The Hindu Business Line : Carrot of financial autonomy with the stick of performance

NOW that the Cabinet Committee on Economic Affairs (CCEA) has decided to increase the financial autonomy of profit-making Central Public Sector Enterprises (CPSEs), most of us have suddenly come to know what powers the Chairman-cum-Managing Director of these enterprises didn't enjoy all along, such as approving business tours abroad of functional directors up to five days without intimation to the Ministry.

Though the phrase `financial autonomy' has no precise definition, one can be one's own to start from the scratch, drawing inspiration from the Greek `autonomos' meaning `having its own laws', that lies at the root of the word autonomy. In essence, financial autonomy is to be self-governing in matters of money, with its attendant benefits and evils. On the one hand, shoddy performance is often blamed on lack of autonomy, especially in the public sector, while on the other, the very same autonomy occasionally takes a big rap for unbridled abuse, as in the case of Barings Bank or Enron, in the private sector.

That perhaps explains the why of ceilings that the Government has thought of while loosening the reins of the CPSEs. For instance, capex or capital expenditure limit has been more than doubled, though with a corollary cap of net worth. What is significant is the empowering of CPSEs to go in for mergers and acquisitions within the financial limits set for floating joint ventures and subsidiaries, such as Rs 1,000, subject to a net worth restriction, though critics may say that the Government is pushing in privatisation through the back door.

Generally, the one who pays the piper calls the tune, and so no eyebrows were raised when as the largest stakeholder in these enterprises, the Government exercised its traditional right to micro-manage.

Though government is big business, the gradual transformation of the economy has driven home the point that government is no good at business that demands fast response and market focus. It was sensible, therefore, that the Common Minimum Programme of the present government accorded priority to the question of autonomy and stated, "The UPA is pledged to devolve full managerial and commercial autonomy to successful, profit-making companies operating in a competitive environment." A case of offering the carrot of autonomy, with the stick of bottom line focus. Yet, the proof of the pudding is in the eating, and so we may have to wait for the results to see if the reduction in breathing-down-the-neck by the Government is effectively translating into better payback from these companies.

Interestingly, the report of the Twelfth Finance Commission (2005-2010) spoke of lack of `financial autonomy' for finance commissions. "All their financial needs have to be cleared by the Ministry of Finance, which acts as the nodal ministry in the Government in respect of the finance commission. This results in references, back references, and delays, especially due to finance commission's work receiving a relatively low priority," it said, before recommending that the secretariat of the finance commission be vested with the powers of a full-fledged department of the government. Financial autonomy is no local issue. A story posted on http://allafrica.com argues for the granting of `financial autonomy and editorial independence' to Uganda Broadcasting Corporation so that it can compete in the cut-throat environment of Uganda's airwaves; "this will call for running the corporation on private enterprise standards like profit and reinvestment, market-oriented programming that does not compromise primary social responsibility, meritocracy and zero tolerance to corruption," it adds.

"Tightly controlled media have never been vehicles for trustworthy news," states a posting on www.miami.com, while discussing if the Chinese newspapers (numbering 2,000 now, from 69 in 1979) can achieve some independence through heavier reliance on advertising and market forces, rather than turning into `commercialised government mouthpieces'. The site www.gulf-daily-news.com reports about a Bahraini independent tourism organisation, being established in co-operation with several related government departments, with the promise of administrative and financial autonomy. The main stumbling block, according to http://meionline.com is the definition of federalism for Iraq. "Kurdish autonomy in the north is virtually assured, but the Shi'ite bloc is demanding the option of similar decentralisation, including financial autonomy for regions composed of three provinces, all around the country. Fiscal federalism would determine how oil revenues are shared out, potentially keeping more wealth in the Shi'ite-dominated south," is some insight about a country where more than 800 civilians and cops get killed every month, or "roughly one every hour, according to figures released by the Interior Ministry".

If you're looking for research on the topic, an early paper I stumbled upon is of Turo Virtanen from University of Helsinki, `Financial autonomy and accountability of public managers', available on www.valt.helsinki.fi. "In the external accountability, the accountability to the ministry tends to increase as the financial autonomy is seen strong. At the same time, the accountability to particular customers goes down," it observes. "When the increase of the accountability to the ministry is interpreted as political accountability, it is not probable that the financial autonomy of public managers is to any substantial extent related to the sharpening of the politics/policy-administration dichotomy." Though on a different tack, `Globalisation and the Fiscal Autonomy of the State' by J. Mohan Rao of the University of Massachusetts at Amherst, available on http://papers.ssrn.com is worth catching up with. "States must retain the autonomy from global market forces necessary to pursue nationally and politically determined tradeoffs," cautions Rao.

Another paper, posted last week on http://econpapers.repec.org, is `Autonomy and performance of foreign subsidiaries in transition countries' by Urmas Varblane, Katrin Männik and Helena Hannula of the University of Tartu (Estonia). "Relationship between autonomy and performance depends on the type of autonomy," argues the paper. "Marketing and finance are the most powerful dimensions of autonomy. Higher autonomy in marketing is negatively linked with technology upgrading, measured by the productivity level... The higher the financial autonomy of the subsidiaries the bigger the positive changes in all fields of performance."

While that shows the importance of financial autonomy, it may be long before our public sector enterprises get used to deploying their double-edged new power.

ZeroBase@TheHindu.co.in

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