Corporatisation of Ordnance Factory Board –An Analysis
Lt Gen (Dr) V K Saxena (Retd), PVSM, AVSM, VSM, Distinguished Fellow, VIF
A Bold Decision – Govt Walks the Talk

Something big happened on 16 June 2021. In a run time of less than a year from first open announcement, the Govt of India has gone ahead to approve the Corporatisation of the Ordnance Factory Board (OFB)1. It was just the other day on 29 Jul 2020 when the Cabinet Committee on Security (CCS) took the decision to convert the OFB into one or more 100% Govt-owned entities and register the new body under the Companies Act 20132. Going through with it (despite huge opposition/ protests) is indeed a bold decision.

The Big Question

The big question is – what corporatisation should actually imply? This article is an attempt to find an answer to the above poser.

Sequence of Examination
  1. What is expected in corporatisation?
  2. What actually ails OFB?
  3. Revisiting corporatisation
  4. What is required – a viewpoint
What is expected in Corporatisation

Corporatisation will mean the following3:-

  1. The 41 Ordnance Factories (OFs) with a whopping 81,500 workforce will be re-organised as seven corporate entities each with 100% Govt ownership.
  2. Each of these entities will get registered as an independent Company under the Companies Act 2013.
  3. Once the above happens, each of the seven group companies will become like any other govt-owned Defence Public Sector Undertakings (DPSUs) such as Bharat Electronics Ltd (BEL) or Bharat Dynamics Ltd (BDL) and more.
  4. While the above entities will be 100% Govt-owned, each of these will be professionally managed (with select leadership) like any other corporate body. There will be a degree of freedom in matters relating to decision making, choosing partners for joint ventures (JVs), Memorandums of Understanding (MoUs), co-development, co-production decisions, transfer of technology bids, buy/make decisions and more.
  5. Each group will have to survive on its own strength of core-competency (ies) and win businesses and contracts in open competitions. The days of captive customers and assured orders through the nomination route will be passé.
  6. Each of the seven entities will actually transform into a group company consisting of a cluster of OFs belonging to one type of core-competency. The seven groups will be as under :-
    1. Ammunition and Explosive Group
      This will be a mainstay group carrying the central core-competency of OFB, namely, ammunition and explosives. It will undertake production both for the domestic market under the make-in-India banner, as well as, for world market through the export route.
    2. Vehicles Group
      As the name suggests, this group will operate under its core competency of manufacturing defence mobility equipment - vehicles/specialist vehicles, tanks, trawls, armoured personal carriers, mine-laying vehicles, cranes and haul equipment and more. The group is expected to serve the domestic market, as also, win contracts globally.
    3. Weapon and Equipment Group
      This is already a growing business of the OFB but ridden with many shortcomings/voids/delays. This group would take forward the on- going business of the manufacture of various types of small arms, short range missiles , various calibre and types of artillery guns etc.
    4. The Other Groups
      Besides the above, the groups are -4. Troop comfort items group, 5. Ancillary group 6. Opto-electronics group and 7. Parachute group. The core businesses are self-explanatory.
  7. Leadership?

    While there is much talk on corporate DNA of the new group companies, how will this be achieved in the DNAs of the group companies is the moot question. One of the key ingredients (read driver) for the so called change-over is leadership. Will the current OFB leadership be re-organised to steer the change or will there be select induction of talent and expertise from the marketplace is not very clear yet. Will a mix and match be attempted?

What Actually Ails OFB

In order to arrive at a possible answer to the poser; what corporatisation should actually imply, it is imperative to see what actually ails OFB which is sought to be remedied in the new arrangement. Salient points are stated.

