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TOOLS FOR CREATING SITES AND PREMISES
FOR BUSINESS PREPARING PROPERTY FOR BUSINESS
THE CHALLENGE To provide sites and buildings that can be used by existing, newly formed or arriving firms for their growth-oriented job-creating activities.
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WHAT IS PROPERTY FOR BUSINESS?
WHAT ARE THE BENEFITS OF INVESTING PUBLIC RESOURCES INTO SITES PREPARATION?
HOW TO CREATE AN INDUSTRIAL PARK?
WEB RESOURCES
WHAT IS PROPERTY FOR BUSINESS?
Definition
In economic development we define property as the real estate (land, buildings and land, buildings, and other immobile assets located in a particular place) and the rights and obligations (ownership title, usage title) associated with the real estate. However, there are various estates for different uses – warehouses, manufacturing plants, back offices, R&D laboratories and also industrial estates. An industrial estate may be defined as a planned or organized tract of land specifically developed and subdivided with provision for roads, transport and public utilities with or without built-up factories to provide plots for industrial activities. The essential element is that the estate is administered/managed by a single authority that has defined jurisdiction with respect to companies that will occupy the land tract either as renters or purchasers. The authority provides continuing management of the estate, including the enforcement of restrictions or servitudes upon the business users of the land tract, and detailed planning with respect to lot sizes, access and utilities.
Industrial estates are usually located close to transport facilities, especially where more than one transport modality coincide, such as highways, railroads, airports, and navigable rivers. A more "lightweight" version of an estate is an office park, which has offices and light industry, rather than heavy industry.
This idea of setting land aside through this type of land tract zoning is based on several concepts:
- To be able to concentrate dedicated infrastructure in a delimited area to reduce the per-business expense of that infrastructure. Such infrastructure includes roadways, railroad sidings, ports, high-power electric supplies, high-end communications cables, large-volume water supplies, and high-volume gas lines.
- To be able to attract new business by providing an integrated infrastructure in one location.
- To set aside industrial uses from urban areas to try to reduce the environmental and social impact of the industrial uses.
- To provide for localized environmental controls that are specific to the needs of an industrial area
Although it is possible to outline the general characteristic features of an industrial estate, there exists an extremely wide range of industrial estates depending on the stage of economic development of a country, the sophistication of up-to-date physical master planning, and the availability of investment capital. Some estates are very small zones (~5 ha) located in rural areas. Others are extremely large industrial complexes, which cover more than 100 ha. According to its objective, an industrial estate may be classified as developmental, promotional or dispersal.
- Developmental – to advance, improve or increase the level of industry activity in the area
- Promotional – in a sense, all estates are promotional but in this case its goal is to introduce new industries into economically underdeveloped regions.
- Dispersal – to ensure relocation of several industries (e.g. for environmental reasons) from urban areas
Typology of FDI development properties
There are basically five forms of relevant properties which may be prepared on the local level:
- "Greenfield", which means vacant land where new construction of factories will take place
- Properties built by professional land developers for speculative re-sale purposes are know as “speculative properties”
- Acquisition properties are assets of existing local firms that are acquired in full
- Joint venture
- "Brownfields“ are abandoned industrial compounds
Pros and cons of the individual solutions:
Each of these property types offers advantages and disadvantages to potential investors, and the relative attractiveness of such property types will depend on the business plans and priorities of each prospective investor.
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A) Greenfield and turnkey buildings |
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B) Speculative properties |
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C) Acquisition or D) joint venture |
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E) Existing not functional/abandoned properties (brownfields) |
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At the present time In Central and Eastern Europe, municipalities mostly focus on preparation of Greenfield industrial sites, typically 10 – 30 hectares in size and capable of accommodating companies employing 500 – 2000 employees (the current average being between 40 – 60 employees per hectare).
Role of Property in Economic Development
While incentives for attracting investors are typically instruments of national policy, the preparation of appropriate property belongs to the responsibilies of local governments.
The connection between property and FDI is similar to that of water and a vessel. Conventional discussions about economic growth and development have typically assigned a passive role to property markets. Economic growth (or decline) in a region is usually seen to result from advantages or disadvantages involving location, from the resources of the city or region, or from the skills and flexibility of the labor force. The importance of property in stimulating or supporting economic growth is rarely emphasized. Standard analyses see the property markets as entirely dependent on economic cycles of the territory in which they are located. Property is a secondary demand, with supply of property responding (with some time lag) to the impulses of economic change.
