Метhodolоgical аspect items of armaments and military equipment pricing in the defense system of the Republic of Serbia

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Метhodolоgical аspect items of armaments and military equipment pricing in the defense system of the Republic of Serbia

Market as a phenomenon and an economic category is very complex and it is a place where exchange is conducted among economic subjects in every society where division of labour has been done. There is offer with sellers who ensure satisfaction of general or inividual needs of people through their production or some other activity, and there is demand with buyers who, having money, ask to provide for their needs in the way and under conditions that best suit them. Here, it is first of all necessary to point out several regulatory flows: first, economic selection of products in demand, which producers and other turnover subjects will put at the market; second, economical and technical allocation of material goods production and the best selection of production procedures with the goal to satisfy market with all requirements buyer or consumer have: third, total distribution of created values and profit realized during operations among production participants, social development turnover, can be conducted with the help of market mechanisms in the most just way and direct them to further social reproduction.

Arms market existed at earlier times, too, but it was purely military issue taken care of by military organs within their canals and always in closed military circles. That is why it was not a subject of extensive consideration of economic theory. Speaking about military markets, at a national market (in small countries) there can be one buyer (state) and one seller (firm) and such market is bilaterally monopolistic. In case of larger country with several arms producers or importers and producers, state appears as buyer, there are several producers, which makes such market monopsonistic. With arms turnover, there is, most frequently, one buyer and one seller and such arms market is called bilateral monopoly market. This phenomenon has been first dealt with in our country by Dragomir Djordjevic.

Price is synthetic market element analyzed and researched by many a number of economist and theoreticians, as well as by all participants in market economy. According to generally accepted definition, price is conceptually determined as a monetary expression of commodity market value, on condition that it is formed freely in relations of offer and demand and market law effect. Out of thus defined concept of price, a conclusion follows that each limitation or direction of market law effects causes formation of special price categories and requests for appropriate intervention on the market.

In market conditions, all prices which are freely formed are very mobile and dynamic. Price trends are classified according to time and space. Price time trends (variations, dynamics, disparity) are represented by the change in price of one product within certain period of time. Price time disparity, depending on period of time in which it happens, is classified in five different forms: daily, short-term, seasonal, annual and long-term trends. Spatial trends (variations, dynamics, disparity) show the level of market price of one product, at the same time, at different market points or areas. Price spatial trend is an indicator of offer and demand distribution and of commodity stock turnover directions. Costs of handling, transport and storage can be reduced by well equipped, organized and connected production, manufacturing and trade organization, which as a result leads to standardization of spatial price variations.

Particular form of price trends is represented by changes in relations among different kinds of price. Those are parities - when the relation is harmonious and disparities - when there is no accord among given price values. Price disparity, frequent in practice, occurs as a result of effect of economic policy measures, not as a result of differences in observed products actual reproduction costs. The most frequently analyzed are disparities of agricultural and industrial product prices, resources and final products, imported and exported products, etc. In this sense, price of a product is a relative value when compared with a price of some other product. It can be nominally high, but realistic, that is, in relation to production costs or in relation to some other product it can be insufficient. Market has a characteristic to not only determine price level of a product through offer and demand, but also to establish balance among different products by giving stronger impulse to the production of different products alternately.

Since arms market is specific, arms prices have their own specific traits compared to prices of goods and services on the market. Arms price is not formed in total confrontation of offer and demand, but in bilateral relations between arms buyers and sellers, where most frequently, there are statal organizations which offer or buy arms. Prices are often not, in such conditions, regulator of sales relations, especially if the market is monopsonistic.

Тheoretical-methodological aspect of armaments and military equipment pricing

When making contracts and conducting accquisition and sale, it is necessary to follow certain standard actions in order to permanently implement steady procedures of armament and military equipment (AME) acquisition in economic segment within defense system. Within substential attitude emphasized in this way, it is necessary to give theoretical-pragmatical retrospection on certain limitations which characterize this field. Within these limitations it is necessary to point out: regulations which control supply and sale for the needs of defense system, budget limitations and financial discipline in spending planned defense funds (in that sense it is necessary to match planned supplies with approved monetary funds), to create contract commitments only for the current budget year. When contract is made for the supply of AME items with defense industry companies, certain commercial and economic elements should be observed (advance payments should not be made, delivery of AME items should be on principle realized during first three quarters of a current year, in case of disregard of contracted delivery terms, contract should be broken without harmful consequences for buyer, and payment commitments should be contracted with the time limit of 30 and more days after the day of occurence of debtor-creditor relation).

