Why MoD wants 'corporatisation' of ordnance factories

Nearly 82,000 employees of all 41 ordnance factories across India went on a month-long strike from Tuesday, in protest against “corporatisation” of the Ordnance Factory Board.

The OFB unions claim that the government's move to “corporatise” the ordnance factories is in violations of agreements and assurances of the past. The three unions that went on strike are All India Defence Employees Federation (AIDEF), Indian National Defence Workers Federation (INDWF) and the RSS-affiliated Bharatiya Pratiraksha Mazdoor Sangh (BPMS).

"There is a risk to national security in case of the growth of private players in the event of possible failure of the proposed OFB corporatisation, resulting in disinvestment and even closure," M.K. Ravindran Pillai, Vice President of the AIDEF told THE  WEEK.

An OFB official claims that the ordnance factories can not be run on a commercial basis since a 'war reserve' has to be kept at par with the armed forces to maintain capacity to take care of surge in demands in a war-like situation. “No private sector will be able to maintain idle capacity as a war reserve.”

The OFB is a subordinate/attached office of the Department of Defence Production and has 41 factories. The principal products of the OFB include tanks and armoured vehicles, artillery guns, small arms and weapons of several types and ammunition. It also produces troop comfort equipment like uniforms, tents and boots. The main customers are armed forces including Army, Navy and Air Force, and the paramilitary forces. 

"Efforts have been made in recent times to expand the export market. Ordnance factories were set up as 'captive centres' to serve the needs of the armed forces, but they have been facing the performance issues for a long time," says a defence ministry official, while adding that concerns have been raised in various quarters over the last few decades regarding the functioning of the OFB which “lacks professional attitude as is required from a production organisation”.

While pointing out the monopoly in supply, the ministry official says that the OFB has all along supplied products to the armed forces on nomination basis, which has not really given incentive to the board to improve its quality of products and does not have a dynamic system of getting customer’s feedback on quality and timely delivery issues. 

"The government has notified 275 non-core items of OFB, which are now available to be procured from the market. These items hitherto reserved for OFB are easily available in market," the official pointed out.

The Defence Ministry has also raised the poor quality issues of OFB products that have been a constant cause of concern and also the high cost of products due to high overhead charges in the OFB, including high maintenance charges, high supervisory and indirect labour charges.

"There is minimal innovation and technology development in the OFB. There is low productivity of plant and machinery and manpower. Furthermore, working under the cushion of government procedures and being the sole service provider for armed forces, there is no penalty for delayed delivery to the customers," the official added.

The ministry officials believe that the present structure of the OFB is 'inconsistent' with the requirement of a production centre, which calls for a lot of flexibility at managerial and functional level. 

"The decisions like modernisation of plant and machinery, entering into a joint venture with other companies, entering into a ToT (transfer of technology) agreement etc, all are subject to government regulations and instructions, reducing the leverage and flexibility of any dynamic production and marketing unit. As a government department, the OFB cannot retain profits and therefore has no incentive to make profits. As a whole, the OFB in its present structure of departmental organisation may not be appropriate for carrying out production activities and standing in competition with its competitors in the private industry, who have all the managerial and technical flexibility required for production and marketing activities," the ministry official further said.

The subject of restructuring/corporatisation of the OFB has been examined by various committees in the past. The T.K.A. Nair committee (formed in May 2000) observed that past recommendations to integrate finance, human resources and research and development engineering have remained unimplemented mainly because the government is unable to make an exception to one department in the application of its all pervading rules of business. The committee, therefore, suggested corporatisation—the conversion of the Ordnance Factory Board into the Ordnance Factory Corporation Limited.

Similarly, the Vijay Kelkar Committee (formed in 2004) observed that in the existing set-up the ordnance factories, by the very nature of the products and the manner in which they manufacture, have to continuously face the problems of obsolescence of existing technology, accessibility to newer technologies and the inability to meet requirement of the user. There are also instances where the user keeps changing their specification. Further selection of raw materials, supplies, and quality control are not under the control of the ordnance factories. Sustaining the OFs in the current structure would prove financially and strategically costly for the user and consequentially for the country’s defence preparedness in the long run. Therefore, the committee recommended that all ordnance factories should be corporatised under one single corporation under the leadership of a competitive management. And the corporatisation could be on the lines of Bharat Sanchar Nigam Ltd (BSNL).

"Corporatisation does not necessarily mean privatisation. It was observed that the formation of corporation alone would ensure that the ordnance factories get the desired functional autonomy and make them accountable and responsible for their operations and performances," the MoD official clarified.

The ministry officials maintained that the proposed transformation of OFB from a government department to a public sector corporate entity will have several advantages. These include improvement of efficiency, reducing import dependency for arms and ammunition, enhanced combat efficiency of the armed forces and ensuring customer satisfaction and greater penetration in defence export market. It is also a move towards optimal costs.

The corporatised ordnance factories can form strategic alliances with Indian and overseas companies to develop new products and carve out a niche in the international armament industry.

The Defence Ministry officials also noted that in the last three-four years the chairman’s tenure has been less than one year (two of them having tenure of six months each). "It hampers continuity in the working of the OFB and also impedes bold decision making for the benefit of the organisation. Corporate OFB will ensure fixed secure tenure for the top management," the officials said.