Originally published on 13th January, 2021;

Ordnance Factories are the oldest and the largest government organisation run under the administrative control of the Department of Defence Production, Ministry of Defence. Dated back to 1787, as a gunpowder factory at Ishapore, today there are 41 factories, providing a wide range of arms, ammunition, clothing items, military equipment, weapon systems, armoured and infantry combat vehicles, etc. primarily for the Armed Forces. The major objectives of the Ordnance Factories, also known as Ordnance Factories Board OFB, are¹:

• To supply quality products to the armed forces
• To modernise production facilities to improve quality
• To equip themselves with technologies through Transfer of Technology (ToT) and in-house Research & Development (R&D)
• To meet customer satisfaction, and expand the consumer base.

Studies show that OFB has performed poorly in all four of these, with very little evidence of improvement.  The Kelkar Committee (2004-05) in their ‘Revitalising Defence Public Sector Undertakings and Ordnance Factories’ Report recommended the corporatisation of all OFBs under a single corporate entity. T. K. A. Nair Committee (2000), Dhirendra Singh Committee set up in 2015, and many other similar committees, in their reports, endorsed these recommendations of Corporatisation of OFBs.

Here we try to explore and build on the already existing literature that studies and evaluates the performance of the OFB with respect to these four objectives. This current study restricts the evaluation from FY 2014-15 to FY 2017-18. All the analysis further concerns this period, unless specified.

Indicators	FY 2014-15	FY 2015-16	FY 2016-17	FY 2017-18
Overhead as % of COP(cost of production)	30	30	31	33
Labor costs as % of COP	12	11	11	12
Production per employee (Rs in thousands)	1821	2059	2317	2392
R&D expenditure as % of total revenue expenditure	0.44	0.62	0.37	0.48
Stores-in-hand as a % of total inventory	47.99	50.26	51.70	51.30
Work-in-progress as a % of total inventory	31.01	30.92	31.53	31.52
Export % (of the total issues)	0.08	0.04	0.11	0.06

 

From the table above, we see that store-in-hand as a percentage of total inventory is a strikingly high value of more than 50%. The Store-in-hand essentially holds the stores procured for manufacture but not used within the last financial year by the factories. It shows an increasing trend. According to the CAG reports, this accumulation is majorly accounted for due to:

1. Cancellation or short-closure of orders due to slippages in production or quality problems
2. Midway reduction of targets leading to the stores rendered surplus
3. Over-provisioning of stores by the factories, etc.

This calls the need for an evaluation committee to analyse these problems, initiate prompt actions for the quick valuation and timely disposal of inactive, surplus, or obsolete stores. And so is the need for an active initiation to make sure timely conversion of unfinished goods into finished products, since the Work-in-Progress as a percentage of total inventory, is also at a significantly high value of more than 30%.

Evidence shows minimal innovation and technology development in the OFB. The R&D expenditure as a percentage of the total revenue expenditure has been less than 1% over the last few years. The Intellectual Property Rights (IPRs) filed before 2018 were almost zero. It is only after the launch of “Mission Raksha Gyan Shakti” with the primary focus on ‘boosting IP culture’, in the month of April 2018, that we saw a significant rise in the IPR filed, with just one in 2016-17 and none in 2017-18, to 154 in 2018-19 and 81 in 2019-20³. Clearly, the mission has been a huge success.

There have been over 400 accidents between 2014 and 2019, leading to 27 deaths, because of accidental explosions and the use of poor quality OFB-manufactured equipment and weapons. The Indian exchequer has incurred around ₹960 Crore of losses because of the same reasons during the above duration. Other countries have rejected OFB manufactured goods on account of concerns regarding the quality, procedures, and inefficient after-sales service⁴. Consequently, exports as a percentage of the total issues are close to zero.

The production targets for factories are fixed by the OFB in consultation with the Defence Forces pertaining to their requirements, after careful consideration and valuation of the production capacity of these factories. However, the factories continue to fall short of targets, with a consistent shortfall of more than 50%, as shown in the table below:

 

(in number of items)
Year	Target	Achievement	% of shortfall
2014-15	693	251	64
2015-16	580	194	67
2016-17	576	249	57
2017-18	446	220	51

