A PRESENTATION TO EXECUTIVE TRAINEES ON

&

MOU SYSTEM
SPS Solanki AGM (CP)

PUBLIC SECTOR

PUBLIC ENTERPRISES

DEFINITION
Public Sector
Public Sector - set of organisations which are owned by Public (representatives), to the extent of 50% or more

Public Enterprises (A Subset of Public Sector) In Indian context

Central Govt.organisation - owned by Public Authorities, to the extent of 50% or more - engaged in activities of Business character

(involving Investment & Returns and markets its output for a price).
i.e

Central Public Sector Enterprises Established as Govt. Companies or Statutory Corporations .

PUBLIC SECTOR

Government companies in Central sector

Government companies in State sector

PUBLIC ENTERPRISES

R a i l w a y s

Post & Ordnance Telegraph Factories

Banking, Insurance ,Financial services

Role of the PSE: A Historic consensus

Karachi session 1930- The state shall own or control key industries and services, mineral resources, waterways, shipping and other means of public transport National Planning Committee- 1938 -classified industries into defence, key and public utilities and recommended that they be owned and operated by the state. The Bombay Plan, 1944- Government intervention was necessary to cope with the huge task of pushing through the extensive industrial programmer.

1947
At the time of Indias Independence in

1947 country had:

A weak industrial base Low level of Savings and Investments Near absence of infrastructure facilities Vast percentage of extremely poor population

Inequalities of Income
Lack of trained manpower

Objectives of Public Sector

Among the imperatives before the Govt. were:
A Removal of poverty Employment generation Regional imbalances removal Accelerated growth of agriculture and industrial production

Better utilisation of natural resources

Prevention of concentration of economic power in few hands.

This led to pragmatic compulsion to use Public

Sector as an instrument for self-reliance economic

growth.

Objectives of Public Sector

Objectives of setting up of public enterprises was,

inter-alia to:
Ensure the rapid economic development and industrialization of the country and create the necessary infrastructure for economic development.

Promote redistribution of income and wealth;

Create employment opportunities Promote balanced regional development Assist the development of small-scale and ancillary industries; and Promote import substitutions, save and earn foreign exchange for the economy.

Role of the PSE: A Historic consensus

Industrial Policy Resolution of 1948 - accepted the inevitability of the state ownership of means of production alongside private enterprise which was to be properly directed and regulated
Industrial Policy resolution, 1956 large area of industrial, activity both for exclusive (Schedule A) and priority (Schedule B) development by the public sector while the remaining industries were left in general to the initiative and enterprise of the private sector (Schedule C ).

Industrial Policy Resolution, 1956

Two different principles of organization were visualized: one, the public economy for allocating resources through administrative and political decision giving priority to considerations other than profit mainly social equity and two, the private economy based on the principles of market relationships with profit motive being the guiding criteria for allocation resources.

GLOBAL SCENARIO
Direct involvement of Government in
Industrial, Fiscal or Trading Activities -

MUST for development of any economy

during developing phase.

PUBLIC SECTOR
Over the last more than five decades, public sector in India has evolved into a major force. Being the principal instruments of planning in India it occupies the commanding heights of the economy, controlling and directing in a large measure the whole course of development. Its growth has been phenomenal in terms of investment and production as well as in scope of activities.

Image of the Public Sector

BUT. The image of the Public Sector has been under attack by vested interest through a systematic dissemination of disinformation and myths. Until 1991, a number of decision were taken on the way which saddled the public sector with failed private enterprises - in order to protect the employment of thousands of workers left high and dry.

Public Sector today

What is completely missed is that the public sector is not what it was even a decade ago. It has been undergoing a transformation and is fast joining the mainstream of the market economy Growth has been phenomenal in terms of investment and production as well as in scope of activities.

CONTRIBUTION OF PSEs
PUBLIC + ENTERPRISE
Social (Public) Obligations Employment, Public Welfare, Community Development etc. Commercial (Enterprise) entity Economically viable & contributory to National Exchequer

Performance of PSEs: Selected Indicators

Rs. In Crore

2006-07 2005-06 %age change Cumulative investment of all (244) CPSEs as on 31.3.2007 Overall growth in turnover of CPSE 421089 964410 403706 837295 4.31 15.18

Aggregate reserves and surpluses of all CPSEs

Net profit of CPSEs*

416494
81550

359181
69536

15.96
17.28

Performance of PSEs: Selected Indicators

Profit before deprecation, interest and tax & EP

Rs. 178083 crore in 2006-07 Rs 150262 Cr in 2005-06 Rs 530,62 Cr in 1997-98

20.91 per cent in 2006-07 (PBITEP to CE) 19.54 per cent in 2005-06 14.89 per cent in 1997-98. Rs. 665124 crore in 2006-07 (13.60% increase) Rs.585484 crore in 2005-06 Rs.2,49,855 cr in 1997-98

