Corporatisation of Ordnance Factory Board (OFB)

Context:

Addressing a long pending reform, the Union Cabinet approved a plan to corporatise the Ordnance Factory Board (OFB), which has 41 factories, into seven fully government owned corporate entities on the lines of Defence Public Sector Undertakings (DPSU).

Relevance:

GS-III: Indian Economy (Privatization and Commercialization, Fiscal Policy, Budgeting), GS-III: Industry and Infrastructure

Dimensions of the Article:

1. Basics: What is Public Sector and Private Sector?
2. What is Privatization?
3. What is Corporatization?
4. Privatization and Corporatization in the Economic Survey 2020, Volume 1 Chapter 9
5. Lack of traction for privatisation in India
6. Ordnance Factory Board (OFB)
7. About the Current Major decision regarding OFB

Basics: What is Public Sector and Private Sector?

• In general, two main sectors compose an economy: the public sector and the private sector. Government agencies generally run operations and industries within the public sector.
• Enterprises not run by the government comprise the private sector. Private companies include the majority of firms in the consumer discretionary, consumer staples, finance, information technology, industrial, real estate, materials, and healthcare sectors.

What is Privatization?

• Privatization occurs when a government-owned business, operation, or property becomes owned by a private, non-government party.
• Note: This is NOT to be Confused with “corporate privatization” that describes the transition of a company from being publicly traded to becoming privately held.
• It generally helps governments save money and increase efficiency, where private companies can move goods quicker and more efficiently.
• Privatization is considered to bring more efficiency and objectivity to the company, something that a government company is not concerned about. India went for privatization in the historic reforms budget of 1991, also known as ‘New Economic Policy or LPG policy’.
• Critics of privatization suggest that basic services, such as education, shouldn’t be subject to market forces.

What is Corporatization?

• 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.
• However, unlike publicly traded companies, the government is the company’s only shareholder, and the shares in the company are not publicly traded.
• 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.
• 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.

Privatization and Corporatization in the Economic Survey 2020, Volume 1 Chapter 9

Evolution of Disinvestment Policy in India

• The liberalization reforms undertaken in 1991 ushered in an increased demand for privatization/ disinvestment of PSUs.
• In the initial phase, this was done through the sale of a minority stake in bundles through auction. This was followed by a separate sale for each company in the following years, a method popularly adopted till 1999-2000.
• India adopted strategic sale as a policy measure in 1999-2000 with the sale of a substantial portion of government shareholding in identified Central PSEs (CPSEs) up to 50% or more, along with transfer of management control. This was started with the sale of 74 % of the Government’s equity in Modern Food Industries Limited (MFIL).
• Thereafter, 12 PSUs (including four subsidiaries of PSUs), and 17 hotels of Indian Tourism Development Corporation (ITDC) were sold to private investors along with transfer of management control by the Government.
• Another major shift in disinvestment policy was made in 2004-05 when it was decided that the government may “dilute its equity and raise resources to meet the social needs of the people”, a distinct departure from strategic sales.
• Department of Investment and Public Asset Management (DIPAM) has laid down comprehensive guidelines on “Capital Restructuring of CPSEs” in May 2016 by addressing various aspects, such as payment of dividends, buyback of shares, issues of bonus shares and splitting of shares.

Privatization in 2019

• In November 2019, India launched its biggest privatization drive in more than a decade. An “in-principle” approval was accorded to reduce the government of India’s paid-up share capital below 51% in select Central Public Sector Enterprises (CPSEs).
• Among the selected CPSEs, strategic disinvestment of the Government’s shareholding of 53.29% in Bharat Petroleum Corporation Ltd (BPCL) was approved which led to an increase in value of shareholders’ equity of BPCL by INR 33,000 crore when compared to its peer Hindustan Petroleum Corporation Limited (HPCL) and this reflects an increase in the overall value from anticipated gains from consequent improvements in the efficiency of BPCL when compared to HPCL which will continue to be under Government control.

Lack of traction for privatisation in India

• Typically, privatisation policy in India has been motivated by the need to raise resources in tough fiscal conditions. This is evident in the choice of the word ‘disinvestment’, as opposed to ‘privatisation’, which implies that the ownership and management of companies or assets move to private hands.
• In sectors such as defence and national security, which could be the termed ‘strategic’, the government may continue to play a role. However, in areas where there are private players and where there is already a competitive market (such as steel, pharmaceuticals), or where the market has a few dominant players but is regulated (such as telecom), it makes sense for the government to exit.
• Past efforts at privatisation through strategic sales — when it was attempted by the first NDA government in the early 2000s — have faced several hurdles. One reason is endless litigation, sometimes by the labour unions, and sometimes on account of valuation of government assets and the prices at which they were sold.
• Concerns on valuation have also got officials in charge of privatisation tangled in legal battles, even well past their retirements. This has made civil servants risk-averse and unwilling to sign off on any sale at any price.

Ordnance Factory Board (OFB)

• Ordnance Factory Board (OFB) consisting of the Indian Ordnance Factories is a Government agency under the control of department of defence production (DDP) Ministry of Defence (MoD), Government of India.
• OFB is the world’s largest government-operated production organisation, and the oldest organisation in India.
• It is engaged in research, development, production, testing, marketing and logistics of a product range in the areas of air, land and sea systems.
• OFB comprises forty-one ordnance factories, nine training institutes, three regional marketing centres and four regional controllerates of safety, which are spread all across the country.
• OFB is the 35th largest defence equipment manufacturer in the world, 2nd largest in Asia, and the largest in India.
• Ordnance Factory Board predates all the other organisations like the Indian Army and the Indian Railways by over a century. The first Indian ordnance factory can trace its origins back to the year 1712 when the Dutch Ostend Company established a Gun Powder Factory in Ichhapur.
• The Indian Ordnance Factories have not only supported India through the wars, but played an important role in building India with the advancement of technology and have ushered the Industrial Revolution in India starting with the first modern steel plant of India much before Tata Steel, first modern electric textile mill of India, first chemical industries such as smokeless propellant plants of India, established the first engineering colleges of India as its training schools, played key role in the founding of research and industrial organisations like ISRO, DRDO, BDL, BEL, BEML and SAIL.

About the Current Major decision regarding OFB

• This restructuring is aimed at transforming the ordnance factories into productive and profitable assets, deepening specialisation in the product range, enhancing competitiveness, improving quality and achieving cost efficiency.
• Currently, the Kolkata headquartered OFB functions as a department under the Department of Defence Production. There have been several recommendations by high-level committees in the past for corporatising it to improve efficiency and accountability.
• All employees of the OFB (Group A, B and C) belonging to the production units would be transferred to the corporate entities on deemed deputation initially for a period of two years without altering their service conditions as Central government employees.
• The 41 factories would be subsumed into seven corporate entities based on the type of manufacturing.
• The new structure 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 exploring new opportunities in the market, including exports.

-Source: The Hindu