Creeping privatisation

Print edition : September 29, 2017

A BMP armoured troop carrier at the ordinance factory in Medak, Telangana. Photo: RAVI SHARMA

Engines for T-72 and T-90 tanks under production at the Engine Factory in Avadi, Chennai. Photo: RAVI SHARMA

A variant of the BMP armoured troop carrier under manufacture at the Ordinance Factory, Medak. Photo: RAVI SHARMA

The Narendra Modi government is keen to break the monopoly of the Indian ordnance factories, which are viewed by defence pundits as white elephants that must be restructured to keep pace with changing technology. But OFB officials and employees’ unions seek a level playing field to perform better.

SUPPLYING the Haubits FH77 (Bofors) artillery guns for the Kargil war against Pakistan in 1999, rushing engines for the T-90 tanks during the Indian Army’s “surgical strikes” inside Pakistan-occupied Kashmir in 2016, ramping up production of armoured personnel carriers and dispatching them to the Indian Army’s Eastern Sector during the recent standoff with China on the Doklam plateau, even bullet-proofing the offices of more than one Chief Minister of Andhra Pradesh. The Indian Ordnance Factories organisation, a group of 41 ordnance factories that function under the Ordnance Factory Board (OFB), Kolkata, has, in its history dating back to 1775, assisted both in the march of the British empire in India and in the wars fought by independent India, delivering, on more occasions than one, at short notice. By far the oldest government organisation, 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, in 1775. But being the sole supplier of ordnance to the Army and a crucial element in the country’s war efforts can be akin to tiptoeing through a minefield, a daunting responsibility even for an organisation that has had a monopoly over catering to the Army’s needs—from berets and boots and parachutes to assault rifles, howitzers and battle tanks. Operating under the aegis of the Department of Defence Production in the Ministry of Defence, the 41 ordnance 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”, according to the OFB website.

The ordnance factories’ numero uno status as far as supplies to the Army was concerned has been the accepted norm. But to many defence pundits, these factories are a labyrinth, a white elephant that must be broken up, restructured and hived off.

In July, Lieutenant General Sarath Chand, the Vice Chief of the Army Staff, set the cat among the pigeons when, rather out of character and throwing “official correctness” to the winds, he said that Indian ordnance factories had not only failed to keep pace with changing technology but also did not have the capability to absorb it in the event of a transfer of technology, and “in some cases they had even failed to assemble products that had been imported”. In short, according to the three-star general, the ordnance factories were “an unsuccessful method of supporting [India’s] defence requirements”.

Speaking at AMICON 2017, a conference organised by the Army and the Confederation of Indian Industry (CII), he lamented whether the below-par functioning of ordnance factories was because of the assured orders they had since “there was no competition whatsoever” or because of the lack of accountability. The Vice Chief openly stated what many in the upper echelons of the armed forces had been saying privately for years, that the ordnance factories supplied substandard and overpriced equipment, were unable to support a product, and suffered grossly from time and cost overruns. Nothing can be more glaring than the numerous criticisms against the battle tank Arjun and the assault rifle INSAS (Indian New Small Arms System). Bent barrel, inaccurate firing, chamber burnt, failures in high altitude, the grouses against INSAS are many. The criticism Arjun faces is that its heaviness affects its manoeuvrability, endurance and speed, and makes moving it over bridges a logistic nightmare. The Army is reluctant to place repeat orders for Arjun after receiving the initial 124 tanks manufactured by the Heavy Vehicles Factory (HVF) at Avadi in Chennai between 2004 and 2016. A senior officer said: “Deep into enemy territory and your equipment fails. That can be a disaster.”

Flaws and delays

Explained Lt Gen. V.A. Bhat, who retired as the Director General of Quality Assurance (DGQA): “There is a mismatch between what the Army wants and what the OFB can produce. If the Army gives the ordnance factories a GSQR [general staff qualitative requirement] they are unable to meet even 98 per cent accuracy. Both the raw material and the manufacturing process [machining, surfacing, etc.,] are substandard. There are also huge delays in placing orders on vendors. For example, the Army is not happy with the indigenously designed and produced INSAS rifle. The management cannot do much since labour laws are welfare oriented.” A Comptroller and Auditor General (CAG) of India report in July criticised the OFB for supplying “inadequate quality of ammunition to the Army since March 2013” and for the “shortfall in meeting the production target set by OFB [itself]”. The report stated that despite an earlier high-level report (in 2015) on “ammunition management in the Army” highlighting the concerns about the quality and volume of supplies from the ordnance factories, no significant improvements had taken place. But it is also a moot point that the “majority of the procurement cases from other than OFB [sources], which were initiated by the Army headquarters during 2009-13, were pending as of January 2017”.

