The Much Maligned Public Sector – Mohan’s SAIL Model Revisited.

A D Damodaran

 Delivering a specialised lecture on the Indian industry scene at Trivandrum many years ago during the regime of the ‘license quota raj’, the celebrated economist late Prof V M Dandekar was asked for his suggestions on improving the performance of the public sector industries. His prompt response was "If PSUs are made efficient, how will the private sector industries make profits?". While such a statement has had adequate significance during the earlier protectionist regime, this will not quite explain the basic maladies in management structures and practices of the much maligned public sector, nor would it be fair to many units in the private sector who have been putting in also extremely good financial performance. While those who support the new liberalized policies profess quick winding up of PSUs either by privatisation or through closure, the supporters of PSUs especially the Left hold totally divergent views. Undoubtedly, with the Left supported UPA in power, it is in the fitness of things to have a serious re-look at the problem.

It is in this connection that one would like to go back to the late sixties and have a relook at the new model of PSU governance proposed for Hindusthan Steel Ltd by the then Minister late Shri Mohan Kumaramangalam – perhaps the only such proposal ever emanating from the political leadership of independent India! In order that the sharpness and clarity of his model are not missed, I choose to quote extensively himself. To quote from his lecture on December 9,1972 under the auspices of the C P Ramaswami Aiyar Foundation, Madras,

"There is no doubt that there are several units in the public sector which either break even and some of them also give fair or even good return on investment. But taking a total view, however, there is a financial loss. What are the reasons for the failures and in what way can improvement be brought about? I consider that among the principal reasons is the continuance of the old administrative structure as the mechanism and instruments through which the public sector undertakings are administered. This has led to the installation of the Secretariat as the supervising authority of the public sector and on the top of the Secretariat the Ministers. The consequence was the emergence of two principal weaknesses. First, non-technical persons with no experience in industry or management became the decisive authorities in matters of industrial development. Secondly, non-industrial procedures, civil service procedures, in relation to taking operational decisions as well as reviewing the performance of these undertakings, were superimposed on public sector undertakings.

"Let me explain: the present procedure in Government is that the civil servant, the Secretary and head of the department is the chief adviser of the Minister and the Government in regard to the working of any public sector undertaking. He is responsible ultimately for checking the work of the undertaking and though formally the undertaking is autonomous and has full powers within the ambit of its memorandum and articles of association, in practice the Secretary and his colleagues in the department exercise substantial power in relation to the operational working of the undertaking. To a large extent he checks the correctness of decisions as to how much money should be spent on capital expenditure, on equipment. He helps the Minister in sitting in judgment on the actual functioning of the undertakings. On not a few occasions he supervises selection of the top personnel of the undertaking and advises the Minister about the correctness of choice of individuals to man these top posts.

Now obviously, these decisions are not what may be called pure administrative decisions, such as the appointment of a sub-divisional officer or a collector in a district. They are decisions which can be taken only in relation to the working of an industrial undertaking which is very different from the working of the routine administration of Government.

"Let us take the manner in which a project which involves substantial capital expenditure is looked at inside an undertaking and then later inside that department of Government under which that undertaking comes.Inside the undertaking if, for instance, in the Rourkela steel plant a decision has to be arrived at-whether an extra coke oven battery should be added to the plant’s equipment, the senior personnel of the plant who had worked in the steel industry for a decade or more will look into all the technological and economic aspects of the need for such a battery. Very likely in the course of their work they will involve the director (production) of Hindustan Steel. Finally when the proposal emerges as a firm proposition to be placed before the board of directors of Hindustan Steel Ltd., it will have been vetted by the best technological minds in Hindustan Steel on the one hand and also have been looked at in depth with regard to the economic of the project by competent persons on the board and in the administrative setup of Hindustan Steel. Thus inside Hindustan Steel the proposal will have been examined very carefully by the most competent persons both on the technological and on the economic sides.

