Selecting a place for a new plant

Right location is a half of success in any construction. Here are the ways to select a site for a new plant and build and efficient production facility without flushing money down the drain. These are fully applied in Russia, but will also be useful for investors from other European countries.

Make a list of technical requirements

Start with a distinct list of technical requirements to a construction site. The more detailed is the list, the higher is a probability of choosing a land plot (or brownfield, a site with unused industrial facility and a potential for redevelopment) that would be best suited for the purposes of the project, by criteria of investment and construction period as well, and would allow for further production development.

Key parameters to be considered are listed below.

Area and layout of future construction site. Generally, the most optimum land plot layout is a rectangle. Yet the major factors shaping a site layout are production technology and on-site logistics: process line parameters and layout requirements, production area interface diagrams, and requirements to location of auxiliaries and other necessary structures. In addition, it would be reasonable to determine site area with account of potential production expansion.

Utility loads are determined on the basis of requirements of process equipment and production processes, and with account of production capacity growth and respective increase in energy consumption in the future.

At this stage, it is important to determine the energy resource (electric power, gas, water) that would comprise a major part of production expenses. Naturally, availability of that resource and, most importantly, its cost will be one of the key factors of construction site selection.

Transport infrastructure shall ensure reliable and efficient logistics for the future production, whether in the form of access to highways, to railways, or possible shipping by waterways.

Define the project strategy

As the next step, you shall define the project strategy, i. e. the site format. Usually, companies choose between four variants of construction sites.

Industrial park. Generally, location in an industrial park offers a site with ready utilities and logistical networks to an investor. Park territory is guarded, and a professional administration company manages the infrastructure. The same company provides specifications for connection to the park utilities. It streamlines the procedure greatly at the design stage. In many industrial parks, sites of residents can be provided with both motor roads and railroad branches.

Beside all the items listed above, industrial parks can offer finished production areas with utilities, warehouses and administrative premises. There are also such options as built-to-suit and built-to-rent, when the park owner builds a production facility at its own cost for an individual resident for further handover or rent.

Special Economic Zone (SEZ). Location in a SEZ unites all the advantages of construction in an industrial park and allows for rent and buy-out of the land plots by a preferential price, and offers a special administration regime minimizing red tape. In addition, investor can apply a special customs treatment (duty-free customs zone procedure) and a system of tax preferences.

In Russia to obtain a SEZ resident status, an investor shall comply with the following requirements set out in the Federal Law No. 116-FZ.

  • Register a legal entity in the municipality where the SEZ is located.
  • Make a capital investment in a certain amount within a defined time period from the execution of agreement with the SEZ for performance of activities. Capital investment amount is defined by a federal law depending on the SEZ type.

One should note that prospective activities of the future resident shall match the SEZ type.

Brownfield is generally a territory of a former large factory, used partially or completely as a location for other production facilities. The advantage of such sites includes existing utility infrastructure, and existing production buildings can be converted quickly for a new facility. It reduces project implementation period significantly, compared to a new construction from ground up.

Please keep in mind that in some cases, building reconstruction and conversion costs are even higher than a budget of construction of a similar greenfield facility. Utilities and transport facilities can also be severely worn out and require overhaul. In addition, existing utility capacities may be not sufficient for the production facility planned. Add here low competence or complete absence of administration company. Also, in some cases, a detailed title examination is required.

Greenfield is an empty plot for construction of industrial facilities, without utilities or any amenities at all. As a rule, the companies implementing projects of large-area production facility construction prefer greenfield development. I. e., it is the case when full control and management of the facility infrastructure via direct contact with resource providers and delineation of infrastructural balance sheet attribution are critical. In this case, an investor takes up all costs of land plot preparation for construction, utility and transport infrastructure building, and all risks, including latent ones. Despite a number of advantages, practice shows that the number of companies choosing this site format grow ever fewer in the recent years.