These traditional views are simplistic and incomplete. Property is one of key factors of production and a necessity for any investor. And the quality, accessibility and market features of property are an important variable for any investor’s decision to locate in a specific territory. That is one reason that industrial estates have become so important for attracting investors.
Strategic importance of industrial sites for business
The main advantages that an industrial estate can offer to an investing company can be summarized as follows:
- As mentioned above, companies benefit from fewer hurdles and lower costs to construct their plant since part of the set-up has already been carried out by the managers in charge of the land tract estate.
- Companies also have access to common facilities and services provided by the estate - such as water and electricity, effluent treatment, waste collection, fire protection or security services.
- Some estates may also provide housing and recreation areas for workers, as well as training programmes.
- For SME's (Small- and Medium-size Enterprises) collective access to such facilities can be very important since they may not have the financial strength to access them individually.
- In addition, the fact that many industries are located in close proximity may provide an opportunity for co-operation between them.
Thus it is clear that an industrial estate can offer a number of advantages to a company seeking to locate its activities in an area. However, it is important to note that, for companies to benefit fully from these advantages, there must be a good management team that plays a dynamic role and does not merely limit itself to maintenance of the facilities.
What a good industrial estate needs to have – overall standards of business/industrial estates
We see that an industrial estate may bring many advantages for companies located there, but what factors are considered to be important when a company is choosing where it will locate? Some studies show that two main driving forces for a company in its choice of location are:
- an easy access to suppliers and markets, and
- the environment and infrastructure available are of a high quality.
Fiscal advantages are surprisingly low on the list.
More particularly, key site factors that will determine whether a location is deemed desirable by a potential investor include:
- ease of access - location close to multimodal transportation facilities (not only for investors but also for commuters)
- quality of office space and technical infrastructure (electricity, water and sewer, natural gas, telecom capabilities) - not only availability of technical infrastructure but also its capacity and connection prices; what also may play a role is high-quality architectural and landscape designthat provides an image and visual appeal compatible with company’s image and marketplace reputation (visibility, frontage, etc.).
- qualification of the local work force
- image of the region and compatibility with industrial park and community character (surrounding uses)
- the relationship of the site to alarger comprehensive plan (integrity and conformity with land-use planning and strategic planning in the cities)
Other important factors are:
- sufficient area available, either on one lot or through assembling multiple lots, to ensure that current and future expansion needs are satisfied
- proximity to clients, potential markets and suppliers
- cost of set-up (land, rent for buildings, charges)
- geographical situation – e.g. treed, graded, topography, flood plain etc. – fewer construction challenges to overcome means an increased ability of an investor to bring his goods to market and decrease construction costs.
- on-site essential services for business, employees and clients, provided both by the public and private sectors
- proximity to other subsidiaries of the same company or to other outside companies that afford an opportunity for close linkages concerning business activities by product, process or service
- zoning – zoning helps users anticipate other industries that might be a neighbour, and helps to protect surrounding areas
- compatibility among industrial operations in park (e.g. industrial, office, business, technology, high-end)
- continuing responsibility of park management that provides profitable return to the community and a reasonable return to investors
- fiscal conditions (subsidies, professional taxes)
However, the main qualities that a well-planned industrial estate should provide differ according to its type. Typically desired features for various types of greenfield industrial sites are:
- Local industrial site
- Flat site, no physical barriers and no old damages on site
- Available labor force and contractual transparency to ensure the future value of the investment
- Good transport connectivity and available technical and IT infrastructure
- Landscape on/around site
- Business climate in local development community
- Promotion and communication
- Advanced design/engineering
- Low operational cost
- Regional industrial site
- Sufficient area (30 ha+), without any physical barriers or old damages on site
- Access - up to 5 km distance from motorway/highway, at least 1 state/regional road on/from site in good condition, and ability to connect to railway lines
- Sufficient and qualified work force (approx. 30-40,000 person work force in the catchment area)
- Technical infrastructure in good quality and quantity
- Strategic industrial park (corporate)
- Sufficient area (200 ha+), without physical barriers or old damages on site
- No legal-ownership obstacles because the site consists of limited number of parts/plots
- Adjacent to motorway/highway (issue of critical importance), system of state/regional roads on/from site (sound quality), ability to connect the site to a railway
- Sufficient and qualified work force (approx. 200000+ of work force in the catchment area)
- Technical infrastructure in good quality and quantity
WHAT ARE THE BENEFITS OF INVESTING PUBLIC RESOURCES INTO SITES PREPARATION?
