Relevance:

• GS 3 || Economy || Economic Reforms || Liberalization & Privatization

Why in news?

The Union Cabinet has authorized a plan to privatize the Ordnance Factory Board (OFB).

Present Context:

• Seven new Defence Public Sector Undertakings will be formed from the dissolution of 41 industries across the country (DPSU). The government will own all of the newly formed entities outright.
• These entities will be in charge of distinct product verticals, such as the Ammunition and Explosives group, which will manufacture ammunition, and the Vehicles group, which will manufacture defense mobility and combat vehicles.
• All OFB personnel in the production units will be regarded deputized to the new corporate entities for a two-year period, with their service conditions as central government employees remaining unchanged.
• The government will continue to bear the pension liabilities of retirees and current employees.

Ordnance Factory Board (OFB):

• It is currently a subordinate entity of the Ministry of Defence and serves as an umbrella body for ordnance manufacturers and allied institutions (MoD).
• The Dutch Company established the first Indian ordnance plant as a GunPowderFactory in West Bengal in 1712.
• It consists of 41 factories, nine training institutes, three regional marketing centers, and five regional safety controllers.
• The OFB-run factories produce a significant amount of weaponry, ammunition, and supplies for armed forces, as well as paramilitary and police units.
• Military and civilian weaponry and ammunition, explosives, propellants, and chemicals for missile systems, military vehicles, armored vehicles, optical devices, parachutes, support equipment, troop apparel, and general shop items are among the products produced.

Corporatization:

• Restructuring or transformation: Corporatization refers to the restructuring or transformation of a state-owned asset or organization into a corporation. These organizations typically have a board of directors, management, and shareholders.
• Publicly traded companies: However, unlike publicly traded companies, the government is the company’s only shareholder, and the shares in the company are not publicly traded.
• Allow the government to retain: The main goal of corporatization is to allow the government to retain ownership of the company while allowing the company to run as efficiently as its private counterparts. Government departments are often inefficient due to internal bureaucratic conventions.
• Joining the private sector: Additionally, the government may consider that joining the private sector might improve a company’s performance. If this is the case, the government might conduct an offering on the stock market to divest the organization.

Reasons for Corporatization:

• A performance evaluation by the Comptroller and Auditor General (CAG) in its report for 2019 on the OFB highlights a few of the lacunae, which ails this organisation.
• Overheads (expenses not directly attributed to creating a product or service) constitute a staggering 33% of the overall allotted budget for the years. The major contributors being supervision costs and indirect labour costs.
• Delayed Production: The Ordnance factories achieved production targets for only 49% of the items.
• More than half the inventory (52%) was store-in-hand, procured for manufacture but not used within the year by the factories.
• The Atmanirbhar Bharat initiative, also calls for the Corporatisation of OFB for: ‘improving autonomy, accountability and efficiency in ordnance suppliers’.

Importance of new structure:

• The restructure would also help in overcoming various shortcomings in the existing system of the OFB by eliminating inefficient supply chains and provide these companies incentive to become competitive and explore new opportunities in the market.
• It will allow these companies autonomy as well as help improve accountability and efficiency.
• The restructuring is aimed at transforming the ordnance factories into productive and profitable assets, deepen their specialisation in product range, enhance competitiveness and improve quality and cost-efficiency.

Significance of new structure:

• The restructuring aims to turn ordnance manufacturers into productive and profitable assets, deepening their product specialization, increasing competitiveness, and improving quality and cost-efficiency.
• The reorganization would aid in overcoming several flaws in the OFB’s current system by reducing wasteful supply chains and giving these businesses an incentive to become more competitive and seek new market prospects.
• It will give these businesses more autonomy while also improving accountability and efficiency.

Consciousness:

• One of the main apprehensions of the employees is that corporatisation (ownership and management lies with the government) would eventually lead to privatisation (transfer of ownership and management rights to the private player).
• The new corporate entities would not be able to survive the unique market environment of defence products that has very unstable demand and supply dynamics.
• Restructuring will result in greater autonomy and lesser government control over the corporation but there is a fear of job loss.

Way forward:

• The corporatization of OFB is projected to transform ordnance factories into a modernized, cutting-edge facility with more flexibility and better decision-making.
• There is a requirement for the strategy to have a reflecting road-map. This may alleviate some of the concerns about corporatization.

Mains oriented question:

The goal of restructuring is to turn ordnance factories into productive and lucrative assets by increasing product specialization, increasing competitiveness, improving quality, and lowering costs. Discuss this in detail. (200 words)