The return on investment

Capital employed in CPSEs

Net worth of CPSEs

Rs.452995 In 2006-07 - (24.09% increase) Rs.397275 cr. In 2005-06 Rs,1,34,443 Cr in 1997-98

PBITEP Profit before interest, tax and extraordinary items and prior period adjustments

Performance of PSEs: Select Indicators

Contribution to Central exchequer
Rs 147635 Cr in 2006-07 as against Rs 125456 Cr in 2005-06.

DIVIDEND During 2006-07, total dividend paid was Rs.26805 Cr as compared to Rs. 22886 Cr dividend paid in the previous year registering an increase of 17.12 per cent.

Performance in Power Sector

All Figures in Billion Units (2007-08)

National Production State Sectors production CPSEs Production NTPCs production

704.45 (100%) 338.05 (48%) 298.95 (42%) 200.86 (28.51%)

PRESENT STATUS
As on 31.3.2007, there are 247 Central Public Sector Enterprises 54 77 48 06 Schedule A Schedule B Schedule C Schedule D

( The rest are uncategorised )

Top 10 enterprises in terms of investments

S.No. 1. 2. 3. 4. 5. Name of the Enterprise Oil and Natural Gas Corporation Ltd. Bharat Sanchar Nigam Ltd. NTPC Ltd Indian Oil Corporation Ltd. Power Grid Corporation of India Ltd. Investment (Rs. Cr.) 129984 123851 74406 63625 47895

6.
7. 8.

Steel Authority of India Ltd.

Nuclear Power Corpn of India Ltd. National Hydro Electric Power Corpn Ltd.

32385
32611 27456

9.
10.

Bharat Petroleum Corpn. Ltd.

Hindustan Petroleum Corpn. Ltd.

21162
24126 Total 577501

TOP TEN PROFIT MAKING CPSEs

(Rs. in crores)

Name of the Enterprise

1. Oil & Natural Gas Corpn.Ltd. 2. Bharat Sanchar Nigam Ltd. 3. Indian Oil Corporation Ltd. 4. NTPC Ltd. 5. Steel Authority of India Ltd. 6. Coal India Ltd. 7. Bharat Heavy Electrical Ltd. 8. GAIL (India) Ltd. 9. National Aluminium Co. Ltd. 10.National Mineral Dev. Corpn. TOTAL
.

Profit

2006-07

15642.92 7805.87 7499.47 6864.71 6202.29 2822.81 2414.70 2386.67 2381.38 2320.21 56341.03

TOP TEN LOSS MAKING CPSEs

(Rs. in crores) 2006-07

S.No
1.
2. 3. 4. 5. 6.

Name of the PSE

Fertilizer Corporation of India
Hindustan Fertilizer Corporation National Jute Manf. Corpn Ltd. Hindustan Photofilms Manf. Co. Ltd. National Textile Corpn Ltd. Air India Ltd.

Loss
1432.59
1065.14 794.49 653.06 535.80 447.93

7.
8. 9. 10.

ITI Ltd.
Indian Drugs & Pharmaceuticals Ltd. Hindustan Cables Ltd. Indian Airlines Ltd. Total

405.26
351.16 310.68 240.29 6236.40

Navratna and Miniratna

PSEs enjoy certain amount of financial powers under their Articles of Association. Post liberalisation, Government introduced Navratna and Mini Ratna schemes under which substantial powers were delegated to major profit-making PSEs.
Navratna Scheme

Bharat Electronics Limited Bharat Heavy Electricals Limited Bharat Petroleum Corporation Limited GAIL (India) Limited Hindustan Aeronautics Limited Hindustan Petroleum Corporation Limited Indian Oil Corporation Limited Mahanagar Telephone Nigam Limited National Aluminium Company Limited NMDC Limited NTPC Limited Oil & Natural Gas Corporation Limited Power Finance Corporation Limited Power Grid Corporation of India Limited Rural Electrification Corporation Limited Shipping Corporation of India Limited Steel Authority of India Limited

Navratna and Miniratna

Miniratna Scheme
There are 42 Category-I Miniratna and 13 Category-II Miniratna PSEs.
Category-I CPSEs
Should have profit in last 3 years continuously Pre-tax profit : Rs.30 crore or more in at least one of the three years Should have a positive networth.

Category-II CPSEs :
should have made profit for the last three years continuously and Should have a positive networth.

