PRIVATISATION EMPLOYMENT AND EMPLOYEES THE INDIAN EXPERIENCE Shri

PRIVATISATION, EMPLOYMENT AND EMPLOYEES THE INDIAN EXPERIENCE Shri P. K. Basu India OECD CONFERENCE on Privatisation, Employment and Employees 10 -11 OCTOBER 2002 Ataköy, Istanbul Turkey

PUBLIC SECTOR UNDERTAKINGS IN INDIA n 3

Central Government owned Public Sector Undertakings Particulars No. Profit/Loss for the year 2000 -01 (US $) Profit making PSUs 122 (+) 5936 Loss making PSUs 111 (-) 2675 No profit or No loss 1 0 234 (+) 3261 Total number of PSUs Total Investment 57107 n 4

State Level Public Sector Undertakings in India Particulars as on 31 st March, 1997 No. Profit making PSUs 54 Loss making PSUs 551 Non functioning PSU 241 PSUs not submitted accounts 100 Total number 946 Total Investment (US$ million) 24533 n 5

Employment and Average Annual Emoluments in PSUs Number of Employees (In million) Average annual per capita emolument (Rs. ) 1998 -99 190. 0 147482 1999 -2000 180. 6 168339 2000 -2001 174. 2 219546 Year n 6

DISINVESTMENT POLICY, PROCEDURE AND PROGRESS n 7

The beginning of the Disinvestment Process n The disinvestment policy of Go. I can be seen to be implemented Phase I – 1991 -92 to 1997 -October 1999. Culmination of Phase I was in the form of the report of the disinvestment commission set up in 1996. broadly in 2 phases n The recommendations of the disinvestment commission set up in 1996, which formed the backbone of the Phase I of disinvestment, can be summed up as : 8 n

The Disinvestment Policy revisited n Phase II – October 1999 onwards. The main feature of the policy can be culled out from the 2000 -2001 budget speech as follows : – To restructure and revive potentially viable PSEs Main Features of the current Disinvestment Policy were laid out in the 2000 -01 budget speech. Emphasis on maximising value realised from sale. Bold initiative to close unviable PSUs which cannot be revived, outlined. – To close down PSEs which cannot be revived – To bring down Government equity in all non-strategic PSEs to 26% or lower, if necessary – To fully protect the interest of workers – To put in place mechanisms to raise resources from the market against the security of PSEs' assets for providing an adequate safety-net to workers and employees – To establish a systematic policy approach to disinvestment and privatisation and to give a fresh impetus to this programme, by setting up a new Ministry of Disinvestment – To emphasise increasingly on strategic sales of identified PSEs – To use the entire receipt from disinvestment and privatisation for meeting expenditure in social sectors, restructuring of PSEs and retiring public debt 9 n

Disinvestment Process & Role of MODI Selection of PSU by MODI Approval by CCD Formation of IMG & Selection of Global Advisors 2 -3 months Submission of Expression of Interest Submission of Initial Technical Proposal Due Diligence / Commercial negotiations 3 -6 months Finalise Shareholders Agreement (SHA) & Share Purchase Agreement (SPA) Financial bids 1 week Selection of strategic partner & signing of SHA & SPA 10 n

Main Constituents n Cabinet Committee on Disinvestment (CCD) n Core Group of Secretaries on Disinvestment – The Core Group of Secretaries is headed by the Cabinet Secretary and comprises of Secretaries from Ministries of Finance, Industry, Department of Disinvestment, Planning Commission and Administrative Ministry and any other Department as may be required The Cabinet Committee on Disinvestment is the apex decision making body in the disinvestment process The Ministry of Disinvestment is the key constituent and manages the routine functioning of the disinvestment process. MODI is helped by the relevant ministry and various other Government departments and ministries during the process. – The Core Group directly supervises the implementation of the decisions of all strategic sales – The Core Group monitors the progress of implementation of the Cabinet decisions – The Core Group makes recommendations to the CCD on disinvestment policy matters n Inter-Ministerial Group – The Inter-Ministerial Group is chaired by the Secretary, Ministry of Disinvestment and comprises of officers of Ministry of Finance, Department of Public enterprises Administrative Ministry and the CMD of the Public Sector Enterprise concerned – The Inter-Ministerial Group is responsible for day-to-day implementation of the disinvestment decision n Department of Disinvestment Cabinet Committee for Disinvestment (“CCD”) – The Department of Disinvestment (later, Ministry of Disinvestment)was set up vide Notification No. CD. 551/99 dated the 10 th of December 1999, – Business allocated to Ministry of Disinvestment Core Group of Secretaries (“CGS”) Inter Ministerial Group (“IMG”) Working Group – All matters related to disinvestment of Central Government equity from Central Public Sector Undertakings – Decisions on the recommendations of the Disinvestment Commission on the modalities of disinvestment, including restructuring – Implementation of disinvestment decision, including appointment of advisors pricing of shares and other terms and conditions of disinvestment – All matters relating to the Disinvestment Commission 11 n

