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OFB Corporatization: Boost or Bane?

Most of the Committees set up on improving the performance of Ordnance Factories in the past brought out the main consequences of monopoly and suggested remedial measures through Corporatization. However, the successive governments lacked the political will and courage. The nation will watch the development in this regards by the present Govt.

The Cabinet Committee on Security (CCS) is likely to set up an Empowered Group of Ministers (EGoM) to supervise conversion of 41 ordnance factories to private limited companies with management control by the government. The EGoM, once constituted, will develop a mechanism for stakeholder consultation and decide whether the OFB should be broken into single or multiple defence PSUs. The OFB comprises 41 Ordnance Factories, has over 80,000 employees and holds over 60,000 acres of land bank, the world's largest defence production set up, producing everything from uniforms and tents to ammunition, tanks and artillery pieces for the Indian armed forces. OFB monopoly over captive customer requirements is such that more than 80 per cent of the orders on nomination basis come from the Army; it meets barely 50 percent of the requirements and on top of it receives an annual defence budget support of over Rs 2,000 crores.

In the present organizational structure  the OFB  is dependent on Ministry of Defence (MoD) Department of Defence Production (DDP) for every decision relating to them-from modernising plant and machinery to entering into joint ventures with other companies-is subject to government regulations and instructions, which reduces the leverage and flexibility of any dynamic production and marketing unit. There is no incentive to operate cost-effectively and lacks technical and managerial flexibility and hence is incapable of competing with the private sector. The existing organizational structure of the OFB has the following constraints which impinge on performance:-

  • OFB function as attached offices of the DDP, every decision relating to them-from modernizing plant and machinery to entering into joint ventures with other companies is subject to government regulations and instructions, which reduces the leverage and flexibility of any dynamic production and marketing unit.
  • Being government departments, they cannot retain profits and therefore have no incentive operate cost-effectively.
  • In its present form the OFB lacks technical and managerial flexibility and hence is incapable of competing with the private sector.
  • The OFB monopoly-where it supplies products to a captive customer, the armed forces, on a nomination basis-brings its own set of problems:
  • The main consequence of this monopoly is that there is no incentive for the OFB to improve quality. Poor quality of OFB products have been a consistent cause for concern. The poor quality of ammunition manufactured by the ordnance factories, has led to several fatal incidents.
  • This also results in high overhead charges being loaded onto OFB products, from clothing to battle tanks, example an indigenously assembled T-90 battle tank is almost twice as expensive as an original Russian-built T-90 tank.
  • There are also issues of low productivity, further compounded by the fact that there is no penalty for delayed delivery to customers.
  • There is minimal innovation and technology development in OFB
  • No penalty for delayed delivery to the customers.
  • Low productivity of plant and machinery and manpower

A 2016 report by controller general of Defence Accounts, highlighted OFB overcharges the Armed Forces for everything, from clothing to battle tanks. An indigenously assembled T-90 battle tank, the OFB was charging the army Rs 21 Crores  per tank, nearly 50 per cent more than what an import would cost an original Russian-built T-90 tank.

Corporatization Proposal

The restructuring/corporatization of OFB has been examined by various committees and suggested corporatization. The T.K.A. Nair Committee in May 2000) observed  Ordnance Factories are cost centers in a government department and would prove expensive, financially and strategically. In 2004, the Vijay Kelkar Committee recommended the OFB be accorded the status of a Nav Ratna, to get the desired functional autonomy and make them accountable and responsible for their operations and performances.

Later, in April 2015, Raman Puri Committee mentioned corporatizing the OFB and splitting it into three or four segments, with each one specializing in a distinct area like weapons, ammunition and combat vehicles. These are reflected in Fig below.

Most of these committees brought out the main consequences of such monopoly and suggested remedial measures through Corporatization.  However, the successive governments lacked the political will and/or courage until the corporatization of ordnance factories was listed as one of the 167 “transformative ideas” to be implemented in the first 100 days of the Modi government's second term. The first moves to end the OFB monopoly came last year when the government notified 275 non-core items which the Armed Forces could buy from the open market. In the past, the services had to buy these items exclusively from the OFB.

Understood a Cabinet note to give effect to corporatization had been prepared and circulated to stakeholder ministries for consultation. According to the present dispensation, the vision of the proposal is to provide operational freedom and flexibility to the OFB and make them increase their turnover, export growth and self-reliance. The proposed transformation will have several advantages such as:-

  • Improve flexibility in decision making.
  • Improvement of the efficiency, timely delivery, increased turnover/profitability
  • Transition from cost-plus mechanism to competitive pricing.
  • Increase in defence export.
  • Increase self reliance on arms and ammunition.
  • Flexibility in technology acquisition, form strategic alliances and boost innovation.
  • Better equipment state of the Armed Forces and customer satisfaction.

Below given fig gives a glimpse of the likely grouping and structure of OFB Factories after implementation of corporatization.

Apart from the above mentioned group and the factories underneath them, the remaining factories can be merged with the existing facilities or should be shut down.

Implementation of this vital piece of reform measure considered critical to India's overall defence preparedness as well as self-reliance. The transformation will improve flexibility and help in better decision-making in the functioning of ordnance factories, including creating space for joint ventures with foreign firms. Aim is to make them competitive and self-reliant in the production of arms and ammunition and increase the turnover. To quell employee anxiety on job losses and related issues, the ministry proposes to safeguard their wages and retirement benefits. It has to be see whether the Govt can take the bold step in national interest.

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