REPAINTING THE WHITE ELEPHANT
Hectic moves within the defence ministry suggest the Modi government is working to end one of the government’s last monopolies—ordnance factories By Sandeep Unnithan
For nearly 70 years, the ordnance factories that supplied the armed forces with everything from boots to battle tanks thrived as a government monopoly. This meant the armed forces had no option but to buy what they produced. Then, this year, the ministry of defence (MoD) made its first moves to open one of its last bastions to the harsh light of competition. The full contours of what is being planned are yet to be revealed, but a study of the agenda points of meetings suggests a major change in thinking within the ministry.
In February, a letter went from the Prime Minister’s Office to the secretary (defence production), asking for lists of ordnance factory board products, plant and machinery and, more significantly, the land held by each of the 41 factories operating under the MoD’s department of defence production.
The letter was followed by a series of policy moves signalling that business as usual was coming to an end within the ordnance factories, long criticised by the armed forces for supplying substandard, overpriced equipment. In April, the MoD invited the private sector to participate in tenders to supply nine types of ammunition for tanks and howitzers, hitherto a preserve of the ordnance factories. On April 27, an MoD circular to the chairman of the Ordnance Factory Board (OFB) identified a list of 143 ‘non-core’ items, ranging from uniform cloth and sleeping bags to military trucks, that the army could buy from the open market. The shape-up or ship-out approach was outlined in the circular: ‘…the MoD can identify non-core activities that can be either closed down or put on the PPP model for optimal use of the OFB’s vast
infrastructure and skilled manpower’.
A May 30 meeting within the MoD, attended by OFB chairman S.C. Bajpai and secretary (defence production) Ashok Kumar Gupta, is believed to have identified four ordnance factories for public-private partnership (PPP). These include the Rifle Factory Ishapore, Small Arms Factory Kanpur, Ordnance Factory Project Korwa and Ordnance Factory Trichy.
It is still not clear if the government will corporatise the ordnance factories—merge the 41 factories into a conglomerate along the lines of other defence PSUs, such as Hindustan Aeronautics Ltd, before selling a stake to the private sector, as in the case of Maruti Suzuki. Corporatisation was a panacea held out by various MoD-appointed committees, headed by former revenue secretary Vijay Kelkar in 2005 to vice admiral Raman Puri in 2016, but never implemented by the government fearing the political fallout. Still, the recent moves—that put the government on a collision course with ordnance factory trade unions—are big enough for a private sector CEO to call them the biggest after the Strategic Partnership policy cleared on May 20, that allowed the private sector to make defence systems with foreign vendors.
The ordnance factories are the oldest organisations of the government, predating the Indian Railways by a half-century and mirroring the march of military history on the subcontinent. The East India Company set up a Gun and Shell factory in Cossipore near Kolkata in 1801. The British empire added a dozen ordnance factories after the 1857 revolt. The newly independent Indian state, its decade of somnolence rudely awoken by defeat in the 1962 war with China, established 22 factories to equip its expanding armed forces. The factories were set up in four clusters, insulated from the need to raise finance or fight for orders.
Over 80 per cent of the OFB’s orders come from the Indian army. Yet, these 41 factories meet less than 50 per cent of the army’s requirements. A general reels out the factors afflicting the OFB—inability to absorb technology, support a product, maintain quality and meet time and cost parameters. The army has had to repeatedly order T-90 tanks from Russia to make up for production delays at the ordnance factory in Avadi, Tamil Nadu. As the general says, the OFB promised 100 tanks a year but could barely deliver more than 85.
Several OFB-built mainstays will soon need replacements. The army has to go shopping for a new main battle tank to replace the T-90 and T-72 tanks built at Avadi, it will need a new infantry combat vehicle to replace the BMP-2 made at the Ordnance Factory Medak, and a new 7.62x51 mm assault rifle to replace the INSAS rifle made by Rifle Factory, Ishapore.
