Explained: Corporatisation Of The Ordnance Factory Board And Why It Was Needed

Nothing speaks more about the priorities of the leadership of the Ordnance Factory Board (OFB) than its threat to go on a strike in the middle of a national security crisis.

In July last year, when Indian Army was preparing to take the peaks of the Kailash Range in eastern Ladakh to bring China to the negotiating table, three employees’ federations of the OFB, which operates 41 defence production facilities across the country, were threatening to go on an indefinite strike.

The federations, which claimed to have support of over 70,000 employees, were against the government's move to corporatise the 246-year-old organisation.

The proposed strike was called off by these federations only in October, over a month after they were proposed, after talks with the government.

Over the last decade, at least four separate committees had recommended the corporatisation of the OFB, starting with the T K A Nair committee in 2000. In 2006, the Vijay Kelkar committee reiterated the same, followed by Vice Admiral Raman Puri committee in 2015 and the D B Shekatkar in 2016. But resistance from the OFB meant that there was little to no movement on making the OFB efficient and accountable over the last 20 years.

In 2019, when the government announced its proposal to corporatise the OFB, the organisation had used strikes to scuttle the plan. Not this time.

Despite pushback from the OFB, the Cabinet Committee on Security, headed by Prime Minister Narendra Modi, approved the corporatisation of the OFB in July last year. Less than a year later, the Union cabinet has cleared the proposal to restructure the OFB into seven separate corporate entities on the lines of the nine existing defence public sector undertakings (DPSUs) in the country.

Under this plan, the 41 units currently functional under the OFB will be subsumed under one or the other of the seven new companies.

Each of the seven entities that will emerge will be responsible for a separate sector — ammunition and explosives, vehicles, weapons and equipment, troop comfort items, opto-electronics gear, parachutes and ancillary products.

While OFB has actively pushed back against plans for corporatisation, it has done little to improve its abysmal record on defence production over the years.

The Many Failures Of OFB

The Comptroller and Auditor General (CAG), in a 2019 report, pointed out that in 2017-18 OFB achieved the production targets for only 49 per cent of items.

“Army places demand on OFB for supply of the items and subsequently, OFB fixes production targets to the Factories to fulfill the demand of Army. A significant quantity of Army’s demand for some principal ammunition items remained outstanding as of 31 March 2018, thus adversely affecting their operational preparedness,” the CAG report on the performance of the OFB said.

“OFB’s slippages in production and supply led to critical deficiency of seven types of ammunition (ranging from 32 to 74 per cent),” it added.

The report underlined that a large number of production orders given to the OFB, the oldest being from the year 2009-2010, remained outstanding as of March 2018. Around 29,393 warrants — production orders to undertake manufacture according to the yearly production plan of the OFB, valuing 4,648 crore, were outstanding.

It also reported that the OFB had a high cost of overheads, which accounted for as much as 28 to 33 per cent of the cost of production during 2013-18.

During the same period, the supervisory costs of the factories increased by 36 per cent, the report adds. This resulted in higher costs for the armed forces for the products manufactured by the ordnance factories, and in some cases, the cost of its products is significantly higher than what is offered by others.

The OFB’s record on research and development isn’t great either.

Between 2014 and 2018, various ordnance factories had 618 in-house research and development projects with a total sanctioned cost of 594.21 crore. Only 201 projects of these were completed by the factories, 92 were short-closed and work was still ongoing on 325 projects as of March 2018.

The CAG found that the spending on research and development as a percentage of total revenue expenditure was abysmally low, adequate resources were not allocated for in-house development, and projects repeatedly missed deadlines.

In one case, the OFB had not taken any initiative till 2018 to create in-house capacity for electronic fuzes, a requirement the Army projected as early as 2013.

“Only in July 2017, OFB sanctioned an in-house R&D project for development of electronic point detonation fuze for artillery ammunition... with planned date of completion by July 2018. However, as of May 2018, only field trial of pilot lot was conducted successfully,” the CAG report notes.

In another case, six research and development projects remained incomplete even after the lapse of one to six years from their planned date of completion.

Similarly, in many cases, ordnance factories failed to fully absorb the technology transferred to them by foreign original equipment manufacturers (OEMs), resulting in continued dependence on OEMs for products.

Quality of its products, too, has been called into question repeatedly.

In a recent internal report to the Ministry of Defence, the Indian Army claimed that the fund it spent on faulty ammunition supplied by the OFB in six years between 2014 and 2020 would have been enough to purchase 100 medium artillery guns.

The poor quality of ammunition supplied by the OFB results in at least one accident per week on average, the army said, adding that 403 such cases related to faulty ammunition had been reported since 2014. It reported that 27 troops and others had been killed in accidents due to faulty ammunition since 2014, and 159 were seriously injured, including disabilities such as loss of limbs.

Quality issues in products led to significant quantum of return and rejection, the CAG says, adding that the rejection of products manufactured by the OFB, in turn, was one of the reasons for shortages, and led to financial losses.

Why The OFB Fails And How Corporatisation Will Help

One, the OFB, as the Defence Ministry has pointed out, is an attached office of Department of Defence Production. As a result, the OFB has little to no autonomy when compared to DPSUs. Decisions related to finance, research and development, tie-ups and modernisation are taken outside the organisation.

Lack of autonomy means there is zero appetite for risk and the focus remain on adhering to the rules and regulations governing the functioning of the ordnance factories rather than the shaping outcomes in terms of products and quality, that will help in equipping the armed forces better.

Two, the OFB enjoys monopoly in many sectors and has a captive customer in form of the armed forces. Products manufactured by the OFB are priced without charging any profit over the cost of production as it is barred from making profit from the supplies to the armed forces.

There is no competition with other manufacturers as the OFB is nominated as a production agency for supply of core items to the armed forces.

The government shells out around Rs 5,000 crore annually to pay salaries of the OFB employees and Rs 3,000 crore to OFB as operational cost.

Thus, OFB has no incentive to enhance the product range, increase competitiveness, improve efficiency and quality and spend on research.

Corporatisation of OFB will give the organisation a structure similar to that in the existing DPSUs, which are managed by their own board of directors with the government giving only broad guidelines, thereby providing greater autonomy and flexibility at managerial and functional level.

New entities will be able to make their own plans on investments and research and development, without much interference from outside.

Post corporatisation, the new entities will also be able to forge partnerships with the defence manufacturers in the private sector, both domestic and foreign, like other DPSUs such as Hindustan Aeronautics Limited have done. This would bring new hardware and technology to these units, helping them upgrade the existing infrastructure, which is outdated in many cases.

Frequent change in the leadership of the OFB has resulted in little accountability and lack of planning. In the last 10 years, the organisation has had as many as 15 chairmen. In comparison, DPSUs have had relatively stable leadership.

The new entities will also be in a better position to improve capacity utilisation, face competition and tap new export opportunities. Post-corporatisation, the new units will move from administrative pricing mechanism to competitive pricing, which in turn will bring down the cost of products for the armed forces.

These entities will also be able to retain profit, making them self-sufficient financially in the medium term.

The government believes corporatisation of OFB could increase the turnover of the ordnance factories to Rs 30,000 crore by 2024-25, help grow exports to 25 per cent of the turnover and increase self-reliance in technology, which is currently limited to 20-25 per cent, to over 75 per cent by 2028-29.