, 1958-71, was largely aimed at stimulating the private sector to take a more active role in expanding the economy's industrial and financial base (Bohkari,1994). The second and more protracted phase, ongoing since 1977, has been distinctly aimed at denationalisation and was justified in the following general terms:

Loss making by a number of manufacturing of public enterprises;

A political commitment to deregulation and privatization, as a move toward a "superior method of achieving the country's social and economic objectives with equity";

Moves towards more competent public sector management;

A more targeted approach to industrial development, with the private sector playing a leading role;

A need to sell off public assets to obtain the investment necessary for sustained industrial growth;

A strategy of redirecting limited public funds from large projects with long gestation periods to smaller undertakings with higher yields in the short run (particularly in agriculture, water and energy);

Inducing private savings through creating the opportunity for private investment;

As part of the partnership with the World Bank and the IMF. Pakistan received loans and other support from them in 1978, 1988 and 1992, and selling public assets has been one aspect of the structural adjustment program promoted by those agencies.

Denationalization in the late 1970s and early 1980s was largely directed at processing and manufacturing enterprises. However, the Sixth Five Year Plan (1983-88) adopted privatization as a philosophy and had deregulation and privatization as central themes. Implementation was put in the hands of a standing committee of the Cabinet, on Reorganization of State Enterprises, and the process moved from denationalization through direct negotiation with previous owners, to privatization by invitation of bids. The public sector reform agenda also included decentralisation of management decisions, performance evaluation and bonus payments, and closure of enterprises.

The 1988-93 Seventh Five Year plan envisaged a more extensive role for the private sector in utilities. The Water and Power Development Authority (WAPDA) and the Oil and Gas Development Corporation (OGDC) would no longer have access to Government budget funds and be required to raise their own funds through, for example, issuing Government guaranteed bonds.

The new Government, elected in 1990, embarked on a major programme of privatization of the main nationalized industries, including utilities. A Privatization Commission reporting directly to a Cabinet Committee on Privatization was set up in early 1991 to prepare recommendations for privatization and deregulation, and evaluate the bids made by potential private investors. In 1990, the Government had published a list of 100 companies and enterprises for sale. This was increased to 115 the following year, and by 1994 it included all 118 enterprises (mainly in manufacturing or processing sectors) controlled by the Ministry of Industries and Production (FEER; 29.8.91; FEER, 12.11.92; ILO-SAAT, 1996). By late 1992, 57 Government-owned companies had been sold, worth 9 billions Rupees (US$360 millions), with a further 27 due to be sold before the end of the year. By mid 1994, 67 units had been privatized (ILO-SAAT, 1996).

At the same time, regulation on foreign investment were changed, and from the early 1990s financial incentives were offered to open out a number of public entities to foreign direct investment, including oil, gas and power generation.

By the end of 1992, Pakistan privatization entered a new phase, extending to utilities. The Water and Power Development Authority (WAPDA), that generates and distributes all the country's electricity, was identified as potentially for sale. An American consultancy, the International Resources Group, prepared a plan for a staged sale of the electricity authority. This would commence with the 800 Mw thermal power plant at Jamshoro and the power distribution system around Faisalabad. A US$1.5 billion Hub river project was already being built by the private sector, and other projects under negotiation.

In 1996, the privatization program was still led by the Government Privatization Commission (FEER, 15.02.96). At least 26 State owned companies were to be privatized, including minority shares; but in two cases with management control, in two power plants and an electric supply corporation.

The present Government divided the units to be privatized into three groups and stipulated the process for privatization to be used in each case (ILO-SAAT, 1996): small and medium-sized industrial enterprises like cement, sugar and chemicals will be sold by public auction; large manufacturing units like petrochemicals and services in airlines and banking will be disinvested through stock exchange flotation; and the public utilities, including gas, generation and distribution of thermal electricity and telecommunications will be sold to strategic investors.

Privatization of electricity

Responsibility for electricity supply in Pakistan is divided between the Water and Power Authority Board (WAPDA) and Karachi Electricity Supply Company (KESC). KESC covers generation, transmission and distribution in the Karachi area, while WAPDA has the same responsibilities in the rest of the country. In 1990, WAPDA accounted for around 80 per cent of publicly generated electricity, while an estimated 14 per cent was produced for captive and self-use by the private sector (Asian Development Bank, 1993, p. 229). The end-user prices doubled over an 18 months period, and both the generating facilities and the transmission and distribution system needed extensive modernization. Government argued that private sector involvement was required to solve these problems (FEER, 30.11.95).

As in a number of other Asian countries, privatization has been proceeding along two dimensions. The first is the disaggregation of integrated public companies and the sale of parts of the resulting structure. Privatization has been proceeding with the sale of power generating plants on a plant-by-plant basis. The process started with the sale of a 26 per cent stake in the Kot Addu PP to the British National Power, transferring the right to manage operation and maintenance. Another 26 per cent sell-off in the Jamshoro PP was expected to be completed by the end of 1996 (Power In Asia, 27.5.96; Privatization International, Jan 1996). Sale of minority stakes in Karachi Electricity Supply Corp. (KESC) has also begun (Privatization International, Jan 1996). Furthermore, the Faisalabad Electric Area Electricity Board (FAEB) is to be separated from WAPDA and privatized. This process will provide guidelines for the future separation and privatization of seven other distribution boards (Power In Asia, 8.1.96).

The second dimension of privatization is private investment in generation, through BOOT and similar schemes. The Hab River Power Plant has been seen as the test project for BOOT schemes in Pakistan, and since it is now well under way similar projects are expected to follow at a quicker rate. One such project has been planned by CEPA, who is going to build 8 off-the-shelf 660 Mw coal-fired power plants in Keti Sandar, Sind. The off-the shelf approach allows CEPA to build large plants in a relatively short time, and similar projects are planned in India and the Philippines.

Agreement on employment and working conditions under privatization and its outcome

Privatization has been a central feature of Pakistan's Government policy for a number of years. In keeping with their commitment to privatization, successive Governments have placed emphasis on the position of public sector employees displaced by the process. The All Pakistan State Enterprises Workers' Action Committee signed an accord with the Government in 1991 to protect employees in privatized industries. The accord is a general agreement that there will be no layoffs during the first year of privatization and that wages and other working conditions will not decline. A generous severance package is in place for employees choosing not to take up employment with the private company. Surplus laid-off employees are to be retrained, with a view to absorbing them into other units. Employees have also been encouraged to make bids for the purchase of privatized bodies, through the preparation of management and financial plans (Bokhari, 1994, p. 53). However, concerns have been expressed about the efficacy of this overall programme. In effect, there are no employment guarantees after the first year and hence large-scale redundancies are expected (ILO-SAAT,1996). Further, it has been argued that retraining for redundant workers does not equip them for new jobs and many are being pushed to become contract workers. (Johnson, 1994)

Pakistan has also used specific agreements between the Government and trade unions to decrease uncertainty at the time of privatization. In 1996, one was signed by the Privatization Commission, the Government and Pakistan WAPDA Hydro Electric Central Labour Union (CBA), covering employees transferred with thermal power stations. Clause 1 of the agreement states that there will be no retrenchments on privatization, and that transferred workers will be provided security of service. Clause 2 provides for a 35 per cent increase in basic pay, and for allowances to be paid at the new rate. The agreement also protects existing terms and conditions pertaining to leave and pensions, and covers access for employees to medical facilities, free electricity, loan facilities, discount transport and other benefits.

Projected impact of privatization on pricing

While wages and other working conditions in the electricity industry appear to have been maintained with privatization, there are indications of substantial price rises for consumers. Trade unionists argue that the doubling of electricity prices in one year stems primarily from demands by foreign investors for higher profits paid in foreign currencies, rather than labour costs (The Muslim, Sep. 96, 2.10.96, 6.10.96).

There are also concerns about the pricing agreements reached by the Government with TNCs to induce them to invest in the new IPP schemes. The Government has undertaken to ensure that companies are paid for the supply of electricity equalling 60 per cent of their capacity even if electricity is not required. It has also set a minimum price for electricity which is considerably higher than in neighbouring countries. There has been no price capping mechanism implemented, and electricity prices have indeed been spiralling upward. Government also restricts the building of new power stations, so existing power companies are protected from competition.

