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

1
Role of Employee Considerations in Privatization
Policy -The Case of Chinese Taipei-
Session I THE IMPACT OF PRIVATIZATION ON
EMPLOYMENT EMPLOYEES

• Kuei-Lin Chang
• Director General
• Council for Economic Planning Development
• Chinese Taipei
• Conference on Privatization, Employment and
  Employees
• Istanbul, Turkey
• 10 October 2002

2
CONTENTS

• Background of Taiwans Privatization
• Working Conditions in Taiwans SOEs
• The Legal Framework of Taiwans Privatization
• Policy Design for Employees Rights Interests
• Dimensions of Policy Impact
• Prospect of Taiwans Privatization
• Concluding Remarks
• Appendices

3
Background of Taiwans privatization -1

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

4
Background of Taiwans privatization -2

• 31 main SOEs in year 2001
• Total Assets US 593.8 billion
• Total Owners Equity US 119.6 billion
• Annual Sales US 80.8 billion
• Profit Before Tax US 7.9 billion
• Number of Employees 188,357

• In addition to few utility SOEs (legal
  monopolies), profitability and productivity of
  most SOEs in the competitive industries fall
  behind their private counterparts.

5
Working Conditions in SOEs

• Employees of SOEs used to enjoy much better
  benefits than their private counterparts.
• e.g. the average monthly salary in the
  public/private enterprises in year 2000

Unit NT (1 US34.5 NT)
6
Working Conditions in SOEs -1

• In year 2000, employees in 90 SOEs work 42 hours
  on average per week but only 46 private
  businesses offer the same conditions.
• The ratio of labor cost to sales in most SOEs
  reaches 30 or more which is rare in the private
  businesses.
• Accordingly, there is great fear of job loss,
  reduction in salary and fringe benefits, increase
  in workload and work pressure among employees in
  the SOEs chosen for privatization!!

7
The Legal Framework of Taiwans Privatization
Policy

• The Statute for Transforming State-Owned
  Enterprises into Privately-Owned Enterprises
  (STSP)
• the law governing the process of privatization
  and regulating the rights obligations of
  relevant entities in the process.

empower the line ministries to draw up the
detailed regulations
Enforcement Rules of the STSP
MOEA
VAC
MOF
MOTC
Administrative Regulations on preemptive
favored shares subscription of Employees
Administrative Regulations on compensation for
Employees rights interests
8
Policy Design for Employees Rights Interests

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

9
Policy Design for Employees Rights Interests
10
Policy Design for Employees Rights Interests

• Job Security
• When a SOE is transformed into a POE, the
  employees can be transferred concurrently as they
  desire.
• Premise unless otherwise provided in an
  agreement between the original and new employers
  upon the change of legal status of the original
  enterprise (e.g. reorganization or assignment of
  the unit(s) of the enterprise)

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Policy Design for Employees Rights Interests

• Seniority Settlement
• The original owner of the enterprise shall, on
  the date of privatization, settle the account of
  all employees benefits in terms of their
  respective lengths of service based on the
  criteria for payment of retirement set out in the
  Labor Standards Law
• 2 months salary for each year of the first 15
  years of service one month salary for the rest
  years.
• Seniority settlement pay shall not exceed 45
  months salary in total.
• After employees account have been settled, the
  calculation of their service year shall start
  anew.

12
Policy Design for Employees Rights Interests

• Severance Pay
• The employees who are not transferred
  concurrently or being laid off within 5 years
  after privatization shall be entitle to the
  severance pay, including
• 6 months salaries
• additional wage payable for the period of the
  one-month advance notice

13
Policy Design for Employees Rights Interests

• Compensation for Insurance Discrepancy
• Where the employees suffer the losses of pension
  payable to them because of the original insurance
  scheme interrupted by privatization, their losses
  of such benefits shall be duly compensated.
• The scope of all other compensation shall be
  limited to the losses which incurred at the time
  or privatization.

14
Policy Design for Employees Rights Interests

• Priority Shares for Employees
• encouraging employees participation in corporate
  governance through their shareholdings
• The employees are entitled to preemptively
  subscribing a specific amount of shares. Each
  employee is allowed to buy shares equal in value
  up to his 48 months' salary.
• priority shares for employees shall not exceed in
  total 35 of outstanding shares.
• Reserved shares in favor of employees holding
  shares for 1 or 2 year(s)
• a certain ratio of shareholding can be
  additionally subscribed at par value.

