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1990-11 Lack of Understanding on Memorandum of Underdtandung

1990-11 Lack of Understanding on Memorandum of Underdtandung

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Published by: Prajapati Trivedi on Dec 26, 2012
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 No one can say that the Memorandum of Understanding (MOU) is a panacea for public sector ills, nor cananyone claim it is perfect in its design as well as in its implementation. But it is an improvement over all known previous efforts and represents a step in the right direction. Much work needs to be done to improve it further,notwithstanding the fact that it has achieved a great deal in a short period of time and is regarded to be in thevanguard of such efforts internationally
THE recent article by Murthy [1990] on thepolicy of Memorandum of Understandingis a typical 'good news-bad news' story. Thegood news is that it signals an increase inthe level of interest and awareness regardingthe existence of the MOU policy' The badnews is that it is, unfortunately, factuallyquite inaccurate and betrays a surprising lack of clarity regarding the current status of theMOU policy. As we shall see later in thiscritique, the subtitle of the paper: 'MoreMemorandum than Understanding' is moretrue for the article by Murthy than for theMOU policy, if correctly understood.Before embarking on a systematic reviewof this article, it may be worth making a fewgeneral observations to set the stage right.First, it is clear to anyone who has beenfollowing the recent developments in theMOU policy that the article under review hasignored much of the recent changes in theMOU policy, to be sure, it does make passing reference to the recent changes.
However, all the criticism is primarily against
the old MOU
as it operated
thesigning of 1988-89 MOUs. This tends tocreate an impression that two separatearticles have been mechanically slappedtogether and passed off as an integratedpiece.One gets the feeling that any initiative of the government other than the formation of holding companies would have been criticised by the author in order to pursue hisown agenda. It is perfectly reasonable tosuggest an alternative policy. However,'fairness' mandates that the alternativepolicy be presented in an honest way. By notpointing out the enormous problems withthe theory and implementation of the'holding company' concept in India andabroad, Murthy reveals his subjective bias.He could have spoken with a few holdingcompany chiefs and told us why formation
of holding companies will solve our
problems better than MOUs.
Finally, the article is full of internal con
tradictions. For example, on page M-64(second para of column 2), Murthy statesthat the experience of several decades showsthat as long as major decisions "remainbound by procedures, unrelated to achievingenterprise goals, morale and performance,the enterprises drift into lifeless routines asappendages of the bureaucracy". However,having stated this how could Murthydisregard (as well as discard) the currentMOU policy which espouses the philosophyof moving the supervision of public enterprises from one based on 'control by procedure' to that based on 'control by results'.MOUs for the first time in the forty year'shistory of our public sector have made aserious attempt in this direction [Iyer, 1990].Murthy could have questioned the'magnitude' of the progress but by questioning the 'direction' of the progress he contradicts himself and goes against the tide of the history.If this article had been written by anyoneother than a professor from a well-endowedinstitute it would be understandable.Therefore, this article by Murthy is a bitdisheartening and disappointing, to say theleast. The author apparently has ready access to the Bureau of Public Enterprises(BPE) and all he had to do was to discusshis ideas with the people at BPE to savehimself this embarrassment. Since Murthyseems to have interviewed some people forthis article, one more interview at BPEwould not have strained his resources toomuch. Even good journalists try to get bothsides of the story and, thus, to expect thisfrom academicians does not appear to be anunreasonable proposition.The body of the Murthy's article can bedivided into three main parts; one part deals
with the 'Origin of the MOU Concept and
Its Application in India'. The next part of the paper deals with the 'Critique' of theMOU policy and finally a few paragraphsare devoted to 'Suggestions for Improve
ment'. We will also divide our critique into
the corresponding sections. It is impossibleto deal with all issues raised by Murthy inhis article, as there are too many of them.We shall, therefore, focus on a varied sampleof the important points in each of the threesections to illustrate the problem with
Murthy's -article,
The signs of trouble begin to show up asearly as the second paragraph of Murthy'sarticle (on page M-59). The article says'MOU, quite simply, is an agreementbetween two (or more) parties'. This issimply wrong. MOU is an agreementbetween 'two' parties only. As far as I know,and I have checked with everyone at BPE,nowhere do we find a statement saying thatMOUs may have 'more' than two parties.None of the MOUs signed to-date in Indiahave had more than two parties.Later on in the same paragraph, Murthystates: 'lf the two parties also agree on a performance evaluation system, they need onlymeet at intervals specified in the MOU toreview the fulfilment of the obligations byeach ...' This statement raises two issues.First, it implies that the two parties have achoice whether or not to have a 'performmance evaluation system' in the MOU. Thisis, Again, just not true. An effective performance evaluation system is the very heartof the MOUs and there is no question
an.option here.The above statement also shows that theauthor is confusing 'monitoring' with'evaluation'. Since the targets included in theMOUs are annual ones, the evaluation itself,
by definition, will have to be annual.