Theoretical-methodological character of price determination procedure is, beside above given limitations, based on several very important assumptions, that is, principles which represent the base of economical-empirical method of AME pricing within the market where army is a buyer. When forming the price of AME items, it is necessary to observe the following general principles: co-ordination principle, which can be described through the need, that is, recognition of technical-technological and organizational level of current capacity state of equipment of AME producers when pricing AME, which is directly or indirectly connected with producer; identification principle which can be presented through the requirement that the state of general price level at domestic market reflect on actual element when forming the AME price which calls for maintenance of real price parities; plurality principle implies that level of AME price has to be co-ordinated with several modalities of comparison, which demands recognition of world price level of AME items and labour absorption principle which can be accentuated through the demand to co-ordinate labour value within methodological sphere of pricing with the demand for full capacity employment.

Within thus presented general principles of methodological elements of AME pricing, it is necessary to differentiate two cases which have to be considered separately. The first is related to the methodological aspect of pricing AME produced for the first time, and the second is related to the methodological aspect of pricing of current production program.

Within methodology of pricing AME produced for the first time, it is necessary to point out demands on which pricing procedure is based. Since calculation is a methodological procedure of pricing a product in a certain moment of time, it also applies for AME item pricing, where these particular requirements apply. They can be differentiated through following elements:

1 - Starting point for calculative pricing method based on actual costs consists of production period and material standards. Within thus differentiated elements of price component, it can be seen that the classification of direct and indirect costs has been made according to production period, which is through the cost distribution key connected to cost holder, in this case, to the product - AME and production material which represents direct cost and is allocated to each product respectively.

2 - Since AME price includes a number of products which cannot be obtained at local markets, methodological character of this value is specific. Within components which make structural part of production elements, it is necessary to specify conditions on which imported components will be implemented in the price of relevant AME product. Therefore, imported component should be methodologically adjusted to the pricing model and thus establish its share in the price. For such implementation, it is necessary to determine so-called cost distribution key which will in this case be achieved in the way that imported component share will be formed within the relevant product price on the parity of the relation between domestic and foreign currency (currency of exporting country). Within this element it is important to mention that component import must be secured through well formed business policy of the company which produces AME, in such way, that within its frame it will be planned to ensure all purchase elements for imported components, that is, evidence that the selection of the most favourable foreign supplier has been made, which is closely related to connected entities which create elements of joint business subject (concern).

Within material price elements, all elements of dependent costs which occur at this type of material supply should be methodologically included, in the way that they should be calculated according to the actual, that is, objectively specified and economically-methodogically conditioned costs. For that purpose, it is necessary to provide reliable evidence which will help to establish: import material price and all items related to dependent costs.

3 - It is necessary to calculate domestic material component in product price with current market verified price in the period of establishing cost price of relevant AME product. Price of the same raw materialS may be the same with all AME producers. Selection of the most favourable raw material supplier should be made according to the credible market indicators, which, as could be seen above, have to be clearly seen from the company business policy determined for related period. Dependent costs should be calculated according to real and objectively conditioned costs. In order to ensure objectively economic and methodological character of price forming procedure, it is necessary to make material value specification for each AME item for which cost price is formed, such as follows: for imported material it is necessary to make uniform specification and for domestic material specification according to branches of industrial activities, which can be represented through: non-ferrous metallurgy, ferrous metallurgy, chemical branch and other.

4 - Within AME price forming methodology, contribution of co-operation costs, which represent most frequent AME input produced in the unique military-industrial complex (defense industry enterprises) should be specified. Within price forming methodological aspect for related AME product, it is necessary to separately specify co-operation costs as: specific-purpose co-operation and other co-operations on the market.