The board of directors, which is composed of senior persons who have worked in the steel industry over many years, would then look into the merits of the project equally carefully. On that board are also representatives from the administrative Ministry (the department of steel) as well as from the Ministry of Finance. These officers are of the rank of joint secretary, that is they occupy a position in the department of steel or department of finance immediately next to that of the head of the department, the Secretary. The board, including these two gentlemen, will then examine the project with the needed care and after modifying it to the extent that is considered necessary, adopt this proposal and send it to Government.

Despite the care with which the board of directors of an undertaking examines such a question, when it comes to the department of Government from the undertaking, the project will then be examined all over again in the Secretariat. The present procedure in Government provides for it to be examined both from its technological as well as its economic point of view not merely by the department that is concerned directly with the administration of the public sector undertaking (in this case the department of steel) but also by the department of finance and the planning commission. All these three departments have technical advisers who re-examine and recheck the frame of the entire project report, right down to the smallest detail.

"The ordinary procedure is that the Secretary of the department (who is the head of the department) will send the report for examination down the different rungs of the department through the joint secretary, the deputy secretary, the under-secretary and even right down to the section head who does the main secretarial work of the department. The section head and all these gentlemen, it may be noted, are non-technical personnel… The section head when he receives a report will very likely make a summary of it and then will send it up to the Secretary again, naturally through the usual channel of all his superior officers, advising that the comments of the technical wing of the department may be obtained. The Secretary will then send the report to the technical wing.The technical wing is composed of a very senior engineer at its head and not so senior personnel working under him. But in all probability the report will be examined in detail only by a junior engineer of comparatively short standing and experience. The result not unoften is that, after painful and laborious checking of the entire report, the department of steel will send the report back to the public sector undertaking concerned, requesting certain "clarifications". As has been pointed out pungently by Parkinson, this is the easiest way by which a person or a set of persons in administration can justify their existence. After all, if one merely approves a report then there would seem to be little justification for the continuance of that person in the administration. If, therefore, it is difficult to find flaws in a report, it is always possible to locate points on which further "clarification" is necessary. And it would be difficult to compute the number of occasions on which such clarifications have been asked.

"But this is not the entire story. We have also technical wings in the Planning Commission as well as in the Finance Ministry and the Bureau of Public Enterprises. And these technical wings again very often through junior engineers conduct as rigorous and as careful a scrutiny of the feasibility report as has been done by the department of steel despite the fact that it has been framed by the public sector undertaking and adopted after long and intensive discussion by its board. The result, therefore, is easy to see; though the feasibility report has originally been checked by persons who, one must assume, are competent to frame and check the correctness of such a report, yet it has to go again through as many as three different checks, namely in the departmental Ministry itself, the Ministry of Finance and the Planning Commission.

" Is it not a relevant question to ask whether the persons in the Ministry are competent to sit in judgment on decisions of public sector undertakings? If they are so competent and are in effect superior in technical knowledge and capacity to those who are in charge of the day-to-day administration of public sector undertakings then surely their place would be better at the head of such public sector undertakings where their knowledge and experience could be more effectively and continuously utilized. But to have these several place where every project is screened and scrutinized leads to both waste of time and, more important, of money. It is commonly accepted now that by and large most of the project reports submitted by public sector undertakings after being carefully prepared by the technical officers and the boards of these undertakings are changed or modified to a very minor extent even after the most rigorous scrutiny by Government departments; in fact many case studies can be made which will demonstrate that at the end of a long and tortuous examination of a project report produced by a public sector undertaking, the cut that is suggested or the modification that is put forward by the Government department concerned, whether it be the administrative department, the Finance Ministry or the Planning Commission, would not even result in one per cent reduction in expenditure. But this does not take account of the extra expenditure that inevitably is involved when time is wasted in the examination, re-examination and then re-examination a third time of the scope and details of a particular report. The point that I wish to stress is that when we have placed in positions of authority persons who are competent to take decisions on technical/managerial/industrial matters in public sector undertakings, it is totally inappropriate and in fact wasteful to set up another set of authorities to sit in judgment and scrutinize the work of these industrial managers.

