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Performance contracts (or the memoranda of understanding (MOUs) as they are called
in India) between government and Public Enterprises are being actively promoted in India.1
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Similarly, the holding company to 'distance' public enterprises (PEs) from government is being
given a second trial in India.2 While the efforts may have emerged out of the Arjun Sen Gupta
Committee's recommendations, they are also being independently pursued. Yet there is much
uncertainty in these efforts. Witness that Bharat Business International3 which had been set up
less than a year ago without any debate or consultation by the government, was to be wound
up by the Chandrashekar government, and is now apparently having a second lease of life.
These mechanisms have also attracted the attention of academics particularly from the
management schools. There is much discussion on the advantages and disadvantages of
these mechanisms, as also their relative merits on purely a priori considerations of their
design4. Government itself has pinned much hope on the MOUs, to reduce dysfunctional
interference, and to reorient the enterprises towards their primary goals and tasks.
At the outset we must state that conceptually the holding company mechanism and the
contracts between government and public enterprise are not competing mechanisms but
complement each other. Performance contracts have been a useful instrument in the
management of PEs in France, and South Korea very recently. In Italy and Sweden the
holding company has been used rather successfully. The holding company as an instrument is
quite important if government has to deal with a manageable number of public enterprises
through formal contracts or otherwise. Certainly one important element in the dysfunctionality
of the interface is that Governments in countries like India have to deal with a large number of
PEs separately8. We would like to interpret the holding company concept functionally rather
than legally. Discussions on holding companies have tended to get bogged down in the legal
form of the holding-company, and in attempts to define the holding-company. Legally the holding-company
concept is hardly ambiguous. But functionally holding companies (private
and public) in their relationship with their subsidiaries and affiliates have shown great variety,
so that we must narrow down the holding-company idea functionally rather than legally. We
would tend to see it as a large firm that controls the strategic decision making of other largish
units, through among other things, appointment of chief executives, boards, or key personnel,
and possibly control over investment and resources. The operational and managerial decision
making is still very much with the units. Share holding provides the basis for this control.
Functionally therefore a 'legal' holding company and its constituent units could be very similar
to a large divisionalised enterprise9.
That both holding companies and the contract instrument are being actively pursued
today is indicative of the emerging pressures to reform the PE system. (The exploration of
privatisation as an option is also an expression of the same pressure.) It also tells us that as
much as in the past when similar experiments had been tried out there is an enchantment with
the formal structure of organisations and their interrelations. The source of ills is being seen in
the formal structure of things. No one can deny that the structure of organisations is important
for performance. But we would suggest that the true content of these mechanisms whatever
the stated objectives are, and however good the design may be, are already showing signs of
being distorted and ritualised to serve the purpose of keeping the public enterprise system in a
state of dis(mis)orientation. This would suggest that the leverage point to bring about change
is hardly in things formal - in the interface as formally defined or introduced. They lie in matters
that are political, economic and social10.