Corporatisation of OFB to put it on par with other defence PSUs

New Delhi, Sep 22 : The corporatisation of the Ordnance Factory Board (OFB) will put the ailing institution on par with other defence public sector undertakings managed by its own board of directors with broad guidelines from the government, top source in the Ministry of Defence said on Tuesday.

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 existing Rs 12,000 crore, and has set up a high-level panel to work out a roadmap to achieve the same.

The government said that post corporatisation, OFB will be allowed to forge partnerships with the private sector as per the Defence Ministry'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 per cent above lowest price for 'Make' and 'Buy and Make' category products.

The Centre will support OFB in case of losses, by way of loan for 30 per cent of the total shortfall and by way of equity investment for balance 70 per cent 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," the ministry said.

The government constituted an Empowered Group of Ministers (EGoM) on September 11 to oversee the corporatisation of the OFB.

Union Defence Minister Rajnath Singh had said that the process of corporatisation of the OFB will be completed in one year.

The corporatisation of OFB will result in better management of its functioning with greater autonomy in functioning and dynamic decision making, also resulting in timely delivery and better quality supplied by factories.

After corporatisation, there would be competitive pricing.

At present, a cost plus mechanism is followed by OFB to fix the prices. "In this system the price is fixed by taking maximum estimated cost plus 20 per cent to cater for contingencies which are further raised by another 8 to 15 per cent next year," said a senior government officer adding that this led to overpricing with Comptroller and Auditor General even pointing out that in some cases OFB is charging even more than the import value of the equipment.

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.

There would be 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 main key in 'Make in India' project.

Further, there would be financial independence.

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, Research and Development and boost innovation.

There would be optimum use of idle capacities and increased defence export.

"The idle or underutilised capacities of the factories will be better utilised post corporatisation," said the officer adding that corporatised ordnance factory can use the idle capacities to generate surplus production over and above the requirement of armed forces, which can be exported to generate better revenues.

Further, Indian armed forces being the biggest customer of ordnance factories are likely to benefit immensely from corporatisation with better pricing and improved products leading to an improved equipment state and better customer satisfaction.

Matters of Concern

There are some concerns about corporatisation of OFB and the ministry is looking into it.

The officer said that the argument given by OFB employees is that corporatisation of OFB will not be commercially viable since there is no fixed demand by the armed forces, coupled with issues of long gaps between orders, uneconomical order quantity, and lifecycle support required for 30-40 years after the introduction of equipment.

However, OFB can take a leaf out of the functioning of the DPSUs, which seem to be managing these issues without any problem.

OFBs have some idle capacity as a war reserve, to cater for surge in demand during war, as was demonstrated during the Kargil conflict.

"The government will need to look into this aspect while formulating laws for corporatisation to not compromise with the logistic support to the forces during war," said the officer adding that 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.

Corporatisation of OFB is likely to rouse it from its slumber and transform ordnance factories into modernised, state-of-the-art facilities with flexible and better decision-making in functioning.

This move is likely to make it more competitive and self-reliant in production of arms and ammunition and convert it to a profit earning organisation within the next few years.

Current capacity

India inherited all 18 ordnance factories established by the British, while Pakistan did not have any ordnance factory at the time of independence.

Currently, the OFB with its 41 factories, 13 development centres and 9 institutes of learning is expected to be a national strategic asset with the potential of not only meeting national military hardware requirements and also contribute to overall comprehensive national power.

"The suboptimal 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," the officer said.

It is also a matter of concern that certain countries have refused to accept OFB-manufactured ammunition and equipment offered against defence lines of credit due to concerns regarding quality of output, procedures in the factories and inefficient post-sale service.

"Similar issues plague some of our DPSUs too which are involved in manufacture of military hardware," the officer said.

Currently, the OFB budgetary allocations under capital and revenue heads are made from the defence budget.

These allocations amounting to approximately 1 per cent of the total defence budget cater for shortfall in requirement of the OFB after accounting for income through sales.

"OFB is unable to run the factories from its own profits.

OFB officers look at the Army as their captive customer irrespective of shortfalls in quality, delayed supplies, costly products and indifference to complaints," said the officer.

Further, factories operate on 'No Profit No Loss' basis.

The products are supplied at a price that includes actual cost of production.

Actual cost of production is very high because all non-production expenditure is added to the pricing making the products extremely expensive.

Captive consumers have no choice due to government policies. The cost of production includes cost of material, cost of direct labour and overhead costs. The high pricing of OFB items is mainly attributed to the high percentage of overhead costs.

During the past two decades, several high-level committees like TKA Nair Committee, Vijay Kelkar Committee and Raman Puri Committee have inter-alia recommended that ordnance factories should be converted from a government department into a corporate entity.

Trade Unions' Resistance

The central government floated a proposal for corporatisation in July 2019 but the trade unions called for an indefinite strike against the decision on August 20, 2019.

However, the strike was called off from August 26 2019 after assurances by the Secretary of Defence Production that the government has not taken any decision yet towards corporatisation of OFB.

The government thereafter set up a committee to address the concerns of the employees in September 2019 and subsequently in November 2019 notified the "proposal to convert Ordnance Factories under the OFB into a 100 per cent government-owned public sector unit."

Now the biggest concerns of OFB employees is that 'corporatisation' is the first step towards 'privatisation' and is likely to result in layoffs and job cuts.

"However, as of now the Centre 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 top source said.

(Sumit Kumar Singh can be reached at



Source: IANS