Six Of Seven New Defence Companies Carved Out of Ordnance Factory Board Report Profit In First Six Months

Six of the seven new defence companies formed after the corporatisation and restructuring of the Ordnance Factory Board (OFB) have reported provisional profits in the first six months of operations.

Context: In July 2020, the Cabinet Committee on Security had approved the corporatisation of the OFB, despite the organisation’s protests.

• Less than a year later, the cabinet has cleared the restructuring of the OFB into seven separate corporate entities on the lines of the nine existing defence public sector undertakings in the country.

• Under this plan, the 41 units functional under the OFB were subsumed under one or the other of the seven new companies.

Why this matters: Before corporatisation and restructuring, the OFB had no incentive to enhance the product range, increase competitiveness, improve efficiency and quality and spend on research.

• With the new entities making a profit in the first six months of their operation, it seems that the they are more efficient than in their previous avatar.

• Earlier, the government had to shell out around Rs 5,000 crore annually to pay salaries of the OFB employees and had to provide Rs 3,000 crore to OFB as operational cost.

The OFB was corporatised because it had failed to improve its abysmal record on defence production over the years.

• The Comptroller and Auditor General (CAG), in a 2019 report, pointed out that in 2017-18 OFB achieved the production targets for only 49 per cent of items.

• For example, in one case, the OFB had not taken any initiative till 2018 to create in-house capacity for electronic fuses, a requirement the army projected as early as 2013.

• Quality of its products, too, has been called into question repeatedly. The poor quality of ammunition supplied by the OFB resulted in at least one accident per week on average, the army said in 2020.

• Of the 618 in-house research projects that it had between 2014 and 2018, only 201 projects of these were completed by the factories, 92 were short-closed and work was still ongoing on 325 in March 2018.

How corporatisation helped: Corporatisation of OFB gave the new companies a structure similar to that in the existing DPSUs, which are managed by their own board of directors with the government giving only broad guidelines, thereby providing greater autonomy, incentive, and flexibility at managerial and functional levels.

• Frequent change in the leadership of the OFB has resulted in little accountability and lack of planning. In the last 10 years, the organisation has had as many as 15 chairmen. In comparison, DPSUs have had relatively stable leadership.

• Government believes the corporatisation of OFB could increase the turnover of the ordnance factories to Rs 30,000 crore by 2024-25 and help grow exports to 25 per cent of the turnover.

Dig deeper: Corporatisation Of The OFB And Why It Was Needed