Why Corporatisation Of Ordnance Factory Board (OFB) Is Inescapable Strategic Need of India
Strategic Environment
India, as an independent country inherited some grave security challenges, since its independence in the form of unsettled borders with China and Pakistan and relatively unstable neighbourhood, which necessitated a manpower intensive large standing military. The threat of two front war is no more a subject of military education, but a real one, with collusion of both the adversaries. It necessitates indigenous capacity building capability of its military, to be functioning at the utmost efficiency level so that the country can maintain the level of military it needs, along with necessary military resources it requires.
With recent Chinese aggressive posturing in Ladakh, occupation of areas which were not supposed to be occupied as per CBMs, the urgency of capacity building and the hollowness in military hardware has made the decision makers rethink their strategies for defence manufacturing, as the slippages indicate what should have been done decades earlier and what needs to be expedited. India was the second-largest arms importer in the world over the past five years, which is not a very good tag to carry, if it has to meet the challenges of two front war. If the import figures from 1950 to 2017 are analysed, India has imported $119.89 billion worth of arms; by far the largest globally, and double than that of Saudi Arabia.
There is, therefore, a need to be self-reliant for which India needs an efficient defence manufacturing set up. Along with many key structural reforms in defence manufacturing, Corporatisation of OFBs announced by the Finance Minister on 16 May 2020 was one such important and positive step.
Strategic Needs
For a developing country like India, the capability of the nation to bear the financial cost of war is a major factor in determining its strategic choices, responses as well as escalation dynamics, especially when confronted with an adversary like China, having much stronger economic muscle. Needless to say that besides territorial integrity and sovereignty, it also impacts sovereign choices in terms of economic decoupling, digital and commercial independence and data sovereignty. Under these circumstances the nation can ill afford the loath of underperforming ordnance factories, hiding their inefficiencies under the garb of being defence establishments, firewalled with protectionism to avoid accountability.
In analysing the responses against China, Indian dependency of military hardware on imports, especially approximately 60- 65 per cent of it being of Russian origin was a subject of public debate, in light of economic dependency of Russia over China. While Russia did not back off from its commitments, but a possible vulnerability of the supply chain of spares, did give India a resounding lesson to redouble its efforts for self-reliance in defence manufacturing and improving efficiency of the existing factories. It is fair to assume that financial allocation in a developing country like India will never be adequate to buy state of the art equipment due to competing priorities; hence it is mandatory that the revenue expenses be reduced by efficiently managing our production lines, which makes Corporatisation of OFBs a strategic inescapable.
What is Ailing in OFBs?
Archaic Organisational Structure: The OFB with its 41 Factories, 13 Development centres and nine Institutes of learning is expected to be a national strategic asset, not only to meet the national military hardware requirement, but also to export it, thus contributing to overall Comprehensive National Power. The OFB, currently, is wholly owned and funded by the government with allocations made out of the meagre defence budget. It is a subordinate office of the MoD.
It is managed by IOFS officers, headed by Chairman (normally senior most) to occupy it as a transient berth at pre-retirement stage (as the last five years of OFB saw seven Chairmen, with no chairman staying even for one full year, with hardly any experience of managing production lines). Supervisory costs account for 65 % as against Industry standards of 30 % of the total labour cost of the OFB and account for 42 % of its overhead costs. Being directly under MoD, issues pertaining to professional oversight, lack of functional and financial autonomy, result in bureaucratic delays and cover ups. The ailing management with no worthwhile continuity and sound strategic directions certainly needs a rejig.
Production Pitfalls, Leading to Hollowness:
As per the 2019 CAG Report, from 2013 to now, the production shortfalls every year has been more than 50 per cent. Importantly, the shortfall in supply of critical ammunition is a major concern due to slippages in production, despite joint target setting with services.
Between April 2014 and April 2019, Rs. 658.58 crore worth of products were declared unserviceable before their shelf life was over. It is estimated that due to loss to exchequer on account of poor quality control and consequent pre disposal of ammunition due to accidents, the amount would have been adequate to purchase 100 latest artillery guns for India. Between 2014 and 2019, there have been 403 major accidents mostly related to poor quality of armaments and ammunition, leading to fatal/non-fatal casualties.
Exorbitant Production Cost: OFB claims to operate on ‘No Profit No Loss’ basis and products supplied to captive consumers at ‘actual cost of production’. The reality is that its overheads, especially in the non-production expenditure makes the products extremely expensive and OFB can get away with it, because captive consumers like Army have no choice but to buy it, due to government policies.
Just to elucidate, an OG Jersey for soldiers, which costs Rs 750 per piece ex trade is priced at Rs 1950 per piece by OFB. The revenue budget of the Armed Forces, which is already shrunk, is being robbed off, right under the supervision of MoD staff. Same is the case with many other products, the list of which is unending, as OFB enjoys monopoly over products required by the armed forces.
Inadequate accountability and protectionism has led to minimal innovation, technology upgrade and hardly any incentive to improve quality and cost-efficiency. The nation cannot bear it endlessly.
Inefficiency: The sub optimal efficiency of this potential strategic asset is one of the major contributing factors to the hollowness threatening the ammunition and armament holdings of the Indian Army. It’s poor efficiency was well protected by having captive major buyers in the form of the Indian Armed Forces (Army top buyer with 80 percent inventory), along with some supplies to CAPF and exports/civil trade, and the protective shield of Indian bureaucracy managing it, irrespective of shortfalls in quality, delayed supplies, costly products and indifference to complaints. It is also a matter of concern that certain countries have refused to accept ordnance factory manufactured ammunition and equipment offered against Defence Lines of Credit, due to concerns regarding quality of output, procedures in the factories and the inefficient post sale service.
