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Anachronism of the `finance' veto

S. Venkitaramanan

IN THE Vision 2020 article (Business Line, December 18), Prof P. V. Indiresan emphatically declared that he favoured reducing finance's deadening control over the government's various activities.

He is not alone in this desire to cut down the rigours of financial control. Most of the executive wings of the government have, at some time, felt that the Finance Ministry interferes with their decisions without being responsible for the outcome. But i t may be going a bit too far to say that the Finance Ministry should have little to do with controlling the government's activities, except to approve the Budget.

In Prof Indiresan's estimation, the Finance Ministry's control can continue mainly in external affairs, Defence and finance. He legitimately objects to the exercise of detailed control without being responsible for the consequences. As for dispensing wit h parliamentary control, as suggested by Prof Indiresan, it is too much of a visionary suggestion. While too detailed a control by Parliament has been rightly objected to, it seems too ambitious to object to any parliamentary scrutiny of the expenditure decisions. We have to arrive at a compromise by which parliamentary intervention does not frustrate progress.

Prof Indiresan has, however, raised a valid question about parliamentary intervention. Parliament exercises control partly through the Public Accounts Committee and Question Hour. In both cases, the PSU and programme chiefs have to brief their ministers through the bureaucracy of the administrative ministry. This invariably leads to these bureaucrats dominating the affairs of the PSUs and service agencies. Detailed questions on personnel and purchase decisions are the forte of Question Hour. A self-deny ing arrangement under which members of Parliament do not raise questions of detail with regard to public sector undertakings would do much to restore to them real autonomy.

No private undertaking would be able to function efficiently in an atmosphere where the `general body' (analogous to Parliament) raises questions regarding executive decision-making. Audit comments are also often made without reference to the special cir cumstances in which service departments and PSUs work. While there has been considerable improvement in the style of control through audit, many PSUs or service departments find their time occupied defending their actions and decisions. A decisive chief executive finds himself in greater trouble with the audit than the CEO. However, a private sector competitor does not have to face questions on the propriety of his decisions. In a private firm, purchase procedures are detailed and the CEO has to work wi thin the budget and the limits laid down. Nor does he have to consult the Finance Director on purchase and personnel decisions.

In defence of the existing system, we must grant that our structure of governance places great responsibility on the Finance Ministry to ensure that the other ministries and their agencies observe financial norms. Whatever the reorganisation of governanc e, the Finance Ministry cannot, at any time, be expected to surrender its power to control expenditure. But it is entirely another matter to say that this control should be exercised keeping in view the Executive's responsibility to deliver on time. The interlocutors from Finance must be more responsible.

Prof Indiresan is right in claiming that many Executive wings feel constrained while discharging their functions because of the excessive control by financial representatives unaware of the technical details of the process under consideration.

If we compare governance government-style and private sector-style, the major difference would be the lack of a diarchy of power in private sector as exists in the public sector. The authority entrusted with the budget in the private sector is fully empo wered to take decisions. He has accountants to point out the rules and statutory regulations to be complied with. He can even overrule them if business considerations so warrant it. Not so in the public sector. The Financial Adviser or the Finance Direct or has the veto power. Granted that this veto has, over time, been diluted, especially in recent years, it nonetheless remains an important instrument to enforce compliance with the Finance Ministry's intentions.

Every public sector undertaking has a Finance Director, appointed in consultation with the Finance Ministry and owing loyalty to the Expenditure Secretary. Even if the entire board agrees with the proposal of the Chief Executive, the Finance Director's o bjections have to be reported to the Ministry. Needless to say, this can cripple the CEO. This system has grown over time and changes are likely to be resisted. Prof Indiresan is right in saying that the present system of controls has not resulted in eff iciency. The efficiency gains resulting from the modulation of controls, and the consequent increase in the Chief Executive's autonomy within the limits of the budget, will be more significant than the savings from nitpicking.

One objection is that with the divestment programme, the question of ensuring public sector efficiency may be rendered academic. But despite the divestment, there will be a number of public sector undertakings and service departments that will continue t o work within the constraints of the present system of financial control. What is disturbing is that the Finance Director can act as an independent power centre. He has the right to refer his objections back to the Ministry concerned and the Finance Mini stry.

How does the private sector handle this problem? The Chief Finance Officer of the private sector undertaking is admittedly an important figure. But, his responsibility is not so much in expenditure control as in ensuring adequate finances at lower cost a nd the observance of the approved budget. More importantly, the Chief Finance Officer does not have the power of veto over the Chief Executive's operational decisions. The Chief Executive is the ultimate authority for the company. While the CEO has to ab ide by the budget and observe various legal and statutory provisions, the Chief Finance Officer has no authority to stop the Chief Executive if he carries the board with him.

The genesis of the problem lies in the special position the Finance Minister holds in the Cabinet. If he differs from the individual Cabinet Ministries, the subject can be referred to the Cabinet. Even the Prime Minister cannot overrule the Finance Minis ter's objections. He thus carries forward this position and extends it to the institution of Financial Advisers and Finance Directors.

Prof Indiresan points out rightly that excessive control by the Finance Ministry has neither improved efficiency nor the profitability of operations. It can be argued that it has contributed to inefficiency and, through delays, to more potential corrupti on. The Finance Ministry has to learn to live within the limitations of governance through the Budget. Once each Ministry is asked to work within the Budget and implement its programmes within the rules and procedures of the government, there should not be any external authority, such as the Financial Adviser or Finance Director, to overrule the executive power of the ministerial head.

Thus, while Prof Indiresan's recommendations regarding the dilution of the Finance Ministry's control may not be fully acceptable, they raise the important issue of improving efficiency in governance. The Chief Executives of our public agencies must not be handicapped by shared power. The Finance Director, with the power of veto over the CEO on matters on which he may have no knowledge, is an anachronism and has to be changed.

Pic.: The Finance Ministry always wants to be one up, only those bearing the brunt are not necessarily smiling.

Picture by Ramesh Sharma