Interview with Mr. Denis Zhuravskiy, Executive Director of the Association of Industrial Parks

Credit Consultant Magazine | No. 1(1) August-September | 2012

 

Quite recently, as early as 10 years ago, our country witnessed the appearance of such a phenomenon as industrial parks. Industrial production facilities located at their territory can undertake their core activities without worrying, for example, about laying and maintaining utilities. Since this business has appeared very recently, national developers and managers of industrial enterprises do not wholly comprehend the advantages of industrial parks. The fact that creation of such businesses, long-term investment of funds in them, and placement of enterprises there is advantageous has been proven to us by Mr. Denis Zhuravskiy, Executive Director of the Association of Industrial Parks.

Industrial parks in Russia.

Denis Zhuravskiy – Executive Director of the Association of Industrial Parks.

 

Credit Consultant: What do industrial parks involve? What are their characteristic features, and how do they differ from spaces offered on lease?

 

Denis Zhuravskiy: Definition of the concept of an industrial park needs to be started with the word “business”. It is a business offering services for accommodation of industrial production facilities in Russia. It is of crucial important not to consider it simply a land plot or a real-estate object. These functions are secondary. The essence of this business is to relieve manufacturing companies from irrelevant functions. An organization producing foodstuffs or assembling cars cannot efficiently deal with such issues as connection to gas and electric power networks; its management does not wish to participate in long-term construction projects.

 

Essentially, an industrial park is a sign of post-industrial society, within the framework of which consumption of services is carried out. The greater is the concentration of manufacturing companies on their primary business, the more popular are the services for accommodation of production facilities. Therein lays the fundamental difference of industrial parks from hundreds of thousands of industrial assets available in the Russian Federation.

 

CC: When did the first industrial parks appear in Russia and abroad?

 

DZ: The business appeared in our country only about 10 years ago; however, in Europe it has been in existence for over a century. The first industrial park was created in Great Britain in the first decade of the 20th century. It was organized by an industrial magnate who had built his own plant. However, It turned out that the land plot was too large for just him, so he decided to split the expenses for laying utilities, railroad tracks etc., namely, the most expensive construction aspects, with other entrepreneurs. As a result he commenced his search for partners. A whole new business appeared based on this rather primitive model, and the industrialist earned more from exploitation of his land plot than from his manufacturing facilities.

 

CC: Something must have changed in the past 100 years…

 

DZ: At the moment this type of operations has accumulated various standards and requirements. In particular, our association has offered finished standards for an industrial park to the Russian market. They form a massive document specifying the park’s mandatory features and its competitive advantages.

 

CC: Does this mean that your association performs functions of self-regulating organization?

 

DZ: Our association was designed specifically as a self-regulating organization (SRO). In particular, its Charter includes all requirements imposed on a SRO. Any self-regulating organization is created through a nonprofit partnership which later gains SRO status. I’ll tell you straight away, we are not in a hurry to do so, because our sector is too young yet, and we do not wish to offer extra challenges for market players to overcome. When the sector is mature enough for creating a full-scale SRO, we will obtain the status. At the moment, though, we simply perform self-regulation functions.

 

CC: Could you tell how exactly industrial parks are created in our country?

 

DZ: We can pinpoint two models of industrial park creation. In the first case, owners of large industrial enterprises in fact become their hostages. When modernization started and new technologies permitted reducing their production area, they had to take steps to use the cleared space somehow (which could involve up to 70% of the plant’s territory) as well as generating capacity. As a result brownfields appeared. By no means had all of them become industrial parks straight away: some let the space on lease, others created a managing company and started providing services. For some manufacturers this in time became the main source of income, and as a result they started positioning themselves as industrial parks. The second type of business parks includes greenfields, which also were created around large anchor investors. Here we could offer a well-known example of Volkswagen plant in Kaluga Region. There exist some less prominent but at the same time more effective projects. I mean private parks which from the outset were created in the capacity of industrial parks in the empty field. Currently several western players operate at the Russian market in such manner, which have been creating greenfield-type business parks starting from mid-2000s but do not act as their residents (manufacturing enterprises) at the same time. They are represented by Lemminkainen, Yit, Dega and a number of other companies. There are no more than 10 such organizations in Russia. They purposefully make simultaneous arrangements for several sites, geography of which follows economic growth: they are located in Moscow, Saint Petersburg and several other cities of the Central Federal District.

 

CC: What kind of companies do normally become residents of industrial parks?

 

DZ: Mostly they are foreign companies. The thing is that in the Western business culture the practice of outsourcing is better developed. There, non-core functions would rather be entrusted to specialized organizations, despite is being more expensive. However, at the same time such approach leads to reduction of risks. It perfectly suits the logics of Western enterprises, which have a far greater planning horizon that their Russian counterparts. Domestic enterprises also often become residents of business parks, but they as a rule prefer to connect to utilities, build plants, etc. on their own.

подобный подход способствует снижению рисков.

 

CC: What factors determine the selection of the construction site of the industrial park?

 

DZ: A lot depends on the sector where the enterprise operated. The first factor is market outlets and transportation and logistics corridors. However, there exist specific areas, where industrial parks are bound to raw materials. For example, enterprises involved in manufacturing ceramic tiles, bricks, other construction materials, will tend to find a place close to materials’ deposits, because otherwise they would be forced to first deliver raw materials to the plant, and then ship the finished goods to consumers, on the top of it. It is a lot easier to perform just one operation. Experts often tie business parks to labor resources. However, as far as I am concerned, such approach is incorrect. There are examples when an industrial park was built in a clear field, far from residential communities, and later workforce was invited.

