Igor Ishchenko: Better infrastructure means lower investment risks

Technopolis Moscow was launched in 2012 at the premises of former Moskvich car plant. Now, Technopolis Moscow is the largest of all thirty technoparks of Russia’s capital. About 3,000 people work at Technopolis Moscow, while its revenue as a management company (according to the 2017 preliminary results) reached RUR 778 million ($ 13.5 million) which is a 20% gain against 2016, EBITDA is RUR 231 million ($ 4 million). For Technopolis Moscow, 2017 was a year of remarkable events. First, its management company which previously was a government owned corporation, went public. Second, Technopolis Moscow became part of a special economic zone. Finally, the chances are high Technopolis Moscow may become management company for an industrial zone in Egypt. Invest Foresight discussed all these news with Igor Ishchenko, CEO of Technopolis Moscow.

Present-day agenda is third level infrastructure

– Excuse a silly question, but what can your tenants get from Technopolis Moscow apart from the premises for rent – which are abundant in the capital city anyway? Where would infrastructure of Technopolis Moscow move?

– When out Technopolis was established at the premises of the former Moskvich plant, the first thing we did was renovating its entire material infrastructure, including all facilities, internal networks of shops and sites, having spent about RUR 5.5 billion ($ 95 million) allocated from the municipal budget. Now we still have an outstanding RUR 3 billion loan from the Savings Bank but we keep gradually repaying it and will certainly fully reimburse it. The funds furnished by the municipal authorities are reimbursed via out taxes.

Second, the authorities of Moscow and ourselves have jointly drafted a properly functioning legislation, even though it is still a long way to go to further improve all sorts of laws, bylaws and procedures.

Third, the tenants get broad range of services at the site, such as perfectly clean premises, a congress center, a customs office, warehouses and temporary depots, public areas and a professional navigation system. We are currently actively developing a so called third level infrastructure.

– What is it about?

– It is the infrastructure which will enable people to sort out their routine domestic problems onsite, like visiting a gym. We now explore a possibility of setting up kids rooms. If we ultimately discover that for many of our tenants’ employees daytime care for their children is essential, we will undoubtedly respond to the matter.

Another element of such infrastructure are round the clock cafeterias since some of our tenants have a continuous manufacturing cycle. We are negotiating with some investors constructing a two or three-star hotel nearby, as at the moment there are some 3,000 people working at Technopolis Moscow, with great numbers of visitors from other locations, such as start-up and adjustment specialists who may stay here to perform their duties for weeks and months, whereas there are no reasonable hotels in the proximity.

More so, municipal authorities have improved the area by the nearest underground station and installed adequate street lighting. We have in turn arranged a proper fully automated system of onsite parking. The people who arrive to Technopolis Moscow to work here, do not need to wait for someone to let their vehicles in; if the license plate is registered in the database, the barrier will open all by itself. We have a personal office in our computer system where about 13,000 applications were submitted over the past year to which we try to swiftly respond.

We believe a virtual personal office is another step towards a situation when we have a variety of service aggregators present, so that a tenant company which, for example, does not want to use our cleaning services, could have access to other service providers. We will in fact have an electronic exchange where cleaning companies and other service providers could offer their services so that our tenants could make their choices. We do reserve a provision though which allows ourselves to bar unreliable service companies which we label beggars. They are quite numerous and they cause problems as at times low quality services result in financial losses. For our tenants such losses may be quite damaging since not all of them are business giants.

– What are the plans for further infrastructure development?

– By the end of 2018 we will have all major issues resolved. Most importantly, we expect to have 100% of our premises occupied by Technopolis tenants.

– How many tenants do you have now?

– By now we have got over 80 tenants, and aggregate raised investments in the vicinity of RUR 20 billion ($ 350 million). Those are ongoing investments and we expect that further RUR 6 billion will be invested in 2018.

We hope, by the end of 2018 the ecosystem will operate properly and smoothly. Our function here will be that of the facilities operator and moderator of the ongoing processes at site. A moderator is required since the task of the ecosystem is broader than the functions I have named. We now actively engage in building a cluster, i.e. designing within Technopolis Moscow some processing chains. Our tenants will have to ultimately start buying various items from each other thus minimizing their costs. We already observe this process taking shape. We see that tenant companies engaged in data processing and digital currencies mining have commenced ordering video cards and memory plates to be printed by other tenants. The latter had to meet the challenge as well, and to accomplish research and development to come up with respective products. That is what Technopolis Moscow is about, since we do not merely mean production competence, there should also be technology developers, specialists who can properly document their development and accomplish its certification. Otherwise, in mid-term perspective any project is doomed.

Part of zone

– Starting this year, Technopolis Moscow is not just a technopark but a special economic zone too.

– Technopolis Moscow, to be exact, has joined the entity which was initially called Zelenograd special economic zone but by some kind of a coincidence is now called Technopolis Moscow. But the area of our Technopolis is much smaller. Our area is 32 hectares whereas that of the special economic zone is 160 hectares. Hence we assume that the special economic zone is, on the one hand, a challenge for the city, while on the other hand, it is some market place where absolutely new industry standards are set and shaped, the standards which may in quality terms be quite different from those of Technopolis Moscow. Technopolis Moscow is an absolutely uncommon brownfield project whereas Zelenograd special economic zone is a purely greenfield undertaking which from the global practice perspective offers a classic design.