Apprehensions against Corporatisation of OFB
The biggest concerns of the OFB employees is that ‘Corporatisation’ is the first step towards ‘Privatisation’ and is likely to result in layoffs and job cuts. The trade unions associated with the Ordnance Factories, representing over 70,000 employees have now once again called for an indefinite strike on October 12, 2020 to protest against the government plans to corporatize OFB.
The call for a strike by the trade unions seemingly with IOFS group “A” officers at the helm of affairs, at a time when the Indian Armed Forces are in a state of high alert on the Line of Actual Control (LAC), is highly condemnable and appears to be an exercise for turf protection, giving a political spin to prevent a progressive action.
It is despite the fact that the Government has made it very clear that it is not thinking of ‘Privatisation’ in the near future and OFB will function akin to the various PSUs in the country post Corporatisation.
The other argument against corporatisation of OFB commonly given is that it will not be commercially viable, since there are no fixed scales and periodicity of demands by the armed forces, irregular timelines for placing orders, uneconomical order quantity, and life cycle support required for 30-40 years after the introduction of equipment. Needless to say that other PSUs like IOC are managing it effectively and if OFB taps foreign markets and broadens consumer base, it can manage like many other DPSUs. Options for collaboration with other international manufacturers having stable demand will also help.
The government has rightly opened the defence sector to the private industry, allowing the armed forces to procure a few comparatively better products at competitive rates. Accordingly, 275 items manufactured by Ordnance Factories were declared as Non-Core Items in April 2017 by the government, another 93 in November 2017 and 39 in January 2018. In my opinion no major power in the world can modernise without private players in defence manufacturing, because no government can afford it, all by itself. Public private partnership, shared Research and Development, Government Owned Commercially Operated (GOCO) model, facilitating collaborations by increasing FDI limit from 49 to 74 percent and transfer of technology are some of the positive steps towards self-reliance in defence manufacturing.
How will Corporatisation of OFB Help?
Restructuring Apex Organisation: One of the major problem of OFB has been its limited autonomy, due to it being an attached office of MoD, vis-a-vis the DPSUs. The Corporatisation of OFB will put it at par with other DPSUs managed by its own board of directors with broad guidelines from the government, thereby providing greater autonomy.
The government has envisioned growth of OFB post corporatisation expecting it to raise its turnover to Rs 30,000 crore by 2024-25 annually against exiting Rs 12,000 crore, and has set up a high level panel to work out a roadmap to achieve the same.
The Government can consider including professionals from the industry, in the Board of Directors, along with some appointments from Military like serving Master General of Ordnance (MGO) who are stakeholders. This will ensure a greater professionalism, accountability and responsibility in the functioning of the OFB.
Collaborations: As per the released policies, post corporatisation, OFB will be allowed to forge partnerships with the private sector as per the MoD’s approved policy and will continue to receive orders from the country’s security forces. It will also be granted a special preference of 15% above L1 price for “Make” and “Buy and Make” category products. The Government will support OFB in case of losses, by way of loan for 30% of the total shortfall and by way of equity investment for balance 70% of the amount. The working capital for the next five years will be provided by the Department of Defence Production (DDP) as a one-time corpus fund. Capital investment for ongoing and sanctioned projects will also be provided.
Flexibility in Technology Acquisition: OFB will be free to form strategic alliances with Indian and overseas companies to boost innovation and develop new products. The factories, if modernised and managed properly will be able to unlock its true potential and be the key player in ‘Make in India’ project.
Financial Independence and Costing: OFB may no longer be dependent on government for funding as it will be able to generate funds through other means like being listed on stock exchange similar to other DPSUs. This will enable it to achieve financial independence and the money can be efficiently used for modernisation, R&D and boost innovation. It is envisaged that corporatisation will lead to reduced and competitive pricing, since OFB will be competing with private players in defence industry, albeit with some advantages, already spelt out.
Increased Productivity: The idle or under-utilised capacities of the factories will be better utilised post corporatisation, to generate surplus production over and above the requirement of armed forces, which can be exported to generate better revenues. Armed forces being the biggest customer of ordnance factories are likely to benefit immensely from corporatisation with better pricing and improved product leading to an improved equipment state and better customer satisfaction.
Surge Capacity in Demand during War. OFBs have some idle capacity as a war reserve, to cater for surge in demand during war. In formulating laws for corporatisation, sustained logistic support to the forces during war will have to be ensured. With widened consumer base, it is possible to divert effort to meet logistics demand of Forces by prioritising it over other demands. OFB will need to work at its maximum capacity and look for exports of its surplus capacities during peace time, which will necessitate it to become more efficient and produce world class quality to survive in this competitive world.
Reforms Are Strategic Inescapable Necessity
Considering the strategic environment and needs of the country at a time when Sino-Pakistan nexus poses a potential two front engagement scenario, the reforms in the defence sector are an inescapable necessity, which should have commenced few decades earlier. The current strategic environment demands immediate implementation of all such reforms including corporatisation of OFB, conceived, deliberated and announced, as national emergent necessity to become self-reliant in defence manufacturing.
Corporatisation of OFB is likely to transform ordnance factories into a modernised, state of the art facility with flexible and better decision making in its functioning. This move is likely to make them more competitive and self-reliant in production of arms and ammunition and convert it to a profit earning organisation within next few years. It is understandable that implementing a change of this magnitude will have political connotations and efforts for turf protection on the part of few, who were comfortable with status quo, enjoying protectionist status, but it will have to be implemented as a national emergency to narrow down yawning gap in capacity building of Indian military vis a vis its adversaries.
(The views expressed are personal views of the author, who retains the copy right). The author can be reached at Facebook, LinkedIn, and Google+ as Shashi Asthana, @asthana_shashi on twitter
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