MoD plans standard price lists for public sector undertakings - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Tuesday 17 July 2018

MoD plans standard price lists for public sector undertakings

Whether for fighters, warships or land systems, production in the public sector costs far more than direct import

By Ajai Shukla
Business Standard, 18th July 18

The defence ministry has traditionally bestowed lucrative contracts upon defence public sector undertakings (DPSUs) and ordnance factories (OFs) without competitive tendering. Now, however, it is taking steps to make them reduce prices.

A senior defence ministry official says DPSUs and OFs could soon be ordered to make public a price list of the equipment and weaponry they build. They would be required to hold those prices for a specified period and then raise them only by a reasonable amount.

If the military demands a deviation from the baseline standard that the DPSU or OF has priced, the cost of delivering that deviation would be added to the standard price.

This follows Defence Minister Nirmala Sitharaman’s statement on Friday that a defence ministry committee is examining (she said a report is expected within 60 days) why equipment from the defence public sector is costlier.

The ministry has concluded that, in the name of indigenisation, it is paying unreasonably high prices for equipment made by the public sector.

A standard price list would reveal that each Sukhoi-30MKI fighter built in Russia costs the Indian Air Force (IAF) about Rs 330 crore, while Hindustan Aeronautics Ltd (HAL) builds the same fighter in Nashik for Rs 417 crore – 26 per cent costlier.

Also that Mazagon Dock Ltd, Mumbai (MDL) is building six Scorpene submarines at a significant mark-up from the cost of the same submarine built in France.

And, as reported by Business Standard on Monday (“Frigate purchase from Russia hit by high cost of warship building”)two Krivak III frigates planned to be built in Goa Shipyard Ltd will cost the navy far more than two identical frigates built in Russia.

Sitharaman said the IAF has specifically asked for the costing of Tejas fighters to be examined. HAL charged the IAF about Rs 116 crore for each of the first 20 Tejas fighters it ordered in 2006. The price rose to Rs 162 crore for the next 20 Tejas that HAL will build. For the admittedly more sophisticated Tejas Mark 1A, which was tendered last December, HAL is pegging the price at over Rs 400 crore each.

A senior defence ministry official complains that each time a DPSU or OF quotes a price, years of protracted negotiation follow between the ministry and one of its own production units. “It is bizarre that the ministry spends years negotiating with itself. Having standard prices would eliminate this nonsense,” he says.

However, reducing prices might not be so easy, say defence industry experts. It is well-known in the international defence trade that buying weaponry over-the-counter from large international “original equipment manufacturers” (OEMs) is invariably cheaper than building the same equipment in the buyer country. That is because the OEM has already set up a production line and partially or completely amortized the development costs. However, the buyer country would additionally have to pay for technology transfer, establishing a production line, transhipping raw materials and the time and effort needed to establish production in India.

The even more expensive path is to design and develop a platform indigenously, since that requires expensive R&D in addition to production line costs. However, indigenous development often works out cheaper in the long term, since it equips a country to sustain the platform through its service life-span, which involves costs like spares, maintenance, training aids and simulators, overhauls and mid-life upgrades.

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