Ordnance factories

Public sector ordnance factories: Fighting for survival

Print edition : September 27, 2019

A protest rally in Jabalpur on August 17 against the Centre’s plan to corporatise ordnance factories. Photo: PTI

Home Minister Rajnath Singh (right) with a 7.62 sniper rifle at the Ordnance Factories Board stall on September 6, 2018, at the Defence and Homeland Security Expo in New Delhi, which brought together over 200 Indian and multinational companies. Photo: Sandeep Saxena

At an exhibition held as part of Ordnance Factories Day celebrations in Tiruchi, Tamil Nadu, in 2018. Photo: M. Moorthy

The government is keen on corporatising the ordnance factories, but unions are against the proposal, which they believe defeats the very purpose of this crucial arm of Indian defence.

The importance of the Indian Ordnance Factories, under the state-owned Ordnance Factory Board (OFB), to the country’s war preparedness cannot be overstated. However, when talks of hostilities ebb away, the functioning and very existence of these factories get seriously questioned.

Reservations about the quality of what the ordnance factories produce—from tanks, armoured vehicles and assault rifles to howitzers, ammunition and even socks—to searing questions over the extended delays in delivery schedules have been the order of the day. Several high-powered committees set up by various governments over the past two decades recommended far-reaching changes in how these factories should function, but successive Defence Ministers rejected the proposals.

The first Narendra Modi government reclassified 275 products manufactured by these factories as “non-core” items and allowed the military to procure them from the open (read private) market, thereby forcing the Army to cut down purchases from ordnance factories by almost 50 per cent. A weak order book, with many products reaching the end of their product line, was also a bugbear. So, it comes as no surprise that the second Modi government, with its penchant for opening up the defence sector to private industry, is looking to drastically change how these factories operate (see “Creeping privatisation”, Frontline, September 29, 2017). Its intention to corporatise all 41 ordnance factories either as a merged single entity or individually to form different defence public sector undertakings (PSUs) has angered the majority of the 82,000 employees, leading to the calling of a month-long strike by the employees’ unions.

Cutting across political affiliations, the strike call has been supported by all the three recognised federations—the All India Defence Employees’ Federation (AIDEF), the Indian National Defence Workers’ Federation and the Bharatiya Pratiraksha Mazdoor Sangh, which is affiliated to the Rashtriya Swayamsewak Sangh)—and the Confederation of Defence Recognised Associations (CDRA). The general feeling is that if the government corporatises the OFB, the basic purpose of the ordnance factories will be defeated.

History of service

The 41 Indian ordnance factories function under the aegis of the OFB, Kolkata, and have a history dating back to 1775, during which they first assisted the British Empire and, after Independence, in the various wars in the last seven decades, delivering, on most occasions, at short notice.

Constituting by far the oldest organisation of the government, predating even the Indian Railways by over half a century, the Indian ordnance factories trace their origins to the British East India Company when the British authorities accepted the establishment of a Board of Ordnance at Fort William, Calcutta, marking the official beginning of army ordnance in India.

The budget of these factories was part of the Army’s budget until the early 1980s. During the 2018-19 financial year, the OFB supplied material worth Rs.10,900 crore (down from Rs.13,600 crore a year earlier) to the Army, Rs.458 crore to the Indian Navy and Rs.764 crore to the Indian Air Force. In addition, the Home Ministry bought arms and ammunition worth Rs.1,260 crore.

Operating under the Department of Defence Production (DoDP) in the Ministry of Defence, the 41 factories “form an integrated base for indigenous production of Defence hardware and equipment, with the primary objective being self-reliance in equipping the armed forces with state-of-the-art battlefield equipment”. This has been the accepted norm for decades, in theory and largely in practice too. It is puzzling why the government is tinkering with their structure. Corporatisation is not expected to succeed in an organisation whose factories were set up primarily for the creation of dedicated capacity to create war reserves and not to earn profits.

The workload primarily comes from the armed forces since the OFB cannot generate business on its own and exports are hardly developed; also, pricing of products is completely controlled by the government. Former Defence Minister Manohar Parrikar, like his predecessors George Fernandes, Pranab Mukherjee and A.K. Antony, was against corporatisation, which he believed would defeat the basic purpose of the ordnance factories. Parrikar had, in fact, proposed Mission 20K, under which the OFB’s turnover would reach Rs.20,000 crore by 2017-18. OFB officers told Frontline that to break even, the OFB needs a turnover of Rs.17,000 crore.

