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Memorandum of Understanding (MoU)

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The Memorandum of Understanding (MoU) is a negotiated document between the Government, acting as the owner of Centre Public Sector Enterprise(CPSE) and the Corporate Management of the CPSE. It contains the intentions, obligations and mutual responsibilities of the Government and the CPSE and is directed towards strengthening CPSE management by results and objectives rather than management by controls and procedures.

The beginnings of the introduction of the MoU system in India can be traced to the recommendation of the Arjun Sengupta Committee on Public Enterprises in 1984. The first set of Memorandum of Undertaking (MoU) was signed by four Central Public Sector Enterprises  for the year 1987-88. Over a period of time, an increasing number of CPSEs was brought within the MoU system. Further impetus to extend the MoU system was provided by the Industrial Policy Resolution of 1991 which observed that CPSEs will be provided a much greater degree of management autonomy through the system of Memorandum of Undertaking.

By 1988-89, i.e. within a period of twenty years since its inception, as many as 200  CPSEs (including subsidiaries and CPSEs under construction stages have been brought into the fold of the MoU system. During this period, considerable modifications and improvements were incorporated in the structure of and procedures for preparing and finalizing the MoUs. These changes have been brought about on the basis of experience in the working of the system, supported by studies carried out from time to time by expert committees on specific aspects of the MoU system.

Broadly speaking, the obligations undertaken by CPSEs  under the MoU are reflected by three types of parameters i.e.  (a) financial (b) physical and (c) dynamic. Considering the very diverse nature of activities in which CPSEs  are engaged. It is obviously not possible to have a uniform set of physical parameters. These would vary from enterprise to enterprise and are determined for each enterprise separately during discussions held by the Task Force (TF) with the Administrative Ministries and the CPSEs . Similarly, depending on the corporate plans and long term objectives of the CPSEs  , the dynamic criteria are also identified on an enterprise-specific basis.

The question of MOU effectiveness has been engaging the attention of the Government right since its introduction two decades back. The Government appointed the National Council of Applied Economic Research(NCEAR) to carry out a study to assess the effectiveness of the MOU system.  The study among other things emphasized the total factor productivity approach, central to the success of the MOU. The NCEAR has submitted its report in 2003-04 suggesting an overhaul of the system in terms of its basic approach, criteria, weightages, evaluation and corrective feedback. The second pay revision committee report submitted in May 2008 has added to the significance of MOU as the variable pay and the performance related pay will have to have a linkage with MOU. The evolution of the performance of a CEO of a CPSEs is largely dependent on the successful implementation of MOU and whereas 75 per cent weightage of performance evaluation of CEO is assigned to MOU. That the MOU has had a speculator impact in the performance of public enterprises could be seen from the effect that the profitability of MOU signing enterprises has increased Rs 12013 crores in  1994-95 Crores  to  91062 Crores .during year  2007-08. 

Despite the overwhelming success of the MOU system, there is a need to strengthen the exercise further to make it more value added. Some of the suggestions in this regard are as follows: 

  • CPSEs  may detract themselves from soft targeting. This could be seen from the fact that your MOU goals set by most of the CPSEs are achieved in the third quarter of a financial year itself. 
  • The internal systems need to be revamped to contribute to MOU effectiveness. This may mean making the internal budgeting, pricing, materials control, MIS, performance appraisal, recruitment systems to be brought in line with the goals set in MOU
  • There is a need to percolate MOU system down the line
  • The wage negotiations should go beyond the managerial cadre in the same split and form as in the case of the process followed relating to executives 
  • Balance scorecard concept should be stressed further to yield a composite MOU index 
  • The basic targets need to be fixed very carefully and questioning the very logic of taking the previous years accomplishments as good.

The MOU System has had a positive impact on the functioning of the CPSEs by not only increasing the top-and-bottom line performance but also increasing their net worth as stated above. Further, the MOU System has also enabled the CPSEs to adapt to the business scenario changes that have come about due to the economic liberalization reforms undertaken in the country and the resultant enhanced coupling of India with the global economy. 

The MOU system has enabled CPSEs to focus on achievements and results associated with increased operational autonomy and more financial and administrative powers. By laying stress on marketing effort and comparing with private sector enterprises MOU are helping CPSEs to face competition and lay bench marks of corporate performance.

At the individual CPSE level, the MOU System has been an important tool in facilitating a turnaround of a number of CPSEs. The recent examples of turnaround CPSEs include NBCC, ECIL, EPIL, MECON, MECL, PDCIL, HIL, etc.

Overall, the MOU System has enabled CPSEs:

  • improve top and bottom line performance, 
  • upgrade their process and systems,
  • address corporate governance imperatives
  • increase their corporate autonomy, and
  • improve their accountability.

Further Background reading on MoU System:

  1. Evaluating the Evaluators, Eloquent Fuzziness at Its Best
  2. Public Enterprises in India: If Not for Profit Then for What?
  3. Sengupta Report on Public Enterprises: Eloquent Fuzziness at Its Best
  4. Performance Evaluation System for Memoranda of Understanding
  5. Lack of Understanding on Memorandum of Understanding
  6. Menu of Financial Indicators Used in MOUs: An Exercise in Clarification
  7. MoU Newsletter November 1996 (Vol. 3 No. 2)
  8. MoU Newsletter December 1997 (Vol. 4 No. 2)

Management Films on MOU System in India


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