Study On The Pricing Method And Procurement Mechanism Of Non Market-oriented Military Products In P.R. China

For a long term, the state governed and planned the military producing and uniformly priced the products on the principle of cost-covering, low margin and free-tax in our country. Since 1998, pricing of military products (PMP) has gradually oriented towards public market and a blended contract pricing (BCP) mechanism that combines state pricing with market pricing has been formed. The basic method was cost plus fixed margin which had been suitable and efficient in the early stage of the development of the market for military products. However, following with the development of socialist market economy and deepening of the reform relating to state price, fiscal and military procurement system, the concept of military products and its cost has changed a lot, which has made the BCP mechanism become increasingly problematic.This paper provides an analysis of the in-born attributes of the BCP with a deep streak of the planned economy as well as the resulting inefficiencies after a detailed introduction of the on-going mechanism and procedures for PMP. Under the current mechanism, the PMP runs counter to the law of market economy and the law of value and has degenerated into a tool for "protection of laggards" and "penalizing the early birds", due to asymmetric information on the part of the regulatory agencies, distortion of incentives to the military contractors and excessive intervention by the government. This has been handicapping the progress of R&D capabilities for military products, exacerbating the moral hazard on the part of military contractors and increasing risk of collusion by the military and the suppl iers. Consequently, the efficient utilization of our national defense resources is at stake and the internal need for market-oriented reform of the national defense industry would hardly be met.This paper puts forward suggestions for improvement from three perspectives regarding the issues raised above on the basis of the status-quo of the market for military products in China. In view of the slow progress of the military products market and complexities of current regime for PMP, the reform of the current pricing mechanism will have to be a long and gradual process. Realistic steps at the current stage are as follows:(1) adjust and refine the pricing mechanism for military products on the ground of the status-quo and the requirements of regulation, including providing different margins to different categories of products, using manufacturing cost as the pricing basis, employing different pricing methods for products at different places along the industrial chain, etc.;(2) introduce mechanisms that can solve such issues as incentive incompatibility between the military and the supplier, adverse selection and moral hazard, including competition in design and competition in manufacture, satisfying governance requirements at different stages in the production of military products;(3) create a good regulatory environment for PMP with less government intervention and build the"soft environment" for administering PMP through training high-quality and competent regulators, standardization of contract management, boosting legal support, sharing of price information, stepping up supervision, etc.