15
Policy Design for Employees Rights Interests

• How much compensation can an employee obtain from
  privatization of his company?
• Assumptions a middle ranked employee with 15
  years of service.
• Seniority settlement NT2.5 million (US72,464)
• Insurance compensation NT0.5 million
  (US14,493)
• Severance pay () NT0.56 million (US16,232)
• Preemptive subscription of shares equal in value
  up to NT3.84 m in the run up to privatization.
• () only for those who dont transfer
  concurrently or laid off within 5 years after
  privatization.

16
Policy Design for Employees Rights Interests

• Vocational Training Displacement Services
• Employees who are not transferred concurrently or
  laid off in 5 years after privatization shall be
  provided with secondary specialty training and
  displacement services rendered by the
  administrative authority in charge of labour
  affairs.

17
How are employees rights in financially
difficult SOEs being protected?

• Special Fund is raised to help financially
  difficult SOEs
• Part of governments revenues from privatization
  should be appropriated to a special fund (Article
  15 of the STSP)
• The Privatization Fund is mainly to finance the
  shortage as required by the financially troubled
  SOE for payment of the severance pay and/or
  seniority settlement amount to its employees.

18
Employees attitudes toward legal protection on
their rights benefits
Notes/ 1 very unsatisfactory 6 very
satisfactory 34 neutral
Source a commissioned research project by the
CEPD in 2002.
19
Dimensions of Policy Impact
20
Impact on Performances the cases of 6
privatized SOEs
? worse ? better ? ? much better 1 China
Insurance 2 BES Engineering 3 China
Petrochemical 4 China Steel 5 YangMing Marine
6 Liquidized Petroleum Supply.
21
Impact of Privatization on Employment

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

22
Impact of Privatization on Employment -1

• Job Security international comparison
• 5.75 reduction in employment after 3 years from
  privatization based on 39 privatized SOEs in the
  world (Megginson, W.L. et al , 1994).
• 7.4 reduction in employment after 3 years from
  privatization based on 13 privatized SOEs in
  Taiwan (CEPD, 1999).

23
Impact of Privatization on Employment -2

• Job Security little impact on national
  unemployment

Public sector accounts only for 6.7 labor force
in Taiwan.
24
Impact of Privatization on Employment -3

• Dilemma of promoting privatization in a time of
  economic slowdown
• Some poorly managed SOEs have turned to be a
  serious financial burden to government. Only this
  year the loss of US650 million is estimated to
  incur.
• Strongly promoted privatization or corporate
  restructuring will inevitably causes redundancy
  which is politically disadvantageous to regional
  employment.
• Privatization will remain on the government
  agenda, but be implemented in more cautious
  manner to avoid exacerbating unemployment problem.

25
Impact of Privatization on Pay Structure

• The case of a state-owned construction company
  which was privatized in June 1994.

• Average salary wage level in the construction
  industry 100
• p-day the day of privatization

26
Impact of Privatization

• The time for an overall appraisal of the impact
  of privatization on labor management and
  industrial relations seems ripe after 12 years
  from governments initiative.
• The full impact and enduring effects of
  privatization on industrial relations might lag
  far behind ownership change and had not yet been
  covered by prior studies.

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

• 17 SOEs have been chosen and approved by the
  Premier to be privatized by the end of year 2007.

• Petro
• Power

• Telecom
• Railway

• The deadlines and methods are currently being
  reconsidered by the authorities.

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Concluding RemarkPrivatization v.s. Employees
Rights

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

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Concluding RemarkPrivatization v.s. Employees
Rights

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

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More Information about Taiwans Privatization

• More details of privatization in Chinese Taipei
  can be found at the website
• http//www.cepd.gov.tw/english/special/9002212.htm
  
• or
• contact directly with
• Mr. Peter C. S. Lee
• Sectoral Planning Department, CEPD
• Tel [phone]
• e-mail cslee_at_sun.cepd.gov.tw

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Appendices
33
A Glance at Taiwan

• Location The island is almost equidistant from
  Shanghai and Hong Kong.
• Area 36,000 square kilometers (roughly equal to
  the size of the Netherlands).
• Population 22 million.
• GNP per capital US14,216 (in year 2000)
• Foreign Exchange Reserves US106.7 billion
• 14th largest trading country in the world.