  1. In a nutshell, the OFB blues can be condensed into some six/seven major issues- 1. Huge shortfalls in production targets. 2. Delayed deliveries. 3. Poor processes. 4. Poor quality 5. Lack of technological advancements. 6. Unfulfilled promises 7. Issues related to work culture, mind set and attitudes (not elaborated).
  2. These are nothing new. The demonstrated lack-lustre performance of OFB was known for decades. Sample these4:-
    1. In 2000, TKA Nair Committee recommended the conversion of OFB into Ordnance Factory Corporation Limited.
    2. In 2005, Vijay Kelkar Committee recommended the corporatisation of OFB bringing it up to a ‘navratna’ status.
    3. In 2015, the Raman Puri Committee recommended something closer to what has finally come about. The Committee recommended splitting of the OFB monolith into 3-4 separate segments each specialising into a core-competency like ammunition, weapons, combat vehicles.
    4. All this culminating into the Govt decision in Aug 2019 to corporatise the OFB.
  3. To get peep in to the state of OFB the CAG report of Dec 2019 is relevant. Some excerpts from the said report are briefly stated5,6:-
    1. In the Financial Year (FY) 2017-18, the OFs achieved a production target of only 49% of all the items on demand.
    2. Resultantly, as of 31 March 2018, a significant quantity of Army’s ammunition demands remained outstanding affecting operational preparedness.
    3. The OFB exports in FY 2017-18 came down by 39% as compared to the previous FY.
    4. Huge inventory holding costs were incurred as the OFB held an inventory representing a whopping 73% of the cost of production; 52% stores in hand, (including 14% non-active stores) and 32% as work-in-progress (WIP) items.
    5. As to delayed deliveries, the oldest pending order was of 2009-10!
    6. The Army suffered a critical deficiency in seven types of ammunition (32-74% deficient) due to filled fuzes and in five types of ammunition due to spare filled fuzes ( 41-94%deficient) amounting to some 403 Crs of ‘unusable ammunition’. This was due to a major shortfall in production of the above fuzes.
    7. All sorts of deficiencies were noticed in the procurement processes – non-adherence to Procurement Manual; non-transparent bidding in some cases; lack of appropriate checks-and-balances, lack of database security; non-adherence to e-payments etc. (points stated in generic terms).
    8. A loss of 62.10 Crs was suffered on account of replacement of defective ammunition which was initially supplied without adequate testing (set point value of TNT not tested before filling, leading to exudation of explosives during shelf life).
  4. In continuation of the above, mention is made of an Indian Army internal report that stated that in the period 2014-2020, there were whopping 403 accidents related to defective ammunition. These not only resulted in a loss of 960 Crs but also took away 27 lives. 7
  5. Expectedly, the OFB came out with counter-figures. It stated, that only a miniscule 2% of accidents between 2011-18 were attributable to defective ammunition, the balance were attributable to the user– faulty gun drill, poor weapon maintenance, incorporating un-validated design changes (by way of up-gradation) in weapon systems and more.
  6. While the unending duel of claims and counter-claims can go on, the author is a first-hand witness of several losses of life-and-limb in accidents involving the ammunition for ZU-23 and L-70 air defence guns. A stage came when the OFB was asked to stop the production of ZU 23 ammunition.
Revisiting Corporatisation

Some salient points are stated:-

  1. It is the sense of the author that if ‘deep-cleansing tools’ are not applied all that the corporatisation is going to end up will be a mere ‘reorganisation’ adding seven more DPSUs to the nine already held.
  2. Notwithstanding any of the credit for the multiple achievements which the MoD has been listing for its existing nine DPSUs8, these have repeatedly come into public eye (CAG’s reports) for the well-known ‘institutional ills’ such as the following:-
    1. Perpetual time and cost overruns
    2. Poor quality, especially in high-tech equipment
    3. Unfulfilled promises; keeping the Services hanging for their urgent operational requirement for years
    4. Lack of spare support
    5. Poor quality of upgrades
      The list can go on.
      Are we going to add another seven to the club of nine? Relevant to note is the fact that these are not seven but actually 41, reconfigured as 7 group companies.
    6. Such a bold decision of corporatisation was taken to address core-ills and not to add to existing woes. Principally, the exercise must end up in addressing the trio of - Timeliness, Quality and Technology.
    7. A simplistic/superficial re-organisation in the name of corporatisation will fall short in addressing the above. What is required is a big question.
    What is Required- A Viewpoint
    Addressing Quality

    It needs to be understood that the Achilles heel of OFB is poor quality. Besides everything else, this needs to be addressed upfront. Poor quality not only comes from poor processes and poor work cultures, it is basically driven by old and obsolete equipment and outdated technology.
    One of the major tasks for the Empowered Group of Ministers (EGoM) constituted under the Raksha Mantri to oversee corporatisation is actually to address the root-cause of all the ills of OFB, namely, poor quality. Following is recommended:-

