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A

PRESENTATION

TOEXECUTIVE TRAINEES

ON

&

MOU SYSTEM

SPS Solanki AGM (CP)

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PUBLIC SECTOR

PUBLIC ENTERPRISES

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DEFINITION

Public SectorPublic Sector - set of organisations which are ownedby Public (representatives), to the extent of 50% ormore

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 outputfor a price).

i.e

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

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PUBLIC SECTOR

PUBLIC

ENTERPRISES

Governmentcompanies inCentralsector

Post &Telegraph

R

ailway

s

Governmentcompanies in State

sector

OrdnanceFactories

Banking,Insurance

,Financialservices

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Role of the PSE:

A Historic consensusKarachi session 1930- The state shall own or

control key industries and services, mineralresources, waterways, shipping and other means

of public transport National Planning Committee- 1938 -classified

industries into defence, key and public utilities andrecommended that they be owned and operated bythe state.

The Bombay Plan, 1944- Government interventionwas necessary to cope with the huge task ofpushing through the extensive industrialprogrammer.

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1947

At the time ofIndias 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

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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 PublicSector as an instrument for self-reliance economic

growth.

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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.

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Role of the PSE:

A Historic consensusIndustrial Policy Resolution of 1948 - accepted the

inevitability of the state ownership of means ofproduction 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) developmentby the public sector while the remaining industrieswere left in general to the initiative and enterprise ofthe private sector (Schedule C ).

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Industrial Policy Resolution, 1956

Two different principles of organization werevisualized: one, the public economy for

allocating resources through administrative andpolitical decision giving priority toconsiderations other than profit mainly socialequity and two, the private economy based on

the principles of market relationships with profitmotive being the guiding criteria for allocation

resources.

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GLOBAL SCENARIO

Direct involvement of Government in

Industrial, Fiscal or Trading Activities -

MUST for development of any economy

during developing phase.

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PUBLIC SECTOR

Over the last more than five decades,public sector in India has evolved into amajor force. Being the principalinstruments of planning in India itoccupies the commanding heights of theeconomy, controlling and directing in alarge measure the whole course of

development. Its growth has beenphenomenal in terms of investment andproduction as well as in scope ofactivities.

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Image of the Public Sector

BUT.

The image of the Public Sector has been

under attack by vested interest through asystematic dissemination of disinformationand myths.

Until 1991, a number of decision were taken on

the way which saddled the public sector withfailed private enterprises - in order to protectthe employment of thousands of workers lefthigh and dry.

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Public Sector today

What is completely missed is that the publicsector is not what it was even a decade ago.

It has been undergoing a transformationand is fast joining the mainstream of themarket economy

Growth has been phenomenal in terms of

investment and production as well as inscope of activities.

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CONTRIBUTION OF PSEs

PUBLIC + ENTERPRISE

Social (Public)Obligations

Employment, Public Welfare, Community

Development etc.

Commercial(Enterprise)entity

Economically viable & contributory to National

Exchequer

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2006-07 2005-06 %agechange

Cumulative investment of all (244)

CPSEs as on 31.3.2007

421089 403706 4.31

Overall growth in turnover of CPSE 964410 837295 15.18

Aggregate reserves and surpluses of

all CPSEs

416494 359181 15.96

Net profit of CPSEs* 81550 69536 17.28

Rs. In Crore

Performance of PSEs: SelectedIndicators

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Performance of PSEs: SelectedIndicators

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

The return on investment

20.91 per cent in 2006-07 (PBITEP to CE) 19.54 per cent in 2005-06 14.89 per cent in 1997-98.

Capital employed in CPSEs Rs. 665124 crore in 2006-07 (13.60% increase) Rs.585484 crore in 2005-06 Rs.2,49,855 cr in 1997-98

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

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Performance of PSEs: SelectIndicators

Contribution to Central exchequer

Rs 147635 Cr in 2006-07 as against Rs 125456 Cr in2005-06.

DIVIDEND

During 2006-07, total dividend paid was Rs.26805 Cras compared to Rs. 22886 Cr dividend paid in theprevious year registering an increase of 17.12 percent.

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Performance in Power Sector

National Production 704.45(100%)

State Sectors production 338.05(48%)

CPSEs Production 298.95(42%)

NTPCs production 200.86

(28.51%)

All Figures in Billion Units(2007-08)

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PRESENT STATUS

As on 31.3.2007, there are 247 CentralPublic Sector Enterprises

54 Schedule A77 Schedule B48 Schedule C06 Schedule D

( The rest are uncategorised )

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Top 10 enterprises in terms of investmentsS.No. Name of the Enterprise Investment (Rs.

