Intensive industrial modernization, the introduction of new technologies and import substitution pose a task for business: how to start production and not get bogged down in long construction, uncertain costs and bureaucracy? The timing, budget and long-term effectiveness of the project depend on the choice of strategy. How to choose a site for construction and what is the essence of brownfield and greenfield formats?
Business development: choosing a path
Choosing a site for a new project or moving an existing enterprise is one of the key solutions for any business. Is it worth building a plant from scratch on a clean plot of land (greenfield) or is it better to upgrade an existing enterprise (brownfield)? The answer depends on a variety of factors, including costs, timing, and risks.
Brownfield: second chance for old grounds
Brownfield projects involve the reconstruction, modernization or restart of existing industrial facilities. This is a path where the past becomes the foundation for the future.
For an entrepreneur, such sites are attractive for the possibility of a quick start. Communications are already ready: there are electric networks, roads, water and gas. The old enterprise is located in an industrial zone close to the main highways and sources of personnel.
This option seems promising if you do not know about the weaknesses of brownfield projects. Here are some of them:
- Dismantling outdated structures and communications can cost more than the budget planned for these expenses.
- There is a high probability of hidden soil or groundwater contamination, the elimination of which will require significant costs.
- Existing energy resources may not be enough for new and technological production.
- The former owner may hide encumbrances, and problems with ownership rights.
- Design flexibility and future expansion are limited by site capabilities.
Brownfield is beneficial when the speed of deployment and low initial investment are important, as well as if the old production meets the new goals of the investor. This format can be beneficial to an enterprise with a short planning horizon or as a temporary solution.
Greenfield: building from scratch
Greenfield projects are the creation of an enterprise in an undeveloped area. Here the investor himself sets the rules of the game and erects the production facility exactly as the business needs it. The territory does not depend on the limitations of the past owner, and the company gets complete freedom to plan its infrastructure.
Often such plots are located in special economic zones offering preferential taxation conditions, simplification of bureaucracy and ready-made infrastructure, regardless of what the area of the plot is: 10 acres or 10 hectares. New objects are more attractive to investors, since it is easier to evaluate upcoming investments here, it is easier to get a loan for business development due to the transparency of the assessment and legal purity. It also has the ability to lay the latest technology, robotic lines and green standards. Greenfield project allows to plan expansion for 10-15 years in advance.
However, the greenfield format comes with higher initial costs and extended time of construction from scratch. From the selection of the site to the start of production, it can take from 2 to 5 years, depending on the readiness of the project.
If the priority is planning freedom and growth prospects, it is better to dwell on greenfield. Such sites are profitable in terms of total cost of ownership (TCO) and are relevant for those who are planning a long-term project for 10 years or more.
Brownfield vs greenfield: where is the sweet spot
Before making a final decision on site selection, it is necessary to compare key parameters, as well as evaluate the capital expenditures for the purchase, modernization or creation of long-term assets (CAPEX) and current operating costs (OPEX).
For a greenfield site, capital expenditures are generally higher. However, they allow the creation of modern production, which will not require major repairs for a long time, and reduce TCO, which in turn is the main selection criterion. Today, business estimates not only land, but the full cost of production on the horizon of 15-20 years. An important role belongs here to the class of energy supply and the amount of OPEX costs (the new greenfield infrastructure provides high-quality and efficient performance).
When choosing a brownfield site, the initial investment is lower due to the presence of existing buildings and communications. However, business risks facing the need to repair infrastructure earlier than in the model. At the old site, you will have to take into account the deterioration of engineering networks and the possible need for frequent updates. These factors can significantly increase operating costs. Not to mention the possibility of brownfield sites falling under various renovation programs and the forced relocation of production.
| Критерий | Brownfield | Greenfield |
| CAPEX costs | Medium | High |
| OPEX costs (first 5 years) | Hidden repair costs are possible | Stable, forecasted |
| Implementation timeline | 1-2 years | 2-5 years |
| Technology flexibility | Limited | Maximum |
| Environmental risks | High | Low |
| ТСО | Higher | Lower |
| Location of areas | In developed industrial zones | In new areas |
Point of attraction for new productions
The Greenfield site looks more attractive for an emerging business, despite the risks that can be minimized by choosing a location in areas with ready-made utilities, such as a special economic zone (SEZ) or an industrial park.
In Russia, there are 45 special economic zones of four types (industrial, technical, agricultural, tourist and port) and about five hundred industrial parks.
To avoid mistakes, you should carefully study the features of the territory where the enterprise is planned to be built.
- Connected networks. Areas with connected communications allow you to start construction immediately, reducing the start-up time by at least half.
- Room for development. The presence of a large land bank opens up opportunities for large projects.
- Location near the market. The closer production is to the consumer, the lower the cost of transporting products.
- Transport infrastructure. Direct access to rail tracks and federal highways simplifies logistics and makes it easier to attract staff.
- Tax preferences. Benefits ease financial burdens and boost ROI, especially at the start.
- Customs regimes. Favorable conditions are especially necessary for logistics companies.
But the main advantage is the support of the management company. It helps to overcome bureaucratic obstacles and speed up the receipt of permits. The principle of “one window” for approvals turns a potentially risky enterprise into a profitable project.
The choice between brownfield and greenfield is up to the business on a case-by-case basis. However, the trend for free construction is obvious: the regions are increasing competition for investments, offering more and more favorable conditions in industrial parks and SEZs. One thing remains for business – to conduct a thorough analysis and use the opportunities that the state creates. It is time to act.
By Roman Musin, Development Director of the SEZ “Maksimikha” (VTB Group)