Disinvestment 13022002 Disinvestment till date The financial year 2002 -03 has started off well with the closure of the Maruti and IPCL divestments • 12

Pace of Disinvestment S. No Month PSU/Asset Sold Total 1. Jan. , 2000 Modern Food Industries (India) Limited 1 2. Jul. , 2000 Lagan Jute Machinery Limited 2 3. Mar. , 2001 Bharat Aluminium Company Limited 3 4. Oct. , 2001 HTL ; CMC 5 5. Nov. , 2001 Hotel Ashok, Bangalore; Hotel Bodhgaya Ashok; Hotel Hasan Ashok 8 6. Jan. , 2002 Hotel Ashok, Madurai 9 7. Feb. , 2002 IBP ; Videsh Sanchar Nigam Limited ; Paradip Phosphates Limited ; 15 Hotel TBABR Mamallapuram; Hotel Agra Ashok; Luxmi Bilas Hotel Udiapur 8. Mar. , 2002 Qutab Hotel, New Delhi; Lodi Hotel, New Delhi ; Centaur Hotel, Juhu Beach, Mumbai; Centaur Rajgir 19 9. Apr. , 2002 Hindustan Zinc Limited ; Centaur Hotel Airport, Mumbai 21 10. May, 2002 Maruti Udyog Limited 22 11. Jun. , 2002 Indian Petrochemicals Corporation Limited 23 12. Jul. , 2002 Hotel Airport Ashok Kolkata ; Kovalam Ashok Beach Resort ; Hotel Manali Ashok 26 13. Aug. , 2002 Hotel Khajuraho Ashok; Hotel Varanasi Ashok 28 13 n

Disinvestment 13022002 Disinvestment Scorecard The Government has fared well in most instances and has got a substantial premium over the suggested reserve price. In the case of the Paradeep Phosphate (PPL) divestment it displayed its flexibility by selling at a price lower than the suggested reserve price. The government has performed exceptionally well on the divestments undertaken till date n 14

THE IMPACT OF PRIVATISATION ON EMPLOYMENT AND EMPLOYEES n 15

Work Force – in India 1. Total workforce in India (Source NSSO 1997) Rural: Urban: Total: 269 million 86 million 355 million 2. Total workforce in organised sector Government: Private: Total: About 20 million* 7 million 2 million 3. Total workforce in CPSEs 4. Investment supporting retention of this workforce (as on 31. 3. 01) Rs. 274, 114 cr. Despitetheseinvestments, andnoprivatisationuntil 1999, the. PSUs workforce is declining. ( *Includes Central / State / Semi Government, Central / State / Semi Public Sector) 16 n

Employment in Central Government owned Public Sector Undertakings Year 91 -92 92 -93 93 -94 94 -95 95 -96 96 -97 97 -98 98 -99 99 -2000 -01 No. of employees (millions) 2. 18 2. 15 2. 07 2. 06 2. 05 2. 00 1. 96 1. 90 1. 80 1. 74 n 17