5 - Within indirect costs, it is necessary to precisely determine contribution of all costs separately. Меthodologically, it could be performed in such way that working component value is input in cost price on the basis of hour norm average value. Hour norm value for different producers varies within certain value interval depending on economic-technological characteristics of relevant enterprise which produces AME. This interconnectedness could be stated throguh certain dependency factors:

- level of technical state of equipment of AME producers,

- company employees qualification structure,

- number of norm hours and norm-setting policy in the concrete enterprise.

Characteristic term for methodological aspect of current production program pricing, is indexation. Since calculation is methodology of cost pricing in a period of time, with cost price of AME determined in accordance with current production program of defense industry, time limitation must be respected. Within current production program of defense industry, cost price should be drawn for each relevant time period separately, taking into account market and production aspects. Within such methodological conception, it is appropriate to use cost pricing procedure by method of indexation of operating and material price component for each relevant period.

AME item prices for current production program are not determined, as we stated, by calculation method. Previously obtained values are only weighted by indexation procedure which adds to the importance of cost price time aspect. Indexation finds its base within base or chain index, and we decided for chain index within this methodological approach, where weighted factor is obtained on the basis of market and economic values. Material and operating component, that is, direct and indirect costs, are weighted on the basis of relevant cost values which belong to each separate group. Chain index factor can be represented in the form of reproduction element price growth in comparison to the previous year, based on which a new structure of AME product cost price is obtained as a product of military-industrial complex.

Methodological aspect of price forming by chain indexation procedure can be seen in the following example:

Military industry average product important elements price growth for the period from January 1, 2006 - December 31, 2006

market economic goods

Price determination within given table represents concretization of theoretical assumptions metioned above. For the purpose of AME cost pricing there is growth due to increase of important reproduction inputs (chain indexation factor) given under the relevant cost title in passed year.

Through this methodological approach, conclusion can be made that operating component cost price, previous value of hour norm should be increased for 6.9% for all products. Hour norm price should be increased at developmental and serial jobs.

Important production costs influenced the growth of hour norm prices: energy, general material costs, depreciation and gross salaries of employees.

When direct costs are observed, it can be said that material component of cost price should be increased for 5.6%, as is the average price growth of domestic and imported raw material and subcontractor services.

Cost price viewed in its total amount can be incorporated as a value obtained on the bases of labour value corrected by growth coefficient 1.069 and material value by growth coefficient 1.056 in the structure of average product price at defense industry enterprise. Average growth of AME item price compared to the prices from the passed year 2006, as specified in the example, is 6.4%.

In order to fit methodological aspect of pricing into a general pricing picture on the level of AME manufacturing industry, certain criteria need to be followed. These criteria can be presented for the purpose of indexation method through the need for manufacturing period standards and material standards to remain unchanged; for products for which starting price is determined, that is, for products for which cost price is determined by calculation method, manufacture time standards and standards of material for serial production need to be determined and verified by authorized institution; all fabourable aspects used by AME supplier during the passed, in this case, year 2006, and are related to contracted advance payments and progress payments have to be quantified and the same effects reflected on the level of current prices of AME items in current year, in this case, year 2007; methodological aspect of pricing should not influence prices of already contracted items: pricing needs to be conducted on uniform forms in order to create possibility of price comparison on the branch level: at AME items current pricing, world market prices should be used as supplementary criterion. When exchanging dinar values into foreign currency amounts, a parity of 1 € = 82.00 RSD 1 USD = 62.00 RSD needs to be used.

With AME items producers where imported materials participate in the cost price material component with more than 70%, conversion of foreign currency into dinar amounts has to be carried out at the selling rate on the day of price determination.

Methodological аspecт of forming starting selling prices of armament and military equipment

Defense system, besides AME acquisition, carries out selling of the former, too, at a scale which is getting more and more important. Sale includes AME items declared superfluous and inappropriate for usage in defense system.

Superfluous movable items are considered to be those movable items in units, that is, institutions not anticipated by formation, affiliation norms, criteria and other regulations. Besides, out-dated movable items are also considered superfluous, since their further usage, due to characteristics which are not in accord with modern technical achievements, is not economical or their further exploitation is hazardous for health and safety of people and property in units.

Determination of kinds and quantity of movable items unnecessary for defense system is conducted by General Staff through subordinates and its organizational units which are titled «'tactical holders'' while making decisions on what is to be declared superfluous and sold, is in the competence of Ministry of Defense and Commanding Officers of operative structures, in accordance with their defined competences. Intensity of occurence of superfluous movable items and their quantities is conditioned by volume, structure and dynamics of organizational - mobilizational changes.

