R. S. Sharma - Rites Ltd.

Integrity as Integral Business Philosophy : ONGC Experience

R. S. Sharma Chairman and Managing Director Oil and Natural Gas Corporation Ltd., New Delhi.

Prologue ONGC is India’s largest Company in the field of E&P in the oil and energy sector. In fact it has been listed as a Fortune 500 Company and is ranked as the number one E&P Company in Asia. The scale of its financial operations is substantial. In order to institutionalize transparency and integrity, ONGC was the first Company to go in for implementation of

the integrity pact in all its large commercial transactions. The present global financial crisis is largely due to systematic factors and adoption of unethical practices. ONGC’s preventive efforts in ensuring corporate integrity are commendable. Hopefully, other PSEs and commercial enterprises would also be going in for similar procedures. - Editor

Backdrop Wealth generation process is complex and so is the distribution process. The complexities arise out of conflicting interests of various interest groups. Balancing them thus becomes the biggest challenge for the people managing business, private or public. Competitive edge and efficiency are always the cornerstones of success. Trade-offs in business is a common practice. However, there are many instances where the practice crosses the Lakshman Rekha of defined and expected ethical practices. Some people take it is as business excellence, others as sharp practices. However, there is no scope for such debate if the dividing line between good and corrupt practices is conclusively drawn. Also, it depends upon the values of the corporate, the image it carries, and the practices which it adopts. It is always important to systematically institutionalise systems based on values, integrity and transparency.

RITES Journal

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January 2009

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Corruption & Integrity World Bank defines corruption as the use of public office for private profit. Nongovernmental organisation Transparency International (TI) puts corruption as the misuse of entrusted power for private gain. However, in a broader perspective, corruption does not only mean the private profit through unethical exchange of cash and kinds, it includes avoidance of responsibility, negligence in duty and/ or resorting to unethical practices, even in the name of organisation’s interest. Mahatma Gandhi had said, ‘Corruption and hypocrisy ought not to be inevitable products of democracy, as they undoubtedly are today’. Hence the need of the hour is to nip corruption in the bud through our actions of transparent procedures and practices leaving no room for interpretations and associated discretionary decisions. It is not that the corruption is visible only at individual level, there are plenty of examples when large corporate houses have shown integrity the backdoor and played havoc with the wealth of millions of individuals. The case of Enron is well documented. In all such cases, greed, and sometimes negligence, have played a damaging role. The recent meltdown of the global financial market, perceived to be on sound footing, is also a glaring example of unbridled greed. Whatever may be the technical cause for this systemic failure, one thing is for sure that the Lakshman Rekha of ethical practices had been crossed. Corporate Governance in Indian PSUs Public Sector Undertakings of India deal with an enormous quantum of public funds. If we consider only the Central Public Sector Enterprises (CPSEs), in the year 2006-07, 217 CPSEs had a capital employment of Rs. 665,124 Cr. (Source: Annual Report on the performance of Central Public Sector Enterprises, 2006-07). The extent of procurements and award of contracts can be imagined from such a massive scale of operations. The governance principles of Indian Public Sector Undertakings (PSUs) have been built on the preamble that the means to achieve defined objectives should be based on transparent and value-based processes. Over the years these processes have become more complex, perhaps making PSUs overregulated. However, overregulation still does not provide the desired effect as far as elimination of corruption is concerned. There is always scope for manipulative interpretations, which may lead to discretionary decision-making and, therefore, grounds for compromising integrity and breeding corruption. However, there is a constant endeavour to plug the loop holes. Transparency in processes and procedures does have its limitations.

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N. Vittal, former Chief Vigilance Commissioner, Government of India, emphasizes this Gandhian definition of Corporate Governance by saying, ‘Corporate Governance is the value framework, the moral frame work and the ethical framework within which corporate decisions are taken.’ This means, Corporate Governance is an in-built part of Corporate Management Process whereby the value, morals and ethics related aspects are taken care of in the entire process of corporate business, encompassing Process, Procedure and People. While Government has delegated powers to various enterprises as per their status, it has also approved the implementation of Guidelines on Corporate Governance for CPSEs. These guidelines have been formulated by the Department of Public Enterprises (DPE) keeping relevant laws, instructions and procedures in view. The views of the various stakeholders, including administrative ministries, nodal ministries, various statutory bodies, Securities and Exchange Board of India, various institutes and other relevant departments, have been taken into account while formulating these guidelines. These guidelines cover issues like composition of Boards, audit committees, subsidiary companies, disclosures, code of conduct and ethics, risk management and compliance. In addition to this, public sector undertaking companies have their own internal audit and monitoring systems to ensure integrity. Central Vigilance Commission has made vigilance an integral part of the corporate departments to ensure an independent vigil on procurement processes. Corporate Governance in ONGC ONGC, a Fortune 500 Company, is ranked as the number one E&P Company in Asia (Platt’s ranking of top 250 Energy Companies, 2008). ONGC remains India’s Most Valuable PSU in terms of market capitalisation, net profits and net worth. It is the leader in Exploration & Production (E&P) activities in India having more than 80% contribution to India’s total production of crude oil and 80% of natural gas. The business activity of the corporate i.e., E&P of hydrocarbons is typical in the sense that inputs are deterministic whereas outputs are probabilistic. ONGC views Corporate Governance in its widest sense as a trusteeship, a philosophy to be pursued, a value to be imbibed and an ideology to be ingrained into the corporate culture. Company’s philosophy on corporate governance is led by strong emphasis on human values, individual dignity and adherence to honest, ethical and professional conduct. This enables customers and all stakeholders to be partners in the Company’s growth and prosperity. It revolves around values based on transparency, integrity, professionalism and accountability. The main objectives incorporated in the Corporate Governance framework include: •

