Ordnance Factories to set up marketing arm

(Concluding a two-part series on Ordnance Factories)

by Ajai Shukla
Business Standard, 6th Sept 07

India’s Ordnance Factories Board (OFB), under fire from the military as well as the Ministry of Defence (MoD) for producing too little, too late, at too high a cost, believes its primary customers judge it too harshly. Instead, the OFB points to its recent success in bagging a Turkish order for air defence ammunition, which was won in the face of international competition from Sweden and Italy.

OFB Chairman, Sudipta Ghosh says that the OFB wants to boost profits for modernizing its factories and in-house R&D, but the bulk of its products goes to the defence forces on a no-profit-no-loss basis. The only profit allowed is on sales to civilians, police and paramilitary forces, and export customers like Nepal, Myanmar, Sri Lanka and now Turkey.

Now, Sudipta Ghosh has proposed setting up a specialized marketing corporation to maximize profits from non-military customers. The OFB Chairman told Business Standard, “Now we have a plan to create a marketing corporation within the OFB, something like the Railways’ IRCON; we can use this corporation to get more flexibility in negotiating with customers.”

The Defence Minister, it is learned, has agreed to the OFB’s request for a marketing wing. Secretary of Defence Production, KP Singh, explained that this would provide the OFB, traditionally a manufacturing body, with greater marketing acumen. Mr Singh pointed out that a marketing corporation “can be more flexible than a government factory. A marketing wing would be able to promote its products better, send people abroad more often… have the flexibility to do exports in a better manner. So the minister has approved this proposal.”

The MoD points out that besides exports, a marketing wing would also provide the flexibility to be able to deal with civilian buyers, where prices fluctuate according to market forces. The Articles of Association are being worked out, but MoD sources indicate that the marketing wing will be formed from within the Ordnance Factories, and staffed by a mix of OFB officers and marketing executives from outside.

The MoD has its own interest in boosting OFB profits. Last year, about half of the OFB profit of Rs 663 crores was ploughed back into the defence budget; the OFB got just Rs 300 crores for modernizing its plants. When the 2007-08 budget was being formulated, the OFB asked to retain all its profits for modernization, as well as an additional Rs 340 crores from the defence budget. Instead, the 2007-08 budget estimates provide for taking back Rs 202 crores from OFB profits. That’s a gap of Rs 542 crores between what the OFB asked for, and what it is getting.

In the light of that, the OFB hopes that a separate marketing corporation will provide it a route for making and parking profits, without having to surrender them to the MoD. The OFB Chairman explains that, “Today I am a complete departmental body so I cannot retain any surplus with me. But if I generate this surplus through the corporation I need not return it to the government, I can keep it, use it for my improvement… and for buying technology from abroad. Today, for each and every thing, I have to go to ministry and take its permission.”

There is some hesitation within the MoD, however, in allowing the OFB too great a leeway in charting its own commercial path. Top MoD officials question the OFB’s eagerness to accumulate funds for modernization, when the MoD says that it will provide all the funds necessary. Some restrictions have already been loosened, such as the limit of Rs 10 crores per year on R&D expenses.

As organizations like the OFB and the DPSUs pump more money into research, the MoD will be dealing with the blurring of lines between purely research-oriented establishments on the one hand, like the Defence Research and Development Organisation (DRDO), and organizations like the OFB and the DPSUs on the other, which were set up initially as manufacturing agencies.