Navratna Score Sheet (2006-07)

Criteria Max Score Maximum score to be given DPE NPNW Manpower Cost to Total Cost PBDIT to CE 25 15 15 15 10 20 100 >20 <=5 >=20 >=25 >=30 I NTPC >=13 <=5 >=12 >=25 >=3 I 13.66 4.41 21.19 33.65 7.55 2* NTPC Performance Score awarded as per DPE 20 15 15 15 4 16 85 NTPC 25 15 15 15 10 16 96

PBIT to Turnover
EPS Inter Sectoral Performance Total

* Under Inter-sectoral criteria, no.1 company is NVVN which is NTPCs wholly-owned subsidiary company engaged in trading of power

Composite Scores for the Navratna CPSEs

S.No. 1. 2. 3. 4. 5. 6. 7. 8. 9. Name of CPSE BHEL BPCL GAIL HPCL IOC MTNL NTPC ONGC SAIL Composite Score 71 58 79 58 63 35 85 89 79 Remarks

Score less than 60 Score less than 60 Score less than 60

Performance Improvement in CPSEs

Performance improvement of CPSEs is a continuous process and enterprise specific measures are taken by the Government like

- Signing of MOU with PSEs - Periodic review of performance - Professionalisation of Board

Disinvestment in CPSEs
Started in 1991-92 Public Sector Disinvestment Commission constituted in 1996 and it submitted reports on 41 CPSEs. Proceeds from disinvestment till March, 2006 are Rs.49,241 Cr. 44 CPSEs are listed on Stock Exchanges. Market capitalisation of 38 listed CPSEs till 31st March, 2007 is Rs.650671 crore.

For sick enterprises Sickness in certain CPSEs has been persisting since last many years. Their losses surpassed their net worth. Since 1992, 75 PSEs registered with Board for Industrial and Financial Reconstruction (upto 30.6.2007) Some of the strategies to deal with sickness on long-term basis include :
Revival Financial restructuring JV with capable partner Fresh fund infusion Organisational and business restructuring Manpower rationalization Improved marketing strategies Cost control measures

Sickness Revival and Restructuring in Public Sector

RECOGNITION
General recognition - PEs had helped in the creation of a strong and diversified industrial base in the country and managerial manpower.

RECOGNITION
Promotion of Balanced Regional Development PSEs: At the Cutting Edge of Technology Setting High Standards as Model Employers Representation of weaker and vulnerable sections such as SCs, STs, OBCs and Physically Handicapped in their worker forces.

Centrality of PSEs in the Indian economy

- CPSEs have a share of:
43.08% of power, 85.52% of the national production of coal, 100% of lignite, 85.87% of crude oil, 74.51% of refinery and 26.89% of finished steel in the country.

A glimpse into the rapid transformation of the PSEs

(random selection)

NTPC- the largest power utility in the country accounts for 29 per cent of the total power generation in India, is the sixth largest thermal generation company in the world second most efficient among the top thermal utilities according to a global survey. Recorded the highest ever plant Load Factor of 92.24 per cent (Coal Units) - India average 78.06 per cent. Indian Oil Corporation- Indias flagship national oil company, finds a place in fortunes prestigious listing of the Worlds 500 largest corporations.

A glimpse into the rapid transformation of the PSEs

(random selection)

ONGC- a flagship Navratna PSU ranked 133rd in the Forbes 400 Global Corporate and at 326th rank in the Financial Times Global 500 by market capitalization GAIL (India) - a flagship Navratna national gas company -controlling 83 percent market share of gas. (BHEL) - unquestioned market leader in its core business area of heavy electrical equipment in the country.

IN INDIAN CONTEXT

SPS Solanki, AGM (CP)

GENERIC PROBLEMS OF

PUBLIC ENTERPRISES

Issues of concern
Relationship between PSEs and the Government dysfunctional. Government established PSEs as corporate bodies with independent legal existence but, it continue to treat them as subordinate departmental offices, and play the role of a super-management on top of the Board of Directors.

Issues of concern
Government - roles
owner, super manager and Government', and did not keep them distinct. relationship of superior and subordinate

different from what was envisaged in the Industrial Policy Resolution of 1956, which talked of 'freedom of management' for functioning on 'business lines.' bureaucratic and political interventions and interferences of various kinds.

Issues of concern
Elaborating on his philosophy and vision behind the PSEs, Nehru had prophetically sounded an advance caution in this regard. He said, The way a government functions is not exactly the way that business houses and enterprises normally function...when one deals with a plant and an enterprises where quick decisions are necessary, this may make a difference between success and failure. I have no doubt that the normal governmental procedure applied to a public enterprise of this kind well lead to the failure of that public enterprises

Issues of concern
Lack of clarity on expectations from PSEs.
If a PSE made losses it was criticised; and if it made profits it was criticised on some other grounds.

