MoU System in Central Public Sector Enterprises

The Memorandum of Understanding (MoU) as applicable to public sector enterprises is a negotiated document between the government and the management of the enterprise specifying clearly the objectives of the agreement and the obligations of both the parties. It was first introduced in France in two phases, that is, as contracts de program 1970 and as contracts de Enterprise in 1979 consequent to the Simon Nora Committee Report (1967). The main purpose of the MoU system is to ensure a level playing field to the public sector enterprises vis--vis the private corporate sector. MoU system in India was first introduced in 1986 as a result of the recommendations of the Arjun Sengupta Committee Report (1984). The Committee laid emphasis on medium term contract between the Government and the Central Public Sector Enterprises (CPSEs) and reco mmended a five-year agreement that may be reviewed annually. Moreover, since the CPSEs have been set up as part of the national/central plan, the Committee favored MoUs especially in respect of CPSEs in the core sectors of steel, coal, power, petroleum, fertilizer and petro-chemicals.

Autonomy and Accountability

The management of the enterprise is, nevertheless, made accountable to the government through promise for performance or performance contract. The government continues to have control over these enterprises through a priori supervision through setting targets in the beginning of the year and through a posteriori performance evaluation at the end of the year. In order to grant autonomy to public sector enterprises vis--vis control of the government, the Arjun Sengupta Committee identified three areas of Government-PSE interaction, namely (a) price fixation, (b) investment planning and (c) financial management. In regard to price fixation the Committee observed that price control/ administered price/ retention price may be retained only in areas where the nature of product so justifies. It further stated that wherever CPSEs are operating under competitive market conditions, the CPSEs should be left on their own to fix the price of their output. While fixing prices for products of CPSEs operating under monopoly conditions, these should be benchmarked with international prices. The gradual dismantling of Administered Price Mechanism (APM) since 1991 has increasingly helped these enterprises to fix the output prices on market principles. In regard to autonomy for investment planning, greater powers were subsequently delegated to the Board of Directors as recommended by the Committee. The Board of Directors of MoU signing CPSEs can therefore sanction capital expenditure without the prior approval of the government, especially so if the required funds could be found from the internal resources of the enterprise. In regard to financial management especially with reference to auditing, the Arjun Sengupta Committee was of the view that subsequent to evolving of appropriate accounting standards by the Comptroller and Auditor General of India (CAG), supplementary audit by CAG for the non-core sector should be given up. In the case of the enterprises in the core sector, however, the Committee recommended that company audit by the CAG may continue. The Committee further observed that Ministries should not interfere in areas of decision making which are within the delegated powers of CPSEs. Accordingly numerous administrative controls emanating from different government circulars issued over the years and pertaining to public sector enterprises were dispensed consequent to the review exercises undertaken in the Department of Public Enterprises in 1996 and in 2000.

MOU System : Process and Principles

The process of finalizing the MoUs starts with the issue of detailed Guidelines by the Department of Public Enterprises (DPE) on the basis of which the CPSEs submit their draft MoU after getting them approved by the respective Boards and the Administrative Ministries. The draft MOUs indicate (five) performance targets on a five point scale for the ensuing financial year. These draft MoUs are then discussed, improved and finalized during the MoU negotiation meetings. The MoU negotiations are attended by the Chief Executives of the CPSEs, Senior Officers from the administrative Ministries and the representatives of the nodal Government agencies such as lanning Commission and Ministry of Statistics & Programme Implementation. The Task Force on MoU set up by DPE, moreover, provides the oversight during the MoU negotiations

Task Force and Syndicates

The MoU Task Force comprise Former Civil Servants, CMDs of the Public Enterprise, Financial and technical professionals, Chartered Accountants and academics. They are selected by DPE. Currently, there are 67 Task Force (TF) members who are divided into sector-wise Syndicate Groups. Each Syndicate consist of 6-7 members. One of the members of the Syndicate acts as the Convener. The rich experience and knowledge of the TF members in different fields provides the necessary technical input and enables the Syndicate in fixing more realistic targets. The DPE issues the Minutes of MoU negotiation meetings to the CPSEs (and the Ministry/Department concerned) for finalizing the MoUs which are authenticated in the DPE to ensure that those are in accordance with the decisions on targets as agreed upon during the meeting. Subsequently, all MoUs have to be signed before 31st March for implementation during the succeeding financial year.