Modi’s doctrine

The Vice Chief’s public diatribe was also probably in line with the thinking in the corridors of South Block, which houses the office of the Defence Ministry. In February, largely in keeping with the Narendra Modi government’s official doctrine to usher in privatisation or hive off public assets in every conceivable entity, a letter went from the Prime Minister’s Office to the Secretary (Defence Production) asking all ordnance factories to “provide a complete listing of products manufactured, along with a photo description of each product, number of items... produced and their value”, and also lists of plant and machinery and, most pointedly, the land held by each of the 41 factories.

Ordnance factories are in possession of around 60,000 acres (24,281 hectares) out of the 17.3 lakh acres (seven lakh hectares) that comes under the nomenclature “defence land”, with the most valuable OFB parcels being in Kolkata, Pune, Jabalpur, Kanpur, Medak, Avadi and Dehradun. Further indications of the Modi government’s line of thinking—to break the monopoly of the ordnance factories—came in April, when the private sector was invited to participate in tenders to supply nine types of ammunition for tanks and howitzers, hitherto a preserve of the ordnance factories. On April 27, the Ministry issued a circular listing 143 items that could be sourced from the trade (read private sector). These items were to be categorised as non-core, and the armed forces would be allowed to buy them from the open market. Of the items, 48 are troop comfort articles such as blankets, socks, boots and rain capes, while 39 fall under the weapons category and include 12 types of ammunition boxes, seven types of empty shells, three types of bombs, two types of binoculars and three types of vehicles, including the Stallion MK-IV truck.

While declaring the 39 items “non-core”, the Ministry’s circular of April 27 stated: “These can be sourced from the trade.... The Army can procure them without a no-objection certificate [NOC] from the OFB.” This was a sharp departure from the prevalent norm wherein the Army was required to get an NOC to procure these items from sources other than the ordnance factories. The circular further indicated that the Ministry could “identify non-core activities [of the ordnance factories] that can be either closed down or put on the public-private partnership (PPP) model for optimal use of the OFB’s vast infrastructure and skilled manpower”. In June, the Ministry proposed that another 39 items, designated as non-core, be outsourced in a phased manner. These include Army logo jackets, man dropping and supply dropping parachutes, and extreme climate clothing and tents (Arctic), to name a few.

Unions protest

These decisions have naturally not gone down well with defence employees’ unions. According to C. Srikumar, secretary of the All India Defence Employees Federation (AIDEF), the largest federation of trade unions of defence civilian employees, “the government’s game plan is to dismantle the ordnance factories”. He said: “The decision to completely outsource these items is going to affect 25 ordnance factories and more than 20,000 employees. The former Defence Minister Manohar Parrikar had given the OFB a turnover target of Rs.20,000 crore by the end of 2017. The OFB was making good progress with a turnover of over Rs.15,000 crore in 2016-17. But this categorisation of 143 items as non-core will impact the OFB by around Rs.3,500 crore. All these decisions are taken to encourage private corporates in the name of ‘Make in India’. Making the existing state-owned defence industries sick and redundant and bringing in their place the private corporate sector, whose sole intention is profit, is against the security interests of the country. [State-owned] defence industries cannot be treated as commercial entities.”

Srikumar further said: “The fact remains that the Army takes its own time to decide its future requirements/equipment because of its own problems. The Army wanted an assault rifle to replace the 5.56 mm INSAS rifle. Accordingly, the ordnance factories in Tiruchi [Tamil Nadu] and Ishapur [near Kolkata] developed an assault rifle in the 5.56 version. After numerous trials, lasting more than two years, the Army decided that it wanted an assault rifle in the 7.62 mm × 51 mm mode. [The Indian Army has decided to go back to the lethal power of the 7.62 mm bore instead of the 5.56 mm it had opted for earlier.] And a global tender was floated. The OFB has developed the 7.62 version, and after a lot of persuasion, the Army will hopefully begin its first round of user trials. This is just one example. There is no delay on the part of the OFB in supplying items to the Army. Delays take place only in identifying standard and reliable vendors for uninterrupted supply of raw materials and components.”

Defence officers also agree that the Army keeps changing its GSQRs. On the INSAS, the Army wanted a switch from a sheet metal to a machine-forged body and from a hinged cover to a sliding cover, thereby necessitating drastic changes in the design of the rifle’s body.