The popularity of industrial estates is based on the fact that their introduction often brings a number of benefits to a country or a region. On the one hand, industrial estates contribute to industrial and economic development and, in addition, they can be used as an important tool for the urban and regional planning policies of the country. However, industrial estates can only contribute to economic and industrial development in the context of an overall development strategy. Without policies ensuring a favourable business climate and without adequate infrastructure and work force quality, investment in industrial estates may be wasted. It is important to note that an industrial estate is an important condition to attract new business or FDI, but it is not a sufficient one.
The issue of regional and local economic development has become increasingly important in recent years. Competition among localities has acquired global character, and many localities do not provide conditions stimulating enough to attract new business. Therefore, many communities cannot even join the global competition, because their sites are so deficient. But if industrial estates are part of an overall development strategy, and if the local regulations and legislation that have a specific impact on estates (planning, environmental protection, landownership) are transparent and consistent, estates can be a useful instrument to stimulate local development and employment.
Among the industrial and economic advantages of industrial estates are that they:
- Promote desirable economic branches, and hence national and local employment, by attracting new private local and foreign investment.
- Attain a more balanced distribution of production and employment within a region by spreading out industries to smaller towns in rural areas.
- Introduce diversification within the territory of their location, and at the same time improve quality and productivity.
- Encourage industrialists to establish their companies in a particular area through lower capital investment costs and easier start-up of the plant.
- Achieve economies in investment in public infrastructure.
- May encourage a more efficient use of resources. An example is through the creation of large, highly diversified industrial estates located around a so-called anchor industry, such as a power plant, an oil refinery, a steel mill or a chemical plant. An alternative approach is co-location around a transportation centre, for example a port, an airport or a rail or road junction. The goal here is to exploit synergies between the companies located in proximity to the industrial estate.
Well-planned and well-equipped industrial estates can also serve as a catalyst for urban and regional planning policies. In this respect they may:
- promote decentralisation of industrial activity, thereby preventing too much growth in certain urban areas and reinforcing the economic base of smaller towns by arresting rural-urban migration; and
- control location of industry and thus separate industrial and non-industrial areas in the situation where an industrial estate is to be located within an important urban area - the outcome is a more attractive and healthier urban environment
HOW TO CREATE AN INDUSTRIAL PARK?
The guidelines that follow do not include all the technical requirements needed for planning a new industrial estate but include the main description of necessary steps to be taken.
Decision process
First, the decision must be made whether a community wants an industrial estate and if yes of which kind. This decision must be part of an overall developmental strategy in order to be able to succeed. When a decision is taken to develop a new industrial estate in a particular area, the impetus may come from several different directions. It may be:
- a privately-sponsored initiative, or
- a government-driven effort as part of a regional development plan
However, even when it is privately-sponsored estate, it will require connection to transport infrastructure and public utilities. Furthermore, it should be considered how scarce public resources, which will be used, will contribute to objectives in the field of industrial, regional and urban development, and whether they could be attained by other means. Possible negative consequences must be weighed against expected economic and employment gains.
At this early stage in the planning process it is important that a project team is created that includes experts of many disciplines. This is because determining feasibility of industrial development requires various skills rather than any single individual skill. The team should include:
- an estate manager
- a financial sector department, including economists
- a site planner / engineer
- marketing experts, and
- environmental specialists
Market and financial analysis
Market and financial analysis is a crucial component in the development of an industrial property. Financial analysis is used to identify the site and to evaluate the development potential of the industrial estate. If demand projections are overambitious, facilities are likely to be underutilized. This will probably lead to financial difficulties. A good pre-feasibility study should therefore pay attention to the environment in which the estate operates rather than to the estate itself. This analysis should determine the optimum combination on location, size and type of industrial estate and selection of industries.
The first step in the planning process for a new industrial estate is to define the potential clients, or tenant companies that might realistically locate in the estate. This should be based on a comprehensive market study which should include:
- economic base analysis (general economic trends affecting national, regional and local economy, level of entrepreneurship, development etc.)
- socioeconomic analysis of the subject area (availability of population and workforce, local resources, utilities and transport, social infrastructure etc.)
- environmental issues (environmental impact assessment)
- forecast for demand for industrial facilities considered
- survey of competing projects
- determination of project marketability based on the capability of the region to host certain new types of investors (is the region already too crowded for new investors of a certain type?)
