Support to the Development of Greenfield investments in Lithuania

1. 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

2. 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? Background

3. Five basic models for zone development & operations Complexity Complexity Model 2: Model 2: Model 4: Model 4: Public Agency Public Agency Equity PPP Equity PPP PUBLIC SECTOR COMMITMENT PUBLIC SECTOR COMMITMENT Model 3: Model 3: Contractual PPP Contractual PPP Model 1: Model 1: Model 5: Model 5: Municipality Municipality Fully private Fully private in in - - house staff house staff development development PRIVATE SECTOR COMMITMENT PRIVATE SECTOR COMMITMENT

4. Model 1: Municipality administration (in-house staff) • Avoids additional overheads • More difficult to get on board all required expertise and skills • More dependency on others’ promotion activities • Typical modelfor smaller zones (<= 40-50 ha)

5. Model 2: Public zone management agency • Allows for a degree of autonomy and initiative (clear mission, objectives and performance criteria) • Creates a unique image, visibility and contact point for investors • Fosters a customer-oriented organisational culture • Allows for a private sector-like HR and remuneration policy • Creates a legal entity with separation of risks and liabilities • Allows for more flexibility in contracting with third parties – including negotiation of agreements with investors • 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)

6. Model 2: Public zone management agency Typical organisational set-up:

7. Model 3: Contractual Public-Private Partnership • Typically, public side contributes land while private side provides expertise and takes the commercial risks • Concession agreement (e.g. Klaipeda FEZ) or other contract • Easier, less risky than equity PPP • Eliminates the need for land auctions? • Does not eliminate need for municipality investment / attractive financial return to private partner! • Reduced control of municipality over strategic orientation and operations of the zone

8. Model 4: Equity Public-Private Partnership • Establishment of joint legal entity • More lengthy and costly set-up • Does not eliminate public procurement requirements • More risky to operate due to diverging goals, profitability norms etc. • Seems suitable only for larger development projects • Added value over contractual PPP?

9. Model 5: Fully private development • Specialised players looking for an integrated development • 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…) • But: municipality control is reduced to a minimum

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

11. Best Practices - Critical Success Factors Why do some zones NOT succeed in getting investors? • Failure to build a professional team within the agency • 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. • A lack of skills in securing additional financial support (e.g. EU Structural Funds) • 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. • Failure to attract, in an early stage, a high-profile investment (“anchor investor”) in the targeted sectors and activities

12. Best Practices - Critical Success Factors • Failure to develop an attractive product, for example where it concerns zone infrastructure or land pricing. • 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…) • Frequent changes in regulations and economic laws, creating obstacles in the development and deterring potential investors. • 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). • A lack of institutional support and goodwill of local, regional and/or national government bodies.