10 June 2014

Seven Reasons Why We Need to Disinvest in Ordnance Equipment Factories Group

08/06/2014

The Ordnance Equipment Factories Group (OEFG) is one of the five product-based operating groups functioning under the control of the Ordnance Factories Board at Kolkata. The OEFG produces general stores and clothing (GS&C), and exercises control over five out of the 39 operational Ordnance Factories. The Ordnance Equipment Factory Kanpur (OEFC) established post mutiny in 1859, Ordnance Clothing Factory Shahjahanpur (OCFS) set up in 1914, Ordnance Parachute Factory (OPC) set up in 1941 to meet the requirements of the allies during the Second World War, Ordnance Clothing Factory Avadi (OCFA) established in 1961, and the Ordnance Equipment Factory Hazratpur (OEFH) which was set up in 1982, are the five factories which produce GS&C inventory for the three Services. They produce uniforms, winter clothing, extreme cold and high altitude clothing, tentage, water proof covers, water holding equipment, soldier’s personal equipment, boots, saddlery items, and parachutes for personnel, supply dropping parachutes and brake parachutes for aircrafts, amongst many such items. The army is its principal customer and accounts for 77.36 per cent of the OEFG sales. This article presents seven very formidable reasons, supported by factual data, why the government needs to disinvest in the OEFG. 

Firstly, the private sector in contemporary India is capable of effectively meeting the GS&C demands of the services. During the period 2008-2012, the OEFG could meet only 56 per cent of the requirement of the services, and the balance, amounting to Rupees 2141.28 crores, came from trade[i]. The volumes indicate that the private sector is capable, and possesses the requisite potential to deliver the low-technology needs of the Services. On one hand the private sector is keen to generate revenue through supply of GS&C items, and on the other hand, the OEFG suffered a loss of Rupees 226.09 crore in the course of meeting the requirement of services.

Secondly, the OEFG is not responsive to the needs of the Services.In the present system, the OEFG has the first right to book orders against the demands of the Services. The private sector comes in only if the OEFG refuses, or fails to meet the demands of the Services. To illustrate, against the target of 4,87,444 pairs of Boot High Ankle DVS, the OEFC supplied only 32,500 boots in 2009-10. This forced the OEFG HQ to issue a No Objection Certificate to the Director General of Ordnance Services (DGOS) to procure two lakh shoes from trade. The case of boots is not a solitary occurrence; slippages are not uncommon to the OEFG. Against mutually accepted targets of 2011-12, slippages were recorded for 41 items amounting to supplies worth approximately Rupees 170 crores. The OEFG is largely responsible for non-availability and delays in meeting the requirements of the services.

Thirdly, the OEFG suffers from low productivity. The OEFG employs 11,912 personnel and has an annual sale of Rupees 826.73 crores. The Output per Person Engaged by the OEFG works out to Rupees 6.94 lakhs, which is just 16 percent of the domestic industry’s average Output per Person Engaged, which stands at Rupees 43.00 lakhs[ii]. The low productivity implies low return on the investment which the government has made in the defence sector. It also means that the defence suppliers are inefficient, and this indirectly inflates the defence budget without yielding commensurate capability.

Fourthly, the factories of the OEFG under-utilise their capacity. The percentage of underutilisation in OEFC ranges from 53 to 63 percent, in OPF from 45 to 53 per cent, and in OCFS from 16 to 69 per cent. As per the analysis of the Comptroller and Auditor General (CAG), the underutilisation of machine-hours is attributable to working of machines on single shift basis, delayed procurement of input materials, as well as offloading of jobs to trade. The under-utilization implies high fixed production over-heads, which in turn increases the cost of production.

Fifthly, the OEFG tends to offload manufacturing, the primary reason for which it exists. The CAG in its reports has observed that the OEFG resorted to trade assistance (euphemism for avoiding the primary responsibility) amounting to Rupees 8.28 crores, as it accepted targets beyond capacity; and for Rupees 11.65 crores even when it had unutilised capacity to manufacture. If the end supplier is trade, then why doesn’t the DGOS place its orders directly on trade, rather than approaching it through a circuitous route, which imposes a stiff penalty both in terms of time and cost?

Sixthly, the OEFG products are very costly. COD Kanpur procured Trouser PW PC Khaki for Rupees 195 against the factory price of Rupees 772 and Vest Woollen FS for Rupees 122 against the factory price of Rupees 632 in 2009-10. The cost of these two OEFG items was as high as 396 and 518 per cent of the market rate. Director General Sashastra Seema Bal, a customer of the OEFG, has observed that the rates of OEFG products are as high as 300 per cent compared to market rates. The variation in costs amongst different factories and also that made over the years is alarming. The labour cost of Fly Outer of Tent 4M manufactured by OCFA is Rupees 90.35, whereas the OEFC charges Rupees 2,836.21 (3039 per cent of OCFA cost) for the same item, in the same production period. Similarly, the production overhead charged by the OCFA is Rupees 159.84 and that by the OEFC is Rupees 3634.45, a variation of 2174%. Further, in OEFH, material cost for Tent 4M increased from Rupees 409 in 2009-10 to Rupees 39,477 in 2010-11.

Seventhly, the OEFG products lack quality. A product is categorised as Returned for Rectification (RFR) when it is put up for final acceptance and the Quality Assurance representative returns the product for rectification, as it fails to fulfil the criteria for the final acceptance. RFR beyond 20 per cent and up to 100 per cent was recorded by the audit in 72 out of 266 instances in respect of 31 items during 2008-12. Items which are not rectifiable are declared as finally rejected. In 2009-10, a total of 53,190 pairs Boot High Ankle valuing Rupees 10.17 crore were rejected for less hardness and less percentage of polymer content in sole. At OCFS, 40,000 blankets worth Rupees 2.35 crore were rejected due to overweight/underweight during 2004-05 to 2008-09. Similarly Mosquito nets, Blankets, Jerseys and Trousers worth Rupees 1.49 crore were rejected during 2009-10 and 2010-11 due to poor workmanship and finish, shade variation, incorrect dimension, loose texture, weight variation, damaged fabric, etc. Rejections also occur at the consignee end. Coat ICK worth Rupees 22.48 crore received by the Army till March 2007 from OPF, OCFS and OEFH are lying in rejected state (as of July 2012). The figures undoubtedly indicate a systemic failure of the quality control mechanism.

The government should indulge in the business of production only if there are very compelling reasons for it to do so. The reasons for which the equipment factories were established are no longer pertinent. A strong case exists for the government to consider disinvestment in the OEFG, and Services should rightfully procure its low tech needs directly from the trade. This shall reduce procurement costs and order fulfilment time, and enhance customer satisfaction. The fiscal liability of sustaining the public component of the defence industrial base would also reduce substantially. The manpower of the OEFG can be rationalised amongst the balance 34 Ordnance Factories, and can also be employed in factories coming up at Nalanda and Korwa. The physical assets of the OEFG should be used to set up Public Private Partnerships for producing high tech equipment. Such a course of action will bring in much needed reforms in the defence industrial base and shall also motivate the Ordnance Factories to perform. 

The author is Senior Fellow at CLAWS. Views expressed are personal.

[i] The data contained in the entire article has been extracted from Report No.-24 of 2013-Union Government (Department of Defence) - Report of the Comptroller and Auditor General of India on Performance Audit of Performance of Ordnance Equipment Group of Factories

[ii] Annual Survey of Industries 2011-12, Ministry of Statistics and Programme Implementation, Govt. of India 

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