Defence Industry

Corporatization versus Privatization
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Issue Net Edition | Date : 10 Jun , 2020


On May 16, Finance Minister Nirmala Sitharaman announced that the Ordnance Factory Board (OFB) would be corporatized. It was emphasized this did not mean privatization and the corporatized OFB will remain under the government control – read Ministry of Defence (MoD).  Shortly thereafter news came that thousands of employees in ordnance factories (OF) and the Heavy Alloy Penetrator Project Factory would be sending letters to the Prime Minister and Defence Minister against corporatization of OFB.

News reports later said that members of the All India Defence Employees Federation (AIDEF) will wear black badges / ribbons on May 22 to express their disapproval of the increase in working hours and its freezing or scrapping of labour laws. The workers unions are opposed to government’s “arbitrary” decision to corporatize OFB and eventually wrote letters to this effect to the Prime Minister and Defence Minister.

The Confederation of Defence Registered Associations comprises multiple unions including the BJP-affiliated Bhartiya Pratiraksha Mazdoor Sangh (BPMS), Left Front-affiliated All India Defence Employees’ Federation (AIDEF) and Congress-affiliated Indian National Defence Workers’ Federation (INDWF).

According to C Srikumar, General Secretary AIDEF, the first phase of opposing the corporatization decision involving participation of 82,000 employees has been formulated by the AIDEF, BPMS and NDWF.  Subsequent news of June 1 indicated that ‘strike ballots’ will be held by the unions between June 8 and June 17 to assess the mood of 82,000 defence workers in 41 OF’s. Government is reportedly in talks with the Unions.

Defence production in America has flourished with state-of-the-art technologies because defence production is wholly privatized. Government-controlled defence production is a success in communist China because rigid work schedule is enforced and production is closely monitored even in private industries. India’s chaotic democracy is witness to the worst work culture, slippages, wasteful expenditure and corruption in the government-controlled defence-industry, organizations and structures.

The OFB required ‘privatization’ decades back but no Indian government has the will to take on the Unions or the bureaucracy – taking on both together appears well nigh impossible.  That is why various studies only dared to recommend ‘corporatization’ not privatization.

Multiple government-appointed committees in the past suggested corporatizing OFB: one, TKA Nair Committee recommended converting OFB to Ordnance Factory Corporation Limited in 2000; two, Vijay Kelkar Committee corporatization of OFB with ‘Nav Ratna’ status, like BSNL in 2006; and three, Vice Admiral Raman Puri Committee (2015) recommended corporatizing OFB and splitting it into 3-4 segments – each specializing in distinct area like weapons, ammunition and combat vehicles.

In August 2019 also government announced the decision to corporatize OFB, following which 60,000 OFB employees struck work for a month. Similar moves made earlier by Arun Jaitley as Finance Minister were also stonewalled. Will we witness re-run of the same story now?

One must marvel at the organization and political affiliations of the defence workers unions. Reminds you of a family with members in different political parties to make sure the money and power keeps flowing in. But has anyone examined who in the government supports and manipulates these unions – who else but the bureaucracy and for good reason?

Recall in March 2011 Manubhai Naik, MD of L&T wrote to the Prime Minister saying, “Defence Production (MoD) Joint Secretaries and Secretaries of Defence Ministry are on the Boards of PSUs – sickest of sick units ….. with the result the gap is widening between us and China….the defence industry which could have flowered around very high technology development and taken India to the next and next level of technological achievement and excellence is not happening.” If OFB has given anything but patchy success, why did we contract 16,479 Light Machine Guns costing Rs 880 crore (US$116.4 million) from Israel in March 2020?

Bureaucrats maintain governments come and go but they continue to   retain power. Sources close to the seat of power admit bureaucrats in conjunction media can break an elected representative holding office at any level. 

An article in media on June1, 2019 read, “The main puppet-master in the IAS is the Establishment Officer (EO) in the Ministry of Personnel….. The EO’s sole purpose is to defend (and expand to the extent possible) powers of the IAS. The EO operates behind the scenes, manipulating and controlling (mainly frustrating) the elected government. He dramatically reduces options for the elected representatives on almost all major appointments. And of course, the Cabinet Secretary plays a crucial role in defending the IAS Empire directly at the Cabinet. This in itself is a huge anomaly…. In genuine democracies, a bureaucrat must not have a seat at the political table. In Victoria, an elected MP serves as Cabinet Secretary.”