Transparency, openness and accountability;

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Integrity as Integral Business Philosophy : ONGC Experience •

Adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders;

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A sound system of internal control to mitigate risks;

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Compliance with laws, rules & regulations in letter and spirit;

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Independent verification of the Company’s financial reporting;

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Strategic supervision by the Board of Directors of appropriate composition, size, experience and commitment;

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Timely and balanced disclosure of all material information to all the stakeholders;

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Equitable and fair treatment to all its stakeholders including employees, customers, vendors, shareholders and investors.

The Company constantly endeavours to improve upon these aspects on an ongoing basis and adopts innovative approaches for leveraging resources, converting opportunities into achievements through proper empowerment and motivation, fostering a healthy growth and development of human resources to take the Company forward. The implementation of Information Technology (IT) across the organisation covering its entire supply chain has brought a new meaning to transparency in ONGC’s transactions. Giving effect to the Right to Information (RTI) in true spirit is another landmark as far as transparency in business transactions is concerned. ONGC became the first Indian corporate to sign the Integrity Pact with Transparency International India Ltd (TII) in April 2006. Expectedly, World Council for Corporate Governance conferred ONGC with the ‘Golden Peacock Global Award for Excellence in Corporate Governance 2007’, for the 3rd consecutive time. Also, ONGC became the first and the only Indian company to be listed in Fortune’s ‘Most Admired Companies List-2007’. The commendable endeavours of ONGC towards corporate governance resulted in the organization receiving ‘NIL’ comments from Statutory Auditors and Comptroller and Auditor General (CAG) of India during the last two years and four times in the last five years. This is commendable considering the massive size and nature of its business activities, the number of business deals and the money involved. Integrity Pact The application of the principles of integrity, transparency, accountability, fairness and efficiency in decision-making on public investments and purchases are expected to minimise corruption and maximise benefits not only in the procurement but also in the

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economic, financial, social, and political environment and build the image and reputation of the organisation. Integrity in procurement means an honest process that is in compliance with the respective laws, procedures and guidelines; that the best available and most suitable technical expertise is employed in a non-discriminatory manner; that fair and open competition is ensured for quality output at a fair price (value for money); and that the decision making process has taken the legitimate aspirations and concerns of all stakeholders into account. The original concept of ‘Islands of Integrity’ in a sea of corruption mooted by Dr. Peter Eigen, founder of Transparency International was subsequently popularized as ‘Integrity Pact’ (IP). The IP contains rights and obligations to the effect that neither side will pay, offer, demand or accept bribes of any sort, or collude with competitors to obtain the contract, or while carrying it out. Also, that bidder will disclose all commissions and similar expenses paid by them to anybody in connection with the contract; and that sanctions will apply when violations occur. These sanctions range from loss or denial of contract, forfeiture of the bid or performance bond and liability for damages, to debarment for future contracts as far as the bidders are concerned, and criminal or disciplinary action against employees of the principal organization. The IP helps enhance public trust in procurement and contracting dealt by state owned enterprises and, hence, contributes to improving the credibility of procedures and administration. This is done by the IP by establishing mutual contractual rights and obligations between the contracting parties. The contract and the IP may cover the planning, design, construction, installation or operation of assets by the Principal, the privatization, acquisition/sale of assets, the issue of licenses and concessions, as well as the corresponding consulting services and adequate technical, financial and administrative support. The IP normally covers all the activities related to the tendering, bidding processes as well as the execution processes. The IP is intended to accomplish two primary objectives: (i) To enable Companies to abstain from bribing by providing assurances that : a.

Their competitors will also refrain from bribing.

b.

Procurement and contracting agencies will undertake to prevent corruption, including extortion, by their Officials and to follow transparent procedures.

(ii) To enable public bodies to reduce the high cost and the adverse impact of corruption on procurement and contracting.

