The deep dive into the possible functioning of new entities being created out of the OFB – which included a retired Vice Chief of Army Staff, a former OFB Director General and a Secretary level IAS officer – suggests that prices for most products will go up by 7.5 percent as they align to a corporate structure.
“Contrary to the popular belief, the war-game brought out that corporatisation will lead to an increase in prices. In the past, OFB was functioning on a ‘No Profit No Loss’ basis supplying at ‘actual cost of production’, but with additional overheads. Now they will operate under corporate pressures, where cost of capital and R&D costs will have to be taken into consideration and added to the cost of production,” Rajiv Chib, Partner at Insighteon Consulting that conducted the exercise said.
The war gaming exercise also concluded that out of the new entities being created, the future is brighter for Vehicles, Ammunition and the Parachute group, while the ancillary group may struggle for orders. The analysis was conducted for the next five financial years.
“It was estimated by the analysts that an average minimum profit of 7.5 per cent was necessary for sustenance, during the period under assessment upto FY 2026-27,” Chib said. The exercise simulated a discussion between OFB, the Army HQ and the defence ministry to fix prices for future contracts.
The corporatization is already underway, with the new entities set to get functional by next month, with an interim board of directors already selected. The OFB, consisting of 41 factories will be divided into seven corporate entities, each of which is expected to improve competitiveness and product quality. The forces have had a dismal experience with OFB products in the past and have been pushing for large scale reforms in the organization.
Conducted in August, the interactive war-game is predicting that there will be a reduced demand for products by the armed forces on OFB entities in the near future, with orders of upto Rs 11,500 Cr being placed per annum for the next five years.
“As 95% of the revenue of all seven corporatised entities is dependent on the government budget, the implications of reduced demand would be an increase in prices, keeping in mind the new pressures that the corporatised entities will be operating under besides its corresponding effect on turnover,” the findings read.
Among those who participated in the exercise are former Vice Chief of Army Staff Lt Gen SK Saini, former OFB DG Sourabh Kumar, former DG Quality Assurance Lt Gen Samsher Singh and retired Secretary Alok Petri who was part of the Dr Vijay Kelkar committee.