Central Public Sector Enterprises and MoU

Dr.K.Trivikram

An International Perspective

The Performance Contract System first originated in France in the late 1960s. In other
words, it was first introduced in France in two phases, that is, as ‘contracts de programme’
in 1970 and as ‘contracts d’ Enterprise’ in 1979 consequent to the Simon Nora Committee
Report (1967). It was later adopted by Pakistan and Korea. India applied the system of
Memorandum of Understanding (the Indian version of Performance Contracting) in 1986.
In the past five decades, more than 35 developing countries have introduced the
Performance Contracting system for enhancing performance of their public sector
enterprises and for providing operational autonomy.
MoU System in CPSEs

MoU is a mutually negotiated agreement between the management of the CPSEs and the
Government of India/Holding Company. Under this agreement, the CPSEs undertakes to
achieve the targets set in the agreement at the beginning of the year and submit themselves
to an evaluation on the basis of its achievements at the end of the year.

The Government of India introduced the system of MoU in the year 1986, based on
recommendations given by Arjun Sen Gupta Committee report (1984). The report
recommended that the CPSEs enter into agreements with their Administrative Ministries for
five years, while progress would be reviewed annually. The MoU system was given broader
thrust by the Government after the announcement of the New Industrial Policy of 1991.In
view of the above policy statement, the scope of MoU system has been extended to cover
nearly all CPSEs over a period of time.

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.

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 Niti Aayog and Ministry of Statistics & Programme
Implementation.
Institutional Arrangements for Implementation of MoU Policy
High Powered Committee (HPC) 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, HPC is headed by the Cabinet Secretary and comprises of 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 HPC on MoU gives guidance and directions with respect to the
determination of the principles and parameters for evaluating the performance of CPSEs.
Inter-Ministerial Committee (IMC) on MoU

The Inter-Ministerial Committee on MoU consists of Secretary, DPE as Chairman, Secretary

of the concerned administrative Ministry/ Department or his representative not below the
rank of Joint Secretary (Member), Secretary, Ministry of Statistics and Programme
Implementation or his representative not below the rank of Joint Secretary (Member),
Additional Secretary, NITI Aayog or his representative not below the rank of Joint Secretary
(Member). Secretary, DPE may co-opt any officer who is a finance expert in case the need is
felt.

Adviser (MoU), DPE provides secretarial support to the Committee.

The role of IMC is to approve the MoU targets and recommend its evaluated score and
rating to the High Powered Committee (HPC).

Pre-negotiation Committee (PNC)

The role of the Pre-negotiation Committee (earlier known as Standing Committee on MoU)
would be to assist the IMC in determining the most appropriate and relevant parameters
for measuring improvement in performance and for fixing targets. Meetings of the Pre-
negotiation Committee are held in each case before the meetings of IMC to look at the
trends, discuss, negotiate and recommend MoU parameters and targets. The composition of
Pre-negotiation comprises of Adviser (MoU), DPE, concerned Joint Secretary/Adviser,
Administrative Ministry, concerned Adviser (Niti Aayog), Director (MoU) and representative
from Ministry of Statistics and Programme Implementation (MoSPI).

Evaluation Methodology

To counter the perils of the accounting system borrowed from private sector, the MoU
system was revamped in 1989 and further refined in 2004. A five step performance
evaluation system was introduced in the MoU system which included:
• Criteria Selection
• Criteria Weight Selection
• Criteria Value Selection
• Performance Evaluation
• Performance Reward

Within the context of evaluation of the performance, the concept of composite scores also
becomes critical as it measures the capacity of the enterprise to meet its own commitment
and simultaneously, helps in ranking and comparing the enterprises.

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. In other words, there would be
uniform parameters for measuring financial performances such as revenue from operations,
operating profit and return on investment (e.g. ration of PAT/Net-worth). This would be
applicable to all CPSEs, except CPSEs which are dependent on government grant or
performing functions of distribution of grant etc.

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

MoU Scores

In order to distinguish 'excellent performance' from 'poor performance' under the new
system, (five) different targets are finalised against each of the evaluation parameters. On a
5-point scale each are shown as (1) for 'excellence', (2) for 'very good', (3) for 'good', (4) for
'fair' and (5) for 'poor'. The targets are fixed in two stages of (a) determining the basic target
and (b) determining the percentage difference or the spread between one (target) level of
performance and another. each of the parameters is furthermore, assigned weights to
distinguish a more important parameter (evaluation criterion). The final performance
evaluation or 'the composite score' is arrived at by adding the weighted score of the actual
achievements ( at the end of the year) against each of the parameters, in comparison to the
target that have been finalised in the beginning of the year) on a 5-point scale. The
'composite score' is thus an index of the performance of the enterprise. 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
4.51-5.00 Poor

MoU ratings of CPSEs

Performance evaluation is done based on the comparison between the actual achievements
and the annual targets agreed upon between the government and the CPSE. The targets
constitute of both financial and non-financial parameters with different weights assigned to
the different parameters. In order to distinguish ‘excellent’ from ‘poor’, moreover,
performance during the year is measured on a 5-point scale. A comparison of the MoU
ratings secured by the CPSEs in the last 10 years is given below.

Statement showing year-wise Ratings of CPSEs

 (Nos)

Rating 2006- 2007- 2008- 2009- 2010- 2011- 2012- 2013- 2014- 2015-
07 08 09 10 11 12 13 14 15 16 *
Excellent 46 55 47 73 67 76 75 76 73 57
V. Good 37 34 34 31 44 39 39 38 53 58
Good 13 15 25 20 24 37 37 36 41 28
Fair 06 08 17 20 24 36 26 29 26 22
Poor 00 00 01 01 02 02 02 08 07 26
Total 102 112 124 145 161 189 187 187 200 191

* Provisional