In case the property should be of national / regional importance and new / external employees will be attracted to the area, it is also important to evaluate the potential socio-economic impactsof an industrial estate. The influx of workers into a region may put local infrastructure – such as housing, transport, hospitals or schools – under pressure. It is very important to assess whether an increased future demand for housing and services can be met and, if not, how the local authorities propose to act. An important technique which serves to assess potential socio-economic impacts, is so-called cost-benefit analysis. It is process of weighing the total expected costs against the total expected benefits of one or more actions in order to choose the best or most profitable option. The process involves monetary calculations of initial expense vs. expected return. A frequent problem with CBA is that typically the costs are tangible, hard and financial, while the benefits are soft and intangible. Caution should be taken here against claims that "if you can't measure it does not exist/it has no value". Especially in more strategic investments, frequently the intangible benefits clearly outweigh the financial benefits. A more sophisticated approach to CBA is to try to put a financial value on intangible costs and benefits.
CBA answers three important questions:
- Is the project/investment “meaningful”?
- Which is the best investment project/alternative?
- Does the investment project bring more benefits than costs?
All expected costs and benefits are set against comparing two possible options/developments – zero and investment alternative. Thus you compare all the costs and benefits realized which would not take place choosing zero alternative.
A frequently made mistake in the CBA methodis to use non-discounted amounts for calculating the costs and benefits; therefore CBA calculations typically involve using time value of money formula. This is usually done by converting the future expected streams of costs and benefits to a present value amount. The time value of money is based on the premise that one would prefer to receive a certain amount of money today, rather than the same amount in the future, all else equal. Three formulas are used to adjust for this time value:
- The present value formula is used to discount future money streams: that is, to convert future amounts to their equivalent present day amounts.
- The future value formula is used to compound today's money into the equivalent amount at some time in the future.
- The present value of an annuity formula is used to discount a series of periodic payments of equal amounts to the present day. Variations of this formula can find the future value of the annuity, or solve for the annuity given the present value or find the annuity given the future value.
The accuracy of the outcome of a cost-benefit analysis is dependent on how accurately costs and benefits have been estimated.
Important part of the decision process is financial decision making which should say whether planned investment makes financial sense. This type of study is usually known as feasibility analysis which must be done. A feasibility study is defined as an evaluation or analysis of the potential impact of a proposed project or program. It is conducted to assist decision-makers in determining whether or not to implement a particular project or program. It provides the answers to four important questions:
- How much capital should be set aside to purchase the tract of raw land and what are the ongoing costs?
- How must the end product be priced and are the prices within the market structure?
- What kind of capital structure and financing will be needed?
- How much profit will be made, and is it enough in the view of risk being taken?
The feasibility analysis should be done before any binding commitments are made.
Possible parts of the financial analysis of industrial estate investment are financial projections as business conditions continually change during its development.
Difficulties may arise because economic and environmental factors may lead to conflicting conclusions at the site selection stage. Therefore, it is important to look at the potential environmental impactsof the industrial estate at this early stage. The most useful tool at this stage is an Environmental Impact Assessment (EIA) based on the projected structure of the estate. The goal of the EIA is to try to predict the potential impact of the estate on the environment and to suggest ways to reduce unacceptable impacts.
Planning
The next step is to select a site for the industrial estate. From the viewpoints of both developers and community, selecting an appropriate site for the type of industrial estate envisioned is essential to the development’s success. It is obvious that the site must comply with the existing physical master plan (or the change of the plan must be prepared, negotiated and approved). Here are some economic factors that will be considered in the choice of the site for the estate (more in detail discussed in previous parts):
1. The size of the site relative to the expected future demand for space. Since industrial estates are developed in phases over many years, the planning team will need to choose a site where land is available nearby for future expansion.
2. The specifications of the site. A manufacturing type of estate for example would ideally require:
- Suitable land conditions (gently sloping ground for drainage, good ground conditions for building foundations)
- Good access to cities, main transportation roads and airports
- Adequate water supplies
- Reliable electricity / gas / public heating supply and telecommunication facilities
- The possibility to install wastewater treatment facilities and solid waste disposal
However, also environmentalfactors should be considered when choosing the site:
- Select sites where, with good planning and site management, environmental impacts can be minimised and avoid selecting a site that will result in damage to areas that are environmentally fragile.