Public opposition to privatization

Privatization in Pakistan has not been popular among trade unions despite the general and specific labour agreements which apply. Throughout 1996, a grouping of national labour organizations, the Pakistan Workers Confederation, organised demonstrations against the Government's actions. Government restructuring had also resulted in the closure of mills and higher unemployment. Trade unions have criticised the present Government for breaking promises to bring the country's labour policy into line with ILO Conventions, and to raise wages for public and private sector employees in line with price increases. They have also been critical of its failure to regularise the use of contract labour.

In early 1997, a National Conference on Energy Policy and Economic Development was organised by the Pakistan WAPDA Hydro Electric Central Union (CBA). A number of politicians, academics and trade unionists participated. The Conference, which received widespread press coverage, produced a number of recommendations and comments. Participants pointed out that electricity prices in Pakistan are substantially higher than in neighbouring countries and criticized the requirement that Government and WAPDA pay energy companies for 60 per cent of their capacity even when electricity is not needed. Conference recommendations also claimed that reductions in costs associated with thermal machinery had not been passed on to consumers. Privatization had not resulted in open price competition, but rather allowed multinationals to reap profits through a fixed minimum price, with the opportunity to raise prices as fuel prices fluctuate. Restrictions on the establishment of new power stations afforded companies owning power stations considerable market strength. The Conference also claimed that WAPDA had neglected important hydro-electric projects because of the drain on funds represented by payments to multinationals in foreign currency. The Conference established a Steering Committee to mobilize public opinion and pressure Government into revising its energy policy (Resolutions passed in the National Conference on "Energy policy and its III effects on national development", 27.1.97).

Commentary and issues for further consideration

Pakistan has experienced considerable privatization, and is planning extensive privatization of its electricity industry. Opposition to the general plans and the specific initiative in electricity has partly been responsible for the agreements which have provided some protection to employees. These have been general agreements, since the early 1990s, covering all privatization; and a specific one, in 1996, covering electricity sales.

However, the nature of the agreements has left major concerns about the overall implications of privatization; the resulting job losses in a period of high unemployment, and specifically the possibilities for displaced employees once the period of employment guarantee expire; the increasing use of contract labour to which, it is claimed, privatization is contributing; and the potential for high and rising prices resulting from agreements and undertakings given to secure the interest of private firms in IPPs.

6: Restructuring of electricity in the state of Orissa, India

Labour and pricing issues when generation, distribution and transmission are disaggregated

Privatization in India

The public sector as a whole has played a fundamental role in the development of the Indian economy. In the mid-1980s, it accounted for just under 70 per cent of total employment in the "organised sector" of the economy. Its share in fixed capital formation had risen from 20 per cent in the 1950s to 50 per cent in the 1980s. Irrigation and power accounted for nearly 40 per cent of the public sector capital stock (Reddy, 1989). Public enterprises in the mid-1980s were of five types: Government departmental enterprises, such as railways, telecommunications and irrigation; manufacturing companies; financial institutions; State level enterprises, of which electricity was one of the most important; and joint companies, in which Government holdings overall were less than 50 per cent.

The overall social and economic significance of the public sector has resulted in an antipathy by Indian Governments towards forms of privatization which make wholesale transfers of assets from the public to the private sector. This antipathy was also strong among public sector unions, and led to important strikes in 1987 and 1988.

In the 1990s, Indian Governments have been moving towards privatization (partly under the pressure of structural adjustment reforms sponsored by the IMF and World Bank since 1991); but through the partial sale of equity and shares in public enterprises and involvement of private sector capital in infrastructure schemes, rather than direct transfers of assets. Despite the general approach to economic liberalism introduced by the Government in 1991, with the announcement of its intention to raise around US$1.3 billions in each of the next three years through share sales, by 1993 the main privatization had been the sale of between 1-20 per cent stakes in 30 key public sector firms (FEER 18.3.93). None of the 248 public sector undertakings owned by the federal Government had been entirely sold, and only a few of the estimated 1,100 State Government enterprises had been sold (in Kerala and Karnataka), with some conversions of enterprises into joint public private projects in West Bengal.

Since 1994, the Federal Government's plans included (Johnson, 1994):

A reform of state-owned enterprises through restructuring of "unviable" enterprises and changes in the Industrial Disputes Act;

No further Government enterprises to be established during the 8th Plan, 1992-97;

Withdrawal of non-Plan loans from Government enterprises;

Disinvestment of 49 per cent of the equity in a range of public enterprises

The Government also planned to introduce private capital through BOOT schemes in new infrastructure projects. By 1996, this programme was particularly advanced in electricity generation, where 86 powered projects with a total capacity of 39,400 MW were being planned with private involvement.

Privatization of electricity

The 1948 Electricity Supply Act defines supply in India as a joint National/State responsibility. At the national level, overall policy planning resides with the Central Electricity Authority (CEA), under the Department of Power (DOP). Also under the DOP are a number of corporations operating in generation and transmission on a nationwide basis (Asian Development Bank, 1993, p. 122). The main organizations generating and distributing power are the State Electricity Boards (SEBs), established under the 1948 Act. The 32 SEBs in the country generate around 75 per cent of India's electricity and are responsible for most of the distribution to final consumers (material provided by the Indian National Electricity Workers' Federation). Apart from national and state level authorities, the Indian Government has introduced 5 Regional Electricity Boards (REBs) to coordinate regional electricity production (Asian Development Bank, 1993, pp. 122-123). However, these do not seem to play any central role in Indian privatization plans.

The major changes taking place in electricity supply are the introduction and rapid expansion of private generation and attempts, funded and promoted by internationally bodies such as the World Bank, to reform fundamental the SEBs. As mentioned earlier, private sector involvement has historically not been widespread in India, but the 1948 Act was amended in 1991 to widen the scope of private sector participation in all aspects of the industry. Up to late 1995, 245 expressions of interest had been received to set up private power projects, with a total capacity of 93,661 MW and approximate investment of Rs339,700 crore (one crore is ten million rupees). Of these, 52 were from foreign investors (including joint venture proposals); and 16 of them have been cleared by the National Government for rapid implementation, including the largest, the 1,000 MW power project in Managalore promoted by the TNCs Cogentrix and GEC, and the 695 MW (now increased to 740 MW) project at Dabhol developed by the Enron Corporation (The Economist, 1995; Privatization International, 2.96; Material provided by the Indian National Electricity Workers' Federation).

The Dhabol power project has come to be seen as the test case for foreign investments in India. The project has been subject to a number of legal battles and hold-ups over several years. A change in State Government in Maharahastra made the authorities terminate the contract because of claims of padded costs and corruption. This led to a renegotiation of the project, where Enron was forced to cut a third off the initially proposed production costs and lower electricity price to 1.86 rps/kWh. However, in late 1996 the project was held up again by public interest litigation filed by the Centre for Indian Trade Unions (CITU) against the company and State Government. The project in Mangalore was also held up in late 1996 by a Supreme Court Order that a proper environmental impact assessment should be conducted (Material provided by the Indian National Electricity Workers' Federation).

The operation of SEBs has been a major area of concern and has prompted proposals for restructuring, corporatization and privatization. SEBs have been running at substantial commercial losses because of a combination of under-investment in power distribution, inadequate billing and revenue collection, high pilferage, inherent losses in conductors and equipment, and a tariff structure setting charges substantially below cost for domestic consumers and agriculture. Losses in transmission and distribution, at around 21 per cent, are high when compared internationally and mainly due to sparsely distributed loads in rural areas. But capacity usage is also low. Plants have an average non availability factor of 40 per cent, of which around half is from forced outages due to equipment and component failure (material provided by the Indian National Electricity Workers' Federation). The solutions to these problems now being promoted are increased use of markets and privatization. SEB restructuring and privatization was initiated in the States of Orissa, Haryana, Uttar Pradesh, Rajasthan, Bihar and Andraha Pradesh; the most extensive processes being the one in Orissa.

The Orissa State Electricity Board has been restructured into three autonomous enterprises (Frontline, 19.96):

A transmission and distribution company, Grid Corporation of Orissa (GRIDCO);

Orissa Hydro Power Corporation (OHPC), which will operate all the State owned hydro-electric power plants;

Orissa Power Generation Corporation (OPGC), which will construct and operate thermal power stations.

