Need to generate parameters for measuring intangibles

The memorandum of understanding (MoU), which clearly specifies the objectives of the agreement and obligations of the signatories—government and central public sector enterprise–originated in France in 1967. The objective was to create a level-playing field for the public sector enterprises in France vis-a-vis the private corporate sector.

The MoU system was first introduced in India in 1986, based on the Arjun Sengupta committee report (1984), which recommend agreements for five years that may be reviewed annually. Since the planning exercise laid much emphasis on the core sectors of steel, heavy engineering, coal, power, petroleum and fertilisers, the committee favoured MoUs in respect of such enterprises only.

The first set of MoU was signed by four CPSEs for the year 1987-88. Over the years, more CPSEs were brought within the system. According to the MOU system, the management of the enterprise is made accountable to the government through a promise of performance or ‘performance contract’. The government control over the CPSEs is exercised through ‘target setting ‘ in the beginning of the year and ‘performance evaluation’ at the end of the year. This system is designed to give enough freedom or autonomy to the CPSE managements to increase operational efficiency, but within government control.

The committee recommended three parameters for regulating the control-freedom interaction between government and CPSEs: price fixation, investment planning and financial management. These parameters are essentially financial in nature.

The specific objectives of the MoU system are to: (i) improve the performance of PSEs though increased management autonomy; (ii) remove the haziness in goals and objectives; (iii) evaluate management performance through objective criteria; and (iv) provide incentives for better future performance.

The process of MOU signing involves presenting draft MoUs?indicating various performance targets prepared by the CPSEs and approved by their administrative ministries?to the department of public enterprises (DPE). The drafts are then discussed, improved and finalised during MOU negotiation meetings, overseen by a Task Force appointed by the DPE. The negotiation meetings are attended by chief executives of CPSEs, senior officers of the administrative ministries and representatives of nodal government agencies like Planning Commission and ministry of statistics and programme implementation. Currently there are about 68 task force members who are divided into sector-wise syndicate groups.

The high power committee (HPC) on MoU is a committee of secretaries set up as the ‘apex committee’ to assess the MoU performance of CPSEs and the support given by the administrative ministries/departments, as committed in the MoU.

The MoU system was revamped in 1989 and refined in 2004-05. Under the current MoU guidelines, equal weights are given to financial (50%) and non-financial (50%) parameters. This is done according to the Balanced Scorecard approach to performance management. The financial parameters are in the form of absolute values: gross margins (profits) and turnover as well as in terms of ratios.

The non-financial parameters are further divided into dynamic parameters, enterprise-specific parameters and sector-specific parameters. For performance evaluation, different weights are assigned to each evaluation parameter in a 5-point scale to ‘signal’ what is Excellent and what is Poor performance. The final evaluation is a Composite Score based on the Targets and the Actual Results.

In 2010-11, 202 CPSEs signed the MoU. Almost all the CPSEs are now covered under the MoU system, considering that the subsidiaries enter into separate MoUs with their holding companies. No doubt, the present MoU system is a proof of a huge institutional mechanism for monitoring the performance of CPSEs under the DPE. This, to an extend, shields the DPE against CAG’s recent report on CPSEs which remarked that the department has not developed institutional mechanism to monitor compliance of its various guidelines.

The MoU system did help public enterprises, going by the profitability of MoU-bound enterprises. Their profits increased from Rs 12,013 crore in 1994-95 to Rs 91,062 crore in 2007-08. MoUs were critical to the turnaround of many enterprises like NBCC, ECIL, EPIL, Mecon, MECL, PDCIL and HIL Overall, the MoU system has helped CPSEs: improve top and bottom line performances; upgrade process and systems; address corporate governance imperatives; increase corporate autonomy; and improve accountability.

Though the MoU system has worked well, there is scope for incorporating global best practices in it. As the cabinet secretary has described in 2009, there are five major global trends in performance management in public systems and government.

First, there is a clear movement away from the Administrator Model to the Management Model. The Management Model represents an internal culture of making managers manage, as opposed to the Administrative Model which values compliance to pre-determined rules and regulations.

The second trend is represented by more countries moving from the Bureaucratic Model to the Market Model, which represents greater use of market-type mechanisms as opposed to rendering public services as a monopoly provider.

The third trend is represented by the efforts of many governments to reinvent themselves. Reinvention is not the same as reform; it involves something much deeper, something tantamount to changing the very DNA of public organisations so that they habitually innovate and continually improve performance without external pressure.

The fourth broad trend is reflected in the efforts of governments to promote knowledge management and knowledge sharing within the public sector, which leads to an overall performance improvement of all government wings.

The fifth broad trend is obviously e-governance. No government has transformed itself without an extensive use of e-governance tools.

All these trends, which are essentially qualitative in nature, need to find space in the non-financial indicators for MoU evaluation. But the approach to evaluation of the non-financial group in the present MoU system is quantitative-oriented.

The non-financial groups include CSR, sustainable development, R&D and the like which are qualitative and intangibles in nature. But the approach suggested is tangible as part of the SMART (specific, measurable, attainable, results-oriented and tangible) method. Therefore, more work need be done for generating tangible parameters for measuring the intangible aspects of CPSE performance.

In addition, the Balanced Scorecard Approach has to be adopted in its totality, as it includes non-financial parameters like human capital (skill, knowledge & attitude), organisation capital (culture, leadership & organisation development), information capital (systems, database & networks), process efficiency, and resource utilisation and the like.

Another parameter to be considered as per global trend is knowledge management. Though CPSEs employ highly qualified professionals, management of their skill and knowledge is not an area of priority for the enterprises. It can?t be a priority until it is an MoU parameter.

The author is president, Vision Consulting