The Government has been, as a result, retreating from the OFB products, for the last few years. Over 275 items produced by the OFB were declared as non-core items in April 2017, another 93 in November 2017, and another 39 in January 2018, giving private players a new opportunity in the market, and wearing down OFB’s monopoly power.  Also, the introduction of the new ‘Proforma Account’, adoption of the commercial accounting system, is a positive step towards the facilitation of better efficiency. The Government also constituted an Empowered Group of Ministers (EGoM), under the Chairmanship of Raksha Mantri Shri Rajnath Singh, to oversee the corporatisation of OFB, i.e., conversion of the department run organisation into one or more than one 100% Government owned corporate entities⁵. The government has made it very explicit, especially to cater to the employee unions, that the decision of corporatisation is not made with the intention to further privatise the factories, but to improve efficiencies, better react to the dynamic nature of the market, and facilitate the entry of new technologies and process at a faster pace.

 

India’s defence sector demands better performance from the Ordnance Factories to be capable of supporting the armed forces. An autonomy in managerial decisions, faster execution and general processing, and the necessity to perform optimally, are the major concerns being tried to address through this reform. The corporatisation of OFB is an inescapable necessity.

Having said that, corporatisation is definitely not a one-step solution, a continuous and quality-oriented change in the managerial structure, strategy, and organisation design and transformation are required to achieve strategically advantageous and meaningful indigenisation, and greater autonomy in carrying out effective research and development of technology. Whether or not privatisation of OFBs is the way forward hardly needs any further consideration, given the dire need for modernisation of production facilities and high quality products, minimising imports, in line with the Atmanirbhar Bharat vision. The aim must be to achieve maximum inclusiveness in the process of privatisation so that MSMEs, startups as well as research groups, along with the large companies, can also get a platform to have meaningful participation, which in turn, would promote industrialisation within this sector.

What to do?	Benefits
Outsource work Joint developments and Project-based joint ventures Joint Research & Development Ensure external and private sector participation in laying down the vision	Stops brain drain, increased flexibility and focus on core tasks Shared investment and expenses, technical expertise and know-how Incentive to employee more engineers/researchers/technicians, utilising synergies, hence, faster results Creation of a Defence Manufacturing Sector

One of the main arguments against privatization of OFBs is the concern for national security. The concerns are legitimate and should be addressed using technology that’d ensure consistent and effective monitoring of the participating firms. Another important measure can be imposition of restrictions on strategic IPRs. Also, distribution of the work orders in such a manner that the entire configuration is not known to any of the involved parties could be an effective step.

The DefEXPO-2020, held in the month of February, last year, with the theme: “India: The Emerging Defence Manufacturing Hub”, saw over 70 nations participate and express their interests. Given the expenditure in the defence sector worldwide is showing a decreasing trend, India has a great potential to thrive in this sector if dealt with judiciously and at full tilt. Our focus right now must be oriented towards laying the foundation for a full-fledged defence manufacturing sector in India, by handing over real and actual work, to MSMEs, startups, research groups, along with large companies, in terms of research, design, development, manufacturing of machinery, as well as software.  A strategic implementation of reforms is, therefore, the need of the hour and shouldn’t be further delayed, with a view to rationalise this transformation now and in the near future.

 

 

Citations

1. Report of the Comptroller and Auditor General of India, Union Government (Defence Services), Ordnance Factories: 2016-2019 https://www.cag.gov.in/en/audit-report?ts=allwords&title=ordnance+factories&gt=&udt=&state=&state%5B%5D
2. =&lbt=&sector=&sector%5B%5D=41&report_type=&report_type%5B%5D=&od=%3E&yrf=2013&yrt=
3. Report of the Comptroller and Auditor General of India, Union Government (Defence Services), Ordnance Factories: 2016-2019
4. Mission Raksha Gyan Shakti, Issue-1, Department of Defence Production https://www.ddpmod.gov.in/sites/default/files/pdfupload/E-Magazine%20-16-03-20_0.pdf
5. Army says ‘poor quality’ Ordnance Board ammo, mines have cost India Rs 960 crore since 2014, https://theprint.in/defence/army-says-poor-quality-ordnance-board-equipment-has-cost-india-rs-960-crore-since-2014/513072/
6. PIB, Release ID: 1653374, 11 Sep 2020, “Corporatisation of Ordnance Factory Board: Government constitutes Empowered Group of Ministers headed by Raksha Mantri”
7. Sandeep Unnithan 2017, “Repainting the White Elephant”, India Today https://www.indiatoday.in/magazine/defence/story/
8. 20170619-defence-ministry-modi-government-mod-ordnance-armed-forces-986563-2017-06-11