In Favour of Corporatisation of Ordnance Factory Board

In a bold move, the Ministry of Defence (MoD) has floated a proposal to corporatise the Kolkata-based Ordnance Factory Board (OFB) which controls 41 Ordnance Factories (OFs) and 16 other associated entities that include nine training institutes, four regional controllers of safety and three regional marketing centres. Though the move has been opposed by various trade unions, which have gone on an unprecedented 30-day strike, beginning August 20, the government appears determined to stay firm on its proposed plan of action. The corporatisation of the OFB, an idea which dates back to the early 2000s, is a much-needed reform to revitalise the organisation which has lost much of its relevance due to its inherent constraints, poor performance, and the entry of private sector companies in defence production.

With its origin dating back to the British Raj, the OFB is the oldest as well as the largest departmentally-run organisation of the Indian Government. Over the last two centuries, it has been a key supplier of a wide variety of products ranging from tanks and armoured vehicles to artillery guns, small arms and ammunitions, besides various troop comfort items. However, as an organisation, the OFB has been constrained by a host of factors that has forced the organisation to look inward and perform below its potential.

As a departmentally-run organisation, the OFB is barred from making profit from the supplies made to the armed forces, eliminating a major incentive to innovate and improve efficiency. OFB’s cost-plus approach to production, which is globally accepted as inherently inefficient, makes the armed forces’ procurement budget expensive and puts an extra burden on the defence budget.

The OFB’s biggest bane, however, is its limited autonomy. Being an attached office of the MoD, major decisions pertaining to finance, human resource, research and development (R&D), technology tie-ups and modernisation of plants and machineries are taken outside the organisation. The highly bureaucratic decision-making process of the external agencies responsible for the OFB’s functioning and wellbeing, and their propensity to adhere to the rules and regulations rather than the outcomes, has made the organisation risk-averse with little incentive to think out of the box. Further, OFB’s location far away from Delhi and frequent change of its leadership have not been helpful. Suffice to mention that in the past 10 years the OFB has seen as many as 15 chairmen. This is in stark contrast to the relatively stable minimum tenure of two years granted to the heads of the central public sector enterprises.

Burdened with a constrained environment, the OFB has also done very little to improve its performance that can match the organisation’s rich history and its strong manpower base of over 82,000. Today, it can hardly boast of any worthwhile product of its own as nearly 75-80 per cent of its production comes from technology developed outside the country. The lack of focus on R&D coupled with delayed execution of orders, low labour productivity, and meagre exports have frustrated its key stakeholders, especially the army which accounts for nearly 80 per cent of its supplies. The army is also concerned about the poor quality of the OFB products. The Comptroller and Auditor General of India (CAG) had once observed that some of the OFB products were passed on to the army with defects which were visible to the naked eyes!1 Being frustrated with its repeated performance shortfalls, the MoD has over the years moved away from the OFB products. 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 OFB has over the years lost its pole position in the Indian defence production. The private sector companies, having defence industrial licenses, are in fact producing more than 41 OFs put together. The rapid growth of the private sector, which is likely to be accelerated further given the wide range of reforms undertaken by the government under the Make in India initiative, will further push the OFB to the margins unless drastic reforms are undertaken at the earliest.

The corporatisation of OFB was first suggested by the Nair Committee constituted by the government in 2000. The Kelkar Committee (2005) too had made a strong pitch for the corporatisation of the OFB under a single corporate entity. However, the successive governments lacked the political will and/or courage until the Modi Government finally decided to bite the bullet and implement this vital piece of reform measure considered critical to India’s overall defence preparedness as well as self-reliance.

The corporatisation of the OFB will turn it into a Defence Public Sector Undertaking (DPSU) under the administrative control of the Department of Defence Production (DDP) of the MoD. This is far from privatising the organisation as some would seem to 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; and subject to broad guidelines issued by the government, it can also make its own financial/investment plans, form joint ventures/subsidiaries and articulate R&D roadmap without much interference from external agencies.

More importantly, as a corporate entity with a stable leadership, the OFB will be in a much better position to respond to the market dynamics and face the competition effectively. With a production of over Rs. 12,800 crores, the corporatised OFB may also subsequently qualify for the ‘Navratna’ status which will provide it with even greater flexibility in financial decision making. This is only way it can reclaim its position as a leading force in India’s defence production sector.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

• 1. “Performance Audit of Ammunition Management in Army”, Report No. 19 of 2015, Comptroller and Auditor General of India, p. 31.