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A corporate OFB will be weaker than UK’s privatised ROFs

The arguments pertaining to competition, value for money, efficiency for corporatising OFB does not hold good in a rigged market that India wants to create

The arguments pertaining to competition, value for money, efficiency for corporatising OFB does not hold good in a rigged market that India wants to create.
The arguments pertaining to competition, value for money, efficiency for corporatising OFB does not hold good in a rigged market that India wants to create.
  • The corporate OFB will be weaker than the Royal Ordnance PLC without incorporation of part of DRDO and any marketing arm

  • Just like Reliance Jio dominates the market, one private monopoly will rule the market at the cost of public money in India

New Delhi: June 16 will be remembered as the Black day for defence preparedness of India. It was on this day that Finance  Minister  Nirmala Sitharaman announced that the  41  ordnance factories will be converted into a corporation /Public  Sector Undertaking and will be listed in the share market. The decision raises more questions than answering. Let us try and draw resemblances with the Royal Ordnance factories (ROFs) in Britain which met with after a similar fate of Corporatisation. The reason behind such comparison is due to the fact that the Indian Ordnance Factories are the successors of Royal Ordnance Factories of Britain.

Corporatisation of Royal Ordnance factory: A failed decision 

The UK government made ROFs (Royal Ordnance Factories) an independent commercial organisation by corporatising the existing ROFs in 1984. The newly created organisation was Royal Ordnance PLC, where part of the Royal Armament Research & Development Establishment (RAEDE) was transferred to Royal Ordnance PLC to provide an R&D capability. The Ordnance Factories and Military Services Act, 1984, triggered a fierce debate in the British Parliament, with the government arguing it will be stronger with R&D and marketing arms merged into it. Moreover, it was further contended that the decision will help the new corporation to set up joint ventures and access private funding and will remove the burden of civil service bureaucratic processes, such as hiring employees. The point is important to note because a similar logic is being put forward by the MoD (Ministry of Defence) in the case of OFBs in India. 

However, those who opposed the privatisation move, expressed concerns that the Royal Ordnance would be sold cheaply, there would be job losses of worse terms and conditions and it would reduce competition from the market, as monopoly private companies would make huge profits from the Defence Ministry. This argument is applicable in the Indian context too. Historically, we have seen Tata increasing the prices of its trucks during the Indo-China 1962 war, and given the systemic capitalist mindset of private companies, it is highly likely that in the future as well a private company would extract as much profit possible out of the public exchequer. 

The British government set a target date of July 1986 to float Royal Ordnance PLC on the stock market. But, by June 1986, it was realised that the stock market listing would not be possible due to the unstable financial position of the company — liabilities regarding a contract with British Aerospace, the anticipation of an uncertain relationship between the UK MoD and the company. A similar complication is also expected to arise in the case of OFBs in India, given the complicated partnership the board has got into with companies like Russian Kalashnikov Concern and Rosoboronexport. 

The Thatcher government privatised major defence industries, including British Aerospace, British Shipbuilding and the Royal Ordnance Factories. One of the tank-making units at ROF Leeds was sold to Vickers for 15.2 million pounds. The rest of Royal Ordnance PLC with 13 factories with 18,500 workforce, was sold to British Aerospace, which paid 190 million pounds for Royal Ordnance PLC. A total of six contenders had thrown their hats in the ring.

The post-privatisation story

In the period following privatisation, there was intense competition for various contracts. At the same time, the capability of the Military Industrial Complex declined as private parties stopped investing in the manufacturing facilities. The value-for-money philosophy was a clear failure. Similarly, the arguments pertaining to competition, value for money, efficiency does not hold good in a rigged market that India wants to create. 

The British government changed the course by shifting from short-term contracts to a 10-year arrangement, whereby the government continued to pay the same price as before for each product but an additional sum of money was set aside to cover overheads under an open book principle (to manage the war insurance called redundancies). The idea was that if an unacceptable return was being realised, then money would be given to mask this. A staggering sum of 67 million pounds was spent within six years, raising eyebrows about the new approach. Eventually, the UK government-backed out of paying for the redundancies. Given the high valuation that the OFB holds, private players in India are eyeing to make huge profits once OFB is dead.