But there is much more than what meets the eye beyond the Comptroller and Auditor General pointing out high cost of OFB products due to high overhead charges, minimal innovation and technology development. Take the mundane example of the soldier’s combat uniform.

In late 2017, Army found huge price difference between combat uniforms procured from OF compared to those in open market of “same cloth”; one set of combat uniform ex OF cost Rs 4,150, whereas same material stitched locally costs Rs 1,800-1,900 including GST. Army therefore sought ‘no objection’ certificate from OFB (bureaucratic requirement) to procure combat uniforms locally, also stating the if procured from private vendors in the “same volume” as through OF, the price of each combat uniform set will lost Rs 1,200-1,300 – saving of Rs 2850-2950 per combat uniform set. The AIDEF wrote to the Army Chief saying local vendors cannot guarantee required standards (as if that is OF responsibility), adding MoD has “assured” OF employees that combat uniform would not be declared a “non-core” item and there was no justification for the Army seeking a no-objection certificate. This, despite the Army when asking for the no-objection certificate clearly stated that the “same cloth” is available with private vendors.

Army’s annual procurement of combat uniforms from OF varies from 2,50,000 sets to 10,00,000 sets. Even if average annual procurement of 5,00,000 is taken, which may be conservative estimate, annual savings to the Army comes to between Rs 1,42,50,00,000 to Rs 1,47,50,00,000 if procured through private sector. Bulk stitching of combat uniforms is outsourced by OF; they buy cloth, outsource stitching, and charge the Army four times the price. Can you have a more institutionalized corrupt set up? This is just one OFB product. A holistic examination would lead to lakhs of crores of rupees if all OFB products are included.  

The Comptroller and Auditor general (CAG) has repeatedly cited overpricing by OFB beyond what is commercially available off the shelf. CAG reports also point out poor quality of OFB products, which is why the Directorate General of Quality Assurance (DGQA) which was to come under HQ Integrated Defence Staff as recommended by the Group of Ministers, was retained by the  MoD.

Coming months will show how government handles the strikes and what form corporatization of OFB will take. Question is even if OFB becomes Ordnance Factories Limited (OFL) would it help beyond optics? Hindustan Aeronautics Limited (HAL) is a ‘Limited Company’ since 1941 that came under government control later.  Has its working been optimized in past 73 years and how much has it benefited the Armed Forces – LCA Tejas took 36 years to fructify? This is not to criticize HAL but to drive home the point that unless there is complete overhaul in functioning of OFB, there is little that will change if the same or similar management continues with cosmetic changes.

A post on social media mirrors similar concern: “I doubt if government will corporatize OF.  For all their talks they don’t have the will to fight unions and babudom who wield control of defence production units. They don’t want excellence. It doesn’t suit them in any manner. More the import, more the money to be made by babus and politicians. Unions don’t want corporatization because that will entail hard work and accountability.” Significantly, news reports of February 27, 2018 had highlighted MoS (Defence) briefing the Prime Minister that bureaucracy was a hurdle to ‘Make in India’.   

The private industry feels OFB doesn’t fear competing with them because the so-called level playing field isn’t level with MoD favouring the OFB. Only some projects come to the private industry. Foreign Original Equipment Manufacturers (OEM) too prefer to team up with indigenous private industry. Kalashnikov was keen to team up with Adani Defence and Aerospace to set up the AK-203 assault rifles production in India but ways were found for it go for joint production with an ordnance factory.

MSMEs wanting to team up with an OEM similarly have little option but to join up with OFB. Why despite having the third largest startup ecosystem in the world, India is ranked 23rd in 100 countries  (down from 17th position in 2019) even lower than Brazil and Denmark?  Are we wasting talent? Is it because those holding authority at functional levels just don’t care?

A recent interesting development is Union Ministry of Home Affairs (MHA) having held discussions with 17 private Indian companies including L&T and Godrej for locally manufacturing small arms for central armed police forces (CAPFs). News reports of June 7 have quoted an MHA official saying, “The private companies shortlisted by the MHA own license to manufacture weapons.”

