Remove overhead expenditure from the cost of OFB products to be competitive, opines C. Srikumar, General Secretary of AIDEF
www.indianpsu.com has published this report afrter studying the CAG report on Indian Ordnance Factories for the financial year 2017-18 published in Report No. 15 of 2019. One area of criticism by the CAG is in regard to the overhead expenditure being incurred by the Ordnance Factories. The CAG has recommended remedial action by the Ministry of Defence.
www.indianpsu.com contacted C.Srikumar, General Secretary of All India Defence Employees' Federation (AIDEF), who is one of the architect of the joint proposal submitted by the Federations to the Government as an alternative to Corporatization, for his views on the CAG report. His views are published here for the benefit of our viewers.
The Federations of the Defence Civilian Employees of Ordnance Factories are fighting a long drawn battle to save the 219 years old Defence Industry. Basically Ordnance Factories are established for equipping the Army to defend the country with all types of Defence equipments starting from Battle Tank to Battle Field Dress. Considering the fluctuation of the requirements of the Armed Forces and also to maintain a War Reserve capacity Ordnance Factories are kept as Government Industry. Therefore it is the bounden duty of the Government of India to maintain and preserve the Indian Ordnance Factories at par with the Armed Forces. However the Government which is ruthlessly following the neo liberal economic policies. is bent upon to takeout Ordnnce Factories from the Government and to convert them into a PSU, so that its policy to handover all activities to private corporate gets easily implemented . Against this decision of the Government, not only the Defence Civilian Employees and their Trade Unions are fighting, people of the country are also supporting the movement to save the Ordnance Factories. Many Members of Parliament, Political Parties, Retired Chairmen of Ordnance Factory Board have already written to the Government to reconsider its decision to Corporatize the Ordnance Factories and to retain the same with the Government.
Negotiations with the Federations (AIDEF, INDWF & BPMS) based on a conciliation settlement reached in the presence of the Chief Labour Commissioner (Central) on an Indefinite Strike Notice is going on with the Defence Ministry. In a meeting held with Secretary (DP) on 29-10-2020, the Secretary (DP) himself asked the Federations that since they are against the Government decision to Corporatize the Ordnance Factories they should give alternative proposals for improvement in the autonomy, accountability and efficiency in Ordnance Factories in the present Government setup itself. Accordingly, the three Federations accepted the challenge and submitted a 23-page document giving alternative proposals to the Government. One of the important aspect which the Federations have dealt in their document is about the major area of concern of the Army i.e the cost of the products of the OFB.
The Federations have analysed the cost of the product and have come to the conclusion that the direct labour cost is 13% to 14%, material cost is around 43% and overhead cost is around 43%. The Federations in their report have stated that already efforts are being made to reduce the cost of the products by rationalising the material and labour estimates. However, the major area of concern is the 43% overhead cost which consists of indirect labour cost, indirect stores, supervisory charges, electricity, transportation, NPS Contribution, Pension Contribution, School, Hospital and Residential colonies etc.,
The Comptroller and Auditor General of India (CAG) in its report for the Financial year 2018, on Ordnance Factories i.e Report No.15 of 2019 has analysed the cost of production. The CAG has opined about the cost of production as follows :
1.2.5 Cost of Production
Stores account for 54 percent of the Cost of Production in the Ordnance Factory Board. Overheads at 33 percent of the Cost of Production are particularly high in the Ordnance Factory Board. The composition of costs varies across operating groups with the Armoured Vehicle (AV) Group and the Ammunition and Explosive (A&E) Group being the most material intensive. The Ordnance Equipment Group manufacturing clothing and general purpose items was the most labour intensive among the Factories.
126.96.36.199. High Cost of Overheads
Overheads charged in Ordnance Factories include indirect labour cost, indirect stores, supervision, electricity, transportation, depreciation, etc. The cost of Overheads accounted for 28 to 33 percent of the cost of production during 2013-18. Major elements of the overheads are supervision charges and indirect labour costs which together occupied 56 to 65 percent of the total overhead costs during 2013-14 and 2017-18.
Material and Components Group with some of the oldest factories of the OFB reported the highest levels of Overheads as much as 50 percent of the Cost of Production.
The main reasons for high supervision charges and indirect labour cost are holding of excess supervisory staff, compared to the number of Industrial employees (IE’s), non- reduction of indirect IE’s despite induction of new CNC machines, outsourcing of house keeping, maintenance, store-keeping and material handling and irregular payment of piece work profit to indirect IE’s.
Audit noted that over the period 2013-18, the supervisory costs in the OF organisation increased by 36 percent. In fact, for every two IE’s, there was one supervisor. Supervisory cost as a percentage of total labour costs was 72 to 78 percent during the period 2013-18. The number of indirect IE’s stood at 35 for every 100 direct IE’s during 2013-14 to 2017-18 which was very high. High supervisory costs lead to higher costs for the Armed Forces for the products manufactured by Ordnance Factories. Ministry of Defence may review the high cost of overheads and take appropriate corrective measures.”
The CAG has recommended that Ministry of Defence may review the high cost of overheads and take appropriate corrective measures. The Federations also, in their report have suggested the MoD to take the following corrective measures:
1. Due to stoppage of recruitment of direct manpower by OFB on the plea of shortage of workload has created a situation there by the direct labour strength has come down considerably resulting in a huge gap between the ratio of direct worker vs indirect workers and supervisors. The Federations have suggested that considering the retirement profile direct workers strength should be increased by recruitment of young blood from amongst ex-trade apprentices.
2. Like other Government Employees, OFB employees have also got every right to aspire for career progression in their service life . On promotion the Employees become supervisor at the fag end of their service. Therefore career progression of the employees cannot be stopped. The Group ‘A’ Officers, who are recruited through the UPSC, over a period of more than 25 years, climb the ladder and reach the level of Secretary in Government of India. With the same aspirations, other employees also will have to reach upto certain level in the hierarchy before their retirement. There is nothing wrong in that.
3. The Governments costing method of adding all the overhead expenditure which includes various elements as pointed out by the CAG and even adding other expenditure like NPS contribution (which Central Government has to contribute), Pension Contribution, Accounts department expenditure to the cost of the product is the main reason for the complaint of the Army that the cost of the product of OFB is exorbitant.
The Federations have rightly suggested to the Government that to overcome this situation, the only way out is to allot the salary expenditure separately to the OFB, so that the same need not be added to the cost of the product. Similarly, as recommended by a High-Level Committee, the expenditure towards Accounts Department, NPS contribution and pension contribution, etc., should also be delinked from the cost of the product. The Government instead of accepting the reasonable and justifiable proposal given by the Federations, is only going ahead with its agenda to Corporatize the Ordnance Factories. The Federations still believe that the Government will consider the proposals given by them as an alternative to corporatization and implement the same there by saving the Indian Ordnance Factories in the interest of Defence of our Country and to achieve self–reliance and finally, to have a reliable source of supplier and solution provider to the Indian Army.
Views expressed here are those of C. Srikumar, General Secretary of All India Defence Employees Federation and NEC Member of AITUC