There is a sale at national, domestic level and the sale through export. Since armament sale is growing more and more in volume and significance in the light of structural and organizational changes in defense system, as well as in realization of sale income under circumstances of aggravated financing and lack of budget funds for allimentation, the need for Army equipping, development and modernization, determination of starting selling price is becoming more and more important element in realization of AME selling process.

Average item unit value, as a monetary value form is directly proportionate to changes in commodity value. However, direct correspondance of price and value applies only in special cases, when labour used for manufacturing of certain goods corresponds to social needs (offer and demand correspond). Therefore, there are numerous economic factors which influence the change of proportionate relation between price and value and they have effect throughout the whole item lifetime.

For the purpose of more qualitative and realistic determination of item value, there is the need to neglect the influence of those economic factors with the aim to unambiguously define the concept of item «'starting average unit price''; this conditional linearity needs to be regarded as general category.

According to the above specified goal, taking into consideration given assumptions, this methodological approach to determination of movable items starting average unit price: of main technical - material items, ammunition, spare parts and Army operation and protection assets, provides algorithm of calculation and determination of item starting average unit price, starting from acquisition price and exploitation period (age), as well as from primary factors of their present values.

Since it is realistically impossible to analyze each item separately due to great number of items in defense system (several millions), starting from its price recorded in material books, level of worn-out condition of operating resources and moral obsoleteness from the aspect of technological construction complexity (exploitation period - age), the need for such method of calculation of starting average unit price arises only for types of items that appear as general representatives of their group. Average unit price for different item models is determined by comparison with typical representative with additional estimate.

Item starting average unit price, as monetary form of its current commodity value is determined by: acquisition price, price from the purchase contract, written-off value, present value, market conditions for sale.

The above specified structure elements of starting average unit price per item are determined depending on different factors characteristic for an item type for whose representative the starting average unit price is determined: place and year of production, acquisition method in defense system, construction contemporaneity, lifetime, market conditions of acquisition and sale on the domestic and foreign market.

With regard to these circumstances, and for the purpose of easier determination of starting parameters, items are classified in different groups:

а) Items produced in domestic industry;

Acquisition price is taken from the purchase contract or commission report on price determination, in dollar value, according to the exchange rate on the day of purchase.

b) Items whose production has stopped;

Acquisition price is taken from the official item price lists, from the year preceeding the one the item is produced in, specified in dollar value according to the exchange rate on the day of price list elaboration, or by comparison with similar items of foreign origin.

c) Items produced abroad;

Acquisition price is taken from the foreign purchase contract, specified in dollars, according to the exchange rate on the day of purchase.

d) Material items declared inappropriate for defense system;

Starting average unit price is determined by the price of secondary raw material which would be obtained by item removal from an inventory. This value cannot be less than 10 to 20% of acquistion price or the price of estimated item.

Criteria which determine elements for forming real starting average unit price per item, should be defined in the way that gives them real technical and economical weight.

Entry parameters for determination of starting average unit price are:

- average acquisition price Pa, (din),

- average lifetime Т, (age),

- average depreciated (written-off) value Dv, (din),

- average utilization period (age) Тu, (age),

Exit parameter:

- starting average unit price Ps, (din).

Starting average unit price per item is determined by the following relation:

Cs = Ca - Dv (din), where Dv = Ca (din)

Value (Тu) is estimated for each type of item separately, as time spent in exploitation - age, starting from the year of model development and implementation in operative use until the end of current year.

Exceptionally, this value can be increased for 10 - 20%, for items exploited above average, that is, decreased for 10 - 20% for items which have had a low level of exploitation, with the goal to establish the value as realistically as possible (Tu).

Average item lifetime (Т) is necessary to be determined for all types of items as general representatives of their groups.

If the calculation shows that item is 100% depreciated and its present value is equal to zero, then, 10-20% of its acquisition price or price obtained by estimation should be taken as its starting average unit price, because specified value will be obtained by its removal from an inventory and secondary raw material sale, except in case of ammunition where 30% of acquisition price should be considered.