However, monitoring can be more frequent.Though, 'Guidelines for MOUs', issued l?ythe High Power Committee (HPC), haverecommended as infrequent a monitoringexercise by the concerned administrativeministries as possible.It is worth noting that detailed monitoringis, perhaps, a more appropriate task for theboard of directors. The government, throughthe MOUs, intends to focus on the endresults and, hence, ought to be more concerned with evaluation. Whatever monitoring the government undertakes is bound to
be qualitatively different from the monitor
ing done by the board of directors.The section on origins of MOUs starts byciting BPE (1988a) document as suggestingthat '... government decided upon a policyto enter into MOUs with all its enterprises'.The truth is that this document only suggeststhat the 'government... proposes to extendit to increasing numbers of PSEs in thecountry'. If Murthy had bothered to check with BPE, he would have discovered that thegovernment is emphasising consolidation of the recent gains made in the MOU policyrather than unbridled expansion. This year,33 of the largest public enterprises representing approximately 80 per cent of the totalpublic sector turnover are expected to signMOUs. This is a good enough achievement.No one I spoke with in the governmentEconomic and Political Weekly November 24, 1990
Lack of Understanding on Memorandumof Understanding
Prajapati Trivedi
wants to bring in 225 or so central government public enterprises under the MOUsystem in the near future. If anything, thegovernment is thinking of how best torationalise its portfolio of existing publicenterprises (PEs). This, as we have come toknow, is an euphemistic way of saying thatit may, in fact, want to get rid of some PEs.Only if the Government feels the gains madeby the MOU policy have been substantialand could not have been achieved otherwise,it may expand the coverage of the MOU
In this section an erroneous impression issought to be created in the minds of thereader that Arjun Sengupta committee wasin favour of MOUs only for the holdingcompanies. A careful reading of the ArjunSengupta report shows that this committeewas indeed silent on the use of MOUs bycompanies other than the holding companies. Silence does not mean that it wasagainst it. As a matter of fact, if the committee's recommendation on MOU (Paras3.23, and 10.12) is read with para (4.39), itis reasonable to deduce that this committeewould have found the present MOU policyin line with its thinking. Para 4.39 reads as
The committee recommend that the performance of the chief executive of the enterpriseas evaluated according to agreed parametersshould form his performance record for the
It is also not clear what is so sacrosanctabout the Arjun Sengupta committee. If youread the committee's report, it becomes clearthat they had not given much thought to thedetails of the MOU system. They had recommended only the general directions, Thecurrent MOU policy has evolved out of several years of experience with MOUs inIndia. Therefore, deviations from ArjunSengupta committee's report are only to beexpected. The real question is whether deviations from the report are in the right direc
tion. To this question Murthy has little to
offer.Another gross inaccuracy is tucked awayin the second paragraph on page M-61,where Murthy asserts that 'to assist highpower committee... several
ad hoc
committees are set up, chaired by the additionalsecretary (BPE): First of all, there is onlyone
Ad Hoc
Task Force and not several
ad hoc
committees. Further, this task force consists of all 'non-government' managementexperts and professionals. Hence, a government servant like the additional secretary,
BPE, is ruled out by definition.
The table on page M-60 proves to be thelast straw which broke the proverbial earnersback. In this case, the credibility of the entirearticle comes under a big cloud as we realisethat of the twelve observations made on theimplementation of MOUs in this table, eightare simply not true. As an example let usexamine a couple of them. Murthy asserts
that the monitoring by ministries will be on
the same methodology as the HPC and ona more frequent basis (quarterly or
Economic and Political Weekly November 24, 1990
monthly). As mentioned earlier, there is adifference between 'evaluation' and Monitoring'. While HPC is supposed to focus onyear-end evaluation, the concernedministries will be focusing on regularmonitoring. It is recommended under theMOU policy that this monitoring should beas infrequent as possible. Ideally, a six-monthly review ought to be enough. But, if the ministry and the PE agree on a more frequent monitoring exercise, that would alsobe acceptable. The parameters for monitoring can be the same or different than thosefor the final, end-of-the-year evaluation.In this table, Murthy also claims that theSengupta committee recommended 'differences in evaluation by the type of PE;whereas, MOUs have implemented auniform evaluation system. It is not clearwhat Murthy means by 'uniformity'. Onehas to took at the 18 MOUs signed in 1989to realise that they are all very different asfar as their contents are concerned. Forexample, the indicators for evaluating theperformance of Indian Airlines are verydifferent from those for evaluating HeavyEngineering Corporation's performance.The only uniformity one can detect in theMOU system relates to uniform applicationof the general principles of performanceevaluation. For example, each MOU is supposed to include criteria that are 'fair' to themanagers and 'fair' to the country. Onewould like Murthy to let us know what is
wrong with this kind of uniformity.