Unclarity regarding accountability.

The prevailing systems concentrated on procedural correctness of individual actions , decisions rather than on answerability for results.
The managers in turn tended to offer ex post facto excuses as there was no ex ante agreement on what was expected.

Issues of concern
little overall evaluation of performance; no proper evaluation methodology or machinery was in operation.

-Indian Audit Department.

Undertakings.

-Reports

of

the

Parliamentary

Committee

on

Public

PROBLEMS OF PUBLIC ENTERPRISES

ADMIN. MIN PLANN. COMM. FINANCE MIN COPU PROFIT NON PROFIT

MULTIPLE PRINCIPALS

MULTIPLE GOALS

LACK OF ACCOUNTABILITY LACK OF AUTONOMY

PROBLEMS OF PUBLIC ENTERPRISES-II

NOT ME SYNDROME PEOPLE PUBLIC ENTERPRISE

PARLIAMENT

GOVERNMENT

CRITICAL ISSUE

WHETHER THE PROBLEM OWNERSHIP ONLY-?

THE MAIN ISSUE IS :

IS

DUE

TO

UNDER WHAT CONDITIONS WILL PSE MANAGERS BE MORE LIKELY TO ACT IN THE PUBLICS INTEREST.

REFORMING PUBLIC SECTOR

DO WE NEED PUBLIC SECTOR?

YESNO-

REFORM and RETAIN THEM REFORM and SELL THEM OFF

1984-85 PRE-LIBERALISATION ERA

REFORMING PROCESS

Economic Administration Reforms Commission (the Jha Commission) was formed with one of objectives of finding ways to improve public enterprise performance . The Arjun Sengupta Committee (1984) also went into the question of performance evaluation of public enterprises. proposed a short list of indicators for

performance improvement process.

CONCEPT

Performance Cycle
TARGET SETTING

C O U N S E L L I N G
APPRAISAL

E N A B L I N G

Performance Cycle
TARGET SETTING

Performance Criteria weightage

C O U N S E L L I N G

Future planning

E N A B L I N G

Delegation of power

APPRAISAL
Evaluation

Performance Cycle
TARGET SETTING

C O U N S E L L I N G
APPRAISAL

E N A B L I N G

MOU
MANAGEMENT TECHNIQUE
AIM

PERFORMANCE IMPROVEMENT

CONCEPT OF MOU IS SIMPLE

MEMORANDUM OF UNDERSTANDING

BETWEEN TWO PARTIES

IS A FREELY NEGOTIATED PERFORMANCE AGREEMENT BETWEEN GOVERNMENT ACTING AS OWNER OF THE PUBLIC ENTERPRISE AND ENTERPRISE CLEARLY SPECIFIES THE INTENTIONS, OBLIGATIONS AND RESPONSIBILITIES OF THE TWO PARTIES

SYSTEM
THE ENTERPRISE UNDERTAKES TO ACHIEVE THE TARGETS SET IN THE AGREEMENT AND THE GOVERNMENT AGREES TO PROVIDE NECESSARY ASISTANCE FOR ACHIEVING THE TARGETS AT THE BEGINNING OF THE YEAR. IT IS SIGNED BY THE CHIEF EXECUTIVE ON BEHALF OF ENTERPRISE AND SECRETARY OF ADMINISTRATIVE MINISTRY ON BEHALF OF GOVERNMENT. MOU COVERS BOTH FINANCIAL PERFORMANCE AS WELL AS NON-FINANCIAL PERFORMANCE.

WHAT WAS THE OBJECTIVE ?

AUTONOMY ACCOUNTABILITY

AUTONOMY IS INCREASED BY

GRANTING GREATER DELEGATION OF POWERS

REDUCING MULTIPLE EVALUATIONS BY DIFFERENT GOVERNMENT AGENCIES REDUCING FREQUENCY OF EVALUATION REDUCING BUREAUCRATIC INTERFERENCE IN DAY-TO-DAY FUNCTIONING OF PUBLIC

ACCOUNTABILITY IS INCREASED BY
CLEAR SPECIFICATION OF PERFORMANCE CRITERIA
COMPREHENSIVENESS OF PERFORMANCE CRITERIA PRIORITISING PERFORMANCE CRITERIA

Ex-ANTE AGREEMENT OF JUDGING DEVIATIONS FROM PERFORMANCE TARGET (CRITERIA VALUES)