BAE Systems had insisted upon having a cap on liability for failing to deliver the contract, something that the British government did not want. The result was a painful negotiation and the inclusion of a very high cap on liability. The government was fearful of BAE Systems wishing to sell the business to a foreign entity following the contract award. Meanwhile, the UK MoD team had to answer tough challenges around: “Why are you going to single-source?” The time is not far off. Just like Reliance Jio dominates the market, one private monopoly will rule the market at the cost of public money in India. The corporate OFB will be weaker than the Royal Ordnance PLC without the incorporation of part of DRDO and any marketing arm. The sustainability of this organisation will be an issue. It could be sweet music to the ears of many, as they want OFB to fail so that the private sector can win. But that’s what’s in store.

Gross Irregularities in EoI-cum-RFP

The EOI-cum-RFP document published by the MoD has exposed them. The platitudes of greater incentive for export, agility in absorbing ToT, besides forming Joint Venture (JVs), to create surge capacity to meet war requirements, improvement in the quality of its products by enabling the new entity to follow market-based quality practices are missing in deliverables in the proposed contract. There may be a game plan to squeeze OFB, to run away with the money after ensuring generous payment terms, without linking the contract to outcomes.

Slap in the face for Aatmanirbhar Bharat

The nation has fallen prey to the private lobby. On the one side, there is the call of Aatmanirbhar Bharat, on the other side, see the spate of purchases from overseas — MIG 29, Sukhoi, Excalibur artillery rounds for M777 ultra-light howitzers from the United States, Spike anti-tank guided missiles from Israel, 93,895 Caracal International, carbines and SIG Sauer’s SIG 716 rifles. For the record, OFB had fielded its own in-house weapons. Where is the private sector, which is sitting with so many licenses and a clear advantage given to them through so many sops? 

The Modi government will be known for this gross misstep — with the clear intention of Make by Private, with screwdriver technology, with imports from abroad. The Make in India initiative is at stake with a spate of huge imports, which can only happen when OFB is silenced. Moreover, the draconian Essential Services Maintenance Act (ESMA) is expected to be notified through an ordinance. Why is the government so afraid of its peaceful employees, who want to speak for their rights? The action of the government is a direct affront to the democratic principles enshrined in the Constitution. The constitutional democracy is at stake with the voice of its people and their fundamental rights being sacrificed. The logic and rationale of the government is untenable. If the Modi government is interested in providing autonomy to OFB, it is being voiced only while talking of corporatisation. The problem is that the ministry does not want to cede power and it wants closer control through government nominees in the Board of Directors for rent-seeking. 

OFB a scapegoat 

Being a government department, the OFB is accountable to the people of the country through Parliament and also to the CAG. The Ordnance Factories are subjected to periodical review by the Defence Minister and the Parliamentary Standing Committee as well. It is not understood, in what way OFB has failed in transparency and accountability in a democratic system with checks and balances, right from RTI, audit, executive overview, and parliamentary scrutiny. If all of them are not working, the government should try to reform their system rather than making OFB a scapegoat. If the accountability of OFB is being questioned, it is a serious issue for the entire government. 

Further, when compared to any other government department, the workforce of the Ordnance Factories is more efficient and more than 60 percent of the employees earn their wages only through their output since they are on a piece-work system. PSUs are not necessarily more efficient than the Ordnance Factories, especially as stated by the MoD before the Parliamentary Committee. Had it been so, PSUs would not have been divested. OFB has to address many social welfare concerns, unavoidable social responsibility like school, residential colonies and hospitals etc. They have to be factored in for calculation of efficiency.  

The government does not want the voice of dissent. The unfortunate part is that the drama will unfold and the history will be repeated. The OFB will be corporatised and eventually privatised. The soldier will cry for a piece of indigenous weapon. The MoD will pay from its deep pockets the price for placing monopoly suppliers on the pedestal. The script will run similar to that of the ROF in the UK and India will have to suffer because of such a disastrous step. 

C Srikumar is General Secretary of the All India Defence Employees Federation. 


Disclaimer: This is an Op-ed article. The opinions expressed in this article are the author's own. Defence Watch does not endorse nor support views, opinions or conclusions drawn in this post and we are not responsible or liable for any content within the article or for any damage or loss caused by and in connection to it.

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