Assess particular sites

After a company envisages its perfect site for its factory, a “composite portrait” of sorts, it can start searching for a particular location. From a list of preferred regions (districts), select several potentially suitable sites and assess their compliance with the project requirements and purposes. Analysis shall include five key aspects.

1. City-planning and cadastral status of the plot.

One must review city development plan, abstract from the Unified State Register of Real Estate, documents of territorial planning (municipal site plan, area planning scheme, rules of land use and development) as applicable to the land plot, and other documentation depending on the project specifics and particular circumstances.

E. g., city-planning regulations can contain a list of permitted land use types and other construction permission parameters:

  • land plot size limits;
  • maximum height of capital structures;
  • land-to-building ratio;
  • minimum number of parking lots;
  • minimum landscaping percentage, etc.

Among other data, the Unified State Register of Real Estate includes information on restricted use zones. Such zones include water protection zones, coastal buffer zones, utility protection zones (for gas, heat, electric power supply facilities), etc. Land plots located partially or completely in restricted use zones have various restrictions of their use.

2. Specific terrain and geological conditions.

Information on those parameters can be obtained from engineering (geodetic, geological, hydrological, etc.) survey reports. If no such studies have been performed, it is recommended to perform preliminary survey independently. They are not very detailed yet they provide basic information on natural conditions at the site, that can have a potential adverse effect on design solutions or pose a threat to construction facilities. This way, you can identify complicated geological conditions, high ground water level or large height difference at the site, which can result in significant cost increase at the construction stage.

3. Utility infrastructure. As mentioned above, energy resources are a key component of investment and production costs. Unavailability of any resource, high purchase cost, or large investment required to build utility networks (due to their length, engineering complicacy, etc.) can affect construction budget and schedule, and even the whole project implementation dramatically.

While the situation may be quite clear with an industrial park, SEZ or brownfield, this issue can be really complicated with a greenfield site. To check a possibility of future connection to utility networks and network construction cost, an investor shall address relevant resource providers, namely, local branches of Gazprom, power grid operators, Water and Sanitation Authority, etc.

4. Traffic infrastructure. Transport infrastructure state and development level have a direct influence on efficient operation of production facilities and represent a key factor of competitive performance. Construction planning shall involve analysis of transport system state in the area of the prospective facility (availability of major roads, logistical hubs, etc., and their development prospective).

As for the site where the facility itself will be located, one shall check the state and status of existing access ways (motor roads, railroad lines, etc.), and assess construction possibilities and related restrictions and encumbrances for an investor, if no access ways are available.

5. Environmental class os the site shall be assessed to identify risks related to historical and current use of the facility. Special attention shall be paid to the aspects related to sanitary protection zone of the facility planned.

A restricted use zone is a mandatory buffer zone designed in compliance with Russian regulations of public protection against hazardous emissions, noise and other adverse factors generated by production facilities during operation. Define an estimated restricted use zone according to SanPiN 2.2.1/2.1.1.1200-03, review information on restricted use zones and buffer zones of nearby facilities and on environment pollution sources that can impose restrictions on planned activities of an investor.

An investor shall have a clear understanding whether environmental risks and related costs are acceptable, and develop environmental risk management strategy both at the stage of discussion of facility purchase terms and conditions and after execution of the deal. The most common types of environmental risks and costs related to company activities and real estate facilities include:

  • depollution of the territory itself;
  • depollution of adjoining territory to prevent pollutant ingress to the facility territory;
  • liability for health or property damage due to emissions of hazardous substances;
  • increasing costs of structure dismounting or redevelopment due to the presence of hazardous materials in the design, or due to the presence of wetlands and other restricting environmental elements.

Beside the features listed above, for many companies other important factors of location selection include availability of qualified labour resources and preference packages provided to investor by the region or site (industrial park, SEZ).

Аuthor: Lyubov Zubakova

This blog was published in the Russian media RBK and is available in Russian via the link!

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