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ONGC is committed to overall implementation of transparency and integrity into its procurement and contracting processes and aimed to set a demonstrative public precedent of its commitment. This sentiment was the precursor of assimilation of “Integrity Pact” in its procurement and contracting processes. ONGC’s Experience with Integrity Pact The concept of IP was adopted by ONGC during a presentation organized by Central Vigilance Commissioner (CVC) in May 2005 at Bangalore. Thereafter, ONGC appraised the IP concept to its major vendors and invited their comments directly and through publishing the draft on Integrity Pact in ONGC’s tendering website. The draft IP was vetted by G. E. Vahanvati, Solicitor General of India. The feedbacks thus received from various vendors were examined and necessary amendments to the draft were made. Finally, the IP document was approved by ONGC’s Executive Committee in June 2005. Internal Guidelines on IP implementation were issued promptly and ONGC decided to first implement IP in tenders from its major work centre, i.e., Mumbai High Asset, covering major services like Off-shore Drilling and Well Services, Logging Services, Engineering Services, and Corporate Material Management department with effect from July 2005. Subsequently, it was rolled out across ONGC covering all its tenders for Works, Services and Purchase from August 2005. As per requirement of the IP procedure, the bidder is required to sign the IP document, pre-signed by ONGC’s authorized representative, while submitting the Bids. Thousands of vendors have signed the IP while submitting their Bids. All reputed bidders, nationally or internationally, like GCA, Schlumberger, Halliburton, Transocean, Gesco, Jindal Drilling, Aban Offshore, Jagson, CIPL, CDSS, ISMTL, OCTL, BHEL, BPCL, HSL, B&L, HPCL, HAL, Punj Lloyd, L&T, Samsung HI, IOEC, IHI, Hyundai HI .Kawasaki HI, Mc Dermot, NPCC, etc., have happily complied with the requirement. Key Features of ONGC’s IP Programme 1.

Commitments and Obligations of ONGC.

2.

Commitments and Obligations of Counterparties.

3.

Violation and Consequences.

4.

Independent External Monitors.

5.

Implementation Guidelines.

6.

Periodic Review and Evaluation.

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As per the IP guidelines, ONGC, in consultation with CVC and TII, has engaged three competent and credible Monitors (Independent External Monitors - IEMs) to review whether and to what extent the parties comply with the ‘Integrity Pact’. As the IEMs play the most crucial role of ‘referee’ to ensure integrity in the overall process, their expertise, professionalism and reputations are very important. The following three eminent personalities consented to be the first IEMs of ONGC for three years: 1. Shri V.K. Shunglu , Former CAG of India. 2. Shri V.K. Agarwal, Former Chairman Railway Board & Ex-Officio Principal Secretary, GOI. 3. Shri Arvind Varma, Former Secretary, GOI. The job of IEM is voluntary, non-salaried and is initially for a term of three years. However, ONGC provides an honorarium for each sitting apart from bearing the actual expenditures towards their movements, accommodations, etc. Their expenses on account of secretarial jobs, telephone communication, etc., are also borne by ONGC. The name of nominated IEM is mentioned in the tender document itself while issuing tenders with value of Rs. 150 cr. and above. As per the programme the complaints from bidders are to be referred to IEM for review, if requested by the bidders. CMD, if required, may also refer representations to the IEMs. IP allows a continuous improvement in the tendering and procurement processes depending on the experience, suggestions of bidders and recommendations of IEMs. Conclusion In the last three years after IP implementation, only seven cases have been referred to IEMs. It is pertinent to mention that ONGC’s procedures and guidelines are so robust and exhaustive that in five of these cases, IEMs have upheld the decisions of ONGC. There was only one case (although no specific allegation against ONGC), where the IEMs opinion was upheld and the case dealt as per the Arbitration Clause. However, in one case IEM had a different opinion to that of ONGC when the case finally became sub-judice and ONGC followed the orders of the Court. Till July 2008, IEMs have been pre-nominated in a total of 62 cases constituting a total value of about Rs. 80,900 crore. Considering the enormity in number and variety of tenders that ONGC deals with from its seventy odd material management centres across the country, it can be confidently said that there is no doubt about the efficacy of the IP program. Apart from the transparency and integrity, IP implementation in ONGC has surprisingly brought down interventions from several quarters. The number of court cases and arbitrations has come down dramatically, resulting in substantial savings in terms of finance as well as executive mandays.

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Oil and gas companies world-over are among the richest corporations and their dealings are in astronomical figures. As a result, the amount of likely corruption in this business area is also substantial. United Kingdom had launched ‘Extractive Industries Transparency Initiative’ (EITI) in 2002 to bring transparency in the payments made by the oil and mining companies that would make corporate responsibility more of a reality. Though EITI originated in UK, it is international today. TII is a similar kind of experiment in India. From my experience, I would like to say that implementing IP was not another business program for ONGC; it was an investment that has given excellent returns in terms of sanctity of the whole process as well as image of the company. Today, integrity is an integral part of our business, thanks to the implementation of Integrity Pact. References 1.

Annual Report on the performance of Central Public Sector Enterprises, 2006-07.

2.

www.ongcindia.com

3.

www.transparency.org

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I hold the maxim no less applicable to public than to private affairs, that honesty is the best policy. – George Washington God looks at the clean hands, not the full ones. – Publilius Syrus An honest man’s the noblest work of God. – Alexander Pope