The terms of a World Bank loan are that there will be a phased privatization of the three wholly State Owned enterprises, starting with GRIDCO. The US$350 million, twenty year loan will be made to the Government of India, which will "lend on' to the State Government, which will in turn lend to OHPC, GRIDCO or distribution companies at rates specified by the Bank (amounting to near commercial rates to the companies).

GRIDCO is being divided into four geographical distribution zones. The management contract for each zone is being handed over to a private company for three years, after which the zone will be fully privatized through outright sale or longer-term lease. Government stock in GRIDCO will be reduced to 33 per cent by 1998, with eventual full privatization. Privatization of OHPC and OPGC is also planned in the long run. The management contract for the most lucrative GRIDCO zone, the central zone, was taken on in late 1996 by the Bombay Suburban Electric Supply Corporation (BSES), following a competitive tendering process involving four Indian and one international company (Press Trust of India, 14.9.96).

The Orissa model raises important issues about the potential impact of reforms on the cost of power and the implications of privatization for employees.

The direct labour consequences of ORISSA reforms

The combined staffing of GRIDCO and OHPC combined totals around 35,000. The State Government has given an Undertaking that they will not be retrenched. BSES will be managing about 8,000 workers from GRIDCO, but has indicated reluctance to take on the management contract unless it is assured of a free hand in the deployment of workers.

A joint action committee of electrical workers-employees and engineers has been set up to oppose the privatization (Press Trust of India, 15.10.96), and the Orissa Electrical Engineers Service Association has appealed to the State Administrative Tribunal for the right to remain employed with the State Government even when deputed to GRIDCO or the private distribution licensee (Frontline, 1996).

The potential labour implications of a wider application of this reform model have prompted demands from Indian trade unions for:

Transfer of employees with protection of service conditions when undertakings are transferred from the public to the private sectors;

Protection against reductions in employment and employment opportunities which may follow rationalisation;

Trade union rights to participate in the management of private sector enterprises;

Full employee protection against health and safety hazards, pollution and emissions;

More extensive vocational and advanced training, particularly in new technologies (Material provided by the Indian National Electricity Workers' Federation).

The impact of the reforms on electricity prices

There is also likely to be a fundamental impact on tariffs. GRIDCO has raised tariffs already twice in one year 1995-96, by 17 per cent each time (though the World Bank and State officials claim this was unrelated to the reforms). Steep increases, at least for some users, are likely to follow other aspects of the reform package. The World Bank has prescribed that GRIDCO purchase power at commercial rates and earn a 10 per cent return on investment (rising to 16 per cent). An increasing emphasis on full user cost recovery in charges will mean a reduction in or removal of cross-subsidies, with resultant increases in tariffs for rural domestic users and the agricultural sector (Frontline, 1996).

The Orissa model is being adopted by some other States, such as Rajasthan and Uttar Pradesh (FE News Service, 15.10.96 and 26.10.96). The scale of tariff restructuring which might result form the application of this model is also illustrated by estimates of World Bank-funded consultants advising Uttar Pradesh Government on reform to its SEB. The consultants' report, submitted in mid-1995, proposes a separation of production, transmission and distribution functions into three Independent Boards, followed by break up of each Board into smaller operating units, to be eventually privatized. The consultants propose that restructuring of pricing on a user cost basis would result in a 190 per cent increase in domestic tariffs over five years; a 218 per cent increase in agricultural tariffs; and a 40 per cent reduction in industrial tariffs (material provided by the Indian National Electricity Workers' Federation).

Commentary and issues for further consideration

Privatization of the SEB in Orissa, on which other State's plans are being based, will be through restructuring and sales of facilities. While Government undertakings have been given on labour issues, it appears that the new operator will require flexibility in the deployment of staff; thus raising worries about Government's ability to deliver on its assurances. At the same time, some staff unions have indicated their preference for remaining state employees. These concerns have generated trade union demands for a wider and more explicit set of rights for employees affected by privatization.

The other major privatization avenue will be through IPPs. India, like most other countries in the region, currently provides no access to trade union in the planning or execution of such projects. This has prompted demands by employees, through their trade unions, for wider involvement in the planning of the industry.

A third area of persistent concern among trade unions and other stakeholders are the apparent increases in tariffs, particularly for domestic and agricultural use, which will follow restructuring and privatization.

7: Privatization of the gas pipeline authority in Australia

Employment agreements negotiated directly between trade unions, the new employer and the federal Government

Privatization of gas in Australia

Australia has substantial reserves of gas, much of which located off the west coast or in Western Australia. The Timor Sea is another potential site. Gas exploration and production in Australia is controlled by TNCs: the North West Shelf Gas Project is operated by Woodside Petroleum, in partnership with BHP, Shell, Chevron, BP and Japan Australia LNG; and the Gorgon gas field is being developed by Chevron, Texaco, Mobil and Shell. Historically, however, the gas transportation infrastructure from gas fields to the industrial and populous East Coast has largely been built by the public sector (with the exception of the State of New South Wales). Governments at both the federal and state level have invested in gas pipelines.

The recent interest by all Australian Governments in privatization has meant that gas pipelines, along with other infrastructure, have been sold to the private sector. In 1994, the Moomba to Sydney gas pipeline, owned by the Commonwealth Government, was sold to a consortium headed by Australian Gas Light (AGL), a private company that established gas services in New South Wales. The Queensland Government sold its 600-kilometre-long gas pipeline stretching from Wallumbilla to Mackay to the American company, Pacific Gas & Electric. The South Australian Gas Pipeline Authority, owning the major pipeline running from Adelaide to the gas fields of the Cooper Basin, was sold to Temeco (United States Department of Energy, 1996, p. 3). The Victorian Kennett Government, at the forefront of privatization in Australia, has explored the possibility of privatising its gas authority. The Western Australian Government has plans to sell the 1,600 kilometre Dampier-Bunbury Pipeline (Howarth, 1997, p. 16).

In the wake of deregulation and privatization of the gas industry, a number of private companies have investment options in gas infrastructure. BHP and Canada's Westcoast Energy plan to build a 700 kilometre pipeline linking Longford in Victoria with Sydney and the industrial centre of Port Kembla (United States Department of Energy, 1996, p. 3). Temeco has constructed a pipeline from the Cooper Basin to Wallumbilla in Queensland. There are also proposals to link the New South Wales and Victorian grids. A more ambitious proposal suggests the construction of a pipeline from Papua New Guinea to Australia.

Privatization of the Pipeline Authority

The Pipeline Authority was a public sector body responsible for the safe and constant flow of natural gas from the remote fields of Moomba in South Australia to the populous eastern States. It employed approximately 120 staff, located in New South Wales and at its head office in Canberra, and had long-term contracts with Australian Gas Light (AGL), a private company distributing gas in cities and towns in New South Wales. These long-term contracts and existing controls on gas prices resulted in stable supply and prices for domestic and industrial users for the 15 years preceding privatization (Lilly, 1994, pp. 15-16; Beazley, 1994).

The proposal for privatization was first announced as a Commonwealth Government budget decision in 1989. The sale was opposed by trade unions with members in the Authority and, at that time, by AGL because of the break to existing contracts between the Pipeline Authority and AGL which would have been necessary to facilitate the sale. Court action by AGL, lobbying by large business users of gas and extensive political lobbying of opposition parties resulted in a defeat of Government's proposal in Parliament in 1990.

AGL's successful court case gave it, because of its contractual arrangements, first right of refusal in the event of a sale of the pipeline. In 1989-90, AGL had not wished to buy at the Government's asking price. But in 1992, when the Government announced again the sale of the pipeline, it took up the option given its more attractive new price. The sale took place in 1994. Since this sale to AGL alone would have created a privately owned vertical monopoly for gas transportation and distribution (Lilly, 1994, p. 17), it was required by the Trade Practices Commission to separate the operating company from its other activities. The pipeline proprietor was therefore East-Aust Pipeline Limited (EAPL), owned by AGL Pipelines (NSW) Ltd (51 per cent) and Gasinvest Australia Pty Ltd (49 per cent). Gasinvest is a consortium entirely owned by two companies, Novocorp International and Petronas. The problem of private monopoly power is also addressed by a regulatory regime controlling prices and enabling competitors to access infrastructure (Ranald, 1995, pp. 1-2).

