Federal Law No. 44-FZ has been amended to extend offset agreements to service provision since July 2022. Experts presume that the agreement performance will be similar to current offset agreements between the Moscow government and investors.
Introduced in Moscow in 2016, offset agreements aimed to encourage business investments in new companies or upgrade existing ones. The agreements are focused on encouraging import substitution, among other things. With the investment of at least RUB 1 billion, offsets are made for a period of up to 10 years. The Moscow government has shared its experience on Smarteka with the regional audience to help them use it.
The offset agreement covers both the delivery of goods to the customer and the supplier’s investment obligations to establish, upgrade or launch production in the region. This mechanism will encourage private investment in critical import-substituting production.
The Moscow region has followed Moscow’s lead and executed the offset agreement related to the pharmaceuticals industry. Bashkiria announced its intent to execute an offset agreement late last year. Moscow, in turn, has always been willing to help its regional peers scale the offset practice.
According to Aleksandra Druzhinina, Deputy Director of Moscow Investment Agency and the author of Smarteka’s Offset Agreement Practice, offset agreements allow the city government to save on social procurement, increase the taxable base, and create new jobs. The government has signed five offset agreements related to local content in manufacturing and the supply of medical products for ostomy patients and baby food.
«Private investments in offset projects in Moscow will total RUB 12.9 billion and, in return, we will purchase the products of these companies for RUB 72.7 billion. As the offset market leader, the Moscow government is always willing to help our regional peers scale up the offset practice,» Druzhinina said.
She also noted that Moscow had established efficient and consistent communication with the business. Amendments to the law are also part of such a partnership. According to her, the business community was the first to request applying the offset practice in services. The most promising offset areas include communication services, such as 5G urban network infrastructure development, endoprosthetic services, waste recycling, and disposal.
«As for the communication system, it requires serious investments to develop networks, lay cables, purchase and install stations and towers. With the too high a pace of technology, it is too expensive to keep up. The business community has proposed that if we buy communication services, they will develop the required infrastructure. Why is it profitable for business? With a 10-year contract, businesses can hire the best scientific personnel, invest in research, develop new technologies, and attract the best staff. These long-term guaranteed investments will boost the industry,» Druzhinina said.
As another example, Druzhinina mentioned electric vehicle batteries. «By purchasing battery charging services, we encourage the supplier to invest in the battery production and compete with the industry market leaders. In fact, it is similar to the life cycle contract (LCC), but with an investment component and without a limited list of products to contract. The offset agreement imposes no restrictions on services, within reasonable limits, of course. From July 1, 2022, we will be able to enter into such agreements, and I think there will be many,» Druzhinina said.
Please do not hesitate to contact Alexandra Druzhinina, the author of the offset practice, and learn more about it on the Smarteka practice exchange platform.