Support to the Development of Greenfield investments in Lithuania

“Management Models and Operation of Industrial Parks

Training session leader: Gino De Reuwe, Business Mobility International

Hotel Reval, Vilnius, 19 September 2006

Background

• The economic development perspective• The private investor’s perspective• Intensive competition• Wide range of skills required • Key questions:

– who to involve and why?– how to structure this involvement?– do we have the budget?

Five basic models for zone development & operations

Model 1: Municipality in-house staff

Model 3: Contractual PPP

Model 4: Equity PPP

Model 2: Public Agency

Model 5: Fully privatedevelopment

PRIVATE SECTOR COMMITMENT

Complexity

PU

BL

IC S

EC

TO

R C

OM

MIT

ME

NT

Model 1: Municipality in-house staff

Model 3: Contractual PPP

Model 4: Equity PPP

Model 2: Public Agency

Model 5: Fully privatedevelopment

PRIVATE SECTOR COMMITMENT

Complexity

PU

BL

IC S

EC

TO

R C

OM

MIT

ME

NT

Model 1: Municipality administration (in-house staff)

1. Avoids additional overheads

2. More difficult to get on board all required expertise and skills

3. More dependency on others’ promotion activities

4. Typical model for smaller zones (<= 40-50 ha)

Model 2: Public zone management agency

1. Allows for a degree of autonomy and initiative (clear mission, objectives and performance criteria)

2. Creates a unique image, visibility and contact point for investors

3. Fosters a customer-oriented organisational culture4. Allows for a private sector-like HR and remuneration policy5. Creates a legal entity with separation of risks and liabilities 6. Allows for more flexibility in contracting with third parties –

including negotiation of agreements with investors 7. Benefits from a more advantageous tax regime (e.g. VAT)

But: higher cost, higher commitment, higher risk> Typical for larger zones (now or in future stage)

Model 2: Public zone management agency

Typical organisational set-up:

MANAGINGDIRECTOR

FINANCE ANDADMINISTRATION

MANAGER

ARCHITECT /ENGINEER

Economic &InvestmentDepartmentDIRECTOR

Planning DepartmentARCHITECT-DEVELOPER

Municipality - Back office Public Agency - Front office

Model 3: Contractual Public-Private Partnership

1. Typically, public side contributes land while private side provides expertise and takes the commercial risks

2. Concession agreement (e.g. Klaipeda FEZ) or other contract

3. Easier, less risky than equity PPP4. Eliminates the need for land auctions?5. Does not eliminate need for municipality investment /

attractive financial return to private partner!6. Reduced control of municipality over strategic orientation

and operations of the zone

Model 4: Equity Public-Private Partnership

1. Establishment of joint legal entity2. More lengthy and costly set-up3. Does not eliminate public procurement requirements4. More risky to operate due to diverging goals, profitability

norms etc.5. Seems suitable only for larger development projects6. Added value over contractual PPP?

Model 5: Fully private development

1. Specialised players looking for an integrated development2. Need for attractive overall financial return, for example

through:• Intrinsically commercially attractive location• Fully integrated concept including flexible warehouse & office

space• State support (cheap land, infrastructure subsidy…)• Opportunities for extra added value & synergies

(e.g. access to investors, access to capital, extra services, cluster concepts in chemical, automotive, electronics…)

3. But: municipality control is reduced to a minimum

Summary

Conclusion: • Choice = function of commitment, resources of municipality• Public agency? only for larger zones, and it is not a sufficient

condition for success

(from municipality’s

perspective)

Model 1

Municipality

Administration

Model 2

Public

Agency

Model 3

Contractual

PPP

Model 4

Equity

PPP

Model 5

Fully

private

development

1. Cost and time for set-up low medium low high none

2. Commitment of

resources (ongoing basis)

low medium low low none

3. Operational flexibility low high low medium none

4. Complexity and risks low low medium high low

5. Municipality control high high medium medium low

Best Practices - Critical Success Factors

Why do some zones NOT succeed in getting investors?

1. Failure to build a professional team within the agency 2. A lack of start-up capital, insufficient funds for developing an attractive portfolio of

readily available equipped land, for attracting high-quality staff and for launching a promotion campaign on a sufficient scale.

 3. A lack of skills in securing additional financial support (e.g. EU Structural Funds) 4. A lack of a clear strategic vision in targeting sectors and activities, possibly resulting

in (a) inefficient promotion efforts and (b) an unattractive early mix of tenants that will deter future investors.

 5. Failure to attract, in an early stage, a high-profile investment (“anchor investor”) in the

targeted sectors and activities 

Best Practices - Critical Success Factors

6. Failure to develop an attractive product, for example where it concerns zone infrastructure or land pricing.

7. Mediocre quality of the overall offer to investors, due to relatively unfavourable location factors in a national and international context (for example in terms of labour availability, taxation system…)

8. Frequent changes in regulations and economic laws, creating obstacles in the development and deterring potential investors.

9. A long-term investment plan of the zone that is not in line with that of local, regional or national government (for example when alternative, competing industrial zones are given development priority).

10. A lack of institutional support and goodwill of local, regional and/or national government bodies.