The Pipeline Authority was sold for a net figure of A$221 millions, although the Commonwealth Government expected a (gross) figure between A$510 and A$550 millions (Beazley, 1994), and an independent valuation actually judged the Pipeline Authority's worth over A$640 millions (Walker, 1992, p. 7). At the time of sale, the Pipeline Authority had a large and assured cash flow and excess capacity which would increase its earning capacity in the future (Walker, 1992, p. 1). It has thus been argued by critics that the sale price, even in the range put forward by the Commonwealth Government, was largely below its actual worth.

Concerns about the impact that privatization would have on employees led the three trade unions covering the Pipeline Authority to serve a log of claims on the employer and the Government in December 1992. A particular cause of concern was uncertainty about whether EAPL would maintain its Canberra location or move to Sydney, which would have resulted in a large number of redundancies (Ranald, 1995, p.3). By October 1993, the disputes were under consideration by the Australian Industrial Relations Commission.

The unions sought to resolve staff transfer issues well before the sale date of 30 June 1994. Negociations commenced with the Assets Sales Task Force of the Government's Department of Finance in November 1993. Agreement was reached that the sale legislation would ensure transmission of the existing enterprise bargaining agreement which covered pay levels entitlements. The unions approached AGL in December 1993 as the then only representatives of EAPL (the company was not actually formed until shortly before the sale date), requesting their involvement in negociations.

AGL, representing EAPL, agreed to commence negotiations in April 1994. Trade unions met with EAPL representatives ten times between April and June 1994. But negotiations broke down and the unions gave notice of industrial action. This was the first time such action had occurred in the history of the Pipeline Authority (Ranald, 1995, p. 3).

The issues of concern to the unions were resolved after the industrial action and a number of hearings by the Australian Industrial Relations Commission. The staff transfer agreement was signed on 28 June 1994. It provided for the transfer of the enterprise bargaining agreement covering the workplace and preservation of all award and other conditions contained in it. Certain other working conditions, not contained in awards but in legislation applying only to public sector employees, were preserved, including long-service leave after ten years and paid maternity leave. The agreement also provided that in respect of superannuation, when employees retired from or otherwise left EAPL, the after tax benefit they received would be no less than what they would have received if they had remained with their current Government fund. It provided for Pipeline Authority employees to receive offers of equivalent employment by EAPL, and provided a definition of equivalent employment which included employment location, salary, classification and career opportunities as well as the preservation of conditions outlined above. Those not offered equivalent employment were entitled to redundancy payments. The agreement also contained a tripartite appeal mechanism to settle disputes about equivalent employment. Out of 120 employees, 102 transferred to EAPL (Ranald, 1995, p. 4). In a separate written document EAPL undertook not to make redundant transferred staff for 12 months after the sale date. A further separate Agreement on enhanced redundancy provisions for those few staff made redundant as a result of the sale process was reached with the Government (Ranald, 1995, p. 4).

Commentary and issues for further consideration

The lack of any process of negotiation or consultation about the proposal to privatise the Pipeline Authority has produced considerable opposition.

The agreements obtained by the trade unions separately with the Government, and the new company, were the outcome of industrial action and subsequent negotiation, rather than being readily available as an integral part of the process.

8: Privatization of electricity and gas in New Zealand

The significance of labour market deregulation in determining the labour impact of privatization.

Privatization in New Zealand

New Zealand is the industrial economy in the Asia Pacific region which has gone furthest with privatization and deregulation. In 1984, its Government spending constituted over 40 per cent of GDP. The election of the Labour Government in 1984 marked the beginning of radical change in New Zealand's public sector. The Government adopted a structural adjustment policy which espoused commercialization, corporatization, deregulation and finally privatization. It pursued these ideals aggressively, which was rather unusual for a Labour Government, in a developed country, with a tradition of social responsibility (Bollard and Mayes, 1993, p. 308).

Against a background of deregulated finance markets, changing tax structures and a devalued dollar, the Government rapidly adopted a corporatization agenda which involved the separation of the commercial and non-commercial aspects of public sector functions (Kelsey, 1995, p. 115). In most cases, the commercial divisions were converted into state-owned trading enterprises (SOEs) and were required to compete with private businesses under conditions of competitive neutrality. As a general policy, it was also decided that privatization should follow where there was no compelling argument for public ownership. Privatization was seen to have three major advantages: it would finance the fiscal deficit in the short term; address efficiency shortfalls associated with corporatization; and avoid future SOE financing requirements (Kelsey, 1995, p. 116; Bollard and Mayes, 1993, p. 323).

The 1986 State Owned Enterprises Act corporatised public sector activities relating to land, forestry, electricity, telecommunications, coal, airways, Post Office Bank, postal services and Government Property Services. In 1991, the Housing Corporation, public hospitals, research, science and technology, were also corporatised. In many instances these processes preceded privatization.

The next step was a systematic review of each SOE, to ascertain the likely benefits that would flow from privatization. There was overwhelming support in Treasury for privatization, and the principles set out to protect public interest were largely marginalized (Kelsey, 1995, pp. 128-129). The overriding economic objective was the payment of debt, and privatization was seen as a tool to achieve that end. In the 1987 and 1988 budgets, extensive privatizations were announced, including New Zealand Steel, Petroleum Corporation, the Development Finance Corporation and Government's stake in Air New Zealand.

By late 1990, when there was a change of Government, 18 Government enterprises had been sold (Kelsey, 1995, p. 129). At the same time, unemployment had risen, the economy had not picked up, and the Labour Government had lost the public's confidence (Bollard and Mayes, 1993, p. 309).

In 1993, the National Government reactivated the privatization agenda at the national level and sold Housing Corporation mortgages, New Zealand Rail, the Export Guarantee Corporation and the Government Computing Service. Possible sales were announced for New Zealand Post, the residue of Forestcorp, Railcorp, Radio and Television New Zealand, and Electricorp, which were of even greater interest to the private sector. Overall, by the end of 1994, Government received NZ$13 billions in asset sales (Kelsey, 1995, pp. 132-135; Harris, 1996, p. 3).

The 1996 election returned a Coalition Government of the National Party and New Zealand First. The new Coalition signed a series of agreements which will slow the privatization programme, particularly in electricity.

Privatization of electricity

Prior to 1984, New Zealand's electricity industry was controlled by the State. The Central Government was responsible for generation and transmission, and franchised distribution to supply authorities (Wylie, 1996, p. 2).

The Government commenced its programme of reform by creating the Electricity Corporation of New Zealand (ECNZ), in 1987. The initial focus of reform was reorganizing transmission and distribution. The radical changes in generation did not follow until 1995.

Transmission

In 1988, the electricity transmission grid, Trans Power New Zealand Ltd, was formed from the Electricity Corporation's National Grid Division. There were no plans to privatise the system, but rather to allow access to it by all carriers on an equal basis. Trans Power adopted a pricing structure in which the price reflects more closely the cost of transmission. In remote areas this policy may result in prices rising by up to 25 per cent (Wylie, 1996, p. 9).

Distribution

Distribution has been the domain of a large number of supply authorities. In 1990 it was announced that corporatization would be implemented, and competition would be introduced through the removal of area franchises. Difficulties arose when the Government attempted to identify the owners of the statutory bodies. Interim trusts were set up and by mid-1993 there had been initial corporatization of supply authorities under a number of ownership structures (Wylie, 1996, p. 12).

Most local authority-owned electricity suppliers have remained in local authority ownership. Other forms of ownership include non-charitable trusts and direct consumer, elector or market investor ownership. In 1993, an "Energy List" was established by the New Zealand Stock Exchange. A restricted listing was provided for those energy companies which could not seek full listing on the exchange because of restrictions in their articles of association on the transferability of shares. The list was seen as a transition mechanism and ceased at the end of 1995, when caps were lifted on share holding (Wylie, 1996, p. 12).

In early 1996 there were 25 electricity suppliers on the North Island and 13 on the South Island. Mergers and takeovers have since reduced the number of competitors in the industry. On the South Island several small suppliers are discussing mergers. Trust Power has increased its influence in the Bay of Plenty and central North Island area. In Auckland, Mercury Energy and Power New Zealand have been competing for the market and there is the possibility of a hostile takeover. Capital Power and Energy Direct have merged and the new entity, TransAlta NZ., is controlled by the Canada-based TransAlta Corporation.