MHA has held first round of discussions with representatives of these companies and Director Generals of the ITBP, BSF, CRPF, SSB, CISF, NSG and Assam Rifles. Are we now looking at MHA procuring weapons from indigenous private industry while MoD ensures Armed Forces remain dependent on OFB or imports? Knowing our proficiency of left hand not knowing what the right hand is doing, this is a possibility.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Lt Gen Prakash Katoch

is Former Director General of Information Systems and A Special Forces Veteran, Indian Army.

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4 thoughts on “Corporatization versus Privatization

  1. The author has given his perspective as a concerned user. However, we need to consider the corporatisation of OFB in the overall context of defence manufacturing in the Indian environment with the existing labour laws, bureaucratic interference, marginal designs by the DRDO and lack of alternate uses of the defence stores in the civil market. I agree that the government should neither engage in manufacturing nor promoting the manufacturers. They must compete and be self-sustaining. The responsibility for poor performance by the ordnance factories, to a certain extent, also rests with the Department of Defence Production, Ministry of Defence whose officials continuously breathe on the necks of the ordnance factory officials. The Chairman OFB and and the members are selected and appointed by the Govt. The selection system for the technical and administrative posts remains same, which is an anomaly. The OFs don’t even have a free hand to procure the desired plant and machinery. The private industry make keep making a noise that they can undertake manufacturing of defence stores, if give orders. I doubt if they will meet the defence services requirements fully because they will pick only those products whose manufacturing is profitable because of lack of civil market for such products. At present OFB can be forced to undertake manufacturing and supply of such products, even if they are low-tech items. Will the private industry come forward to undertake their manufacturing? I have my doubts. At times even the DRDO designs are marginal e.g. 5.56mm INSAS and Multimode Hand Grenade.
    A number of fancy articles of the subject have been written by many retired Generals of the Indian Army, without having any direct exposure in the field of defence manufacturing. Just going for a few conducted tours to the ordnance factories shop floors, without knowing the on ground problems faced by the ordnance factories officers and staff cannot qualify them to be experts in this field.

  2. How steadfast the facts presented by the Author are, is clear from just one example. The Author’s statement that “The Confederation of Defence Registered Associations comprises multiple unions including the BJP- affiliated Bhartiya Pratiraksha Mazdoor Sangh (BPMS), Left Front-affiliated All India Defence Employees’ Federation (AIDEF) and Congress-affiliated Indian National Defence Workers’ Federation (INDWF)” is an example of utter lack of homework. The Confederation of Defence Registered Associations, consisting of Associations of Group ‘B’ Gazetted, Non-Gazetted & Non-Industrial Employees, is a distinct entity from the AIDEF or INDWF or the BPMS, which are separate Federations of the Trade Unions of Defence Civilians.

    The Author has done no homework with most of the facts wrong and has no idea what is going on in the Ordnance Factories. He does not have any idea of the history and structure of the Ordnance Factories.

    While recognizing that there is a necessity for seriously improving the performances of Ordnance Factories, the Indian Private Sector cannot be the pinnacle of modernization of Defence Equipment, At most they can play a peripheral role. It is a fact that the lions share of expenditure on R&D in India (a minuscule 0.65% of the GDP compared to 2+% in China) is borne by the Government and the Private Industries don’t care to invest in R&D.

    How great the Indian Private Industries fare in the manufacturing arena can be seen from its global performances. Before salivating for a pie of Defence Production, it would auger well for the private industries to show their guts in other manufacturing arena. Unfortunately, people even from the elite patriotic Armed forces are not ready to wash the dirty linens of the Indian Private Industries in the public. They only relish in taking pot shots at the State owned industries since nobody is taking such pot shots to heart.

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  3. As long netas babus , ordnance factories have open supply ot ghoos khor tatoos in umiform with stars and stripes including those at very high level ready to collude for personnel interests and eveready to take alms in kind for self and family eg many ladies being employed as directors of companies manufacturing arms and foreign supplies and other jobs the defence psus /ordnance factories will continue to flourish with congress communist redcoats , who need to be made to work in three shifts of 8 hrs each without any overtime 7 days a week 365 days till these bvintage defunct enterprises are privatised for the benefit of all .

  4. By the same standard as also in light of PM’s call for Self Reliance, should the DRDO not be made accountable to the nation…? The organisation has huge potential to ensure a self reliant India, provided it is tapped properly.

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