Ordnance factories' moment in history

As the government restructures defence manufacturing, it must keep in mind that changing the functional model alone won't improve efficiency

With effect from October 1, the Ordnance Factory Board (OFB) will cease to exist. The creaky conglomerate’s Kolkata headquarters and its 41 Ordnance factories (OFs), nine training institutes, three regional marketing centres and four regional controllers of safety have been carved up into seven defence public sector undertakings (DPSUs), that will operate in addition to the nine DPSUs that already exist. In addition, private sector manufacturers have been allocated 542 defence licences. All these add up to production worth Rs 60,000 crore, which meets a significant part of the country’s defence needs.

The end of the OFB is a moment in history that links back with British colonial rule in India. In order to tighten their hold on India and to have a weapons and ammunition production base from which to control other colonies in Asia, the British East India Company set up a gunpowder factory at Ishapore in 1787. In 1801, the British set up a Gun Carriage Agency outside Kolkata, at Cossipore (Kashipur!). By independence in 1947, there were already 18 OFs in India. Shutting down the OFB closes a 234-years-old chapter.

One of the enduring urban legends that OFB personnel love to recount is of its employees working feverishly, day and night, during the four-and-a-half wars that India has fought (1947-48, 1962, 1965, 1971 and half a war in Kargil in 1999). This ensured that the soldiers on the front lines got all the bullets, artillery shells, guns, tanks and defence equipment they needed to fight and win. However, while surge production capacity is required in wartime, the OFB could never satisfactorily answer this inconvenient question: Why do 76,000 workers in 41 OFs produce only about Rs 11,500 crore worth of defence stores annually — a per capita production of just Rs 15 lakh per annum?

 While several committees, most notably the Vijay Kelkar committee in 2005-06, recommended “corporatising” the OFB, transition to a corporate structure has finally been catalysed by the recommendations of an Empowered Group of Ministers (EGoM), under Defence Minister Rajnath Singh. The EGoM also included Home Minister Amit Shah, Finance Minister Nirmala Sitharaman, then Minister for Law & Justice Ravi Shankar Prasad,  former Minister of State for Labour & Employment Santosh Kumar Gangwar and then Minister of State for Personnel, Public Grievance & Pensions, Jitendra Singh. Consultancy was provided by KPMG Advisory Services and Khaitan & Co. 

According to the EGoM’s corporatisation plan, the 12 major OFs that produce ammunition and explosives will be grouped into a single DPSU called Munitions India Limited. Five more OFs that manufacture vehicles will be grouped into a DPSU called Armoured Vehicles Nigam Limited. Another five that manufacture weapons and equipment will combine to form Advanced Weapons and Equipment India Limited.

 Eight more OFs that manufacture metals and steels will combine to form Yantra India Limited. The remaining 11 OFs will form India Optel Limited, Gliders India Limited and Troop Comforts Limited.

 The big question remains: Will this structural change be sufficient to end the inefficiencies that constrain the OFB, especially the delay in delivery, and the poor quality of its products? The fundamental assumption that underpins the OFB’s corporatisation is that decision-making and strategising that is done in a corporate boardroom would be inherently superior to the management that would emerge from a MoD bureaucrat’s office. However, as several analysts have pointed out, greater efficiency is unlikely to materialise as long as the new manufacturing entities that replace the OFB are structured with the same inefficiencies as their predecessors.

Illustration by Binay Sinha

 A key inefficiency is the issue of how the OFB prices its products. This is currently done on a “cost plus” basis, which means that the OFB simply adds up the cost of production — management, labour, materials and distribution costs — and bills the military after adding on a healthy profit margin, usually in the region of 15 per cent. The military is not given the option of sourcing from a cheaper producer, even if one were readily at hand. With inefficiency being condoned in the OFB’s functioning, there is little or no incentive to tighten up procedures and production processes in order to lower costs.

 These inbuilt inefficiencies are unlikely to be tackled by merely changing over from the OFB’s current functional model, in which it is a wholly-owned department of the MoD; to the proposed model, in which it is under the functional control of the department of defence production, which is under the MoD. In the former model, as also in the latter, there is a MoD bureaucrat overseeing the production unit — whether OF or DPSU — and he is briefed without ambiguity that his annual assessment depends on keeping the order book of his charge full. The MoD joint secretary in charge of Mazagon Dock Limited always ensures that procurement is structured in a manner that keeps his ward’s order book brimming over with warship orders.

 With exactly the same dynamics at play, the MoD civil servant in charge of Armoured Vehicles Nigam Limited will ensure that its order book remains full of T-90S or Arjun tank orders, placed on a “nominated” basis, regardless of their cost or effectiveness. And the bureaucrat in charge of Advanced Weapons and Equipment India will ensure that the new DPSU will be charged with building the Kalashnikov AK-203 rifle for the infantry, even if there is a cheaper private sector bid. After all, the MoD will negotiate the Indo-Russian Inter-Governmental Agreement, and the bureaucrat will ensure that the clauses are framed suitably.

 Another pitfall is the necessity for the new DPSU to have “surge production capacity”, or the manufacturing leeway to suddenly ramp up production to the level that is needed in a war. Surge capacity requires to be built and a cost is involved in maintaining this capacity. How is this proposed to be verified in the new manufacturing structures? If it is left to wartime to be verified, the country might end up paying a cruel cost.

 Finally, it may be prudent to borrow from the experience of countries that have successfully managed a process of “corporatisation”, or even “privatisation” of their defence industries. The UK, for one, has shifted from a largely government-owned defence production model to a highly privatised defence industry. With strategic linkages developing between the Indian and British defence industries, New Delhi might have much to learn from London on this subject.