Chair: Vinod Kumar Misra
Discussants: V. K Chopra and G Balachandran

The aim of this paper is to analyse the reasons behind the poor performance of the ordnance factories (OFs) and recommend measures to revitalize them. To achieve this, the author, Laxman Kumar Behera, identifies six core areas pertaining to OFs. After identifying the problems in these areas he goes on to suggest measures so that the functioning of the Ordnance Factories can be improved.

Structure and Functioning of Ordnance Factories

The author is of the view that the structure of Ordnance factories has several weaknesses, impacting the functioning of the Board, and the performance of the factories.

Under the current dispensation, the Ordnance Factory Board (OFB) has limited functional autonomy. Unlike the Defence Public Sector Undertakings (DPSUs), the OFB is mostly controlled by the Ministry of Defence (MoD) in critical areas such as product development, research and development (R&D), formation of Joint Ventures and in making commercial decisions. These restrictions have not allowed the OFB to graduate into an independent industrial enterprise.

Second, the Board Members, especially those responsible for the operating divisions and staff functions, are not geared to take full responsibility in their areas of functioning. It is primarily because the members have neither time nor power under the current setup. Members of the Board are appointed at the verge of their retirement, providing them very little time to oversee their job.

Third, members are considered ‘rubber-heads’, since most of the production related decisions are taken in the Board meeting and executed through the heads of the concerned factories, with little central monitoring by the Members who are supposed to head a certain group of factories.

Various committees have been constituted from time to time to recommend measures to energize the management of these factories. Despite repeated recommendations by various committees to corporatize the OFB, the government has not done so, apparently because of strong opposition from labour unions associated with these factories. The author recommends making these factories autonomous so as to make them independent in their areas of operations. However, he notes that this autonomy should come with greater responsibility on the part of OFB. And as for making OFB more efficient the MoD needs to outline a time frame by which all the contracts are awarded to OFs on a competitive basis.

Range and Depth of Ordnance Factories’ Production

According to the author, OFs have a wide range of products. But these are not enough to meet the requirements of the armed forces, thus forcing the government to resort to direct import from others. These imports are from various countries such as Israel (towed gun and mortar), Italy (naval gun), USSR/Russia (naval gun, towed gun, SSM launcher and MRL, Mobile AD system, tank, APC, IFV), Sweden (towed gun), Poland (ARV), Slovakia (ARV), South Africa (APC/ISV) and UK (AEW). In addition to direct imports, some of the items are also license-produced or assembled from SKDs and CKDs, based on technical assistance from importing countries.

The author ascribes the lack of an advanced defence R & D base in India and within the organization in particular as the reason for the import of such a wide range of products. He stresses that the government needs to strengthen the in-house R&D facility of the ordnance factories to overcome this problem.

Execution of Orders

The author views the timely execution of orders by the ordnance factories is often a source of acrimony between the OFB and the Armed Forces. The armed forces officials say that the factories are ‘simply unable’ to meet the production requirements, affecting their operational readiness. They further say that the shortfall in OF production is often behind schedule, even after the target for production is lowered from the original requirements. On the other hand, OFs officials maintain that the shortfall is on account of factors remotely related to their production capabilities. They accuse the army of late finalization and placement of orders, resulting in delay in the production programme.

To resolve this problem the author suggests that since the production could not be augmented in a short span of one year, the armed forces could consider giving firm orders for 2 to 3 years. It would also be appropriate for the armed forces to engage the OFB more proactively during the stage of the finalization of services’ long-term perspective plan (LTPP), especially the part which pertains to factories.

Pricing of OF Products

The OFs operate on ‘no loss no profit’ basis. That is to say that the products are supplied to the Armed Forces at a price, taking into account only the actual cost of production, which include the costs of material and labour consumed and the overhead charges. However, according to the author, this cost plus mechanism of pricing is widely believed to be inefficient on three counts

First, the new system of determining and fixing the price of major items supplied to the defence forces is not working optimally because of delays in finalising and reporting the cost estimates at the time of price negotiations.

The second reason is related to efficiency in the usage of both labour and materials. Officials conversant with the functioning of factories state that the organization has a very high input usage rate, due to lack of process improvement and skill up-gradation of the labour force.

The third factor is the issue of ‘surge capacity’. The surge capacity carries a minimum cost in terms of overhead charges. The only way the cost on this account could be reduced is through better utilisation of labour, plants, machinery and stores. Although the factories as a whole have been able to reduce the percentage of overhead charges to total cost of production over the years, the reduction is hardly due to any efficiency gain. Moreover, the reduction in overhead charges is not uniform across the group of factories, which suggests an absence of systematic efforts to curb overhead charges.

Quality of OFB Products

The poor quality of products is yet another area for concern for OFBs. It has been confirmed both in the Parliament and in the Comptroller and Auditor General of India (CAG) Report. Army officials, both present and retired, interviewed by the author said that most of the OF products are below mark, and often the cause of loss of life to service personnel. To make the quality better the MoD of late has asked OFBs to move towards the process of self-certification, a norm widely practiced globally. Though OFB has started self-certification of their products, the items as of now are restricted to low-tech items like clothing and general stores. At present there is no time-frame for covering the entire product range. The author asserts that the MoD in consultation with the OFB should lay down the precise time frame, by which all the items supplied, including those overhauled by them, would be self-certified.

Exports

Despite giving OFBs some incentives exports have not really gone up over the years. At present, only a fraction of their sales come from exports. Besides, not all the factories are in the export business. There are several factors behind OFB’s poor export performance, some of which are not in its direct control. For instance, the OFB’s exports are limited to only those countries which do not figure in the ‘negative-list’, as maintained and conveyed by the Ministry of External Affairs. Similarly, the OFB cannot export some of its high-value systems such as tanks, some ammunition and infantry fighting vehicles because they are based on foreign technology, and require permission from its overseas collaborator for sale to third parties. The export potential is further constrained due to some of the OFB products’ non-compatibility with NATO specifications.

Although the OFB of late has taken a few measures – such as procedural simplification, hosting an “international generic” and product demonstration in major arms exhibitions – they have not resulted in any significant dividend. The author states that the lack of enthusiasm of customers is primarily because of two factors. First, international customers are not yet convinced about the competitiveness of OFB products, in terms of both quality and price. Second, the OFB has so far not taken a corporate approach in establishing a brand image for its products.

The author concludes by saying that unless the foregoing aspects are taken care of, there is little hope of revitalizing the ordnance factories.

Points raised during discussion

• Instead of increasing the range and depth of existing products there is a need to improve existing products.
• Is corporatisation the only viable solution to end deficiencies of OFs?
• OFs should give importance to core areas of specialisation and leave other parts to the corporate sector.
• Delays take place in the delivery of new products as it takes some time to prepare prototypes.
• To increase the efficiency of OFBs the lead time of 42 months can be reduced to 24 months.
• The credibility of Self Certification needs to be ascertained.
• There should be a mechanism of Checks and Balances so as to increase the productivity of OFs.
• Technological absorption is extremely low in OFs.
• There is no reliable system to access the performance of OFs.
• The export targets in OFs are set without estimating capacity and hence targets are never met.
• OFs should be run like businesses and should be incentivised.
• Studying OFs and OFBs is considered “unglamorous”. So very few studies are conducted on their way of functioning.
• There exists a structural problem in the very set up in which OFs operate so the synergy among the Armed Forces, DRDO and OFs is not present.
• There is a lack of transparency, accountability and inadequacy in terms of Information Technology in OFs.

Prepared by Sandeep Anand, Research Assistant at the Institute for Defence Studies and Analyses, New Delhi.