Now with the Army issuing a request for proposal, there is no guarantee that the order for around 1.85 lakh assault rifles will go to the ordnance factories. Punj Lloyd Raksha Systems (PLR), a joint venture between Israel Weapon Industries (IWI) and Punj Lloyd (India’s first small arms manufacturing venture in the private sector), is offering the Israeli Tavor, made by IWI. Tavor is already in use by the Indian Army’s specialised units and sets the stage for Israel to capture the small arms market in India.

‘Give more autonomy’

This is what angers officials in the OFB. Said a general manager: “In terms of procedures, give us a level playing field with the private sector. The Ministry of Defence gives the private sector 10-year stable projections in the request for proposal for ammunition, but the OFB has been denied such a projection. How can you run a business with too many controls and checks from the Ministry? Give us the freedom to choose our partners from the trade. We are too procedure-oriented and monitored by too many super structures [agencies]—the Central Bureau of Investigation [CBI], the Central Vigilance Commission [CVC], the DGQA—and constrained by design IPR [intellectual property rights] issues.

“The OFB still works as a department of the government. Give it more autonomy and at the same time make it more accountable in the manner of the Railway Board, the Indian Space Research Organisation or the Department of Atomic Energy.

“The government is ready to consider requests from the private sector for tax breaks. The same has not been given to the OFB. The Defence Ministry has stalled several OFB projects in the name of Make in India. Can the armed forces be left to the mercy of private corporate houses and multinational corporations for their strategic requirements?”

And it is not as if the private sector does not delay supply. The CAG report on the Army Base Workshops (Report No 36 of 2016) points out the failure of a private sector entity in supplying the ordered items, which were subsequently supplied by ordnance factories.

Srikumar denies that the items are overpriced. “The demand in military acquisitions is generated by the government. The price is decided by the government. The OFB works on a no-profit no-loss basis to ensure war insurance. The volume of T-90 tanks manufactured in Russia is far greater than those made in India. The price of any item is related to the volume. Give the OFB the same volumes and we can match the price of imports. Price is not the sole reason, as any monopoly supplier tries to make unholy profits from the life supply of spares. Troop comfort items such as uniforms, blankets, boots and jerseys may be costlier than those available in the trade. But if you want quality products you have to pay. In the name of cost, the Army procured many of these items at a cheaper rate from many private sector firms. In many instances, the Army had to return to the ordnance factories since soldiers were unhappy with the quality of the products supplied by private players. Ordnance factories have stringent quality control systems in place and all raw materials and components are subjected to different types of testing in the NABL [National Accreditation Board for Testing and Calibration] accredited labs before the items are sent for production.”

An officer at the HVF said: “It is a misnomer that the OFB is loss making. Owned by the government and created for national security, the OFB does not take commercial considerations for any decisions in manufacture. Ordnance factories are not meant to make profits. The price the customer pays is decided mutually between the user and the producer. Moreover, the need for war reserves, idle investment to take care of surge production, social and welfare schemes, residential colonies, hospitals, schools, other statutory and non-statutory obligations, and the image of the government as an ideal employer are unavoidable factors. Further, the ordnance factories face orders that are of an uneconomical quantity.”

Officials at ordnance factories also lamented about sporadic orders and a lack of repetitive orders. One official said: “In 2008, Ordnance Factory, Medak, was asked to manufacture an AAD [armoured amphibious dozer]. We made one and are still waiting for an order. Similarly, an NBCRV [nuclear biological and chemical reconnaissance vehicle] was designed in 2007. We are still awaiting an order. That the private sector can supply at cheaper costs is a myth. One of India’s leading industrial houses is attempting to sell to the Army a wheeled armoured personnel carrier. At 22.5 tonnes, it is too heavy to be conveniently air-lifted, and the cost at Rs.32 crore is way above the international cost of similar vehicles that are around Rs.15 crore. Our ordnance factory manufactures tracked armoured troop carriers under Rs.6 crore.”