While a large number of supply companies continue to be under the control of various councils or trust structures, private companies have increased their stake in New Zealand's supply market. New Zealand's Utilicorp is owned by the American Utilicorp and New Zealand's Todd Corporation. It has shares in WEL Energy Group Limited. Infratil has shares in Powerco Limited, TrustPower Ltd and Central Power Limited, and is a managed fund targeting investment in New Zealand energy utilities, ports, airports and other infrastructure assets. It is managed by Infratil Management Ltd, which is owned by Morrison and Co. and Duncan Saville. The New Zealand company Fletcher Challenge Ltd has a substantial interest in Bay of Plenty Electricity Ltd through Fletcher's subsidiary, Power Supply Corporation. Amuri Corporation Ltd owns Wairarapa Electricity Ltd. Various other domestic and foreign companies have minor interests in New Zealand electricity distribution industry.

Generation

About 95 per cent of the electricity generated in New Zealand is produced by two State-owned enterprises, ECNZ and Contact Energy. The remaining 5 per cent is generated by electricity supply authorities. ECNZ is the largest SOE in New Zealand. In 1996, it held about 60 per cent of the electricity generating market and employed just under 1000 people.

In 1995, the Government announced its plans for the further restructuring of the wholesale electricity market. The key elements were:

Splitting ECNZ into two competing generating companies from early 1996;

Requiring the sale of ECNZ's proposed Taranaki combined cycle station;

The progressive sale of eight of ECNZ's small hydro stations to regional power companies and Maori interests;

A series of special restraints to deal with ECNZ's dominance until its market share falls below 45 per cent (Wylie, 1996, p. 3).

Mercury Energy and a number of other private companies are currently undertaking new generator projects. Mercury Energy and its joint venture partners, Canada-based TransAlta Corporation, and the large New Zealand company Fletcher Challenge Ltd, plan to commission a 400 MW combined cycle power station at Stratford in Taranaki (Wylie, 1996, p. 8). A 110 MW gas-fired plant in Auckland is another project being undertaken by Mercury Energy and TransAlta. Already well under way is Mercury Energy's 55 MW geothermal joint venture with Taupo businessman Alistair McLachlan. Wairarapa Electricity, CentralPower and United States-based Merrill International are undertaking projects focusing on wind power.

As mentioned earlier, the pace of privatization may have slowed following the emergence of the coalition Government of the National and New Zealand First parties in 1996. The two parties negotiated a coalition agreement after the election, indicating among others that there would be no Privatization of the two generation state owned enterprises (SOEs) ECNZ and Contact Energy, and the SOE Transpower (the national grid). Also under the agreement, any changes to the ownership of power companies presently owned by local bodies or consumer trusts would require prior approval of ratepayers or consumers, although how this prior approval is obtained is unclear.

Privatization of gas

Until 1988, New Zealand's Government maintained a heavy presence in the energy sector through the State owned enterprise, Petrocorp. Petrocorp had an equity stake in the giant Maui gas/condensate field and related industries. Gas reticulation was also a Petrocorp monopoly at the wholesale level. In 1987, Petrocorp issued the equivalent of 30 per cent of its shares; 15 per cent by tender and 15 per cent by public float. The remaining 70 per cent was sold to Fletcher Challenge in 1988. The sale was surrounded by controversy. British Gas had been the favoured company in privatization plans until New Zealand's Government abruptly rejected its offer in early 1988, claiming that British Gas presented demands and conditions outside the scope of the agreement which had been reached between the parties (FEER, 17.3.88). Petrocorp was sold for NZ$801,059,000. A "put and call" option in the sale contract was invoked by Fletcher Challenge in 1992, and the Government was required to buy 104.5 million shares for NZ$400 millions. Depressed share prices threatened the Government with massive losses, but a subsequent share price surge allowed it to sell its shares for NZ$418 millions at the end of 1993 (Kelsey, 1995, pp. 132-133). The sale was to a number of institutional investors in various world markets. In 1994, Fletcher Challenge produced 62 per cent of the country's gas and 71 per cent of its crude oil and condensate (Oil & Gas Journal, 12.9.94, p. 25).

In 1990, the Government sold its interest in the Motonui synfuels plant to Fletcher Challenge, which in turn spun off its methanol and synfuels business and Natural Gas Corporation (NGC). In 1994, Canada's Methanex Corporation's Methanex New Zealand owned and operated both of New Zealand's methanol plants and the synfuels plant. NGC is a separate publicly listed company (Oil & Gas Journal, 12.9.94, p. 30).

Until April 1993, all aspects of the gas industry, from wellhead to the consumer supply, were monopolies. Between 1986 and 1993, wholesale and retail prices were controlled. Distribution franchises existed which gave retail utilities sole right to sell gas in a particular region. There was also a requirement that utilities sell gas to any customer who requested it (CS First Boston, 1994. p. 37).

In 1992, legislation was introduced dealing with all aspects of the energy industry. These laws included the Gas Act, the Electricity Act, and the Energy Companies Act. The legislation aimed to require a more commercial approach to gas distribution and supply gas. It also sought to promote competition in the parts of the gas industry that are not natural monopolies. A regulatory regime relying on information disclosure was put in place to monitor the actions of monopolies and dominant market players. The industry's deregulation involved three major changes: the ending of gas price control regulations; abolition of exclusive right of supply through gas area franchises; and abolition of the obligation to supply.

The natural monopoly aspects of gas transmission are now dealt with through regulations requiring access to transmission networks by competing wholesalers and retailers (CS First Boston, 1994, p. 37). It seems likely that the abolition of the obligation to supply gas will disadvantage consumers in isolated areas.

The effects of privatization on labour in a deregulated labour market

The move to a deregulated economy in New Zealand has impacted on direct employment and working conditions through two processes. The first have been the changes in employment and working conditions associated with corporatization and privatization. The second, and arguably more substantial in terms its impact on labour overall, has been the deregulation of the labour market, public and private, by the Employment Contracts Act.

Electricity was corporatized in New Zealand in 1986, through the State Owned Enterprises Act. Despite a "good employer"clause in the legislation, corporatization resulted in major job losses in electricity, along with all other sectors. Between 1987 and 1990, the after-tax profit of Electricorp almost tripled, while staff numbers were reduced from 5,999 to 3,690. The State Services Conditions of Employment Act 1988 gave State-owned enterprises powers equivalent to private sector control over their workforce. The legislation allowed for the elimination of wage-earning and the introduction of productivity based contracts for workers. This legislation has been described as the forerunner of the Employment Contracts Act (Kelsey, 1995, p. 123).

The Employment Contracts Act came into effect in 1991, replacing a system of national award coverage and compulsory unionization, with individual employment contracts and a focus on one-to-one bargaining between employers and employees, although there is provision for representation and contracts can cover a number of people. Unions have no more rights than any other prospective representatives, and have no right of access to workplaces where they seek the authority to represent the workers. Contracts are not public documents, even when they cover groups of workers (Kelsey, 1995, pp. 180-181). These changes in the industrial relations system have applied to both public and private sector employees. However, the removal of national bargaining and compulsory unionization is likely to have had a particular effect on employment and working conditions of employees affected by public sector's restructuring and privatization. The use of individual contracts makes it difficult to track changes in employment conditions as such contracts are confidential.

Employees who have remained in the public sector throughout the privatization drive are now subject to a system where contract Chief Executive Officers are required to lower costs in their departments. The emphasis has been on fiscal restraint, no additional money for wages, increases in productivity, and reductions in additional payments for redundancy situations, working overtime or working in other exceptional conditions (Kelsey, 1995, p. 142).

Prices and quality of service in the restructured electricity industry

There have been major concerns among consumer groups about the impact of deregulation on prices, in both the electricity and gas industries.

The claim that deregulation and competition will benefit consumers, especially commercial consumers, is not supported by the experience of electricity users in New Zealand. Prices have risen for domestic consumers, and there has not been a corresponding fall in the charges paid by commercial consumers. The profit margins of electricity companies have increased at the expense of both groups of consumers. The pricing structures used by many companies disadvantage small consumers, and many contracts do not give consumers adequate protection or recourse mechanisms in the event of a dispute.