34
The Location of Taiwan
China
35
Retrospect of Taiwans privatization

• The 1950s The STSP was promulgated in
  support of the land reform program, the legal
  basis of privatization policy was thus
  established.
• The 1960s Some SOEs floated in support of the
  newly established stock exchange.
• The 1970s Several capital intensive SOEs were
  established in National Infrastructure Projects.
• The mid-1980s Few SOEs went bankrupt. SOEs role
  as a policy instrument had gradually changed to a
  fiscal burden.

36
Retrospect of Taiwans privatization -1

• The late-1980s
• Government restarted the privatization policy in
  the face of global trend of liberalization and
  changing domestic political economic
  environment.
• The mid-1990s
• Several consensus were reached by major
  political parties at the National Development
  Conference held in late 1996
• 42 chosen SOEs should be privatized in 5 years.
• Privatization should be promoted in broader
  scope.
• State holdings of the privatized SOEs in the
  competitive industries should be entirely
  released in 5 years.

37
Institutional Framework of Management of SOEs
State Holdings
The Steering Committee for Promoting
Privatization of SOEs (SCPPS)

• CNC Commission of National Corporations
• MOTC Ministry of Transportation
  Communication
• VAC Veteran Affairs Council

• SCPPS The Steering Committee for Promoting
  Privatization of SOEs
• MOF Ministry of Finance
• MOEA Ministry of Economic Affairs

38
The Definition of Taiwans Privatization

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

39
Governments Approaches -The scope of Taiwans
privatization
While a SOE is deemed unnecessary by the
competent authority after considering the current
situation, the transformation is brought into
effect after a privatization proposal has been
reported to and approved by the Premier. -
Article 5 of the STSP
40
Governments Approaches -Privatization v.s.
Liberalization

• Privatization of SOEs (particularly for utility
  companies) must be proceeded in concert with
  market liberalization.
• e.g. Privatization of Chung-Hwa Telecom Corp.

41
Governments Approaches -The methods of Taiwans
privatization

• The privatization of a SOE can be proceeded in
  the following manners for unspecified investors
• Share selling (e.g. IPO, auction, book-running,
  Depositary Receipt)
• Assets selling through public tender process
• Providing the assets of a SOE as the equity
  capital contribution
• Merging with a private enterprise
• Right issue by private capital to dilute state
  ownership
• For public solicitation of private investor(s)
• Approval from the Premier for soliciting terms
  conditions
• Entering into negotiation with private
  investor(s)
• Submit the content of deal to the Parliament for
  recordation

42
Governments Approaches -The methods of Taiwans
privatization-2

• Employee-Buy-Out
• Employees of two financially troubled SOEs
  raised capital to buy and lease part of operating
  assets of their companies respectively in this
  year.
• Other forms of privatization
• Such as contracting out, management contract,
  Leasing etc. have been applied in some public
  services and considered feasible for some
  loss-making SOEs.

43
Taiwans Strength in promoting privatization

• Mature capital market (May 2002)
• Market capitalization of US300 billion
• Annual trading values of US 556 billion in 2001
• 593 listed companies (excluding 397 OTC listing
  firms)
• Rich experience accumulated in privatizing 27
  SOEs in various sectors.
• A stable institutional framework composed of a
  set of laws and regulations (the next slide).

44
Taiwans Weakness in promoting privatization

• Opposition from vested interest groups
• Labor union bargain for
• working conditions unchanged
• more compensation for their benefits interests
  interrupted by privatization
• participation in corporate government
  (mitbestimmungsrecht)
• Some legislators
• Management level of some SOEs

45
Accomplishment of Taiwans Privatization

• Up to July 2002, 27 SOEs have been privatized,
  yielding total proceeds of US 12.5 billion.

• 15 small-scale factories have been closed down
  upon deliberate reviews by the authorities.