Said Bharat Singh, Senior General Manager at Ordnance Factory, Medak: “We need to strive for a strong industrial defence base. But you cannot build a defence manufacturing industry on borrowed technology. We are on a par with others in terms of infrastructure and machinery and even for the manufacture of defence products. But the items are not our design. So we don’t understand it, we are not authorised to inspect or improve it, are incapable of giving suggestions even, and hence are unable to make enhancements, leave alone the next generation of the product. There is a clear gap between design R&D and manufacturing, and we continue to be capable of only licence production. The DRDO [Defence Research and Development Organisation] has not given the ordnance factories any new designs after the Arjun tank. For decades, we followed the dictum that the DRDO will design, the OFB will produce, the DGQA will inspect, defence finance and defence accounts will exercise control. The manual has not changed since the British set up the defence industry. No defence industry can work without R&D. Since 2006, we have been given powers to do R&D and our products are giving revenues. Dhanush howitzer, L-70 gun upgrade, pump action gun, mine protection vehicle and the BMP-2 [armoured troop carrier] upgrade. For the BMP 2 upgrade, the Army tried to import the technology from the Russian OEM for 13 years. But could not. We developed the technology in two years and in July, the Defence Acquisition Council cleared an order for 693 BMP 2 upgrades worth Rs.2,400 crore. We needed a design base. The BMP 2 offered us a good platform and we had the design documents. We need to do reverse engineering.”

Bharat Singh said: “Take the example of tank design and development. There are around 15 crucial technologies which make a difference. The armament, the weapon systems, the sighting systems. But no one is working to develop an indigenous tank. Everybody wants to be an integrator. We in India are trying to develop front-end technologies without engine design capabilities or the expertise.”

The ordnance factory at Medak has started the path-breaking system of barcoding every item it produces. A reading of the barcode will divulge the complete history of the product; when, where and year of manufacture and all sources of suppliers. The Medak factory is also developing a Futuristic Infantry Combat Vehicle (FICV).

The FICV’s capability matches that of BMP 4. India is, therefore, skipping the BMP 3 version, which Russia had offered to sell. The FICV’s designs have been frozen. It is in the soft model stage, with production expected to start in late 2019. It will have increased mobility and firepower, night capability and better protection levels.

Arjun tank

Deflecting criticism away from the Arjun tank, an official at the HVF said that for a better product, it was important that the user be involved right from the design stage. “We are hoping the Army will place an order for Arjun Mk2: initial trials have been completed and it is on the verge of going into limited series production. The Army has asked for a demonstration of missile firing, which we hope to undertake in 2017. Arjun Mk2 is as accurate and as manoeuvrable as the Russian designed T-90 [India has manufactured more than 700 T-90s]. Mk2 will also have automatic target locating, tracking and destruction capabilities,” said an officer. “The Army’s GSQRs are many times too optimistic, so design agencies find it difficult to meet them. Most of the time the user and the integrator are not on the same page. The user has to treat the manufacturer as a partner, not a vendor.”

At the Engine Factory, Avadi, officers are aghast at the fact that while the Army screams about delays in the delivery of engines for the battle tanks in their arsenal, it does not understand the modalities of the manufacturing process. Explained an official: “The Army’s orders are inconsistent. Take the case of the V-46 engine manufactured for the T-72 battle tank. In 2007, the Army wanted 111 engines, in 2008 it wanted 170, in 2009 it wanted 317 and in 2010, 71. No orders were placed in 2011 and 2012. In 2013, the Army wanted 418 and in 2016, it ordered 257. There is no continuity in the requirement and planning. How do we plan? It takes six months just to get quotations from the Russian OEM for spares. We need to order and then they will supply the spares. That is why it takes two years to deliver an engine. At meetings in the Ministry, Army officers do not address issues such as better planning; rather, they railroad the agenda using the emotional line that troops are at risk and are being killed. All we are saying is place the indent in time and with advance planning, we will deliver.”

Many officers expressed the hope that creation of an Army Design Bureau, akin to the Naval Design Bureau, will help remove the disconnect between the user and the manufacturer.

It is yet unclear what the government wants to do with its ordnance factories. Official sources disclosed that four ordnance factories—the Rifle Factory in Ishapore, the Small Arms Factory in Kanpur, the Ordnance Factory Project in Korwa and the Ordnance Factory in Tiruchi have been identified as possible choices for PPP ventures. Corporatisation of the OFB by turning the 41 factories into a conglomerate along the lines of other defence public sector undertakings, such as Hindustan Aeronautics Ltd, has been suggested as a possible panacea by at least two Defence Ministry-appointed committees, one headed by former Revenue Secretary Vijay Kelkar in 2005 and another headed by Vice Admiral Raman Puri in 2016. But the unions, which control the 88,000 employees in the ordnance factories, are dead against any form of corporatisation.

Said Srikumar: “We are against corporatisation. Corporatisation is just a step away from privatisation. Five successive Defence Ministers have said that there will not be any corporatisation of the OFB.”

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