Workshop for SLPEs 11th 12th August,2011 at Chandigarh

1. Workshop for SLPEs � 11th &12th August,2011 at Chandigarh Memorandum of Understanding in SLPEs 1

2. MoU System in CPSEs The Memorandum of Understanding (MoU) as applicable to Central Public Sector Enterprises(CPSEs) is a negotiated agreement between the Government and the Management of the enterprise. MoU facilitates empowerment, enhancement of performance of CPSEs and greater autonomy. CPSEs are made more accountable. 2

3. Evolution of MoU System for CPSEs Increasing number (4 in 1987 to 202 in 2010) Independent Task force finalize MoU targets & evaluate performance of CPSEs based on Audited data (1988) MoU Excellence Awards (1988); Merit Certificates (1999) Laying of MoU in Parliament (1991) 75% weightage in ACR of CEO to MoU rating (1995) Balanced Score Card approach (2005) Linking of Performance Related Pay to MoU ratings (2008) Holding PSEs required to sign MoUs with Subsidiaries (2009) 3

4. MoU and Autonomy MoU in CPSEs is aimed at providing greater autonomy to these enterprises while ensuring their accountability. The Management of the enterprise is made accountable to the Government through promise for performance in MoU i.e. �performance contract�. The government retains control over these enterprises through MoU i.e. target setting (in the beginning of the year) and performance evaluation (at the end of the year). 4

5. Significance of MoUs Performance Related Pay of all Executives.(40-200% of basic pay depending on MoU performance) Performance Appraisal of CMD, Functional Directors and EDs, GMs based on MoU performance. MoU Excellence Awards & Certificates. Grant of Maharatna/Navratna linked to MoU performance. Affects credibility and morale of CPSEs. 5

6. MoU: A Win-Win Tool For the PSEs: Management tool for PSEs in making them perform and deliver. Providing greater autonomy to these enterprises vis-�-vis Governmental control. Ensures a level playing field to the PSEs vis-�-vis the private sector. For the Government: Brings accountability of the Management of the enterprise to the Government through �performance contract�; facilitates monitoring during & end of the year. For the economy: Tool for Policy makers 6

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8. What are CPSE�s Goals? Shareholder`s interests: Higher Profit Improve production & productivity Reduce costs Grow: Increase market share Innovate Globalize Stakeholder's interests Satisfy customers Add Quality Employees Promote HRM Safety Social objectives Corporate Social Responsibility R & D Sustainable Development 8

9. MoU: Two types of Parameters Static (Financial): 50% weight(40% for section 25 CPSEs and sick, loss making CPSEs) Fixed in DPE guidelines for each Sector Weights fixed in DPE guidelines Non-financial: 50% weight(60% for section 25 CPSEs and sick, loss making CPSEs) DPE guidelines are indicative Framing of weights left to judgement of CPSE, Ministry and Task Force 9

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11. MoU Parameters: Non-Financial Dynamic (Qualitative) parameters Corporate Social Responsibility (5% weightage must) R & D (5% weightage must) Sustainable development (5% weightage must) HRD (5% weightage must) Corporate Governance (5% weightage must) Quality (ISO certification) Customer satisfaction HRD Project Implementation Capital expenditure / Joint Ventures Globalization Enterprise specific parameters; Sector specific parameters 11

13. Performance Targets & their determination Performance Targets are fixed on 5 points scale viz., Excellent, V. Good, Good, Fair, Poor. In respect of CPSEs operating at less than 100%, Basic Targets are fixed for �Good� rating. In respect of CPSEs operating above 100%, Basic Targets are fixed for �Very Good� rating. Targets fixed should be realistic and growth oriented. All performance targets have to be unconditional.

14. MoU Evaluation & Score,Rating The different criteria under financial and non-financial parameters have different weights to distinguish a more important criteria from a less important criteria. The grading of the �composite/weighted score� is done in the following manner: MoU Composite Score Rating 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 14

15. MoU Evaluation-Task Force CPSEs classified into 11 syndicate groups. Task Forces consist of domain experts, finance professionals, academicians, Ex-CEOs of CPSEs and Ex-civil servants. Task Forces entrusted with target-setting and undertaking objective evaluation of the performance of each CPSE. The MoU Task Force is independent of both the signatories of MoU, namely the CPSEs and the administrative Ministry. In 2010, 202 CPSEs signed MoU; in 2011�195 CPSEs. The rating of 144 CPSEs in 2009-10 :Excellent-73;V.Good-30;Good-20;Fair-20;Poor-01 15

16. MoU exercise is done in following steps: Preparation of MoU Guidelines, which are issued by DPE in the month of October/ November. Submission of draft MoU by CPSEs through administrative Ministry on the basis of the MoU guidelines. Examination of draft MoUs by the MoU Division and preparation of critiques to be circulated to the Task Force Members. Fixing of dates and venue for MoU negotiation meetings that starts from January/February. Contd..

17. Holding the MoU negotiation meetings of CPSEs to finalize the MoUs in the presence of the Task Force (January � March ) each year. Preparation and circulation of the Minutes of the MoU negotiation meetings to CPSEs and concerned administrative Ministry after approval of the Convener. Submission of the revised MoU by CPSEs through administrative Ministries as per the Minutes. Examination of revised MoUs for authentication by DPE. MoU has to be signed before 31st March of every year.

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19. Adopting MoUs System for SLPEs Designate a nodal department for MoUs Constitute an Apex Committee on MoU headed by Chief Secretary Finalize the guidelines on MoU. Set up a Task Force for finalizing the MoU prepared by SLPEs and for evaluating the performance Build a system of rewards: MoU awards Performance Related Pay Weightage in ACR of CMDs 19

20. Model MoU System for SLPEs There are currently two models of MoUs for PSEs, namely : (A). MoUs signed between the SLPEs and the concerned administrative/sectoral Departments, (B). MoUs signed between the SLPEs and the Department of Public Enterprises/nodal Division. Model-B is being followed in Karnataka which is akin to the system in China, Egypt and South Korea. 20

21. MoU Parameters: Financial Parameters: - Gross Margin - Gross Sales Non Financial Parameters: - Capital expenditure - Project Implementation - Capacity Utilization - Career Management - Environmental Conservation - Human Resource Management - Sustainable Development - Quality - Customer Satisfaction 21

22. MOU Unit / Nodal Division 22

23. Schedule of Meetings/ Activities The DPE/nodal Division formulates the MoU Guidelines, as the first step. The Guidelines need to be issued to all SLPEs by September/ October. The draft MoUs that have the approval of the Board of Directors of SLPEs and the sectoral/ concerned Department have to reach the Department/nodal Division by mid-October/November. The MoU negotiation meetings may subsequently begin in mid-December and be completed in regard to all SLPEs by mid-February of the next year. 23

24. Schedule of Meetings/ Activities The MoU negotiation meetings have all the three parties, namely, the Management of the enterprise, the Department and the Members of the Syndicate. After authentication by the nodal Department/DPE ,the final MoUs duly signed by the CEO/MD and the Secretary of the Department should reach the DPE/nodal Division before 31st March every year. Performance evaluation of MoUs at the end of the year may be done by the DPE/nodal Division assisted by Members of the Syndicate for ratings, rewards, etc. 24

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