Delivering the fourth tranche of the economic package in wake of COVID-19 in a press briefing on May 16, Finance Minister Nirmala Sitharaman announced three major decision related to defence; corporatization of the Ordnance Factory Board (OFB), hiking Foreign Direct Investment in defence and banning defence imports where indigenous capability exists. It was clarified that corporatization of the OFB does not imply privatization. The OFB comprises 41 Ordnance factories, nine training institutes, three Regional Marketing centres and four Regional Controllers of Safety. It is subordinate to the Department of Defence Production (DoDP) under the Ministry of Defence (MoD). OFB has 82,000 employees, holds over 60,000 acres land. More than 80% orders for OFB come from the Army though OFB barely meets 50% of Army requirements.
OFB’s archaic structure is not conducive to productivity. Every decision from modernizing plant and machinery to entering joint ventures is subject to regulations and red tape, reducing leverage and flexibility needed by any dynamic production unit. In addition is the lack of technical and managerial flexibility, making competition with private industry difficult. There is little scope for innovation and modernizing within the existing structure. Accountability and the lackadaisical work culture leave much to desire.
An example of OFB functioning can be seen from media reports of December 2019 citing a CAG report that states: shortfalls in production in eight types of fuzes with material and quality problems; deficiencies from 32-74% in seven types of ammunition and 41-94% in five types of fuzes; ammunitions worth ?403.27 crore lying unusable with Army due non-availability fuzes; rules and procedures stipulated in Procurement Manual of Ordnance Factories not followed, and; same firm being developer and maintenance agency of the portal, database of defence organization may be at risk of misuse by a private entity.
The high cost of OFB products is due to high overhead charges and there is minimal innovation and technology development. In past three government committees had suggested corporatizing OFB: TKA Nair Committee (2000) recommended converting OFB to Ordnance Factory Corporation Limited; Vijay Kelkar Committee (200$0 recommended corporatization with ‘Nav Ratna’ status, like BSNL; and Vice Admiral Raman Puri Committee (2015) recommended corporatizing OFB and splitting it into 3-4 segments – each specializing in distinct area like weapons, ammunition and combat vehicles.
This is not the first time government has shown the resolve to corporatize the OFB. Arun Jaitley as Finance Minister made some moves towards this but faced opposition from worker unions. In August 2019, government announced the decision to corporatize OFB, following which 60,000 OFB employees struck work for a month. The strike was finally called off by the Confederation of Defence Registered Associations comprising multiple unions including the BJP-affiliated Bhartiya Pratiraksha Mazdoor Sangh (BPMS), Left Front-affiliated All India Defence Employees’ Federation (AIDEF) and Congress-affiliated Indian National Defence Workers’ Federation (INDWF).
On September 17, 2019, MoD set terms of reference for a high-level committee to address concerns raised by the workers federations. However, latter raised further apprehensions about Centre’s aim behind corporatizing OFB. The federation went on another six-day strike but their main apprehension was that government wants to privatize OFB. This fear has been allayed by the Finance Minister now – no privatization but corporatization with control retained by MoD. MoD’s high-powered committee visualizes that corporatizing the OFB will increase annual turnover from the current 14,000-16,000 crore to above 30,000 crore by 2025, meeting 80% requirements of the Army. This may be somewhat ambitious considering OFB barely meets 50% of Army requirements at present.
Corporatizing the OFB is essential for increasing exports, attaining self-reliance plus adding advanced technologies and innovations. The challenge will be in what time frame the change is affected and how holistic it is. Latter is important since there could be forces that by design or default slow down indigenization. In 1995, a Review Committee headed by Dr Abdul Kalam directed that India must meet 70% of its defence needs indigenously by 2014. But we did not move an inch as was discovered 19 years later in 2014. Progress beyond 2014 too has been largely sporadic. Media reports of February 2028 cited a presentation given by MoS (Defence) Subhash Bhamre to PM Modi that acquisitions and Make in India was floundering due to multiple and diffuse structures with no single-point accountability, duplication of processes, avoidable redundant layers, delayed execution, no real-time monitoring and no project-based approach.
Finance Minister has also announced that private sector will be given opportunity to compete in every project and all acquisitions. Claims of a level playing field to private players were made in the past too but executed selectively only as evident from protests raised from time to time. Hopefully, this will be religiously implemented in future with fresh infusion in the defence sector announced by the Finance Minster. If OFB and DPSUs are to compete with private industry in a level playing field, all the more OFB must quickly corporatize holistically in an early time frame. Government perhaps will also permit FDI in entities of OFB, as also joint ventures as in the case of production if AK-203 assault rifles in collaboration with Russia.