Cr.)

1. Oil and Natural Gas Corporation Ltd. 1299842. Bharat Sanchar Nigam Ltd. 123851

3. NTPC Ltd 74406

4. Indian Oil Corporation Ltd. 63625

5. Power Grid Corporation of India Ltd. 478956. Steel Authority of India Ltd. 32385

7. Nuclear Power Corpn of India Ltd. 32611

8. National Hydro Electric Power CorpnLtd.

27456

9. Bharat Petroleum Corpn. Ltd. 21162

10. Hindustan Petroleum Corpn. Ltd. 24126

Total 577501

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TOP TEN PROFIT MAKING CPSEs(Rs. in crores)

Name of the Enterprise Profit 2006-07

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

.

15642.927805.87

7499.476864.716202.292822.812414.70

2386.672381.382320.2156341.03

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TOP TEN LOSS MAKING CPSEs(Rs. in crores)

S.No Name of the PSE Loss

1. Fertilizer Corporation of India 1432.59

2. Hindustan Fertilizer Corporation 1065.14

3. National Jute Manf. Corpn Ltd. 794.49

4. Hindustan Photofilms Manf. Co. Ltd. 653.06

5. National Textile Corpn Ltd. 535.80

6. Air India Ltd. 447.93

7. ITI Ltd. 405.26

8. Indian Drugs & Pharmaceuticals Ltd. 351.16

9. Hindustan Cables Ltd. 310.68

10. Indian Airlines Ltd. 240.29

Total 6236.40

2006-07

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Navratna and Miniratna PSEs enjoy certain amount of financial powers under their Articles of

Association.

Post liberalisation, Government introduced Navratna and Mini Ratna schemesunder 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

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Navratna and Miniratna

Miniratna SchemeThere are 42 Category-I Miniratna and 13 Category-IIMiniratna 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 threeyears

Should have a positive networth.

Category-II CPSEs :

should have made profit for the last three years continuously and

Should have a positive networth.

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Criteria MaxScore

Maximum scoreto be given

NTPCPer-

formance

Score awardedas per

DPE NTPC DPE NTPC

NPNW 25 >20 >=13 13.66 20 25

Manpower Costto Total Cost

15 =12 21.19 15 15

PBIT toTurnover

15 >=25 >=25 33.65 15 15

EPS 10 >=30 >=3 7.55 4 10

Inter SectoralPerformance

20 I I 2* 16 16

Total 100 85 96

Navratna Score Sheet (2006-07)

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

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Composite Scores for the Navratna CPSEs

S.No. Name of Composite RemarksCPSE Score

1. BHEL 71

2. BPCL 58 Score less than 603. GAIL 794. HPCL 58 Score less than 605. IOC 636. MTNL 35 Score less than 60

7. NTPC 858. ONGC 899. SAIL 79

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Performance improvement of CPSEs is acontinuous process and enterprise specificmeasures are taken by the Government like

- Signing of MOU with PSEs- Periodic review of performance

- Professionalisation of Board

Performance Improvement inCPSEs

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Disinvestment in CPSEs

Started in 1991-92 Public Sector Disinvestment

Commission constituted in 1996 and itsubmitted 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 CPSEstill 31st March, 2007 is Rs.650671 crore.

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Sickness Revival and Restructuringin Public Sector

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 (upto30.6.2007) 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

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RECOGNITION

General recognition - PEs hadhelped in the creation of a strong

and diversified industrial base inthe country and managerialmanpower.

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RECOGNITION

Promotion of Balanced RegionalDevelopment

PSEs: At the Cutting Edge of Technology

Setting High Standards as ModelEmployers

Representation of weaker and vulnerable

sections such as SCs, STs, OBCs andPhysically Handicapped in their workerforces.

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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 and26.89% of finished steel in the country.

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A glimpse into the rapid transformation ofthe 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.

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A glimpse into the rapid transformation ofthe PSEs

(random selection)

ONGC- a flagship Navratna PSU ranked 133rd in theForbes 400 Global Corporate and at 326th rank in theFinancial 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 corebusiness area of heavy electrical equipment in thecountry.

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IN INDIAN

CONTEXT

SPS Solanki, AGM (CP)

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GENERIC PROBLEMS OFPUBLIC ENTERPRISES

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Issues of concern

Relationship between PSEs and theGovernment dysfunctional.

