Reforming the Ordnance Factory Board

Discussion in 'Defence & Strategic Issues' started by pmaitra, Jul 5, 2015.

  1. pmaitra

    pmaitra Moderator Moderator

    Mar 10, 2009
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    EST, USA
    Reforming the Ordnance Factory Board

    Below is an article by Ajai Shukla that provides some interesting insights into some of the reforms that are being mulled for the Ordnance Factory Board, which comprises of various facilities all over India.

    Before posting the article, here is a list of the facilities:



    The article by Ajai Shukla (I want to thank @avknight1408 for sharing this article.):

    Ordnance Factories: the tough path to reform

    (Part I of a two-part series)

    by Ajai Shukla
    Business Standard, 5th Sept 07

    The short 40 km drive from New Delhi to the Ministry of Defence’s (MoD’s) Ordnance Factory at Muradnagar was a journey back in time to 1943, when the British first set up the factory. Two old women, squatting next to a charpai, wound a length of jute rope around a piece of metal shaped like a bomb; striking a matchstick, one of them set the rope afire. I was told they were “heat-treating” a bomb for the Mirage 2000 fighter. Little has changed since 1943 in the factory’s manufacturing methods; little has needed to. With captive customers in the Indian military who resentfully pay a “no-profit-no-loss” price for the goods produced in the 39 OFs, there has been little incentive to provide better products at cheaper prices.

    Until now, that is. On 18th May 07, the MoD top brass handed out an ultimatum to a gathering in New Delhi of General Managers of all OFs: gear up or perish. India’s next army chief, Lt Gen Deepak Kapoor, intoned a list of complaints against the OFs that he said the army had conveyed many times before. Defence Minister AK Antony spelt out the bottom line, warning the managers, “The future of the OFs depends upon the decisions that you will take during these deliberations.”

    Mr Antony’s exhortation to change is not the first that the OFs have heard. But with the MoD now serious about a greater role for the private sector in defence production, change is in the air. Before long, as many as 15-18 private companies could be nominated as Raksha Udyog Ratnas (RuRs), providing bitter competition for OFs and defence PSUs.

    The Ordnance Factory Board (OFB), based in Kolkata, has already proposed bold steps towards rejuvenating the OFs. Mr Sudipta Ghosh, Chairman of the OFB, has told Business Standard that he has approached the MoD with the following suggestions:

    • The 39 OFs switch from their traditional, non-commercial system of “no-profit-no-loss” accounting to the commercial accounting systems that most companies use. This would involve each OF preparing a proper Balance Sheet, and a Profit & Loss Account.
    • Instead of the present “no-profit-no-loss” pricing of products, market dynamics should determine prices. The OFs should be allowed to make profits on items where they are competitive and cross-subsidise items that require a subsidy.
    • Profits will be used for modernising existing OFs in order to provide a greater share of the military’s requirements.
    • Selected OFs be nominated as R&D centres, where products could be improved or new products developed.
    • OFs will provide customers with warrantees on all products, with immediate effect.

    These are revolutionary changes for the MoD’s “departmental factories” which will churn out some Rs 6500 crores worth of military equipment this year, ranging from clothing to heavy tanks. Over the years, the crippling combination of cost-plus accounting, assured customers, mediocre managers, highly unionised labour and the shutting out of competition has created the ultimate manifestation of the license raj.

    The MoD has welcomed the OFB proposals cautiously. Secretary for Defence Production, Mr KP Singh says all OFs will implement commercial accounting as soon as the Institute of Chartered Accountants of India (ICAI) and the C&AG give the green signal. Sources in the C&AG department say this could happen very shortly.

    Mr KP Singh sees the proposed accounting systems as a useful way to judge the OFs’ systems and performance, a baseline by which, “you’ll come to know what is the health of a particular factory vis-à-vis other factories. Which manager is doing better and which manager is doing less.”

    But Mr Singh has ruled out the more radical suggestions of profit-making and market-determined pricing. The MoD may wish to insulate the OFs from free market competition, but this appears to the OFB like imposing full corporate accountability, without giving the freedom to operate like a regular corporation.

    (Next, in Part II: Ordnance Factories setting up a marketing corporation) [not available at the time of posting]

    The focus of the discussion is the several points that are proposed in the article. Suggestions that are not mentioned in the article are also welcome.
  3. ezsasa

    ezsasa Senior Member Senior Member

    Jul 12, 2014
    Likes Received:
    Hyderabad, Andhra Pradesh, India
    First we have to recognise that this is a 2007 article, but still relevant to an extent.

    As long as there is monopoly by OFB on defence industry, no matter how hard they try nothing is going to change.

    In the next 10 years if there is Non-OFB option to every defence product manufactured in india, Competition and level playing field will automatically drive efficiency.

    There is one incorrect statement i found in the article"The MoD may wish to insulate the OFs from free market competition, but this appears to the OFB like imposing full corporate accountability, without giving the freedom to operate like a regular corporation."

    MoD has already made attempts to create level playing field.Source:

    One important thing is that Private company JV with OFB should not be encouraged at any cost, after seeing how NDPL operates i am not sure that is a right approach.
  4. Hari Sud

    Hari Sud Senior Member Senior Member

    Mar 31, 2012
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    I will first update the article to toady and incorporate in the analysis all the management and personal changes which have been made after the Chairman of the OFB was summarily fired for corruption.

    Find all the faults you can but find with OFB but also look for nice things which may have happened their.

    Put all the faults and good things in OFB against our inflexible army, which stays on the side lines mostly during development and manufacture but are first to be critical when actual use of ammunition, guns and explosives begins. Only then analysis is reasonable.
  5. blueblood

    blueblood Senior Member Senior Member

    Jan 28, 2011
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    Couple of steps in the right direction.

    The MoD has been critical of OFB delays. The MoD source said OFB was late in delivering jackets, boots and parachutes worth more than $200 million, and the Army had to resort to imports.

    OFB, with more than 100,000 employees, has annual sales of only $2 billion.

    Ordnance factories to move to commercial accounting system

    The defence ministry has asked Ordnance Factories Board (OFB) to start following a dual system of accounting, and maintain both commercial and government accounts for financial transactions. This came after Defence Minister Manohar Parrikar gave an in-principle approval last month to convert OFB into a Departmental Commercial Undertaking on the lines of Railways. DCUs are unincorporated enterprises owned, controlled and run directly by the government. These normally do not hold or manage financial assets and liabilities but charge for goods and services they provide on commercial basis.

    ‘Critical’ shortages of ammunition nearly made up, Army to PAC

    Sources said the quantity of ammunition procured by the army in 2014-15 is worth around Rs 900 crore more than the average quantity purchased in earlier years. Barring one item, the army is confident of overcoming “critical” level for all types of ammunition by 2016. In May, Parrikar had assured, “We will overcome the shortfall within one and half years. The gap has been filled 50 per cent and process of remaining 50 per cent is underway.

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