One stated aim of the electricity reforms was to allow consumers to choose between suppliers and different price structures. In fact, companies have not been interested in marketing to domestic consumers outside their catchment areas due to the fact that the profit margin for supplying to domestic consumers is slight. Around 97 per cent of electricity price derives from generation, transmission and distribution costs. There is therefore little incentive for companies to invest in marketing campaigns to attract more domestic consumers. Companies also argue that limited and expensive technology prevent them from passing on to domestic consumers the benefits of wholesale electricity price fluctuations. The result is that the deregulation of the electricity market has not enhanced competition in the domestic market and has not resulted in lower prices. Companies argue that prices have risen for domestic consumers because cross-subsidies have been removed. Domestic consumers now pay the full price of their service, rather than being subsidized by the higher prices paid by commercial users (Consumer, 1997, pp. 4-6).

However, despite the removal of cross-subsidisation and an increase in competition, commercial consumers have not benefited significantly from deregulation and privatization. Commercial prices for electricity fell between 1987 and 1992 in the lead up to deregulation, but since them commercial consumers' prices have remained largely static. Industry groups argue that electricity companies have been increasing their profit margins at their expense (Consumer, 1997, pp. 6-7).

The structure of electricity pricing has also been a cause of concern, particularly for domestic consumers. Prices are made up of a fixed charge relating to access to the network, and a variable charge associated with actual consumption. In cases where the fixed charge makes up a high proportion of the overall bill, small consumers are disadvantaged and energy conservation is not promoted. At $61 a month for a medium sized domestic consumer, Wairoa Power has the most expensive fixed charge component in its prices. Southpower had the lowest fixed charge, $8 a month. Overall, Wairarapa Electricity has the highest total bill, $154 a month for a medium sized domestic user, and Wairoa Power is the second highest; while King Country Energy charges the lowest prices for a medium sized domestic user. The price range is striking. In the category of medium sized domestic consumers, the most expensive supplier charges 70 per cent more than the cheapest one. The difference is over 60 per cent for smaller households (Consumer, 1997, p. 8). It is evident that the effects of deregulation are varied but are generally disadvantageous to domestic consumers. The Consumer magazine claims that many companies charge consumers "far too much" (Consumer, 1997, p. 5).

A further source of concern has been the content of contracts between electricity companies and consumers. In many cases, they contain clauses limiting a company's liability for losses arising from its negligence. It has yet to be determined whether such a clause contravenes the Consumer Guarantees Act. The use of estimates by companies is common, but this process is often not explained to consumers. Many contracts state that if a meter is found to be faulty, the company may estimate the appropriate charge. There is also no mechanism to verify independently the accuracy of a meter. A final cause of concern is the absence of standardised dispute resolution procedures. While some companies have in place independent dispute resolution mechanisms, others do not deal with the issue or require that the disputed amount be paid before any discussions commence. The Ministry of Consumer Affairs has ranked electricity companies on the basis of the quality of their consumer contracts. Wairoa Power, Electra and Otago Power were rated as having the best contracts, while Waitaki Power, Southpower and Scanpower were the three poorest performers (Consumer, 1997, pp. 8-9).

In gas, deregulation prompted a series of changes in arrangements between suppliers and distributors, which have produced some increases in prices to consumers.

Natural Gas Corporation is New Zealand's wholesale natural gas supplier and provides high pressure pipeline transmission in the North Island. NGC is a listed company and, in 1994, its major shareholders were New Zealand's Fletcher Challenge (33 per cent) and Australia Gas Light (33 per cent. NGC has rights to gas until 2009 at prices which rise at half the inflation rate. NGC contracts with downstream utilities, of which Enerco is the largest, for supply (CS First Boston, 1994, p. 53). Enerco owns the gas distribution networks in Auckland and Wellington, the largest two population centres on the North Island. It supplies most of its gas to industry or commercial properties. The domestic market only makes up 12 per cent of gas volume, but represents 15 per cent of revenues because of higher rates charged for low volume users (CS First Boston, 1994, pp. 41-42).

In the wake of deregulation, NGC attempted to renegotiate contracts with its customers. As negotiations faltered, NGC unilaterally moved back to its pre-price control supply contracts, which resulted in an immediate price rise of about 6 per cent. Enerco responded by raising its prices by 13-14 per cent for residential consumers and 3-4 per cent for other consumers. However, the price increases were not initially a sufficient incentive to force distributors onto new contracts. The new contracts reversed the 6 per cent rise but incorporated other increases over a five year period, including higher rates for distributors operating at a distance from NGC's hub network (CS First Boston, 1994, pp. 38-39).

Commentary and issues for further consideration

New Zealand has experienced the most extensive deregulation process in the region. Arguably the most significant impact on labour has not been privatization per se, but the introduction of a new Industrial Relations system at the same time as the more radical recent moves to privatize utilities have taken place.

Other case-studies indicate that the most significant protection to employees' employment and working conditions in utility privatization processes is through agreements to govern the transfer of existing employment, pay and conditions to the new, private employer. Where the whole industrial relations system is being deregulated, it appears that there is no framework within which such a regulated transfer can be negotiated or can take place.

At the same time, the deregulated gas and electricity industries are producing price increases and raising concern in consumer bodies, because of the re-balancing of pricing accompanying deregulation.

Conclusions and recommendations

In the Asia Pacific region Governments (national, State or local) continue to take the predominant responsibility for provision of water, waste management and electricity services. This is less the case with gas and other energy sources where development is relatively recent except in the more advanced economies While there is no single model of restructuring being applied in every economy in the region, privatization is becoming more widespread. Management privatization, through corporatization and/or commercialization has been the most frequent in public utilities. The form of privatization which will dominate the region over the next decade is undoubtedly finance privatization- the private funding of water and electricity schemes; often related to the extension and expansion of services, particularly in the developing economies. In water and waste, private funding is being linked to contracts or concessions for the management of facilities, as is the case elsewhere in the world. In electricity, the emerging pattern is deregulation, the disaggregation of vertically integrated facilities and systems and, in some economies, partial or full capital privatization through the sale of assets.

Where there have been large scale privatizations of whole water facilities through contracting out, notably the two largest in the region, in South Australia and the Philippines, or of electricity plants or facilities, as in Pakistan or the State of Orissa, they have been vigorously opposed by trade unions and employees, in some cases as part of wider community based campaigns. This opposition derives from the perceptions or expectations of a number of general features of privatizations. In the case of the impact of utility privatization on labour and the potential impact on consumers, this report shows that some of these concerns appear to have substance.

This final section of the report makes a number of recommendations based on these features. It should be reminded, that while privatization is a global phenomenon and proposals and policies are developed by governments with vastly different formal political compositions, this process is perceived to be and reacted to essentially as a political issue. In many instances the case for privatization of a utility is related to the general approach being taken in the economy, rather than being based upon a clear assessment of the benefits to be derived from privatizing the specific utility. In most cases, there is little evidence of specific assessments of a wide range of potential costs or benefits of the privatization or restructuring of the utility. There is also little evidence that alternative forms of privatization have been comprehensively reviewed. In those situations where Governments or the utility itself have articulated a specific case, such as the privatization of MWSS in the Philippines, it appears that there has been no attempt to make an assessment of the policy or to develop a proposal in dialogue with trade unions or other social partners or stakeholders.

Where consideration is being given to the privatization of existing utilities though contracting or capital privatization, it is therefore recommended that the proposal be the subject of an assessment of its potential costs and benefits. This assessment should be made against a full range of appropriate criteria (such as those developed as part of Australia's National Competition Policy) which should include:

financial and budgetary implications;

economic and regional development issues, including employment development;

environmental impacts and any implications for ecological sustainable development;

social welfare and equity issues;

the interest of consumers including specific categories of consumers;

labour issues, including employment, working conditions, industrial relations, occupational health and safety;

the implications for wider business competitiveness in the economy;

the efficient allocation of resources.

The report notes the absence of a widely applied methodology for assessing the budgetary implications of privatization of utilities, and the tendency for the debate to be dominated by gross figures of overall transaction. To assess the true budgetary implications, it is suggested that Governements make and report a more comprehensive review of whichever form of privatization is undertaken, that reflects the short-, medium- and long-term consequences, including additional costs and the loss of potential flows of income, in addition to the funds to be realised by the sale, contract or investment.

