Why corporatisation of ordnance factories is must

'Corporatisation is not only in OFB’s interest and important for its long-term survival, but also for the country’s defence preparedness and self-reliance.

'With its existing turnover, the corporatised OFB would easily qualify for a Navratna status, and can reclaim its lost glory and rebuild itself as a strong force in defence manufacturing,' says Laxman Kumar Behera.

Illustration: Dominic Xavier/Rediff.com

In a bold move, the government has floated a proposal to corporatise the Kolkata-headquartered Ordnance Factory Board (OFB), under which there are 41 factories with combined manpower strength of over 82,000.

The government’s decision has not gone down well with trade unions.

They went on strike from August 20, relenting only after several rounds of discussion with senior defence ministry officials.

The possibility of another strike can’t be ruled out as the proposal under consideration threatens the very governance structure of the organisation.

Should the government back down or stay on course with its decision?

The balance of evidence suggests that the Ministry of Defence (MoD) needs to stay firm on its decision as corporatisation is not only in OFB’s interest and important for its long-term survival, but also for the country’s defence preparedness and self-reliance.

OFB, which traces its origin to 1802 during the British Raj, is the oldest and one of the largest departmentally-run commercial organisations of the Government of India.

With a turnover of over Rs 12,800 crore, it has historically enjoyed a monopoly over a wide variety of products ranging from tanks and armoured vehicles to small arms, ammunition, and various troop comfort items.

However, owing to a number of factors, the organisation has performed below its optimum level.

Being a government department, the OFB is prohibited from making profits from sales to the armed forces.

This has taken away from it a major incentive to improve the organisational and production efficiency.

Moreover, it is frequently allowed to pass on all costs of production to customers.

This cost-plus approach to production, which is widely discarded as inefficient, adds extra cost to MoD’s budget.

The biggest problem for the OFB has, however, been its limited decision-making power.

As a subordinate department of the MoD, OFB’s major decisions pertaining to finance, human resources, research and development (R&D), modernisation of factories, and formation of joint ventures and subsidiaries, are taken outside the organisation.

The bureaucratic nature of the decision-making of the external agencies and their inclination towards rules and regulations rather than outcomes have left little incentive for the OFB to stand on its own and assume accountability for its functioning.

OFB’s woes have further been compounded by its distant location, far away from the Delhi’s power corridors, and frequent change in key leadership.

In the past 10 years alone, the organisation has seen 15 chairmen.

With such a rapid turnover at the top, the organisation has been left with little strategic vision and direction.

The OFB, on its part, has also done little to improve its performance that could match its rich history of over 200 years and vast asset base.

The organisation can hardly boast of any worthwhile product of its own.

Nearly 80 per cent of its turnover comes from imported technologies.

The lack of focus on innovation, along with delayed execution of orders, low labour productivity, and meagre exports, has frustrated its key stakeholders, especially the Indian Army, which accounts for nearly 80 per cent of its supplies.

The Indian Army is also concerned about the poor quality of OFB products.

The Comptroller and Auditor General of India had once observed that some of the OFB products were passed on to customers with defects that could be visible to the naked eye.

Being frustrated with the repeated performance shortfalls, the MoD has, in recent years, tried to move away from procuring products from the OFB.

It has already declared 275-odd items produced by the OFB as non-core items, effectively demolishing the organisation’s monopoly over these products.

The below-optimal performance of the OFB has also led the organisation to forgo it pivotal position in Indian defence production.

Indian private sector companies having defence industrial licences are now producing more than the OFB.

The growth of the private sector, which is likely to be accelerated under the Make in Indian initiative, will further push the OFB on the margins of defence production unless reformative steps are taken at the earliest.

The idea of corporatisation of the OFB has been under consideration for a long time.

It was first suggested by the Nair Committee in 2000.

It was reiterated by the Kelkar Committee in 2005, which had made a strong pitch for corporatisation of the organisation.

However, successive governments lacked the political will and/or courage to implement this vital piece of reform measure.

The corporatisation of the OFB will turn it into a defence public sector undertaking (DPSU) under the administrative control of the MoD.

This is far from privatisation of the organisation as rumours suggest.

As a DPSU and with 100 per cent equity stake by the central government, the OFB will have far greater autonomy in decision-making.

It will be managed by its own board of directors.

Subject to broad guidelines of the government, it can make its own financial/investment plans, form joint ventures/subsidiaries and articulate R&D road map without much interference from external agencies.

More importantly, as a corporate entity with a stable leadership, it will be in a far better position to respond to market dynamics and face competition, especially from the private sector, effectively.

Lastly, with its existing turnover, the corporatised OFB would easily qualify for a Navratna status, which will provide even greater flexibility in financial decision-making.

Corporatisation is the only way the OFB can reclaim its lost glory and rebuild itself as a strong force in defence manufacturing.

Laxman Kumar Behera is a defence economist and a research fellow at Institute for Defence Studies and Analyses.