A member of the board said: “Creation of war reserves, which no private sector entity can maintain, and social commitments like schools, townships, hospitals, transport services, etc., and wages that are much higher than comparable industries, make sure that the normal rules of business don’t apply to ordnance factories. The government is confused and is not seeing logic. It has not even conducted a study on the survivability of the OFB. Ordnance factories cannot survive without government support. Additionally, the private sector, which is putting pressure on the government to take away defence deals from the ordnance factories and hand them over to it, should compete to produce items that the Indian armed forces import. Or develop new products. Private players are only interested in technology that is easily available in the country and easy to replicate.”

For long, the widely accepted, majoritarian view in the OFB’s biggest customer, the Army, has been that the ordnance factories are dinosaurs. This has also been the view of the Comptroller and Auditor General, the government’s auditor. Former Director General of Artillery P.R. Shankar said: “Ordnance factories reflect poor quality, are overstaffed, suffer from abysmal leadership, possess outdated knowledge and technology, are overpriced and greedy and lack the ability to modernise. And the call of strike by unions indicates the struggle of a set of people who have underperformed for seven decades and intend to continue to do so for the next seven decades. They need to understand that their strike will be seen by the nation and the armed forces as unpatriotic from two viewpoints. First, a strike by them for one month undermines the defence preparedness of the nation. Second, they are being seen to be striking for continuance of poor quality and sloppiness in the OFB, which has cost so many lives and has contributed to poor defence preparedness as it is. It is a totally anti-national act.”

Senior serving Army officers who wished to remain anonymous highlighted areas where the ordnance factories scored poorly: poor quality of manufactured goods, which forces the Army to return a large number of items for rectification; high cost of production because of the high overheads; low profitability; large inventories caused by unprofessional procurement; no penalties for shoddy delivery schedules; and a lack of flexibility in operations thanks to it being a government organisation.

Corporatisation plan

The Modi government’s argument for corporatisation or creating PSUs out of the 41 ordnance factories, wherein these entities will “operate like companies”, is that it will make them more professional and efficient, allow them to tap resources including technology from the market, give them greater flexibility and autonomy in day-to-day functioning and decision-making, increase their operational freedom, improve the combat effectiveness of the armed forces, create more jobs, reduce import dependency, hasten the export potential of manufactured equipment, and give them confidence to link up with foreign firms. A Cabinet note prepared for the corporatisation of the OFB talks of augmenting its annual business to Rs.30,000 crore in 2024-25. Curiously, there is no road map on how the ordnance factories will achieve this target.

Spelling out the government’s stand, the Joint Secretary (Land Systems), DoDP, said: “Converting the OFB into a corporation would improve efficiency and competitiveness and also achieve the objective of having more autonomy in decision-making in operational matters.”

He added: “Defence PSUs were performing well and meeting the requirements of the armed forces in an optimum manner.” He underlined the fact that several committees had stated that “the overhead costs at OFB were more than 30 per cent”.

But these views are rejected outright by the federations. Senior officer-bearers of the federations categorically stated that the ordnance factories were created “to serve the defence forces without any commercial considerations and to meet any external aggression”. They said that with this in mind, manufacturing facilities for the various products and surge/excess capacities (called war reserves) had been created. There are adequate provisions in the accounting procedures at the ordnance factories for maintaining these war reserves, according to them. Any effort to corporatise or convert these factories into PSUs would mean that they then had to operate as commercial entities, making the stocking of war reserves unviable, which would drastically hurt the country’s ability to fight a war, they said. Federation members cited the supplies from the ordnance factories during the Kargil conflict in 1999, when a substantial additional quantity of ammunition was demanded by units of the Army’s infantry, artillery and mechanised regiments to meet immediate operational requirements.

OFB’s protest

This point was raised by OFB Chairman Saurabh Kumar in a letter to the Secretary, DoDP, dated August 7 (a copy of which is with Frontline), a day after he met with members of the three federations and the CDRA and discussed the concerns raised with all the members of the OFB Board. The letter raised searing questions about the survival of the 41 factories if they were to be corporatised and attempted a pointwise analysis of the issues. On the issue of war reserves, the letter said that during Operation Vijay (the Kargil conflict) the ordnance factories were able to ramp up production of the ammunition required by the fighting forces by 50 per cent to 300 per cent and meet their urgent operational requirements only because of the “war reserves capacity being maintained in the ordnance factories”.