Government established PSEs ascorporate bodies with independent legalexistence but, it continue to treat themas subordinate departmental offices, and

play the role of a super-management ontop of the Board of Directors.

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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 theIndustrial Policy Resolution of 1956,which talked of 'freedom of management'for functioning on 'business lines.'bureaucratic and political interventionsand interferences of various kinds.

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Issues of concern Elaborating on his philosophy and vision behind

the PSEs, Nehru had prophetically sounded anadvance caution in this regard. He said, Theway a government functions is not exactly theway that business houses and enterprisesnormally function...when one deals with a plantand an enterprises where quick decisions are

necessary, this may make a difference betweensuccess and failure. I have no doubt that thenormal governmental procedure applied to apublic enterprise of this kind well lead to the

failure of that public enterprises

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Issues of concern

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

Unclarity regarding accountability.The prevailing systems concentrated on proceduralcorrectness of individual actions , decisions rather than onanswerability for results.

The managers in turn tended to offer ex post factoexcuses as there was no ex anteagreement on what was

expected.

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Issues of concern

little overall evaluation of performance;no proper evaluation methodology or

machinery was in operation.-Indian Audit Department.

-Reports of the Parliamentary Committee on Public

Undertakings.

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PROBLEMS OF PUBLIC ENTERPRISES

ADMIN.MIN PLANN.COMM.PROFIT NONPROFIT

MULTIPLEPRINCIPALS

COPUFINANCEMIN

MULTIPLEGOALS

LACK OF ACCOUNTABILITY

LACK OF AUTONOMY

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PROBLEMS OF PUBLIC ENTERPRISES-II

GOVERNMENT

NOT ME SYNDROME

PEOPLE

PUBLICENTERPRISE PARLIAMENT

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CRITICAL ISSUE

WHETHER THE PROBLEM IS DUE TOOWNERSHIP ONLY-?

THE MAIN ISSUE IS :

UNDER WHAT CONDITIONS WILL PSE MANAGERS BE MORE

LIKELY TO ACT IN THE PUBLICS INTEREST.

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REFORMING PUBLIC SECTOR

DO WE NEED PUBLIC SECTOR?

YES- REFORM andRETAINTHEM

NO- REFORM andSELLTHEM OFF

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1984-85 PRE-LIBERALISATION ERAREFORMING PROCESS

Economic Administration ReformsCommission (the Jha Commission) wasformed with one of objectives of findingways to improve public enterprise

performance .

The Arjun Sengupta Committee (1984)also went into the question of

performance evaluation of publicenterprises.

proposed a short list of indicators forperformance improvement process.

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CONCEPT

Performance Cycle

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TARGETSETTING

APPRAISAL

COUNSELLI

NG

ENABLING

Performance Cycle

Performance Cycle

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TARGETSETTING

APPRAISAL

COUNSELLI

NG

ENABLING

Performance CyclePerformance Criteriaweightage

Delegation

ofpower

Evaluation

Future planning

Performance Cycle

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TARGETSETTING

APPRAISAL

COUNSELLI

NG

ENABLING

Performance Cycle

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MANAGEMENT TECHNIQUE

AIM

PERFORMANCE IMPROVEMENT

MOU

CONCEPT OF MOU IS SIMPLE

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CONCEPT OF MOU IS SIMPLEMEMORANDUM OF UNDERSTANDING

BETWEEN TWO PARTIES IS A FREELY NEGOTIATED

PERFORMANCE AGREEMENT

BETWEEN GOVERNMENT ACTING ASOWNER OF THE PUBLIC ENTERPRISEAND ENTERPRISE

CLEARLY SPECIFIES THE

INTENTIONS, OBLIGATIONS ANDRESPONSIBILITIES OF THE TWOPARTIES

S S

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SYSTEM

THE ENTERPRISE UNDERTAKES TO ACHIEVE THETARGETS SET IN THE AGREEMENT AND THEGOVERNMENT AGREES TO PROVIDE NECESSARYASISTANCE FOR ACHIEVING THE TARGETS AT THE

BEGINNING OF THE YEAR. IT IS SIGNED BY THE CHIEF EXECUTIVE ON BEHALF

OF ENTERPRISE AND SECRETARY OFADMINISTRATIVE MINISTRY ON BEHALF OF

GOVERNMENT. MOU COVERS BOTH FINANCIAL PERFORMANCE AS

WELL AS NON-FINANCIAL PERFORMANCE.

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WHAT WAS THE OBJECTIVE

?