- Agricultural land is often chosen for industrial estates because it is flat and no old environmental damages (oil, heavy metals…) can be expected. The economic advantages to the developers from the use of such land are counter-balanced, however, by the loss of useful farming land to the community and usually long permitting process can be expected.
Highly important to note is that the planning process does not include only the initial project planning and master plan, but also the continuing development process. Ongoing planning is important to ensure completion of a balanced and viable project that matches the changing market and conditions.
Engineering and design (construction, zoning)
Once the site has been designated the next step is to design the site. Although in the traditional literature one will find phrases such as “industrial estates should be designed to suit the requirements of industry”, the value of an industrial estate will be enhanced if other factors are considered as well. For example, working with the site so as to develop the industrial estate in a way that limits environmental impacts to a minimum, or to optimize health and safety protection for the workers and surrounding communities, will lead to long-term enhanced value.
Preliminary engineering and design
At this moment the developer needs to make several important decisions:
- Decide about size and distribution of individual lots on the site. Usually about two thirds of areas are designated for large investors requiring between 10 – 25 hectares each, one third may serve to small and medium sized businesses. However, the design study should make possible combining two lots into one bigger, if necessary.
- Decide about necessary utility capacities to serve the site. This is not a simple task since the developer does not want to spend more than necessary but at the same time must not underestimate the needs of businesses to be located at the site. There are some estimates which can be used for planning purposes such as 0,2 - 1 MWh per hectare or 50 -100 m3 of gas per hectar but this has to be reviewed with respect to local conditions and expectations of needs.
Based on these decisions design study and technical project for infrastructure will be prepared.
Zone construction
The last and most important step is to construct the site. There are usually two options about when to start construction of an industrial site. Some municipalities prepare all technical documentation, obtain land use planning / construction permits and wait until the first investor appears. The construction then starts immediately after agreement with an investor is reached and technical infrastructure / roads can be modified based on needs of this first investor. However, for some investors this procedure may be too long (at large sites may take 6 – 12 months to bring all infrastructure to the construction site) and they may prefer sites where infrastructure is already in place. For this purpose option 2 – to start the construction immediately without knowing the specific investor—should also be considered.
The decision usually depends on financing available for the developer / municipality, on availability and conditions of national grant programs (some governments provide grants for construction of industrial sites only if there already is known investor).
Marketing and management
Marketing
Marketing starts as soon as the option to purchase is first considered. Targeted firms will range according to the type of industrial estate and marketing concept. There is keen competition among countries to attract foreign direct investment (FDI). Various reforms and strategies have been implemented, with mixed results.
Selection of enterprises
Once the industrial estate has been finalised as a concept and companies start to show interest in locating in the estate, the question will also arise of what criteria are to be used in the admissions policy for the estate. Traditionally the factors influencing admission are:
- whether the new company is compatible with existing or prospective businesses in the estate
- level of technology utilised within the company
- employment it will generate
- use that it will make of local resources
According to these criteria, the selling price or other instalment conditions may vary (lower price for investors from desired sectors vs. higher prices for investors who want to attend local market and have to install in the location).
Control/regulations
Orderly development of an estate requires some controls on investor’s activities. Their main purpose is to ensure that investors behave in conformity with an overall plan for the estate. Controls can take form of conditions attached to a licence or lease agreement and may include:
- limitation on types of activity
- building restrictions
- parking
- storage
- pollution
- safety
Management
Management of an industrial estate is a combination of public relation, standard administration, maintenance, new product development and sales. Marketing and community relations are of great importance. Management of an industrial estate usually follows a three-phase programme. First, coordination of planning construction activities and timing are most important. Second, the absorption period is concerned mainly with sales and leasing pace and price level. Finally, the last phase is concerned with long-term investment management which focuses on regular inspections.
Box 1: Approximate duration of particular development phases
External support
An industrial estate is only one element in an industrial promotion programme. Its enterprises need qualified managers and trained labour force and sources of technical advice and finance. In the absence of privately-run support services, such services can be set up by the government or associations of private enterprises. Again, there is a need that industrial estate development must be part of an overall development strategy.
http://www.unep.fr/pc/ind-estates/ind-estates/facts.htm
These are web pages of United Nations Environment Programme promoting eco-industrial development of industrial estates.
Web pages which offer investment promotion practitioners access to growing collection of resources and tools that support organizations seeking to attract and retain foreign direct investment (FDI).
http://www.areadevelopment.com
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