Where it is intended or claimed that proceeds from capital privatization or savings from contracting out are to be directed to specific investment, projects or expenditure, it would assist social dialogue if this were made explicit, and means were devised to monitor the actual transfer of any privatization proceeds to other areas of Government expenditure.

The instances of contracting out of the management of utilities examined in this report, make it clear that the credibility of the outcome is directly related to the nature of the processes used. A number of international agencies have established procedures for the conduct of tendering procedures as a prelude to contracting out. These include, for example, Public Procurement Directives adopted in the European Union and the similar procedures for Government Contracts adopted by the WTO. While different Governments have developed their own specific procedures, it should be recommended that, at a minimum, the procedures used in utility privatization should provide for probity and transparency; and give adequate opportunity for negotiation and consultation with labour, which may include the right of existing employees to develop their own bids to a contract for the whole operation of the utility or parts of it.

Specific consideration should be given to developing mechanisms for consultation and social dialogue for finance privatization. In effect, even where there is some consultation between social partners on other dimensions of privatization, there appear to be no examples in the region of active dialogue around the private funding of infrastructure development in water, electricity and gas. This will require the effective involvement of social specific information on the utilities in this region, international evidences suggests that those groups are particularly affected by privatization.

It should be acknowledged from the evidence in the Asia Pacific region that a planned approach to providing labour protection in the privatization of a utility is made more difficult if a number of large scale privatizations are taking place simultaneously; and/or are being accompanied by a deregulation of labour markets that reduces the overall significance of Agreements and established industrial relations procedures.

Attention also needs to be given to the implications of the extensive involvement of Transnational Corporations in utility privatization identified in this report. Where Governments have developed a broadly based assessment of the costs and benefits of privatization prior to restructuring or sale, as recommended earlier, it would seem appropriate that they use a similar range of criteria in assessing the TNCs to whom a facility might be sold (in the case of an asset sale), or with whom a contract would be signed. Consideration also needs to be given to developing within a TNC forums for the provision of information to and consultation with social partners within a TNC. Again, EU legislation provides for such a facility, in the form of Works Councils. Where no similar legal jurisdiction exists in the Asia Pacific, mechanisms should be developed through appropriate international channels.

This report also shows that privatization of utilities in the region is associated with price rises for some consumers, and concerns about the adequacy of contractual arrangements and the services that many consumers subsequently receive. The extent and equity of price rises or changes in service are largely determined by the nature, form and content of regulation for the utility. This suggests that, prior to privatization, consumers should be given clear statements of the objectives and projected consequences of privatization for prices, with a statement of their rights of access and use for what are fundamental services. The regulatory framework for prices and services should be in place before privatization is completed, with a clear identification of organisational responsibilities. Provision should be made for input by all social partners and stakeholders into the appropriate form of regulation, and monitoring of the extent to which regulation is achieving its stated objectives.

All figures in this report are quoted in domestic currencies. This table provides approximate exchange rates for currencies against the US dollar. Thus, for any value quoted in a domestic currency an approximate translation into a US $ equivalent can be calculated by dividing that figure by the exchange rate given below for the appropriate year.

Note: all figures have been calculated from rates against the Australian dollar fromfigures provided by the Reserve Bank of Australia and are for the end of June in each year (financial year end).

Source: Reserve Bank of Australia Bulletin, Dec. 1996, and calculations made by the Reserve Bank for the Public Sector Research Centre.

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idem (19/8/93): "Economic monitor: Philippines: More light" (p. 53).

idem (30/9/93): "Time for action: New industries minister to push privatization (p. 24).

idem (28/10/93): "Hong Kong electric power: Watts less is more" (p. 60).

idem (28/10/93): "System overload: Indonesia's private power plans may be too ambitious" (pp. 74-76).

idem (18/11/93): "Alternating currents: Malaysia falters in seeking private cash for power" (p. 52).

idem (27/1/94): "Power play: Hong Kong's Wu encounters hidden agenda in Jakarta" (pp. 53-54).

idem (3/2/94): "Testing the water: Vietnam's privatization efforts start gingerly" (p. 45).

idem (24/3/94): "Sleek or sluggish (South Korea plans to sell more than 70 state firms)" (pp. 40-42).

idem (5/5/94): "Try harder: World Bank prods Dhaka to speed up reforms.

idem (5/5/94): "Who gets what: Politics as usual drives Malaysian privatizations" (p. 78).

idem (12/5/94): "Beyond China: Gordon Wu takes his business to Southeast Asia" (p. 61).

idem (12/5/94): "On again, off again: Islamabad grapples with worsening power shortage.

idem (19/5/94): "Taipei: Go slow" (p. 62).

idem (28/7/94): "Indonesia: Financiers on pParade" (p. 54 ff.).

idem (4/8/94): "Power for the people: Pakistan hastens to privatise energy sector" (pp. 52-53).

idem (1/9/94): "High tension: The looming debut in Malaysia of privately produced power will squeeze profits at former monopoly Tenaga Nasional" (pp. 60-64).

idem (6/10/94): "Switched on: India's power industry gathers steam" (pp. 85-86).

idem (6/10/94): "Think big" (p. 86).

idem (13/10/94): "Seeing the light: Dhaka plans private-investment drive for power sector" (p. 68).

idem (22/12/94): "Power play (Gordon Wu has elevated his Hong Kong construction firm into Asia's No. 1 infrastructure player)" (pp. 42-45).

idem (19/1/95): "Privatization pioneer (Malaysian privatization - going too fast? Who got rich?)" (pp. 42-44).

idem (23/2/95): "The party's over (Privatization plans canceled)" (p. 66).

idem (1/6/95): "Drip drop: Asia's looming water shortage" (p. 54 ff.).

idem (13/7/95): "Power up: Bidders charge to electrify Thailand" (p. 78).

idem (27/7/95): "The envelope, please: Enron awaits verdict on Indian power project" (p. 80).

idem (24/8/95): "Politics as usual (populist opposition to foreign investment in India rising)" (p. 44-45).

idem (14/9/95): "Allow us: Can private companies help fix Taiwan's power woes?" (p. 66 ff.).

idem (21/9/95): "Cash incentive: Sri Lanka privatizes at its own pace" (pp. 71-72).

idem (28/9/95): "Overcharged? Hong Kong's power companies come under scrutiny" (p. 90 ff.).

idem (5/10/95): "Back to the table: Maharashtra agrees to consider an Enron compromise" (p. 82).

idem (12/10/95): "Juice for the bourse" (pp. 140-1).

idem (12/10/95): "Power hungry: Vietnam needs more electricity to push it to 2010 .

idem (30/11/95): "On again: Stalled Enron power project nears revival" (p. 72).

idem (30/11/95): "Power plays: Electricity price rises put Bhutto on the defensive" (p. 64).

idem (1/2/96): "Image is eEverything: Did Enron really concede that much to Maharashtra?" (p. 54).

idem (15/2/96): "A sale gone sour: Pakistan finds no takers for state-owned bank" (p. 46).

idem (11/4/96): "Sell-off in Sabah: Prominent companies line up to bid for the troubled utility" (p. 69).

idem The Nub of Hub: World Bank Seen Backing Pakistani Energy Plant.

FE News Service, (15/10/96): CMs, Power Ministers meet today.

FE News Service, (26/10/96): IBRD suspends $253 m loan MSEB.

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Financial Times (30/1/96): "Trying to stop profits leaking away".

idem (8/2/96): "Thai begins talks on power supplies".

idem (19/6/96): "Influence of the State" (p. 2).

idem (19/6/96): "Ambitions may be too grand" (p. 2).

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The Frontier Post (6/10/96): "Wapda workers rally against privatization".

idem (14/10/96): "Wapda workers protest against privatization".

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GE News Release (General Electric), (18/4/96): "GE awarded $500 million contract for Tokyo Electric's 1,400-megawatt power plant".

Goldstein, C. (17/10/91): "Pipelines of plenty", Far Eastern Economic Review, (pp. 108-109).

Haggin, J. (6/6/94): C&EN: "Asian natural gas pipeline proposed for easing energy, feedstock strains" (pp. 17-18).

Haller K. and P. Siroros, (1994): "Thai-Style' contractual relationships: Two case studies", Contemporary Southeast Asia, No. 3/94, (pp. 317-334).