ALTERNATIVE NAMES
PERFORMANCE CONTRACT PERFORMANCE AGREEMENT CONTRACT PLANS CONTRACT DE STABILITE CONTRACT DE PROGRAMME CONTRACT DU PLAN MEMORANDUM OF UNDERSTANDING (MOU)

IMPLEMENTATION MECHANISM

DEPARTMENT OF PUBLIC ENTERPRISES (DPE)

NODAL AUTHORITY FOR PUBLIC ENTERPRISES

ADMINISTRATIVE SET UP
DEPTT. OF PUBLIC ENTERPRISES
HIGH POWER COMMITTEE TASK FORCE DPE STAFF RESOURCE PERSONS

MEMBERS OF TASK FORCE (TF)

RETIRED SECRETARIES RETIRED CHIEF EXECUTIVES. MAGNAGEMENT CONSULTANTS ACADEMICIANS CHARTERED ACCOUNTANTS PROFESSIONALS

MEMBERS OF HPC
THE COMMITTEE CONSISTS OF THE FOLLOWING MEMBERS. CABINET SECRETARY, CHAIRMAN FINANCE SECRETRY, MEMBER SECRETARY (EXPENDITURE), MEMBER SECRETARY (PLANNING COMMISSION) MEMBER SECRETARY (PROG. IMPL.), MEMBER CHAIRMAN (PESB), MEMBER CHAIRMAN (Tariff Commission) CHIEF ECONOMIC ADVISER, MEMBER SECRETARY (PUBLIC ENTERPRISE), MEMBER SECY.

FORMULATION AND CONTENTS

The contents of the MOU are divided into following five parts:
Part I
Part II

Vision, Mission & Objectives of the PSE

Exercise of enhanced autonomy & delegation of

financial powers
Part III Part IV Part V Performance Evaluation parameters and targets Commitments/Assistance from the Government Action Plan for implementation & monitoring of MOU

Performance Evaluation parameters and targets

Performance Evaluation parameters and targets

EVALUATION MECHANISM

MOU TARGETS (French System)

Parameters Unit Target Actual ActualActual (1) (2) (3) 1200
400

Production MT
Profit
Rs.Crs.

1200
400

1300
370

1180
425

Rating (WHICH ACTUAL IS BEST?)

MOU TARGETS (Signaling System)

Exl. Production Profit MT crs 40% 60% 1250 410 V.Good Good 1200 400 1150 390 Fair Poor 1100 1050 380 370

ACTUALS

Production Profit
Rating- ?

MT

1230

1300 425

1180

1200

Rs.Crs 395 370

400

Which Company has performed best ?

MOU TARGETS
Parameters Production Profit Unit Wt. Exl. MT 40% 1250 410

(Signaling System)
TARGET V.Good Good 1200 400 1150 390 Fair Poor

1100 1050 380 370

Rs. Cr. 60%

Calculation Example (PROD- 1230;

Actuals
Production MT

PROFIT- 395)

Raw Score

Wtd.Score

1230 1+(1250-1230)/(1250-1200) =1+.4=1.4 1.4X.4=0.56

2.5x0.6

Profit

Rs. Cr. 395

2+(400-395)/(400-390)
=2.5

2.5X0.6=1.5 2.06

Rating

Composite Score (Total)

MOU TARGETS
Parameters Unit Target Actual Actual Actual Actual (1) (2) (3) (4) 1200 1230 395 1300 370 1180 425 1200 400

Production MT Profit

Rs.Crs. 400

Rating

2.06 3.40 1.56

2.0

MOU EVALUATION
MOU Composite score
1.00 1.51 2.51 3.51 4.51 1.50 2.50 3.50 4.50 5.00

Grading
Excellent Very Good Good Fair Poor

IMPLEMENTATION OF MOU INTERNALISATION

CATALYTIC AGENTS

OBLIGATIONS UNDER GOI, MOU SYSTEM FLOW OF PLANS NEED FOR STRENGHTHENING COMMUNICATION

FLOW OF PLANS
CORPORATE PLAN (1997-2012)

BUSINESS PLANS (5 Yearly)

INTERNAL MOUs (Annual)

SYSTEM BENEFITS Internalisation of MOU system will facilitate

Unification and integration of departmental Goals/objectives with the organisation goals and objectives. To Provide clear-cut direction for the growth of the enterprise To improve Work culture and attitude. . Identification of the weaknesses and strengths down the line. Defines the performance in clear terms and brings in enhanced accountability

System benefits
Contd... Tie-up the inputs/support . Relative priorities of the goals performance evaluation methodology brings-in the objectivity in evaluation Healthy competition amongst various units . Freedom to operate/ functional autonomy. Enhancement of Managerial / competitive skill

Good Luck