Russian gov’t to support country’s outsourcing efforts

Leonid Reiman, the Minister for Information Technologies and Communications (MinInformSvyazi) announced a new governmental initiative to support Russian software outsourcing companies.

Reiman expects Russian IT exports to increase by 80 percent reaching US$1.8 billion in 2006. According to the minister, the country’s total IT market volume in 2006 will amount $13-14 billion compared to $11 billion in 2005.

As part of the ongoing effort of accelerating the Russian IT industry development, the ITC-ministry presented its plans to create a dedicated authority — Federal Agency for IT Exports Development.

The initiative was first proposed in Reiman’s letter to the Russian president Vladimir Putin, on which Putin issued a resolution in support.

According to Reiman, the agency will analyze the exporting potentials, provide marketing support and conduct PR-activities. The agency is likely to employ about 50-70 people and its budget will mainly consist of employee’s salaries. Still the financing of the agency’s programs is to be discussed with the Ministry of Finance.

Though no particular supporting tools for Russian companies has been offered yet, it’s evident that industry associations will assist the agency in elaborating these tools.

“The instruments we are talking about have to be worked out with active support of industry associations such as Russoft and AP KIT,” said Reiman adding, “I hope in the future the associations will play the key role in the market development.”

The executives for the two agencies have not been appointed yet, as Reiman explained the issue wasn’t even discussed. Soon the documents on the new agencies will pass to the Russian Government for official approval. The ITC-ministry expects the agencies to be created by the end of 2006.

The new Reiman’s initiatives come after he accomplished the previous Putin’s tasks to develop measures for IT industry development. Putin paid significant attention to the Russian IT sector after his tour to Bangalore, India in late 2004.

On March 16, the Russian prime-mister Mikhail Fradkov signed the governmental order to launch the federal program for techno-parks creation to concentrate IT companies there. The government chose Saint Petersburg, the Republic of Tatarstan and the regions of Moscow, Novosibirsk, Nizhny Novgorod, Tyumen and Kaluga as launching pads for the program. Some of them have already been officially inaugurated. The federal budget will finance the further development of techno-parks infrastructure investing 1.4 billion rubles (about US$52 million) in 2007.

On July 27, 2006 the Russian president approved the law introducing amendments to the Tax Code of Russia. Still after parliamentary discussion the amendments fell short of optimistic expectations. Instead of imposing a special taxation scheme for IT-companies (a 6 percent income tax and the abolishment of most taxes), the Parliament introduced nothing but a better way of calculating the unified social tax.

Usually taxpayers benefit from the lower tax rate of 10 percent instead of 26 percent, as soon as employee’s annual salary fund exceeds 280.000 rubles per head, while IT-companies under the new amendments can apply this tax rate after a 75.000 rubles fund. Still the salary fund’s level for applying the most favorable 2 percent tax rate remained at the level of 600.000 rubles.

In order to benefit from the new way of paying the unified social tax the IT-companies should suit a number of requirements: a company should have a governmental accreditation, employ more than 50 people and 70 percent of its turnover should come from software exports. The first legislation draft required having at least 100 employees, but this was changed when it became clear to the parliament members that the tax incentive would be inaccessible for most companies.

“The introduced amendments give significant tax incentives to software outsourcing companies. At the same time they do not completely solve the initial task, in particular, do not create a special [taxation] scheme for companies occupied in this field,” said Reiman.

“We’ve discussed the issue with our colleagues, members of the parliament, senators and we plan to create a working group in September to estimate what was done during the spring session and propose further directions of development, but we are eager to continue this work and bring it to a special taxation scheme.”

The creation of the state-own venture fund, which was started in the summer of 2005, turned out to be even more hard going. Up to the very end it was vague whether the ITC-ministry would be able to create its fund or the Ministry for Economic Development and Trade would lead the initiative with its own proposal.

Finally, the Russian government accepted both. The Ministry for Economic Development and Trade will manage Russian Venture Company (or a ‘fund of funds’ as it was dubbed earlier) for financing venture projects throughout its subsidiary-funds working in different fields. And ITC-ministry will run a dedicated Russian Investment Fund for Technologies and Innovations.

According to Reiman these two projects will be running separately at least in the nearest future.

“Historically the technology fund was being created under our initiative and we proposed it could be used to support the IT sector,” the minister said. “It looks pretty well that the Ministry of Economic Development is creating a fund of funds. Today there are many industries to support with this tool. At the moment we are not speaking about merger, but I don’t deny that we can turn to it in future.”

The ITC-ministry fund will be launched in the form of a joint-stock company with 100 percent shares owned by the federal government. The federal budget will finance the fund with 1.450 million rubles that is about $53.7 million, but later the fund will attract private investments. By 2009 the state share will have been reduced to 25 percent, while private investors will triple the today’s state financing up to $161.1 million.

According to the governmental regulation by 2010 the fund will become completely private.

Nevertheless, Reiman said that private investments can flow to the fund even sooner. After discussions with British and American financial institutions representatives, who invest in IT and know the Russian market perfectly well, the minister got an idea that additional investments can dilute the state share in the fund to 25 percent by the end of 2007.

Many IT companies are eager to get investments from the fund. According to Reiman, the ministry has already got several thousand applications for funding. The quality of proposals for financing is “different” but some of them are ready to be implemented.

The ministry expects the selected projects to pay back within the period from a year and a half to three years; yet the sum of financing shouldn’t exceed 100 million rubles per project.

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