Offset Contracts Truly Work in Moscow
The Department of Investment and Industrial Policy of Moscow is actively engaged in the support and development of the capital’s industry, as well as the formation of a favorable investment climate. Due to close cooperation with business, the city is able to implement complex infrastructure projects, and in return provides preferences, including benefits, subsidies and guaranteed sales. Capital Ideas talked about offset contracts with Stepan Kovalenko, the head of the office for the support of the activities of the SEZ and the implementation of investment projects of the Department of Investment and Industrial Policy of Moscow.
The city concluded its first offset contract in 2017. As a result, a pharmaceutical plant was opened in Zelenograd, one of the capital’s administrative districts, for the production of drugs for the treatment of cancer. How many offset contracts have been signed since then?
First of all, it is worth noting that Moscow was a pioneer in offsets. The city has already concluded five such contracts, and there have only been seven of them in all of Russia. Moscow is actively using this mechanism to develop the investment climate and create new high-tech industries. In these areas, offset contracts have demonstrated their efficiency: several investors have already completed the construction of plants and began to supply products for Moscow. For example, the plant in Zelenograd – which, by the way, is located on the territory of the Technopolis Moscow Special Economic Zone – has been producing drugs for the treatment of oncological and autoimmune diseases since 2021.
What areas of the economy do offsets cover? Are we talking only about pharmaceuticals or also about other areas?
Three offsets out of the five concluded by the city were for the production of medicines, one for medical devices, and another for baby food. An offset contract is a versatile mechanism that covers all new industries. Moreover, from July 1, the minimum investment threshold was reduced by 10 times – to 100 million rubles. This step made it possible to open access to a large number of investors, including SMEs, interested in cooperation with the city – as well as to encourage them to create new or modernize existing production.
Today, Moscow has extended the practice of offsets to all industries. For example, we plan to conclude new offset contracts in such industries as transport engineering, equipment for housing and communal services, IT equipment, and others. It is important for us to provide citizens with high-quality products of domestic production for the long term, and to reduce the purchase price. The offset contracts concluded have showed efficiency in terms of budget savings: the average price reduction was 20% compared to market equivalents – this is about 18 billion rubles of savings.
Who are the main participants in offsets?
According to the law, only Russian legal entities can participate in the tender for concluding a contract. Moreover, goods of exclusively Russian origin should be supplied. Thus, the investor not only undertakes to invest in production, but also to fulfill a number of requirements to obtain confirmation that the goods are completely domestic.
Purchasing can be carried out not only by government organizations, but also by any customer who must purchase products under the law on the contract system – for example, large hospitals. At the same time, only organizations are allowed to participate in the tender. Offset contracts are not concluded with individual entrepreneurs or private citizens.
Are there any plans to attract reliable foreign companies to sign offset contracts? Do you have any experience working with them?
We help foreign companies that localize their production in the city, using a variety of mechanisms: tax benefits, subsidies, preferential loans, offset contracts; we are developing the possibility of working in other PPP areas as well as many other support measures. You need to understand that offset is a competitive procedure. That is, if you offer the best terms at the contract price, you will have the greatest chance of making a deal. The main thing for us is that new jobs appear in Moscow – that the city receives new industries and is provided with high-quality products. I note once again that an offset contract can be concluded only with a Russian legal entity, so a foreign company will first have to localize its business in Moscow.
Why are offset contracts called a growing economic phenomenon?
Such agreements are beneficial, because before opening new production, any investor must calculate the risks. And the main problem now, during the period of sanctions, is the sale of goods. The offset contract, in turn, allows him not to worry about the payback of the business, since he already has a guaranteed customer in the person of the city.
What is the main difference between offset and conventional contracts?
The main difference is, of course, the long term. We are not talking about a one-time purchase, but about long-term purchases – for up to 10 years. The second point is that in exchange for guaranteed long-term demand, there is the investor’s obligation to localize the production of goods, or an obligation to create an infrastructure for the provision of services. It is worth noting that from July 1, 2022, offset can be concluded not only for the purchase of goods, but also for the provision of services.
For which sectors of the economy is the offset contract most appropriate, or is it a universal thing?
Yes, to a great extent it is a universal thing. Now we are already working on more than 40 projects in various fields – not only in the field of healthcare, but as I said earlier, in light industry, IT, housing and communal services, transport, social services. The experience of Moscow has shown that in pharma this type of PPP agreement is simply ideal.
But are there still risks when concluding offset contracts? How can they be avoided?
There are risks, but they are mutual – both on the part of the state and on the part of the investor. It is no coincidence that offset is called one of the forms of public-private partnership. As for the state, it risks that the investor may not fulfill the localization deadlines on time and thereby disrupt deliveries. And for the investor, the main risk is fixing the method of determining the supply price for 10 years in the future.
Exactly due to the effort before the conclusion of the contract to minimize the risks to both the state and the investor, there is careful study with the customer of all conditions and risks. Yes, this slightly increases the time for concluding an agreement, but in the end, a high-quality product is obtained – which increases the investment attractiveness of the project for investors, and as a result, increases competition between potential suppliers.