28 Director insisted that if demand declined greatly,<sup>thefirmwould renegotiate theirdealwiththe</sup> seller.

75. The most common method to deal with workforce<sup>reductionsistheprovisionof</sup> retirement and severance benefits to encourage<sup>voluntarydeparturesand compensatefor layoffs;</sup> governments generally greatly prefer the formrer<sup>tothelatter(Box7).Suchprogramsappear</sup> quite costly in the short run. For example,<sup>Indianlaborleadersareaskingforfiveyears</sup> severance pay for dismissed employees over<sup>40andwith20yearsormoreofservice;and</sup> packages near this size have been awarded<sup>inSriLankaandPakistan.Butsuchprogramsare</sup> politically and socially acceptable, and the<sup>financial and economicreturnscan be high; in recent</sup> World Bank projects that financed severance,<sup>thereturnsrangedfrom22to44percentin</sup> countries as diverse as Brazil, Croatia, India,<sup>Mozambique,Tunisia,and Togo.Yet, care must be</sup> taken to avoid overly generous packages that<sup>resultinunsustainablecosts, leadtoproblemsof</sup> adverse selection, and, in the case of early<sup>retirement payments,createundue burdenonthe</sup> social security system (Kikeri, 1998; Rama,<sup>1999).Selling or awardingsharestoemployees(and</sup> sometimes retirees) in the newly privatized<sup>firmisanother wayof compensatingworkersand</sup> allowing them to share in the gains of privatization.

# Box 7: Dealing with Labor Redundancies in<sup>Brazil Railways</sup>

Addressing overstaffing was a critical issue<sup>in the privatizationof BrazilRailways.The governmentstarted labor</sup> restructuring prior to privatization in order<sup>toattract investorsand mitigatethesocial impact.Nearly40 percent of</sup> the original workforce of 42,000 left on<sup>a first-comefirst-served basis throughacombinationof early retirement</sup> and voluntary and involuntary separations.<sup>Closeto12,000employeesoptedforearly retirement,whileabout</sup> 6,000 chose voluntary separation. The number<sup>of earlyretireeswasmuchhigherthantheestimatednumberof</sup> 5,000. During the program, social security<sup>reform waspassedwhich impliedthatentitlement toretirement would</sup> no longer be based on the number of years<sup>worked buton agemostly,providinganincentivefortheaverage</sup> worker with 18 years of experience who would<sup>otherwisehavestayedonto retire.Involuntaryseparation,based</sup> on performance, was appliedto 400 employees<sup>at80percentof thevoluntaryseparationpackage.On average,</sup> the financial package equaled -22-months of<sup>salaryas comparedtothe legalrequirementof 10months. The total</sup> retrenchment cost, financed by the govermment<sup>and intemationalinstitutions,amountedtoUS$365millionasof</sup> February 1998, with a 40 percent economic<sup>rateof return.The concessionairessubsequentlyretrenchedan</sup> additional 17,000 people through involuntary<sup>separationof which70percent wereretrenched withinone yearof</sup> operation. The concessionaires were required<sup>fora periodof oneyearafter theyassumedoperationstopay the</sup> same financial packages as paid by the<sup>govenmment.By May2000more than80%of theinitialworkforcehad</sup> been retrenched since the start of the privatization.

In addition to severance packages, retraining<sup>supportandoutplacementserviceswereprovided.Actual</sup> participation in training and outplacement<sup>programswassignificantlylowerthaninitialestimates.Thelow</sup> attendance was mainly caused by delays<sup>infinalizingimplementation arrangementswith thevariousservice</sup> providers. The cost of training and outplacement<sup>was approxirmatelyUS$12 million.</sup> Source: Estache, Sydenstrickeri and Schmitt de Azevedo,<sup>October2000.</sup> 76. Compensation packages have often been<sup>combined withretrainingtohelpworkers</sup> reintegrate into the labor market. While popular<sup>with governnentsand donors alike,evaluations</sup> question their cost effectiveness. Targeted,<sup>demand-drivensupport onapilotbasiswith</sup> competition and performance-based arrangements<sup>forservicedeliveryhaveabetterchanceof</sup> succeeding, while counseling and job search<sup>assistancearefoundtobemore costeffective.</sup>