    1. There is an urgent need to appoint a Multi-Disciplinary Team (MDT) composed to gold-class subject Matter Experts (SMEs) drawn from public, as well as, the private sector.
    2. There should be an MDT covering each of the five major technology verticals under the OFB domain. These include- Ammunition and Explosives, Vehicles, Weapon and Equipment, Opto-Electronics and Parachutes.
    3. Each MDT must take detailed analysis of the existing state of equipment, technology and processes in its respective domains and suggest a time-wise plan for induction of new equipment and better technology.
    4. If the Govt is really serious about ‘deep cleansing’that goes beyond a superficial re-organisation, it must be prepared to show resolve to infuse funds in the OFB monolith that can bring about a technological make-over of the ‘old and outdated’ in the OFB.
    5. It is a very tall order and demands substantial long term financial liabilities. But unfortunately if the issue is not resolved at this root-cause level, the rest of corporatisation will be only semantics.
    6. Will the Govt show resolve? Will it commit funds? Does it have funds to commit at this stage of post-Covid roll out? How much? Such are the moot questions that will actually decide whether Govt wants corporatisation or it is merely a tick in the ‘to do list’.
    Doing a Reality Check of the Tasks-at –hand

    It has been reported that the Govt has made up its mind to ‘finish off’ with the corporatisation by the ‘year-end’9. It is hoped that a reality check has been carried out of the gigantic nature of the task-at hand. A glimpse:-

    1. While it sounds rather simplistic to re-group 41 OFs into seven group companies, it is going to be a huge exercise.
    2. In the first place OFs belonging to one core-competency are not located in one geographical area. These are spread out along the length and breadth of the country, many of them in remote and poorly connected areas ( Aruvankadu Tamil Nadu, Bolangir Orissa, Hazratpur UP).
    3. Just picking up a relatively close-knit group; Arms and explosive, some of the connected OFs are – Ammunition factory Khadki Pune, Cordite factory Aruvankadu Tamil Nadu, Gun and Shell factory Kolkata, High Explosive factory Pune, OF Bhandara – Propellants and explosives, OF Ambarnath, and Ambajhari, OF Chandrapur…10) Putting them together as one group under one corporate leadership, one work routine and one target strategy is not going to be simple.
    4. Not only the OFs are far separated out physically, these have their own work culture and labour nuances. Amalgamating them into the work culture and ethos of one company will be a great leadership challenge.
    5. The ground work involved in getting each group registered under the Companies Act, putting in place Board of Directors, setting out rules of business, laying down targets, identifying markets and potential partners for JVs/ MoUs. In fact, getting out of the cosy Govt control and facing the competitors in the free waters of the market place will take a long time.
    6. How will such groups composed of companies located at far flung places going to compete cost-wise, product-wise, delivery-time-wise with core-competent and vertically integrated small and compact companies of the private sector is a question whose answer is not far to seek. The Govt’s dream of converting the OFs into ‘productive and profitable assets’ will be a huge exercise.
    7. Not only 41 OFs, there are others – a recruitment centre, nine training institutes, five regional collectorates of security, three marketing offices, which also need to be brought into the new corporate regime.
    8. What about orders? Today the armed forces and other Para military forces are ‘captive customers’ where orders flow seamlessly from the resplendent gates of the MoD. Tomorrow, this will end. Orders both from the domestic, as well as, the export market would have to be ‘won’ through open competition with other players, each core-competent in its small niche vertical and not suffering the ills of size/volume/location/work-culture etc.

    While the issue at the face of it looks insurmountable, it is not impossible. That said, the bold (thought through???) assertion of finishing off with corporatisation by the year end looks both naïve and off-the-cuff. A viewpoint on the way ahead is presented.

    1. The problem needs to weighed out in all its multiple dimensions.
    2. The Govt has appointed the consortium led by KPMG Advisory Services Pvt limited along with Khaitan & Co ltd as consortium member to provide consultancy services in strategic and implementation management for the corporatisation of OFB.
    3. The Govt, with the expert help of the said consultants, must lay down a clear Time-Bound Road Map of various activities connected with corporatisation assessing the up-and-down of each activity and the likely challenges ( read hurdles) to be surmounted. This is going to be a very involved and a complex exercise. The same needs to be thought through till the end game now – time-wise, cost-wise, stake-holders-wise, accountability wise and responsibility wise.
    4. It is the sense of the author that such an exercise is already underway. The same requires to be reviewed time and again. There has to be Plan B, Plan C and also Plan D to cater for the unseen.
    5. The newly-minted group factories will need a great amount of hand-holding by the Govt till they find their own feet. A degree of market protection, some assured orders, JV/MoU facilitation, cost subsidies etc., all will be required to tide over the teething-trouble period.
    6. Instead of the magic-wand of finishing off with corporatisation by the year end, a realistic timeline must be given out by the expert consultants with adequate ‘slack’ built into the same.
    7. The road map once finalised must be extensively vetted by various stake-holders in a quick and a time-bound manner with the MoD/DDP sitting as the time-monitor/ombudsman combined.
    On Workforce and Work Culture

    One of the most crucial factors which the Govt must be alive to is, that there is 81,500 OFB work force involved as stakeholders in the whole exercise. These are duly represented by the three very active, very assertive and very politically aligned federations of defence sector workers – 1. All India Defence Employees Federation 2. Indian National Defence Workers Federation and 3. Bhartiya Pratiraksha Mazdoor Sangh11.