"To vest the power to take decisions on technical/managerial/industrial leaders rather than civil servants in essence involves the substitution of the culture of industry for the culture of civil service.

I am certainly not against civil servants nor do I want in any way to denigrate the value of the work that they have done and for which they are fitted. But I must emphasise that like all persons in the world they are good in the work for which they have been trained and for which their culture, their mode of work, the procedures they employ, are appropriate; and this means the type of matter and the type of work which is being done by the home and the finance departments of Government, the district magistrates, the SDO and so on. But why should we consider that they are the men for all types of work and in particular for the management of industry which has become more and more specialized during the last decade? The aim of Government in setting up a holding company for the management of all its industries in the area of iron and steel is essentially to reform the administrative structure for the management of iron and steel industry in our county. Instead of the department of steel being the principal adviser to the Minister in the administration of the iron and steel industry, the holding company and its board headed by its chairman will now become his principal adviser.

"The two principal objectives of the holding company are: Firstly, the advisers to the Minister will be drawn from the technocrats, from industrial managers; and secondly, the mode of taking decisions and arriving at conclusions will be those adopted in industry rather than those that are adopted in the civil service".

As the Key to the reform, he proposed the formation of a Holding Company with "the introduction of the chairman of the holding company into the structure of Government, the heart of Government, as Secretary to the department of steel is, in a sense, the key to the understanding of the reform that is proposed. The chairman of the holding company by virtue of his position as Secretary of the department of steel now becomes the chief adviser to the Minister of Steel on all questions pertaining to the area covered by the holding company and in effect by the department of steel. It is to the chairman/Secretary that the Minister will turn when he needs an answer to a question or problem. And equally once the board of the holding company, presided over by the chairman, has arrived at any particular decision, then so far as it is concerned with the department of steel, the matter is over and the decision of the holding company will go straight to the Minister for his approval or for his disapproval. And if the Minster of Steel approves, then it will go probably first to the Finance Ministry where necessary, but ultimately to the Cabinet. The crucial point that I wish to emphasise is that no longer will the department of steel, headed by a Secretary from the civil service, sit in judgment on the solutions suggested to industrial problems by the board of the holding company which, one must always expect, will be composed of eminent men who are competent, perhaps the most competent in the country, to take decisions on such questions. The holding company, therefore, in a sense, replaces the Secretariat in its relationship with the Minister.

All the decisions of the subsidiaries of the holding company will come up before the board for approval and through the board to the Minister; this is in contrast to today’s position when such decisions come up first from the board to the Secretariat and only after being vetted and approved by the Secretariat will reach the Minister….The holding company will be responsible both to the Minister and to Parliament, and in this respect there is no change, and there cannot be. But this organization, which in fact becomes the chief adviser to the Minister in the area entrusted to his responsibility, will now be headed not by the traditional civil servant with the background of a civil servant, but by industrial managers.

The formation of the holding company is an attempt to hand over those of the Government’s powers today vested essentially in the Secretariat, a civil service organization, dominated by civil service procedures, to the holding company whose personnel will be drawn from professional managers who have come up from inside industry and who will run this organization on industrial-commercial principles.

The task of the holding company will be to implement the basic policies of Government in the area of iron and steel and these are: to canalize all investments and organization of industrial growth in the iron and steel sector of our economy where admittedly heavy investment is required and the gestation period is long; to see that this task is performed most economically and yet in such a way as to ensure the speediest growth of our steel production within the framework of the national plan".