High Power Committee on MoU

The High Power Committee (HPC) on MoU is a Committee of Secretaries (COS) set up by the Government as the Apex Committee to assess the performance of MoU signing CPSEs with reference to the commitments made by them in the MOU and also to assess how far the Administrative Ministries/ Departments have been able to give the necessary support as committed by them in the MoU. HPC is headed by the Cabinet Secretary. Secretary, Department of Public Enterprises is the Member- Secretary of this Committee. The other `members comprise, Finance Secretary, Secretary (Expenditure), Secretary (Planning Commission), Secretary(Statistics & Programme Implementation). Chairman Public Enterprises Selection Board, Chief Economic Advisor, Department of Economic Affairs, Chairman Tariff Commission and Secretary (Performance Management). The Apex Committee of Secretaries on MoU has been from time to time giving directions in regard to the determination of the principles and parameters for evaluating the performance of CPSEs.

Aims and Objectives of MoU system in CPSEs

The aims and objectives of the MoU system are broadly the followings : (a). To improve the performance of public sector enterprises by increasing autonomy of Management of the Company.

(b). To remove the fuzziness in goals and objectives of public sector enterprises. (c). To evaluate the performance of management through objective criteria (d). To provide incentive for better performance in future. The incentives under the present system take two forms, namely monetary and non-monetary incentives. As per the Second Pay Revision Committee recommendations (for the executives of CPSEs) vide DPE OM No. 2(70)/08-DPE (WC)-GL-XV/08 dtd. 26.11.2008, the variable Performance Related Pay (PRP) would be payable in the case of profit making CPSEs at 100 % eligibility levels if the CPSE achieves the MoU rating as Excellent. If the CPSEs MoU is rated as Very Good, the eligibility of PRP would be 80% of the basic pay. In respect of Good and Fair ratings, the eligibility levels would be 60% and 40% of basic pay respectively. owever, there will be no PRP irrespective of the profitability of CPSE, in case it is rated as Poor. Moreover, 60% of the PRP will be given with the ceiling of 3 % of Profit Before Tax (PBT) arned during the year and 40 % of the PRP will come from 10% of incremental profit. Further, the PRP has been linked to the performance of the individual executives, which will be based on a robust and transparent Performance Management System). The non-monetary incentives comprise the MoU Awards. These awards are also an expression of commitment of the policy makers to the MoU system.While excellent performing CPSEs are awarded with the MoU (Excellece) Awards and Excellence Merit Certificates, the remaining excellent performing CPSEs are recognized with Excellence Merit Certificates.

MoU Targets and Performance Evaluation

Performance evaluation at the end of the year indicates the extent to which the mutually agreed Targets agreed upon at the beginning of the year were achieved by the enterprise.

MoU Targets
The exercise of fixing MoU targets involves the following steps: (i) Preparation of MoU Guidelines, which are issued by DPE in the month of October/ November. (ii) Submission of draft MoU by CPSEs through Administrative Ministry on the basis of the MoU guidelines. (iii)Examination of draft MoUs by the MoU Division and preparation of critiques to be circulated to the Task Force Members. (iv). Fixing of dates and venue for MoU negotiation meetings that starts from January/February. (v). Holding the MoU negotiation meetings to finalize the MoUs in the presence of the Task Force (January March ) each year. (vi). Preparation and circulation of the Minutes (vii). All MoUs have to be signed before 31st March of every year.

Evaluation methodology
The MoU system was revamped in 1989 and further refined in 2004. Under the current MoU Guidelines, equal weights ( 50% + 50% ) are assigned to financial and non-financial parameters. These are done on the lines of balanced score card approach of performance evaluation. The financial parameters generally relate to profit related, size related and

productivity related parameters. The non-financial parameters are further sub-divided into dynamic parameters, enterprise-specific parameters and sector-specific parameters. Examples of dynamic parameters are project implementation, investment in R&D and extent of globalization etc. Similarly, while the sector-specific parameters refer to macroeconomic factors like change in demand and supply, price fluctuations, variation in interest rates etc, (that are, factors beyond the control of the management), the enterprise-specific parameters relate to issues such as safety and pollution etc. Performance targets for MoUs are framed on a five point scale. The composite score is thus an index of the performance of the enterprises. The grading of the composite score is done in the following manner.

MoU Composite Score Grading

1.00-1.50 Excellent 1.51-2.50 Very Good 2.51-3.50 Good 3.51-4.50 Fair 4.51-5.0 Poor

MoU ratings of CPSEs

MoU rating of CPSEs during the last five years is shown in the Table (which will be displayed in the class)The MoU ratings of CPSEs has improved over the years. During 2009-10, as high a 50 percent of CPSEs evaluated had a MoU rating of Excellent. As many as 21 percent of CPSEs had a MoU rating of Very Good. Out of the remaining CPSEs 14 percent each were rated as Good and Fair and only one CPSE was rated as Poor.