Corporatisation of ordnance factories may lead to selective privatisation in the long term

The government’s decision to disband the Ordnance Factories Board (OFB), under the Department of Defence Production, to convert and regroup its 41 units into seven wholly-owned corporate enterprises may or may not change the business fortune of these factories, but it will certainly reshape the more-than-three centuries old history of new-age armament manufacturing in India pioneered by a Dutch firm, Ostend Company, in 1712 with the setting up of a gun powder factory at Ichhapur, near Kolkata.

To be fair to OFB, it is one government departmental organisation that has performed extremely well over the years, making it the country’s largest defence producer with an annual turnover of around US$3 billion, apart from being India’s biggest armament exporter.

Its turnover is even larger than high profile Hindustan Aeronautics Limited (established in 1940) and Bharat Electronics (set up in 1954), both operating as state-owned enterprises (SOE). Founded in 1802, OFB allowed its factories and establishments full freedom to operate like independent entities.

The board performed as the apex level policy maker and coordinator. Must the government disturb the system which has been performing so satisfactorily?

Incidentally, in an unusual step, the government issued an ordinance, making it illegal for OFB employees to go on strike. The Essential Defence Services Ordinance is in anticipation of widespread employee protests against OFB’s corporatisation. Why couldn’t the government take all major OFB employees’ unions on board before deciding on the future structure of the organisation?

One possible reason behind converting OFB into seven independent defence enterprises is the prospect of their selective privatisation or even sale in due course. This may explain why the government wants to form seven companies while OFB has only five operating divisions:

(1) Ammunition and explosives;

(2) Weapons, vehicles and equipment;

(3) Materials and components;

(4) Armoured vehicles;

(5) Ordnance equipment group of factories

The organisation has around 81,500 employees. Converting these divisions into seven companies is not going to be an easy task.

If the state-owned Coal India Limited (CIL), having eight subsidiaries, can efficiently operate around 400 mines, including some 193 underground collieries, spread over eight states in India, there is no reason to believe that OFB, as an apex body, is overburdened with 41 factories in multiple locations. CIL has around 2,72,000 employees. Its sales income is over $13 billion.

Private entrepreneurs, who are yet to make a major dent in defence production despite persistent government sops and encouragement, may love to lay their hands on some of these high earning ordinance factories

It won’t be a surprise if the current move is aimed to facilitate such privatisation in the long term. Another BJP government, led by Atal Behari Vajpayee, had privatised and sold in 2003 Indian Petrochemicals Corporation Limited (IPCL), one of the country’s largest and top performing PSEs at that time, to Reliance Industries (RIL) for a song. IPCL’s turnover for the financial year 2005-06 was over US$2 billion.

It may be noted that OFB as an apex organisation has over the years developed a large global market. After the corporatisation, seven independent companies may have to be in competition with each other to retain and expand part of the market. Will that pose to be an advantage or throw a new challenge to India in the global armament export market? Will it help the defence import lobby within the armed forces and the South Block to pursue their goal with new vigour?

After all, India continues to be the world’s second largest arms importer after Saudi Arabia. Will the corporatisation of ordinance factories help develop or disconnect the existing relations between the two major government set-ups — OFB and Defence Research & Development Organisation (DRDO)? Will DRDO cooperate or compete with new ordnance companies?

The corporatisation of ordnance factories is being eagerly watched by some of India’s slowly-emerging private players in defence manufacture. The combined annual turnover of India’s all private sector enterprises in defence is only around US$2.4 billion, far below OFB’s annual sales.

Notably, OFB’s vast domestic market includes several non-defence and civilian customers. The products cover arms, ammunition, clothing, bullet proof vehicles, mine protected vehicles among others. OFB factories also cater to the needs of a host of PSEs, state electricity boards, DoT, the railways, private firms and individuals. They also supply industrial chemicals, brass ingots, aluminium alloys, steel castings, leather goods, cables and opto-electronics equipment.

OFB exports armament to some 30-odd countries, including the US. Earlier this year, OFB shipped some 11 million bullets to the US market. Among OFB’s valued export customers are: the US, Singapore, Saudi Arabia, Israel, Italy, Belgium, Chile, Egypt, Sri Lanka, Malaysia, Australia, Botswana, Nepal, Turkey, Thailand, Bangladesh, Aden and Suriname.

As per data published by the Stockholm International Peace Research Institute (SIPRI) in March 2020, India holds the 23rd position in the list of major arms exporters for 2015-2019 and 19th for 2019. The Ministry of Defence’s annual report 2018-19 records India’s defence exports at Rs 10,745 crore, showing a growth of over 100 percent from 2017-18 (Rs 4,682 crore). And, OFB is a major player in India’s defence export market.

Time alone will tell if the disbandment of the OFB structure and conversion of its 41 factories into seven independent corporate entities will help deliver the government objective to make the country one of the world’s top 10 defence manufacturers and exporters. India ranks a distant third position in global defence spending after the US and China. But it stands far behind the US, China, Russia, France, Germany, Spain, the UK, South Korea, Israel and Italy in high-tech defence manufacturing and export.

(IPA Service)

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