A report submitted by a defence ministry officer in May 2016, copies of which were sent to the prime minister and the national security advisor, is believed to have set the OFB reform ball rolling. In the report, A.K. Saxena, additional Controller General of Defence Accounts (CGDA), an organisation responsible for financial advice, payment and accounting in the MoD, pointed towards the OFB’s serious inefficiencies. The OFB, Saxena said, was overcharging the army several hundred crores in cases ranging from battle tanks to clothing to general stores. In the case of the T-90 tanks built under licence from Russia at the Heavy Vehicles Factory Avadi, the OFB was charging the army Rs 21 crore per tank, nearly 50 per cent more than what an import would cost.
“Make in India will fail unless the ordnance factories are corporatised, or better still, get into partnerships with the private sector. There is no way for them but to compete,” Saxena says.
In September last year, NSA Ajit Doval assessed the army’s dissatisfaction with OFB products in a meeting with then army vice chief Lt Gen. Bipin Rawat. This led to the series of policy decisions this year that gradu-
ally whittled away at OFB monopolies.
The powerful trade unions, which control over 88,000 employees in these factories, are aghast at the move to bring in the private sector and have warned of an agitation culminating in an indefinite strike. “The government’s PPP move spells the death knell for our factories,” says C. Srikumar, general secretary, All India Defence Employees’ Federation. “Without orders, our factories will turn sick. And when they turn sick, they can be sold off.”
Significantly, unions hold the change of guard within the ministry responsible for the corporatisation buzz. Former defence minister Manohar Parrikar had reportedly assured the unions he wouldn’t corporatise or privatise the ordnance factories. Similar assurances were given by defence ministers in the UPA era, Pranab Mukherjee and A.K. Antony, as well.
Parrikar instead asked the factories to improve efficiency. “Let me see if I can paint another colour,” he remarked to a 2015 media query on his plan for OFB ‘white elephants’. Under Parrikar, the OFB boosted output from Rs 11,000 crore in 2014 to a record of over Rs 15,000 crore this year and cut its workforce from 96,317 to 87,707. He delegated financial powers to avoid delays in processing R&D projects at the OFB headquarters, gave factories a target to increase the expenditure on R&D activities to 3 per cent of their turnover by 2018-19.
After Parrikar’s departure from the MoD in March this year, the government has stepped on the gas.
The ordnance factories are sitting on a land bank estimated to be 60,000 acres, a small but sizeable fraction of the total 17.5 lakh acres of defence land. The most valuable tracts are thought to be in Pune, Avadi, Jabalpur, Medak, Dehradun, Kolkata and Kanpur. This is where the MoD’s April 27 circular specifically asks the OFB for its real estate holdings in these cities.
“The government is taking a proactive move to ensure land, machinery, capital and skilled manpower are best utilised,” says Ratan Shrivastav, an independent defence consultant and advisor with the Federation of Indian Chambers of Commerce and Industry.
“Corporatisation may not be the ultimate panacea,” says Laxman Kumar Behera of the New Delhi-based MoD think tank, Institute for Defence Studies and Analyses (IDSA). “It is the first step for further reforms such as divestment of government equity and ultimately privatisation, if required.”
Some recent successes suggest a hidden potential in the ordnance factories. One such breakthrough is the ‘Dhanush’ 155 mm guns, an indigenously produced upgraded version of the Bofors howitzers. The first batch of six guns successfully passed field trials, opening up both an opportunity and a dilemma. The OFB has an order for building 414 howitzers, which it presently lacks the capacity to produce. At current production rates, it would take the ordnance factories more than a decade to deliver all the guns. “This is where a PPP model needs to step in and ensure that the OFB can offload orders onto private sector players with howitzer-manufacturing capacity,” says Lt Gen. P. Ravi Shankar (retired), former director general, artillery. A win-win for both.
ON TARGET Field trials of the OFB-built 155 mm Dhanush howitzer