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AUTONOMY

ACCOUNTABILITY

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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

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ACCOUNTABILITY IS INCREASED BY

CLEAR SPECIFICATION OF PERFORMANCE CRITERIA

COMPREHENSIVENESS OF PERFORMANCE CRITERIA

PRIORITISING PERFORMANCE CRITERIA Ex-ANTEAGREEMENT OF JUDGING DEVIATIONS

FROM PERFORMANCE TARGET (CRITERIA VALUES)

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ALTERNATIVE NAMES

PERFORMANCE CONTRACT

PERFORMANCE AGREEMENT

CONTRACT PLANS CONTRACT DE STABILITE

CONTRACT DE PROGRAMME

CONTRACT DU PLAN MEMORANDUM OF UNDERSTANDING

(MOU)

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IMPLEMENTATIONMECHANISM

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DEPARTMENT OF PUBLIC ENTERPRISES(DPE)

NODAL AUTHORITY FOR PUBLIC ENTERPRISES

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ADMINISTRATIVE SET UP

DEPTT. OF PUBLIC ENTERPRISES

HIGH POWER COMMITTEE

TASK FORCE

DPE STAFF

RESOURCE PERSONS

MEMBERS OF TASK FORCE

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MEMBERS OF TASK FORCE(TF)

RETIRED SECRETARIES

RETIRED CHIEF EXECUTIVES.

MAGNAGEMENT CONSULTANTS

ACADEMICIANS

CHARTERED ACCOUNTANTS

PROFESSIONALS

MEMBERS OF HPC

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MEMBERS OF HPC

THE COMMITTEE CONSISTS OF THE FOLLOWINGMEMBERS. 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.

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FORMULATION ANDCONTENTS

Th t t f th MOU di id d

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Part I Vision, Mission & Objectives of the PSE

Part II Exercise of enhanced autonomy & delegation of

financial powers

Part III Performance Evaluation parameters and targets

Part IV Commitments/Assistance from the Government

Part V Action Plan for implementation & monitoring of

MOU

The contents of the MOU are divided

into following five parts:

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Performance Evaluation parametersand targets

Performance Evaluation parameters

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and targets

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EVALUATIONMECHANISM

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MOU TARGETS (French System)

Parameters Unit Target Actual Actual Actual (1) (2) (3)

ProductionMT 1200 1200 1300 1180

Profit Rs.Crs. 400 400 370 425

Rating (WHICH ACTUAL IS BEST?)

MOU TARGETS (Si li S t )

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MOU TARGETS (Signaling System)

Exl. V.Good Good Fair Poor

Production MT 40% 1250 1200 1150 1100 1050

Profit crs 60% 410 400 390 380 370

ACTUALS A B C D

Production MT 1230 1300 1180 1200

Profit Rs.Crs 395 370 425 400

Rating- ? Which Company has performed best ?

MOU TARGETS (Signaling System)

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( g g y )

Parameters Unit Wt. TARGET

Exl. V.Good Good Fair Poor

Production MT 40% 1250 1200 1150 1100 1050

Profit Rs. Cr. 60% 410 400 390 380 370

Calculation Example (PROD- 1230; PROFIT- 395)

Actuals Raw Score Wtd.Score

Production MT 1230 1+(1250-1230)/(1250-1200)

=1+.4=1.4 1.4X.4=0.56

Profit Rs. Cr. 395 2+(400-395)/(400-390) 2.5x0.6

=2.5 2.5X0.6=1.5

Rating Composite Score (Total) 2.06

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MOU EVALUATION

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 - 5.00 Poor

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IMPLEMENTATION OF

MOU INTERNALISATION

CATALYTIC AGENTS

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CATALYTIC AGENTS

OBLIGATIONS UNDER GOI, MOU SYSTEM

FLOW OF PLANS

NEED FOR STRENGHTHENINGCOMMUNICATION

FLOW OF PLANS

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FLOW OF PLANS

INTERNAL

MOUs

(Annual)

BUSINESSPLANS

(5 Yearly)

CORPORATE

PLAN(1997-2012)

SYSTEM BENEFITS

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SYSTEM BENEFITS

Internalisation of MOU system will facilitate

Unification and integration of departmentalGoals/objectives with the organisation goalsand objectives.

To Provide clear-cut direction for the growthof the enterprise

To improve Workculture and attitude.

. Identification of the weaknesses and strengths

down the line. Defines the performance in clear terms and

brings in enhanced accountability

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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

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Good Luck