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

Memorandum of Understanding in SLPEs

1

Department of Public Enterprises

Ministry of Heavy Industries & Public Enterprises

Government of India

MoU System in CPSEsThe 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

Evolution of MoU System for CPSEsIncreasing 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

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

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

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-à-vis Governmental control. Ensures a level playing field to the PSEs vis-à-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

7Investment Turnover Capital Employed Profits Losses Net Profit

0

200000

400000

600000

800000

1000000

1200000

1400000

Performance of CPSEs (1991-2009)

1990-91

1991-92

1996-97

2001-2002

2005-06

2006-07

2007-08

2008-09

Rs.

Cro

res

7

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

MoU: Two types of ParametersStatic (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

MoU Parameters: Financial

Financial Parameters:Profit related ratios - Gross Margin / Gross Sales

- Gross Profit / Capital Employed - Operating Turnover / EmployeeSize related parameters

- Gross Margin - Gross Sales

Productivity related ratios - Gross Profit / Total Employment - Added Value / Sales - Net Profit / Net worth

10

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

Sector specific parametersThese are macro economic parameters like

international prices, disruption in supply ,etc. which are beyond management control, but affects the performance of CPSE.

Enterprise specific parameters These are parameters like safety, environment and

ecological considerations that do not get reflected in increased profits of CPSEs, but is important from the viewpoint of society.

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.

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 Excellent1.51-2.50 Very Good2.51-3.50 Good3.51-4.50 Fair4.51-5.00 Poor

14

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

MoU exercise is done in following steps:

I. Preparation of MoU Guidelines, which are issued by DPE in the month of October/ November.

II. Submission of draft MoU by CPSEs through administrative Ministry on the basis of the MoU guidelines.

III.Examination of draft MoUs by the MoU Division and preparation of critiques to be circulated to the Task Force Members.

IV.Fixing of dates and venue for MoU negotiation meetings that starts from January/February.

Contd..

V. Holding the MoU negotiation meetings of CPSEs to finalize the MoUs in the presence of the Task Force (January – March ) each year.

VI. Preparation and circulation of the Minutes of the MoU negotiation meetings to CPSEs and concerned administrative Ministry after approval of the Convener.

VII. Submission of the revised MoU by CPSEs through administrative Ministries as per the Minutes.

viii. Examination of revised MoUs for authentication by DPE.

IX. MoU has to be signed before 31st March of every year.

MoU Excellence Awards

10 numbers of MoU Excellence Awards, 1 from each of 10 Syndicates

1 best performing CPSE from the listed CPSEs based on increase in market

capitalization

1 best performing CPSE from amongst the turnaround sick and loss making

CPSEs

All other “Excellent” performing CPSEs get merit certificates

Eligible Criteria for Awards From Each Syndicate :

Profit in the year higher than the previous year

Not a loss-making enterprise

The composite Score on a scale of 1 to 5 should not be more than 1.5.

18

Adopting MoUs System for SLPEsDesignate a nodal department for MoUsConstitute an Apex Committee on MoU headed by Chief SecretaryFinalize the guidelines on MoU.Set up a Task Force for finalizing the MoU prepared by SLPEs and

for evaluating the performanceBuild a system of rewards:

MoU awards

Performance Related Pay

Weightage in ACR of CMDs

19

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

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

MOU Unit / Nodal Division

22

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

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

25

Annex-1.a MoUFormatforSLPEs

(Manufacturing/Electricity/Mining/ConstructionSLPEs)

MoUTarget

EvaluationCriteria Unit Weight

(in%)

Excellent

(1)

VGood

(2)

Good

(3)

Fair

(4)

Poor

(5)

I. FinancialParameters

1. 1 AbsoluteValuesof:

1. 1. 1 Turnover

(Net)

1. 1. 2 GrossMargin

(PBDIT)

Rs. Cr.

Rs.

Cr.

20

20

SubTotal(I.a) : 40

1.2 ManagementRatios

26

1. 2. 1 PBDIT/Capital

Employed

1. 2. 2 PBDIT/Total

Employment

1. 2. 3 Totalcost/Total

Output

1. 2. 4 Marketshare

1. 2. 5 R&D/Turnover

%

Rs.

Rs.

%

%

Sub‐Total(I.b): 10

Total(I.a+I.b): 50

.

II. Non‐FinancialParameters

(indicativeparameters)

2. 1 CapitalExpenditure

2. 2 Project

Implementation/

Milestones

2. 3 R&D

27

Measuring Well

Helps

Manage Well

----------

www.dpemou.nic.in

Mail us at : dpe-mou@nic.in

Thank You