Price of spare parts is determined in relation to price of main technical-material item for which they are planned. When calculating starting average unit price of spare part, it is necessary to start from the acquisition value and depriciation need not be calculated. Acquisition price should be calculated as a starting average unit price. Average acquisition prices can be taken from material books where spare parts have been entered, calculating their dollar values according to the exchange rate as on the day of entry or estimation.

For spare parts, power units and assemblies where regeneration has been performed, value should be reduced for 30% in relation to acquisition price of new spare parts, that is, power unit. For spare parts of technical-material items declared inappropriate for defense system starting average unit prices are calculated based on value of secondary raw material which will be obtained by removing spare parts from an inventory.

AME turnover implies buying and selling AME in internal and foreign trade. Acquisition and sale of AME at the national (statal) market is conducted between AME producers, as sellers, and armed forces (Army and Police), as buyers.

Enterprises which obtain necessary approval may perform production of AME, and its turnover may be conducted by organs authorized for defense operations (Ministry of Defense) and enterprises which produce AME.

The main customer of AME items that capacity utilization depend on most, as well as overall development of defense industry enterprises, AME producers, is the Army, that is, the Ministry of Defense.

Market structures significantly influence conditions of exchange, pricing, economic subjects operation, primarily producers and sellers, but also, consumers and buyers. The level of free operation of market forces depend on market structures.

Еfficient regulation of market relations implies understanding of their structures, even more if those structures have more characteristics of monopoly and oligopoly, as is the case with defense industry.

Some authоrs differently classify factors which influence market condition. With regards to AME pricing process and mechanisms, we can classify them in three main groups such as follows: number of sellers and buyers who conduct market transactions; defense industry product character; AME demand elasticity.

Dominant form of AME item market is bilateral monopoly which occurs when one monopoly and one monopsony confront each other at the market, that is, when on the offer side and on the demand side there is one seller and one buyer. Another form of AME item market, which occurs more rаrely, is quasi monopsony, and exceptionally - monopsony. If there is only one product buyer at the market and there are few producers, we then have quasi monopsony, and in case of plenty of producers - monopsony.

Objective material base for occurence and spreading of monopoly structures is contained in the process of concentration and centralization, and the very process is the expression of demand for modern technical and technological development. From the aspect of exchange, the first thing to have in mind is negative consequence of monopoly presence, and from the production aspect, advantage of large-scale production and large economic and technological entities, which create indispensable condition of technical process of production.

Producers of AME items make combination of legal and «octopus' monopolies. For example, it is irrational to have two or more producers of planes, transporters, tanks, etc. as individual production costs are inevitably higher.

At all monopoly groups, except those purely economical ones, there are certain principles of pricing of these products at the market, so, it could be said that those are so-called regulated monopolies. Namely, enterprises undertake to abide to pricing principles set out by authorities when pricing their products and services, as they ensure their monopolistic position. Therefore, price in bilateral monopoly is not a set value, but it results from agreement between buyer and seller.

Еconomic analysis can determine only the scope of price balance. Final price (and production quantity), will be, however, determined by non-economic factors, such as negotiating ability, skill and other strategies of participant enterpise. In the conditions of bilateral monopoly, economic analysis bring uncertainties which, in the end, are resolved by exogenic factors. Mathematical form of «normal price' of AME represents only a theoretical base for item pricing. However, for concrete pricing of AME, elaboration of the above expression is needed through the following two aspects: criteria which unambiguously and clearly determine quantitative frame of socially needed value of each individual input of reproduction and «normal price' element structure of AME item «normal price' with elements whose trends are followed by official country statistics.

Literature

1. Рorрeviж, D. (1993): Theory and practice of pricing in military-industrial complex, ViZ, Belgrade.

2. Рorрeviж, D. (2006): Microeconomy - modern approach, Economic Academy, Novi Sad.

3. Мajstoroviж, А., Мilojeviж, I. (2006): Creation of adequate enterprise business policy, Business policy 10/06, Belgrade.

4. Raiиeviж, B. (2005): Public functions, Faculty of Economics, Belgrade.

5. Stigler, G. (1990): The theory of price, Macmillan, New York.

6. Stevanoviж, N. (1997): Cost calculation systems, Faculty of Economics, Belgrade.

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