Growth in Employment Growth rate of employment during the past decade Ø 1983 -1994 – increased at the rate of 2. 04% p. a. c. Ø 1994 -2000 – increased at the rate of 0. 98% p. a. c. Public Sector Employment Growth Ø 1983 -1994 – increased at the rate of 1. 52% p. a. c. Ø 1994 -2000 – declined at the rate of 0. 03% p. a. c. Private Sector Employment Growth Ø 1983 -1994 – increased at the rate of 0. 45% p. a. c. Ø 1994 -2000 – increased at the rate of 1. 87% p. a. c. Labour Force ØLabour force increased at the rate of 2. 05% p. a. c. during 1983 -94 and by 1. 03% p. a. c. during 1994 -2000 n 18

Gap in Employment Avenues 1983 -1994 (%) 1994 -2000 Growth in labour force 2. 05 1. 03 Growth in employment in organised sector 2. 04 0. 98 n 19

ROLE OF LABOUR UNIONS IN IMPLEMENTING PRIVATISATION v The disinvestment policy and procedure has been discussed and debated at several levels with the national level Labour Unions. One such forum is the Indian Labour Conference held annually. v Disinvestment has been one of the important topics discussed in such conferences with wide and active participation of national level labour unions. v Apart from discussion at the national level, in each case of privatisation, discussions are initiated with labour unions of the company at the beginning of the process in which the disinvestment policy, the rationale behind it and the various safeguards built into the agreements are elaborately explained to the labour unions. v The concerns of the labour regarding their service conditions, past liabilities, if any, pension benefits, severance scheme, employees stock options, are discussed in detail and suggestions received from the labour incorporated as best as possible. v Such interaction with the labour unions are then followed up at regular intervals as the disinvestment process proceeds. v The disinvestment process has been supported by prominent national level Labour Unions such as the Indian National Trade Union Congress (INTUC); even at the cutting edge level tremendous support has been received from labour unions and now there is increased consensus and support at the State levels as well. v This approach has had a huge impact and resulted in smooth transfer of companies. 20 n

PRIVATISATION RESTRUCTURING AND EMPLOYEE RETRENCHMENT – ISSUES AND POLICY RESPONSES n 21

Protection of Employee Interests v. Protection of employee interest is one of the predominant aspects of privatisation. v. Suitable provision related to employees interest provided for in the Shareholders’ Agreement (SHA). v“Best efforts” clause is also incorporated in SHA mentioning the benefits given by the Government to physically challenged persons and members of social disadvantaged categories of the society stating that the Strategic Partner shall use its best efforts to cause the company to provide adequate job opportunities to such persons. v. The concerns among the employees, namely, retrenchment from duty, pay scales and other service conditions are also addressed. v. Companies that have been privatised have not retrenched even a single person. v. Voluntary Retirement Scheme (VRS) given by the disinvested PSUs are at scales which are normally higher or equal to the VRS given by the Government to Central Public Sector employees. v. Reduction in the workforce is a continuous process as during the last 10 years the workforce in PSUs has reduced from 2. 3 million to 1. 7 million even without any privatisation or strategic sale. n 22

PSUs – Social Benefits and Amenities Ø PSUs - Complete freedom for wage settlement with unionised staff. PSUs – As a model employer provided housing facility to the employees and other essential community facilities like health care, education, shopping and creation centres etc. in their township. Ø Ø Capital expenditure on township incurred by PSUs 31. 3. 1999 US$ 1446 million 31. 3. 2000 US$ 1637 million 31. 3. 2001 US$ 1367 million Ø Recurring expenditure on township maintenance, administration and social overheads. 1998 -99 US$ 689 million 1999 -2000 US$ 731 million 2000 -2001 US$ 790 million n 23

Severance Package Voluntary Retirement Scheme (VRS) ØModel Voluntary Retirement Scheme notified by the Government was in force since 1988 till April, 2000 and was uniformly applicable to all public sector enterprises. ØNew liberalised scheme of VRS notified on 5. 5. 2000. Ø 3, 69, 277 employees opted for Voluntary Retirement Scheme (VRS) till 31. 3. 2001 in PSUs. ØVRS in Profit Making PSUs ØMay frame their own schemes of VRS and make it attractive enough for employees to opt for it. Compensation: -60 days salary for every completed year of service may be offered subject to the condition that such compensation will not exceed the salary for the balance period of service left. VRS in Marginally Profit or Loss Making PSUs ØPermitted to introduce an improved VRS scheme. ØCompensation : - 35 days salary for each completed year of service and 25 days per year of service for the balance of service left till retirement subject to the condition that such compensation will not exceed the salary for the balance period of service left. ØVRS in Non-Viable Enterprises ØIn the non-viable enterprises facing closure, VRS will be extended as Voluntary Separation Scheme (VSS) already approved by the Government. n 24