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idem (1995): World Labour Report.

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idem (Aug. 95): "Does Pacific power have market power?".

idem (1996): Competitive tendering and contracting out by public sector agencies", Melbourne.

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idem (1994): World Energy Outlook, OECD Paris.

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Japan 21st, (Apr. 93): "Hong Kong orders two 350MW coal-fired plants from Mitsubishi Heavy Industries (Hong Kong Electric Co.) (p. 26).

idem (May. 93): "Indonesia places order for three 600 Mw steam turbines from Mitsubishi (pp. 10-11).

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idem (1993): Water in Australia, Pluto, Sydney.

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Jomo, K. S. (ed): (1995): Privatizing Malaysia: Rents, rhetoric, realities, Westview Press, Boulder and Oxford.

KCTU, (25/2/97): KCTU Campaign News 23.

Kelsey, J. (1995): Economic fundamentalism: The New Zealand experiment A world model for structural adjustment?, Pluto Press, London.

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Korea Electric Power Corporation, (1997): Korea Electric Power Corporation News.

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Lilly, D, (8/7/94), at LAFGO Forum: "Stance and strategy against privatization/corporatization".

London Economics (Aug. 95): "Market power in the Australian electricity market".

idem (Jun. 96): "Bangladesh power sector: Strategic framework for reform".

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McDonald, H, (7/4/94): "Now you tell us", Far Eastern Economic Review, (pp. 68-69).

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idem (2/10/96): "WAPDA union warns to cut off power supply".

idem 6/10/96): "WAPDA workers anti-privatization demo on 13th".

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idem (30/10/96): "Workers protest against price-hike, privatization".

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idem (24/1/94): "Total pressing Indonesian gas development, exports" (pp. 12-15).

idem (21/3/94): "Thailand scraps projects based on gas imports" (32-34).

idem (5/9/94): "Major new Japanese gas line signals nationwide expansion" (pp. 102-103).

idem (12/9/94): "New Zealand reforms to spark big resurgence in exploration" (pp. 23-30).

idem (17/10/94): "Financial clout to help build two Philippine geothermal projects" (pp. 29).

idem (12/12/94): "Pakistan signs exploration, power agreements" (p. 32).

idem (12/12/94): "Philippines restructuring, promoting investment in its petroleum sector" (pp. 16-20).

idem (24/4/95): "Plans advance for Qatar's LNG export projects".

idem (3/7/95): "Power generation to fuel SE Asia's gas surge" (pp. 28-29).

idem (28/8/95): "European loans in bolster Asian gas infrastructure" (pp. 41).

idem (13/11/95): "Pogo gas group agrees to gas sales from block off Thailand" (p. 34).

idem (22/1/96): "Unocal producing record gas volume in Gulf of Thailand" (p. 23).

idem (12/2/96): "India still lagging as major player on world energy markets" (pp. 19-22).

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Programme working paper, ILO, Geneva.

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idem (Nov. 95): "India: Dabhol debacle dents foreign investor' s confidence "(pp. 6-7).

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idem (Jan. 96): "Philippines".

idem (Feb. 96): "India".

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Provincial Electricity Authority State Enterprise Employees' Association, Thailand (1996): Country Report, Thailand.

PSPRU, (1996): The privatization network: The multinationals bid for public services, PSPRU, London.

Public Utilities Fortnightly (1/9/94): "CMS energy adventures in diversification (in Latin America, Asia and India)" (pp. 14-18).

isem (15/9/94): "India curries favor with foreign investors (power projects)" (pp. 41-2).

Quiggin, J. (1996): Great expectations: Micro-economic reform and Australia, Allen and Unwin, NSW.

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idem (1995): Privatization and equity, Routledge, London and New York.

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Reddy, Y.V., Ramanadham, V. (ed) (1989): Privatization in India, Privatization in developing countries, (pp. 178-198): Routledge, London and New York.

Regional Research Network, (Feb. 96): An assessment of the economic policies of the South Australian Government, 1993-96.

Reuters, PDS, (23/10/96): Third wave of privatization eyed.

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Risk Management, (Jun. 92): "East meets West in risk management (China Light & Power; cover story) (p. 36 ff.).

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Sanghvi, A. (June 1991): Energy policy, power shortages in developing countries: Impacts and policy implications (pp. 425-440).

Sarkar, J. (8/9/94): "Not so suite", Far Eastern Economic Review, (pp. 68-69).

Small, R. (1996): Honours Thesis, University of New South Wales (unpublished): "Contracting labour: The impact of competitive tendering and contracting out on workers".

South Australian Government, (1995): Submission to the Industry Commission on Contracting Out by Public Sector Agencies.

Stzyzewska-Kaminska, M, and Ramanadham V. (ed), (1993): "Privatization: A global perspective", The Privatization processes in Japan in the 1980s (pp. 491-525): Routledge, London and New York.

Tamil Nadu Electricity Board, India, (1996): Annual Financial Statement for 1996. 97 & Revised Estimate for 1995-96.

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idem (1991): "Issues and problems in privatization: Comparison among Southeast Asian Countries", Public Enterprise, No. 4/91, (pp. 314-326).

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Tippee, B. (29/8/94): "Japan", Oil & Gas Journal, (pp. 60-64).

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Treasury, Commonwealth Government of Australia, (1996): Budget Paper, No 1, 1996-97.

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Uppal, J. (1993): "India's new economic policy", Journal of Economic Development, Dec. 1993, (pp. 33-61).

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Vijayasingam, N. (Oct. 96): letter to Mr J.L. Bhan, PSI, re Policies of the Sri Lankan Government, Ceylon Workers' Congress.

Walker, R.G. (unpublished document for the Community and Public Sector Union), (Oct. 92): The Pipeline Authority.

Wall Street Journal (Eastern Edition) (6/6/93): "Power and politics in Malaysian electric-plant deal".

idem (4/10/93): "YTL Corp Will use Malaysian financing for electricity project".

idem (11/7/94): "CEPA scales back its plans to set up power plants in China (Consolidated Electric Power Asia)" (p. A7A).

idem (9/8/94): "Daewoo's chairman is subject of probe in bribery scandal (Korea Electric Power Corp)" (p. A8).

idem (23/9/94): "Malaysia sewer project changes hands soon after company began operating (Indah Water Konsortium)".

idem (11/11/94): "Asian power firm feels heat from US: Hong Kong's consolidated electric rushes to expand" (p. A9C).

idem (2/12/94): "World Bank loan will help Pakistan fund power site (Hub River power project)".

idem (21/2/95): "New World's venture with French group sets accord in China (joint venture of Hong Kong's New World Development Co. and French water-treatment company Lyonnaise des Eaux)" (p. B7B).

idem (27/4/95): "Clash over power plant reflects fight in India for its economic soul: It's a big chance for Enron if reformist government can hold off nationalists" (p. A1 ff.).

idem (4/8/95): "Enron project scrapped by India State" (pp. A3-4).

idem (7/8/95): "Enron pursues arbitration in dispute over project canceled by Indian State" (p. A9B).

idem (23/8/95): "Enron sees compromise on India plant" (p. A8).

idem (25/9/95): "State Government in India to rethink Enron power plant" (p. A9).

idem (22/11/95): "Enron, India State revive power project".

idem (9/1/96): "Enron of US settles India power dispute" (p. A6).

Watanabe, S. (1994): "Restructuring of the Japanese National Railways: Implications for labor", International Labour Review 133(1), (pp. 89-111).

Watts, R. (undated): The costs to Victoria of private investment in privatised freeways, RMIT, Melbourne.

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Whitfield, D. (1992): The welfare state: Privatization, deregulation and commercialisation of public services, Pluto, London.

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idem (1993): "Efficient electricity pricing with self-rationing: Reply", Journal of Regulatory Economics, Mar. 1993, (pp. 101-102).

World Bank, (1994): World Development Report (1994): Infrastructure for Development.

Yamamoto, T. T. Clarke and C. Pitelis (eds), (1993): The political economy of privatization: An analysis of the privatization of the Japan National Railway Corporation (pp. 337-359), Routledge, London and New York.

Yuen, N. G. and Woon, T. K. (1992): "Privatization, the Asian-Pacific region", Asian Pacific Economic Literature, No. 2/92, (pp. 42-68).

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