 

CC: As a result, there can be specialized business parks and such parks, where any company can become a resident.

 

DZ: There is practically not a single specialized park in Russia, so any company can locate its production facilities there. However, I believe such approach to accommodation of residents at business parks far from perfect. The thing is, virtually every modern enterprise imposes certain requirements on its environment due to the fact that production facilities are becoming more sensitive. For example, a car manufacturing plant might demand that there are no cement production facilities, or construction materials producers, or logistical parks processing loose goods, etc., within at least 5 km from it. Atmosphere around such object is filled with suspended matter influencing the painting process. Pharmaceutical companies are eager to become residents of a pharmaceutical park. It is not profitable for them to have, for example, a metallurgical plant in the vicinity. This demand is based on both economic and technical factors, in particular the requirement for creation of a large sanitary protection zone (while enterprises involved in similar operations can overlap this sanitary zones).

 

However, Russian developers, unfortunately, do not fulfill these requirements. The fact that all Russian industrial parks are general-purpose ones reduces competitiveness of our country at the global market, because none of the residents has any guarantees that they will have some unacceptable neighbors at the site in a few years.

 

CC: Why is construction of specialized parks unprofitable?

 

DZ: This fact has resulted from peculiar features of the Russian business culture and business practices. Here, the planning horizon is a lot shorter, there are no successful cases, so developers are after instantaneous pay-off. They follow the logics like this: “Why should I restrict my options if I am able to accommodate one resident at the park, and another one, and another one?” All owners of Russian industrial parks are in a hurry to recover their investments as soon as possible, deliver the project, and leave. At the same time, the rush for quick profit limits their perspectives; as a result we are losing in the global competitive race with foreign investors. Western business parks function based on another model – not the developer model, like Russian do, where most of the income comes from land sales, but the one based on the long-term monetary inflow from sales of power resources and services to residents. Such projects are created for many years ahead and, like most infrastructural projects, are long-term ones.

 

Moreover, as I have already mentioned before, many Russian developers of industrial parks assumed this role against their will. They became hostages of their assets, so they do not intend to improve their business park, but to withdraw from it as soon as possible. So, they don’t care to whom they lease their space – it is only important that there are willing parties.

 

CC: Does the state participate in development of the industrial parks sector?

 

DZ: In our country about 50% of industrial parks are state-owned. At that, they lag behind private ones in terms of their occupancy, and they exceed them where investment volume is concerned.

 

Speaking of state support, I must mention that our Association has taken efforts to make federal-level authorities pay attention to business parks. In October 2010, soon after the Association’s creation, we offered to then-Chairman of the Government, Mr. Vladimir Putin, a program of state support of industrial parks, including private ones. He supported our initiative, signed a number of government instructions, in accordance to which the Ministry for Economic Development together with our Association commenced development of corresponding measures. It has been not very long time ago, but even now the Ministry for Economic Development has begun funding industrial parks and diverting funds from the federal budget and budgets of federation subjects for creation of their infrastructure. However, at the moment these activities are carried out within the framework of a program for support of small and medium businesses, in essence, indirectly. We don’t want to stop at that and believe that a separate program for industrial parks support needs to be developed. Currently, we are working to this effect and we hope that soon such program will be created.

 

We also perform operations for support of industrial parks together with development institutions. In April this year we concluded an agreement with Sberbank of Russia for development of special programs and products designated for industrial projects, including industrial parks themselves as well as their managing companies and residents. At the moment Sberbank is paying close attention to this sphere, and they intend to provide substantial funding for industrial projects starting from the next year.

 

CC: In your opinion, what park is more comfortable for a resident – a state of a private one?

 

DZ: It depends on the company. Each has its own strategy. There are enterprises which flatly refuse to become residents of state-owned business parks. There are companies (Western ones, as a rule), fearful of building manufacturing facilities on the private land in Russia, because they believe that by placing their plant on in a state park they will receive support from regional authorities.

 

CC: Some experts are wary of state-owned industrial parks; they insist that this is a purely commercial area, and the authorities are not to interfere in it. How do you feel about this point of view?

 

DZ: I also believe that construction of industrial parks is not a primary function of the state, and it must not interfere in the area where private business operates. However, at the moment the authorities frequently involve themselves in the process, attempting to compensate our lagging in this sphere. It is a temporary occurrence, resulting from characteristic features of the current historic period. The thing is, the projects are rather risky, and the private initiative is weak. Target-oriented investors who put up their capital in creation of sites and not become residents, unfortunately, prefer less profitable and less risky areas, namely, construction and leasing of office facilities, malls, and residential buildings. Based on the degree of attractiveness for target-oriented investors, Russian industrial parks hold the fourth or fifth place among other types of commercial real estate. After witnessing this and comprehending the lack of good sites, the authorities started participating in development of the sector.

 

CC: What problems do companies implementing projects for creation of industrial parks and maintaining their operations normally face?

 

DZ: The main problem is connected to relations with natural monopolies and power generating companies. Its importance is associated with the fact that industrial parks require significant power resources.

 

CC: In your opinion, what are perspectives of the sector’s development?