Social Safety Net – Retraining, Redeployment 1. Social Safety Net is an integral part of the Economic Reform Progress 2. Government of India set up the National Renewal Fund (NRF) in February, 1992. 3. Of the 73, 194 workers counseled, 55, 374 workers were retrained upto 31. 3. 2001 and out of which 19, 458 have been redeployed. 4. Department of Public Enterprises has taken up a fresh scheme for PSUs from the year 2001 -02 with a budget provision of Rs. 80 million with a target to benefit about 800 people under the Counseling, Retraining and Redeployment Scheme. n 25

Experience in Employee matters post disinvestment Case Study (A) Bharat Aluminium Company Ltd. (BALCO) n Introduced Voluntary Retirement Scheme (VRS) : 1675 employees applied for, but granted to only about 400 employees working in units that have closed down. n In spite of losses of Rs 200 crore due to the strike, ex gratia payment of Rs 5000 per employee paid. n Long-term wage agreement for a period of 5 years on 7. 10. 2001. n Workmen get a guaranteed benefit @ 20% of basic pay. (B) Modern Food Industries (India) Ltd. (MFIL) n Wages increased by an average of Rs. 1600/- per employee. VRS higher than Government VRS offered to the employees. (C) Paradeep Phosphates Ltd. (PPL) n Average emolument of the employees increased by 30% within one month of taking over of the management control by the Strategic Partner. n Additional financial burden - Rs. 37. 9 million per annum. Contd … Successful integration of labour union with the new management 26 n

Experience in Employee matters post disinvestment Case Study (D) Hindustan Zinc Ltd. (HZL) n Employees’ benefits which were withheld in the year 2001 -2002, have been restored. v It is pertinent to note that as long as a venture is an ‘industrial establishment’ the protection provided to the employees under the various labour laws continues. These labour laws are applicable to the company irrespective of whether it is a public sector undertaking or is in the private sector. Successful integration of labour union with the new management 27 n

THE EFFECT OF STATE-OWNED ENTERPRISE PENSION CONSIDERATIONS ON PRIVATISATION v In all cases of privatisation through strategic sale route, the protection of employee interest has been of paramount consideration. v The existing service conditions of the employees are protected including any pension obligations which the company may be having. v Mostly, past liabilities of the employees are settled prior to disinvestment. v In several cases, the strategic partner has also undertaken to meet past liabilities related to employees. v In many cases, where the employees favoured voluntary retirement before sale, liberal severance pay has been offered pre privatisation. v At the beginning of the process itself, discussions are held with employees and all issues relating to service conditions, past employees liabilities etc. are settled. These are fine tuned through further discussions as the disinvestment process proceeds. v Payment of past liabilities, VRS etc. do involve budgetary allocations by the Government which is worked out in consultation with the Administrative Ministry and Ministry of Finance. v It has been the experience that the value of enterprise is considerably enhanced as a result of resolution of these issues before hand. That the Government has so far got high value for the companies sold, one of the reasons is perhaps this. 28 n

EMPLOYEE PARTICIPATION IN PRIVATISATION TRANSACTIONS: POLICIES AND PERFORMANCE v In every PSU selected for disinvestment the employees are involved right from the beginning and therefore the privatizations so far have been smooth. v As an incentive, employees are offered the company’s shares at a substantial discount to the strategic sale price/market price. v The protection to the employees built into the agreements with the strategic partner are evolved after discussion with the employees at several stages. v There is protection against retrenchment, protection of service conditions, severance pay in case of rationalization, protection of retirement benefits including medical facilities post retirement etc. Though employee buy outs have not been successful so far, these are under negotiation in several cases and the structure being worked out. v The agreements also envisage that Government could offer stakes to employees from its balance shares in future as well. v A great amount of transparency has been achieved in the whole process regarding the employees. 29 n