Attracting residents to industrial parks

There are already about two hundred industrial parks in Russia, most of which are faced with difficulties in attracting residents. Why are industrial companies considering some projects and rejecting the others? What are the highest priorities for potential residents? The vice president and partner of GVA Sawyer Elena Shevchuk shared in this article her experience of working with foreign investors and their basic choice principles on industrial parks.

When a foreign company decides to start a new manufacture in Russia and has to choose a land plot, it is usually all about choosing a suitable industrial park. Foreign investors count on both legislative and administrative support from the government together within an industrial park. They also expect Russian government to provide financial and foreign trade privileges for residents and state guarantees for attracting foreign capital. They also hope to achieve the synergy of residents in terms of facility types.

Government and business

That is international practice the way it is, and that is exactly the point for which industrial parks exist all over the world. The form of industrial parks is relatively new for the Russian Federation - their history goes back a little more than 10 years. On the one hand we are now almost equal to Germany in the quantity of industrial parks (numbers approximately 200), but on the other hand the quality of these projects does not always meet investors` expectations.

There are two types of industrial parks in Russia: state-owned (80%) and private (20%). The main targets of the project are attraction of large taxpayers, creation of employment and region development. That is why such park can provide most attractive prices not only for land, but also for service lines. Support for the investor in the approvals process and tax preferences are also the benefits of industrial parks.

Private parks are bound to execute all the development of the project independently and quite often on the account of loans. As the result their major task is to profitably sell or lease existing facilities as soon as possible. It’s not uncommon for industrial parks (IP) to occur on the sites of former industrial territories, territories of single large factories with the advantage of originally supplied power generating capacity for the future IP. But anyway the price of entering such a project for an investor is usually higher due to high initial investment cost. However private industrial parks are attractive for specific groups of buyers, for example those who seek for a small land plot (e.g. 0,5 ha.) or already existing warehouse and industrial premises ca. 500 m2 in area. It is extremely difficult to find corresponding offers within large-scale state-owned IP.

Thorough “casting”

When making the primary selection of suitable projects foreign invertors are guided by territorial indication and conformity between the type of future industrial facility and park’s specialization (if announced by the park). The geographical factor is usually less important for an investor than logistics and quality of transport infrastructure, unless the manufacturing depends on raw materials base. It is also significant, that subjective factors (such as region’s reputation in general, local authorities’ level of professionalism, their loyalty toward future taxpayers are vital for a foreign investor.

Having made a “long list” of 20-30 of projects the investor proceeds with their more detailed research. Besides obvious matters, such as park’s stage of development and readiness state of infrastructure, careful attention is being paid to the legal status of the project. Even foreign investors experienced in working within the Russian territory often face difficulties due to complicacy of laws and legal acts, as well as plenty of approval documents, controlled by different governing institutions. The risk to forfeit a property right to land and correspondingly to future manufacturing entity is unacceptable for foreign investors. In theory they want to see the full set of documents, including the archival documents concerning the history of the devolution of property in land. They also figure that all the tax incentives and preferences granted on the date of signing a contract will have already been approved at federal level, because in this case they can be sure that region’s policy toward investment projects will stay the same even with the change of governor.

In addition the investor pays heed to the presence of residents either of similar industrial facility type or from the same country, analyzes the availability of necessary manpower resources as well as possibilities of training and setting prospective workers.

Most of industrial parks, announced in Russia, represent empty fields (so called “green fields”) most distant from urban and engineering infrastructure. It is most difficult for such projects to attract attention of high-profile investors. The list of foreign residents’ strong requirements includes organized entry from the federal and regional highway, inner roads and set engineering infrastructure (electricity and gas supply with enough power, treatment facilities, sewers, service and drinking water supply) on park’s territory.

The parks offering a land plot together with utilities connection in a single contract, have a serious advantage in attracting high-profile investors.

It is not only the ability of an IP to produce enough power that is important for an investor, but also the simplicity of the documentation process. In order to fully work with foreign investors within an industrial park, it is essential to create a one-stop service aimed at maximum assistance in choosing the land plot, approving initial permitting and design documentation by competent authorities as well as obtaining building permissions and approval of construction works for the investor.

Crucial factors

The investor finally chooses a couple of most suitable projects (so called “short-list”). The further selection of the land plot within an IP runs with the help of the development company or a technical adviser (unless the investor has already turned to their services earlier), as well as lawyers. Declared information on the IP goes through thorough due diligence : all title establishing documents and the land plot’s history are being analyzed, all corresponding contracts with power supply organizations are being requested, all the documents confirming the terms of readiness of engineering structures are being verified, road system of the park and buffer zones approval documents are also being checked, etc. Technical auditing is being carried out, possibility of placing of the production facilities suitable for the investor is being checked, availability of required engineering capacities for the particular facility type is verified , possible utilities connection points are being analyzed, etc.

In the long run a foreign company expects to obtain a land plot within an industrial park with officially registered borders and approved land plot permitted use. It is also crucial for a company to know which industrial facility type is going to be brought about by its neighbors and what buffer zone restrictions it can impose. Of course in “cluster” industrial parks such issues are easily resolved – in that case particular zones for different industrial facility types are initially designed in the master plan with consideration to all necessary sanitary, fire-safety and other standards. Such completely planned sites with defined specialization are most attractive to residents. Investors find that adequate price and utilities connection time frame together with easy design approval procedures and easy construction process are additional benefits provided by positioning within a cluster.

Some regions pursue specific investor-attracting policy: they work out special programs, create specialized agencies, apply one-stop principle in solving all legal and technical matters, assign a personal manager, provide financial guarantees for investment protection, work out particular educational programs on residents’ request. Of course only few industrial parks carry out this kind of policy successfully.

The industrial park owner’s success in a dialogue with an investor depends on his willingness to respond to questions outlined above, to provide documents supporting options he proposes, as well as to give a reasoned position with regard to risk leveling.

Elena Shevchuk, GVA Sawyer vice-president on commercial real estate, Partner.

, November 05, 2014