Monday, July 4, 2016

PSU governance reform in China

The FT reports on the latest in China's "crossing the river by feeling the stones" reform strategy. This one involves the appointments to senior leadership positions in State Owned Enterprises (SOEs) and their salaries. 
Top SOE managers are appointed by the Communist party’s personnel department, with input from the State-owned Assets Supervision and Administration Commission, the SOE watchdog. The most important SOE managers have party rank equivalent to cabinet ministers or vice-ministers and often place political or policy considerations over corporate efficiency. A pilot project in 2014 chose five SOEs whose boards of directors would be allowed to choose top managers. Now a cabinet task force has approved an expansion of the pilot to include three to five additional groups, Economic Information Daily, a daily newspaper owned by the official Xinhua news agency, has reported. Once the Communist party’s central committee signs off, Sasac will select the latest crop of SOEs, the paper reported, citing an “authoritative person”.

The plan also calls for a dual-track mechanism for setting SOE executives’ salaries. SOE chiefs endured pay cuts of up to 50 per cent beginning last year as part of an effort to restore discipline and public confidence in SOEs. But the cuts threaten SOEs’ ability to attract top talent. The cabinet’s latest plan allows executives hired through the pilot to earn compensation in line with industry norms, while political appointees will continue to earn government pay.
Admittedly, this would apply only to a small proportion of the 112 Central government owned SOE's which are overseen by Sasac. But the iterative strategy of reform enables the Party to ease in major reforms without aggregating discontent and resistance. Further, it also enables the government to refine the implementation design appropriately based on learnings from the pilots. 

India needs to do the same with PSU governance reforms. Fundamentally, it needs to embrace more open competitive recruitments to top positions within both large PSUs and the federal government bureaucracy. It would do well to experiment with a few medium sized PSUs and a small number of infrastructure Ministries or Mission-mode projects. This should be complemented with far greater operational autonomy for PSUs from their Departments. A few successes with such experimentation can provide the political capital to push forward such reforms on scale. 

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