Murthy also claims that while theSengupta committee recommended to'reduce the breadth and the frequency of interaction between ministry and PE', theMOU system lets 'Existing interactionbetween PE and ministries to continue'.Nothing could be farther from the truth.According to the widely distributed'Guidelines on MOUs':As a part of the MOU exercise, the entirerelationship between public enterprise andthe concerned administrative ministry shouldbe examined, MOUs must supersede andsupplant not supplement existing mechanismand systems of authorisation, reporting and
This requires a massive cultural changeand it would be simplistic to assume that it
happen overnight. For this
tocome about a number of interrelated factorswill have to come into play. For example, acomprehensive study will have to be undertaken to determine the degree of overlapbetween various information and controlrequirements. Further, people in the government will have to be convinced that MOUs,indeed, enable them to control PEs by'results' and, hence, make control by 'procedure' redundant. It is perfectly reasonableto expect that during the transition one may,initially, observe MOUs supplementingrather than supplanting old procedures.This brings us to yet another general problem with Murthy's article. Pie never makesa clear distinction between the 'theory' and'practice' of MOUs. Most of his argumentsseern to be based on what he perceives to beproblems with implementing MOU but hemanages to convey an impression that theMOU system itself may be theoretically
'Even this tactic, intentional or otherwise,would be acceptable but for its obvioussuperficiality in dealing with the problem of change. One would like to know from Murthy if he is aware of any public policy of thismagnitude that did not suffer from birthpangs. Even in the private sector, reforms inthe management control systems of corporations like Exxon, General Motors andGeneral Electric have taken four to five yearsto stabilise. Will Murthy also care to tell ushow is the current MOU policy doing incomparison to similar efforts in the private
Finally on this point, we ought to be concentrating on the changes. Sure, there aresome problem with the current MOU policy,but they are a hell of a lot less than the problems with the MOUs three years back. That
is how progress is measured.
The second part of Murthy's paper isdevoted to a critique of the existing MOUpolicy. I think it is reasonable to expect thata critique of a 'misunderstood
policy canonly be irrelevant at best, and misleading atworst. Unfortunately, on reading thecritique, our worst fears are vindicated.The critique starts by raising certainquestions relating to the MOU policy and,then, without attempting to answer them,pronounces 'that these questions defy clear-cut answers'. There are several problems withthis approach adopted by Murthy..First, anattempt should have been made to explain
how these issues are being addressed under
the current MOU policy? And, whether thatis satisfactory? If not, what could be doneto improve matters. It is only through suchconstructive debate that public policies areimproved. This, no doubt, requires seriouseffort.Murthy, on the other hand, opts for softoption of raising questions without attempting an answer. In doing so he is not alone.In our country we have a well establishedtradition of academicians who have a'problem' for every 'solution'. Therefore, onewould not have paid much attention to thisfailing. Unfortunately, unanswered questionsin an article have the potential danger of conveying the impression that, indeed, thereare no answers to these questions. Fortunately, the reality is very different from thisfallacious impressior. For every issue raisedby Murthy, an attempt has been made to geta state-of-the-art answer. To be sure, someanswers, though the best available, areunsatisfactory and efforts have to be madeto fine-tune the MOU policy in those areas.As an example of the above class of problem,let us examine some of the issues mentionedby Murthy. He wonders: 'if one of thesignatories to the MOU is unable to fulfilits obligations, how binding are the obligation of the other as the two are closely interrelated'? The answer to this question goesalong the following lines.To begin with, it is important to note thatthe current MOU policy makes a distinctionbetween the 'assistance from the government' and 'obligations of the government'.The latter category includes items which areentirely within the control of the concernedadministrative ministry. Former, includesitems over which the administrative ministrymay not have full control and, hence, theministry is not expected to make a firm commitment with regard to these items. A proposal for an 'Empowered' committee hasalready been mooted in the government toovercome this problem. This committee willact as a single window clearance system forthe MOUs.Be that as it may, the next issue relates tohow do you deal with the effects of one sidenot fulfilling its obligations of the otherparty. The usual scenario implied in thisdiscussion is the one in which the government fails to meet its commitments. Thecurrent MOU approach suggests that,wherever possible, the two parties shouldagree on the tradeoffs involved. Suppose thatthe Minerals and Metals Trading Corporation (MMTC) wants 6 million dollars to setup an office in Brussels. Let us furtherassume that the commerce ministry says thatthey would try to get this money from thefinance ministry but they couldn't guaranteeit would come through. What is the way outin this situation? The current MOUs areexpected to give two alternative sets of targets, one with and the other without thecommitment coming though. Therefore,MMTC could say that with an office inBrussels their turnover would be Rs 4,400crore; and without it, the turnover would beRs 4,000 crore. At the end of the year,MMTC's performance should be judged onthe basis of whatever actually happened.Finally, it is possible that the failure of the government to meet its commitment maynot affect enterprise performance at allduring the given year in question. Forexample, if a clearance for a project is notgiven as expected, it
not affect this
turnover targets but some future year's. Inthat case, no adjustment may be required in judging PE performance for that year.The point of this lengthy digression is thatenough thought has not been given byMurthy to these basic issues. Simply raisingthem does not help anyone. What is requiredis an in-depth discussion of these issues totake the debate one step higher. Murthy'spaper under consideration does just the
opposite, it takes the debate on the MOU
policy several steps backwards.On page M-61 (bottom of column I) of the article, Murthy raises a question whichmakes one wonder, if he has read all thearticles he has cited in this article. If he hadeven glanced through these, he would haveEconomic and Political Weekly November 24, 1990

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