The letter added that “such an exigency of requirement cannot be ruled out even in the future and hence, such capacities would be required to be maintained without any commercial considerations and return on investment irrespective of the structure of the ordnance factories”.

Commenting on the Cabinet note targeting an annual business turnover of Rs.30,000 crore for the OFB, federation office-bearers said: “[T]he same target may be given to the ordnance factories in the present setup and the workforce will ensure that the above target is achieved, provided the government extends all support including salary, budget and indent for all the items, including those that were declared as non-core.”

Stating that even after corporatisation, the Rs.30,000-crore turnover target was “daunting”, Saurabh Kumar’s letter said that even if 20 per cent of the target came from exports, the remaining Rs.24,000 crore would have to essentially come from the Indian armed forces and the paramilitary forces. “As per the recent projections given by the Army (the principal and only large customer of the OFB), they are likely to place an order for Rs.10,000-11,000 crore per annum, and an additional Rs.3,500 crore can be expected from the Navy, the Air Force and the Home Ministry. Thus, as against the target of Rs.24,000 crore, only Rs.14,000 crore is visible,” it said.

The letter also pointed out that after the terrorist attacks in Mumbai in November 2008, the Army placed orders for various ammunition items in large numbers. This helped the Army build adequate stocks. Since sufficient stocks are now available, demand from the Army has reduced.

As the production lines of the ordnance factories are designed for the production of military items, diversification into non-military products will take time. Federation office-bearers also accused the Modi government of pushing for corporatisation without consulting them, something they said was a breach of the assurances given to them by successive governments that corporatisation would not take place without consultations with the unions.

Regarding criticism that India was still the world’s second-largest importer of defence equipment despite such large infrastructure at the ordnance factories, federation members pointed out that the government had made huge commitments to imports: recent acquisitions pertained to fighter aircraft, multi-role helicopters, warships, missiles and electronic warfare systems, which are not in the OFB’s production domain.

Also, the only defence equipment within the OFB’s production capability that the Army has procured from overseas in recent years is the M777 howitzer. This happened when the OFB’s Dhanush gun was undergoing user trials. Deliveries to the Army have already started.

Committee recommendations

A number of committees, such as the T.K.A. Nair Committee in 2000, the Vijay Kelkar Committee in 2004 and the Raman Puri Committee in 2015, recommended restructuring of the OFB, but successive governments rejected the proposals. Nair suggested that the OFB be converted into Ordnance Factory Corporation. Kelkar, citing the continuous challenges faced by the ordnance factories against obsolescence, felt that the OFB could be corporatised the way Bharat Sanchar Nigam Ltd (BSNL) was restructured. Puri said that the OFB should be broken up into three or four defence PSUs.

In 2017, a committee of experts headed by D.B. Shekatkar recommended the corporatisation of the OFB in a phased manner and the conducting of a performance audit on all non-combat organisations under the Ministry of Defence, including the ordnance factories.

It identified 14 ordnance factories, including the Vehicle Factory Jabalpur and the Ordnance Factory Kanpur, that could be “opened up”.

Citing the case of the imported Tatra trucks, the committee said that the OFB and the private sector should come together to produce such trucks in India and export them as well. A tie-up with the private sector would also improve efficiency and the quality of products, Shekatkar said.

Even those who support the government’s stand say that the ordnance factories, which continue to work as “subordinate” or “attached” offices of the Defence Ministry, should be allowed to work as an industry.

Speaking to Frontline, an officer of the OFB said that recommendations of various committees to improve the efficiency of the OFB, including more flexibility to take decisions, merging of finance with production and making it equally responsible for targets, were only partly implemented by various governments.

He added: “By concept, the OFB has always been a production agency where the government, after issuing an RFP [request for proposal], would select technology and hand it over to us to produce. Inspection of products is in the hands of the Directorate General of Quality Assurance, who is also the authority holding sealed particulars. Despite the user’s changing expectations we have no freedom to upgrade any technology, and until 2006 we could not develop any new products. Post-2006, the OFB was given the flexibility of R&D, and we developed the Dhanush, the Excalibur assault rifle, the BMP upgrade, etc. If we corporatise, the basic purpose of the ordnance factories will get defeated, and if the government doesn’t give us sufficient workload, it will mean erosion of our working capital. Naturally the factories will die.” C. Srikumar, general secretary of AIDEF, said: “What we fear is that this government wants to break up and sell off the ordnance factories.”

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