Disclaimer: This internal report by the Indian Army to the Ministry of Defence (MoD) calling for the ‘Corporatisation of the Ordnance Factory Board (OFB) has been acquired through government sources. The veracity of this document has been confirmed by the Indian Army spokesperson.
The report has been reproduced in the larger interest of the Indian Armed Forces and the citizenry; especially the combat soldier on the ground whose task it is to close in with the enemy, despite grave risk to life and limb, and the taxpayers whose hard earned money provides the financial backbone of the nations warfighting ability.
‘Mission Victory India’ does not claim to endorse the view presented in the document below and shall not be held liable.)
- The Ordnance Factory Board (OFB) with its 41 Factories, 13 Development centres and 9 Institutes of learning is expected to be a national strategic asset with the potential of not only meeting national military hardware requirement and also contributing to overall Comprehensive National Power.
- The sub-optimal efficiency of this potential strategic asset is one of the major contributing factors to the hollowness threatening the ammunition and armament holdings of the Indian Army.
- It is also a matter of concern that certain countries have refused to accept ordnance factory manufactured ammunition and equipment offered against Defence Lines of Credit due to concerns regarding quality of output, procedures in the factories and the in efficient post sale service.
Poor Quality Production
Accidents: Lack of accountability and poor quality of production results in frequent accidents. This results in injuries and death of soldiers. On an average one accident takes places per week:-
Casualties: Casualties due to OFB manufactured Ammunition and Armament are as below:-
Loss to Exchequer due to Poor Quality Production
- Rs. 658.58 crore worth of disposed off within shelf-life between April 2014 and April 2019.
- Rs. 303.23 crore worth of Mines disposed off within shelf-life post Pulgaon Accident in May 2016.
- Rs 960 crore loss roughly means one hundred 155 mm Medium Artillery guns could have been bought for this amount.
Corporatisation is the Way Ahead
The Corporatisation of OFB announced by the Government has been debated for a long time. The corporatisation was first suggested by the Nair Committee in 2000 and thereafter by Kelkar Committee in 2005, and Raman Puri Committee in 2015. The Corporatisation of OFBs formed part of the Modi 2.0 government ‘167 transformative ideas’ to be implemented in 100 days i.e. by Oct 2019.
The Modi government had floated a proposal for corporatisation in July/Aug 2019 but the trade unions called for an indefinite strike against the decision on 20 Aug 2019. However, the strike was called off from 26 Aug 2019, after assurances by the Secretary of Defence Production that the government has not taken any decision yet towards corporatisation of OFB.
The government, thereafter, sets up a committee to address the concerns of the employees in Sep 2019 and subsequently in Nov 2019 issued a press release notifying the “proposal to convert Ordnance Factories under the OFB into a 100 percent Government owned Public Sector Unit to provide functional and financial autonomy and managerial flexibility so as to enable the organisation to grow at a faster pace and play a greater role in defence preparedness of the country while also adequately safeguarding the interests of the workers”.
The Modi government looks determined to implement the decision which was finally announced by the Finance Minister as part of the Defence Reforms package. The trade unions have now once again called for an indefinite strike calling the government decision as "arbitrary, illegal, and unjustified".
The biggest concerns of the OFB employees is that ‘Corporatisation’ is the first step towards ‘Privatisation’ and is likely to result in layoffs and job cuts. However, as of now Government has made it very clear that it is not thinking of ‘Privatisation’ in the near future and OFB will function akin to the various PSUs in the country post Corporatisation.
The OFB has regularly performed below its potential over the last few decades and has also been found to be draining the Defence Budget with over pricing of material produced. It has a monopoly over several products required by the armed forces, minimal innovation and technology development and hardly any incentive to improve quality and cost efficiency, with almost nil accountability for its products.
The biggest problem with the OFB has been attributed to its limited autonomy, it being an attached office of MoD, vis-à-vis the DPSUs. The Corporatisation of OFB will put it at par with other DPSUs managed by its own board of directors with broad guidelines from the government.
The government has envisioned growth of OFB post corporatisation expecting it to raise its turnover to Rs 30,000 crore by 2024-25 annually against exiting Rs 12,000 crore, and has set up a high-level panel to work out a roadmap to achieve the same.
Post Corporatisation, OFB will be allowed to forge partnerships with the private sector as per the MoD’s approved policy and will continue to receive orders from the country’s security forces. It will also be granted a special preference of 15% above L1 price for “Make” and “Buy and Make” category products.
The Centre will support OFB In case of losses, by way of loan for 30% of the total shortfall and by way of equity investment for balance 70% of the amount. The working capital for the next five years will be provided by the Department of Defence Production (DDP) as a one-time corpus fund. Capital investment for ongoing and sanctioned projects will also be provided.
Benefits of Corporatisation
There are numerous benefits likely to be accrued subsequent to the corporatisation as dwelled by various committees recommending the same. Some of the prominent benefits envisaged after corporatisation are highlighted below:-
Improved Efficiency: The corporatisation of OFB is likely to result in better management of its functioning with greater autonomy in functioning and dynamic decision making, also resulting in timely delivery and better quality supplied by factories.
Competitive Pricing: At present, a cost plus mechanism is followed by OFB to fix the prices. In this system the price is fixed by taking the max estimated cost plus 20 percent to cater for contingencies which are further raised by another 8 to 15 percent next year.
This led to over pricing with CAG even pointing out that in some cases OFB is charging even more than the import value of the equipment. It is envisaged that corporatisation will lead to reduced and competitive pricing, since OFB will be competing with private players in defence industry, albeit with some advantages.
Flexibility in Technology Acquisition: OFB will be free to form strategic alliances with Indian and overseas companies to boost innovation and develop new products. The factories, if modernised and managed properly, will be able to unlock its true potential and be the main key in the ‘Make in India’ project.
Financial Independence: OFB may no longer be dependent on the government for funding as it will be able to generate funds through other means like being listed on the stock exchange similar to other DPSUs. This will enable it to achieve financial independence and the money can be efficiently used for modernisation, R&D and boost innovation.
Optimum Use of Idle Capacities: The idle or under-utilised capacities of the factories will be better utilised post corporatisation.
Increased Defence Export: Corporatized Ordnance factories can use the idle capacities to generate surplus production over and above the requirement of armed forces, which can be exported to generate better revenues.
Improved Equipment State: Armed forces being the biggest customer of ordnance factories are likely to benefit immensely from corporatisation with better pricing and improved product leading to an improved equipment state and better customer satisfaction.
Some of the concerns highlighted in various forums against corporatisation of OFB are given below:-
Commercial Viability: The argument given by OFB employees is that corporatisation of OFB will not be commercially viable since there is no fixed demands by the armed forces, coupled with issues of long gaps between orders, uneconomical order quantity, and life cycle support required for 30-40 years after the introduction of equipment. However, OFB can take a leaf out of the functioning of the DPSUs, which seems to be managing these issues without any problem.
Surge in Demand during War: OFBs supposedly have some idle capacity as a war reserve, to cater for surge in demand during war, as was demonstrated during Kargil. The government will need to look into this aspect while formulating laws for corporatisation to not compromise with the logistic support to the forces during war.
OFB will need to work at its maximum capacity and look for exports of its surplus capacities during peacetime, which will necessitate it to become more efficient and produce world class quality to survive in this competitive world.
Corporatisation of OFB is likely to wake it from its slumber and transform ordnance factories into a modernised, state of the art facility with flexible and better decision making in its functioning.
This move is likely to make them more competitive and self-reliant in production of arms and ammunition and convert it to a profit earning organisation within the next few years.
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