Atmanirbhar Bharat in Defence sector: Corporatisation of OFB debate – Concerns and the future

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September 29, 2020 4:54 PM

Post Corporatisation, OFB will be allowed to forge partnerships with the private the sector as per the MoD’s approved policy and will continue to receive orders from the country’s security forces.

The first time corporatisation was suggested was in 2000 by Nair CommitteeThe first time corporatisation was suggested was in 2000 by Nair Committee

The government is determined to implement the decision of the corporatisation of the Ordnance Factory Board (OFB), which was announced by the Finance Minister as part of Defence Reforms package earlier this year. “Corporatisation of OFB is probably going to shake it from its slumber and transform these Ordnance Factories into a state of the art facilities and which can be more flexible and can be better at deciding in its functioning,” a top source told Financial Express Online.

“The Corporatisation will make them self reliant and competitive in the production of arms and ammunition and their quality. Unfortunately, due to the poor quality and lack of accountability, there have been frequent accidents which have resulted in injuries and death of soldiers. In fact, certain countries have refused to accept any Ordnance Factory manufactured ammunition and equipment which are offered against the Defence Lines of Credit,” he mentioned.

When did the debate start?

The first time corporatisation was suggested was in 2000 by Nair Committee, this was followed by Kelkar Committee recommendation in 2005 and Raman Puri Committee in 2015. Then again in July/Aug 2019, the government floated the idea of the corporatisation of OFBs and the trade unions then called for an indefinite strike against the decision.

Earlier this year, the decision to implement the corporatisation of OFB was announced by the Finance Minister as part of Defence Reforms package. And, once again the trade unions have called for an indefinite strike, terming the government’s decision as “arbitrary, illegal and unjustified”.

What are the concerns of OFB?

“One of the biggest concerns of the 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 Government 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 source told Financial Express Online.

Why the push for Corporatisation?

Various reports have observed that the OFB have regularly performed below its potential over the last few decades and has also been found to be draining the Defence Budget with overpricing of material produced.

It has a monopoly over several products required by the armed forces, minimal innovation and technology development and hardly any incentive to improve quality and cost-efficiency.

The biggest problem with the OFB has been attributed to its limited autonomy as it an attached office of MoD.

It will be on par with other DPSUs managed by its own board of directors with broad guidelines from the government. 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 exiting Rs 12,000 crore, and has set up a high-level panel to work out a roadmap to achieve the same.

Post Corporatisation, OFB will be allowed to forge partnerships with the private the sector as per the MoD’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% above L1 price for “Make” and “Buy and Make” category products. The Centre will support OFB In case of losses, by way of loan for 30% of the total shortfall and by way of equity investment for balance 70% of the amount. The Capital for subsequent five years is going to be provided by the Department of Defence Production (DDP) as a one-time corpus fund. Capital investment for ongoing and sanctioned projects also will be provided,” explained the source.

Optimum use of idle or under-utilised capacities of the factories, post corporatisation, which will help to generate surplus production over and above the requirement of armed forces, which can be exported to generate better revenues.

What are the concerns expressed by OFB?

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

OFBs’ idle capacity is to cater to the surge in demand during the war, as was demonstrated during Kargil.

Therefore, “The government will need to bear in mind this while formulating laws for corporatisation to not compromise with the logistic assistance to the forces during war. Meantime, OFB will have to work on its maximum capacity and push for exports of its surplus capacities during peacetime, which can necessitate it to become more efficient and produce world-class quality to survive during this competitive world.”

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