"What should be the relationship between the holding company and Parliament? This is a matter of very great importance because accountability is essential. It is the Government ultimately that is accountable to Parliament and to the nation for the working of a public sector undertaking and hence a public sector undertaking must be held accountable to Government for its own working. But our aim must be to enforce effective accountability in the sense of accountability in terms of performance and not accountability in terms of an individual right or wrong decision. Under the decision of the Government regarding the holding company for the iron and steel industry, it will be the duty of the holding company to submit detailed biannual reports to Government about its functioning and that of its subsidiaries and justify the operation of these companies. And it will equally be the duty of the Government to scan these reports with care and to take measures to see that those who are in charge are held accountable for their work.At present, unfortunately there is a tendency both in Parliament and in Government to get involved in checking minor operational decisions that have been made, forgetting that the real need is for supervision of policies and results. This also Parliament must be on the broad working of the company and its performance in relation to the targets set by Government for it. The Government should not involve itself in minor, petty matters like promotion of this or that man; or the appointment or dismissal of this or that man; or the signing of this or that contract.This is not the proper way to judge the working of the undertaking. The most appropriate manner to judge its working is by its results. The introduction of a procedure by which the holding company will report to Government every six months will provide a proper basis for enforcing better supervision, ensuring proper accountability.In the matter of accountability to Parliament of the holding company and public enterprises in general the procedure in Italy, Sweden and France by well established tradition is that discussion by members of Parliament is confined to the broad working of the company and does not cover minor details and minor decisions on operational matters. Parliament generally limits itself to the consideration of the annual report. In Italy, audit reports are also presented to Parliament. The principal discussion of the working of the holding companies takes place once a year at the time of the presentation of the annual reports, which generally concentrate on the performance of the undertaking. Another opportunity for discussion in the Italian Parliament is when special funds for the holding companies have to be voted. Sweden, in contrast, has an interesting arrangement by which a group of selected members of Parliament, representing all parties, participate in the annual general meeting of the holding company and are entitled to ask questions about its functioning. Questions are also asked in Parliament in all these countries regarding the functioning of the public sector undertakings, but these are almost universally confined to the performance aspect of the working of the companies….Thus, there is real accountability to Parliament, through annual reports on the functioning of the enterprises and Parliament also examines their overall performance with a very careful scrutinizing eye. But this overall supervision by Parliament is not diverted by attention to or concern with the minutiae of the working and administration of the enterprises. Parliamentary committees in Italy and Sweden deal only with legislative proposals and demands for funds. In Sweden, the committee on economic affairs also examines the report to Parliament, which forms the basis for Parliamentary discussions.So also in regard to the relationship between Government and the holding companies in these countries, the respective areas are clearly defined and understood. The Government, broadly speaking, confines itself to drawing up national policy guidelines, issuing general directions to the holding companies and exercising minimum supervision over the actual operational working of the holding companies and its subsidiaries. There is adequate reporting to Government, like the biannual report proposed with regard to the holding company for steel in our country; but there is much more close and continuous informal contact through Government representation on boards of directors and frequent discussions and exchange of views on important questions. This leaves a very large degree of autonomy to the companies who have complete operational freedom in their day-to-day functioning. But it also means that even on operational matters there is an exchange of ideas, with the decision-making authority being clearly vested in the public sector undertaking.This line of demarcation has been formulated more clearly in Sweden, where a distinction is drawn between what are called political decisions on the one hand and executive decisions on the other. The former reserved for Government to lay down guidelines for economic growth and the latter reserved for the enterprise imply and involve the exercise of proprietary rights.

"The question may well be asked: surely what is good for steel may be good for other sectors also? There is no reason why not. The setting up of the holding company for iron and steel in our country is therefore a major project in the field of industrial development as well as of managerial and administrative reform. It is the creation of a new model which must provide the answer to the myriad managerial problems that we face in the public sector today".

It is important to realize that Shri Kumaramangalam had proposed his new model based on his extensive study and analyses of the PSU management practices in advanced countries such as Sweden, France and Italy.

Now that the whole PSU Issue is under review, it is hoped that the UPA government would also have a relook at the Mohan’s Model.

(Dr Damodaran is Former Director,CSIR Regional Research Laboratory, Trivandrum, and can be contacted at add@asianetindia.com)