    It is not the intention of the author to go into the tumultuous record of indefinite strikes and threats of various kinds by the above federations in protesting against the Govt’s decision to go ahead with corporatisation. It may be recalled that even when the Galwan crises was on and the country was facing great odds, the federations threatened indefinite strike (luckily, it was called off).

    Why the workers are striking? Possibly due to loss of secure Govt Jobs as also Threats of lay-offs in likely right-sizing of future corporate entities? Loss of pensions as also loss of job-related reservation and facilities by the Govt could be the other reasons? Future blues of hire-and-fire? In fact it could be a combination or a part of all the above.

    The Govt has shown some muscle by promulgating the Essential Defence Services Bill 2021 (passed by Lok Sabha on 03 Aug 2021). The Bill among other things makes it illegal for the workers of the Govt-owned OFs to go on strike in protest against corporatisation.12

    The Govt has however assured the workers’ federation that the pay and perks of the workers including their pensions will be retained and for a period of two years, their status in the new corporate entities will be a ‘deemed deputation’ etc. This in no way will be the ‘end-of-story’. The Govt is up against a huge challenge by the workers’ federations that have different shades of political backings (not discussed).

    While basic assurance of wages, perks and pension may stand, Govt will have to go through some bitter pills at a point in time in future…

    • Rightsizing with no loss of job but with lateral movement into other organisations deficient of manpower
    • Performance-based incentives/bonus
    • Perform or perish??? (easier said than done)
    • Corporate culture of job security
    On Disinvestment

    The mammoth exercise of corporatisation will render another seven 100% Govt-owned DPSUs adding to the nine already in the club. Why 100% Govt owned?

    The Govt has already commenced the action of strategic disinvestment from the four sectors

    1. Atomic energy, space and defence
    2. Transport and telecommunications
    3. Power petroleum coal and other minerals,
    4. Banking insurance and financial services

    In Feb 2021 the Govt announced that it has budgeted 1.75 lakh crores from its sale of its stakes in the above institutions13.

    In all fitness the corporatized group companies should also follow the disinvestment route. This is not to happen now but may be sometimes in the future.

    That is the big picture and big the issue of corporatisation.
    Indeed it is a huge challenge for the Govt to walk-the-talk.

    References
    1. “Corporatisation of OFB” at www.pib.gov.in. Accessed on 23 Jul 2021.
    2. “Ordnance Factory Board corporate makeover,” at www.the print.in. Accessed on 23 Jul 2021.
    3. ibid
    4. “Corporatisation of OFB-SP Land Forces” at www.splandforces.com. Accessed on 29 Jul 2021.
    5. ‘Press release Officeof CAG December 6 , 2019,CAG report on OFB,” Accessed on 29 Jul 2021.
    6. ‘CAG Report – OrdnanceFactoryBoard,” at www.ofb.gov.in. Accessed on 29 Jul 2021.
    7. 2 ibid.
    8. “Defence Public Sector Undertakings”, at www.ddpmod.gov.in. Accessed on 31 Jul 2021.
    9. Ordnance Factory Board’s corporate makeover-the plan and how it impacts India’s arms production, “ at www.theprint.in. Accessed on 07 Aug 2021.
    10. “Establishment of Ordnance factories,” at wwwpib.gov.in.Accessed on 07 Aug 2021
    11. “Defence workers threaten indefinite strike against breaking up of OFB,”at www.thehindubusinessline.com. Accessed on 07 Aug 2021.
    12. “Lok Sabha gives go-ahead to Essential DefenceServices Bil -2021,’ at www.livemint.com. Accessed on07 Aug 2021.
    13. “Hereare the key divestment and IPO announcements …” at www.m.economictimes.com.Accessed on 07 Aug 2021.

    (The paper is the author’s individual scholastic articulation. The author certifies that the article/paper is original in content, unpublished and it has not been submitted for publication/web upload elsewhere, and that the facts and figures quoted are duly referenced, as needed, and are believed to be correct). (The paper does not necessarily represent the organisational stance... More >>


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