– Who will manage the special economic zone? Will that be your company?

– At the moment we are not the management company. The government of Moscow will have to appoint such a company.

Bonds issue and sites launch

– What was the purpose for Technopolis Moscow to become a public company? What will be the results and your company’s advantages?

– The first task we intended to tackle by changing the form of incorporation and becoming a public company was to expand over the limits of a state unitary enterprise, a cumbersome and narrowly-specialized entity which by its nature set numerous restrictions on our development.

I do not refer to the procedural restrictions only, which were certainly present. But besides the federal laws and municipal laws, there were some bylaw regulations of many municipal departments and bodies of executive power which we, as a state unitary enterprise, had to observe. That seriously affected our progress as a management company and the development pace of the site. As a site we were losing competitiveness because we had to spend a month on resolving an issue which could be sorted out in a week.

But there was a second aspect to that, too. The status of a state unitary enterprise meant some restrictions on operating at the capital markets. For us, that was a most essential matter, even though a few years earlier we were granted a sizeable loan from the Savings Bank which we used to buy and refurbish some premises. That was a unique credit facility under which municipal authorities guaranteed the bank’s loan with a pledge of some municipal real estate.

Nevertheless, that did not negate the fact that a sound business entity should be structured in a different manner, to say the least. If there is a company which has some capital and a business strategy, it must be able to offer the owner a set of instruments for implementing the said strategy. The set must include, among other things, instruments to structure new sources of financing. Raising financing is not simple per se, whereas arranging the entire process properly is three times as hard. But for a joint stock company that is at least possible.

I believe in the mid-term prospect we will be able to discuss one more aspect as well. I mean a possibility of coming up with an IPO and a free float, and not even to set a benchmark for the true value of our business, but to send a signal to the market of the existence of this business with its market business model.

– Is it really so? Have you got a business model?

– We can judge by the financial results we demonstrate, by EBITDA first of all.

When we entered the market, there were not more than five management companies in Moscow, and just five technoparks. More so, in my view, those companies were not truly management companies. Whereas now, we see that there are over thirty technoparks in Moscow and a market of management companies. In that market, there are competition, targeting by CAPEX and OPEX, development strategies of some quality, and certain level of funding sources requirement. In fact, a new market industry has emerged. This industry has started attracting banks which initially offered a trivial selection of banking products. Now, national and foreign banks come to offer diverse loan facilities including long-term loans through bonds issue. We discuss all these matters, and an IPO for us is more a signal to the market that the government of Moscow is seeing it all as a purely market situation.

For municipal authorities it is most important not to just raise investments, but to turn the industry into a driving force for Moscow’s industrial development. We are now entering this stage. I think Technopolis Moscow is indeed a driving force that shapes the new image of Moscow’s industry. The management company, the business model and the ecosystem are drawing investors’ interest. I do not mean we already are an investment project but we certainly are an object of interest.

– Still, the competition is very high, isn’t it?

– For Moscow, even thirty-something technoparks make up a drop in a bucket. So in Moscow Region, at Rudnevo settlement, there will be a new industrial site. Municipal authorities have charged us with setting absolutely new industry shaping standards on the 70 hectares of the site facilities. We aim at professional standards when people do not need to travel to their jobs through the cities, do not have to waste time in traffic jams, but can live next door to their work places. We therefore plan to create five to six thousand jobs in Rudnevo.

– You said, becoming a joint stock company was required, among other things, to enter capital markets. What are your plans in this regard and how do you want to use the raised financing?

– That will depend on a number of parameters. On the time we will need to launch new sites, in the first turn. Here, at Technopolis Moscow, we know perfectly well how we finance the entire range of the required solutions. Still, besides that, there is a special economic zone which we now are a part of. Then, there is Rudnevo industrial site. It is most likely there will emerge other sites as well.

I feel that municipal authorities do understand now that unless some reasonable funds are invested to develop the most fundamental infrastructure, they will be unable to meet the requirements of the prospect investors.

The investors intending to come to Moscow are certainly concerned about the incessantly changing laws and regulations. At least, that is a commonplace narrative. Product certification procedures and corruption are other stereotypes which frighten investors to death. Meanwhile there are special zones being established in Kazakhstan and Belarus where national sovereignty in terms of governing laws is absolutely null. In Kazakhstan, their special economic zone is governed by the common law. What could be offered by Moscow? It can arrange a fundamental infrastructure and a set of institutions to support businesses. Everybody can put together cheerful presentations and plenty of colorful images for investors now. It is a different story if an investor can see real roads, energy supply lines and the entire infrastructure. More so, if all options of facilities arrangements are available and entire approval documentation for that is already in place (which is the case of the industrial site at Rudnevo), then all an investor needs to do is to just register an entity, install equipment, certify the products and train the employees. After that, production may be launched. In such a situation, the nature of the risks and hence the essense of relationships with investors are totally different.

– What role will budgetary allocations play in implementing your plans?

– At the current stage, Moscow authorities offer us a classic business model when up to 30% of finances are provided by the city. Local authorities can then offer us a set of market instruments. The way we use them will be absolutely our choice. We will be able to sell some plots of these territories for set purposes, for implementing some decisions within the industrial park concept. We can lease the facilities the construction of which was financed by Moscow government. Above that, launching industrial park in Rudnevo will additionally require billions of rubles. Besides, there is another site, Technopolis Moscow special economic zone of slightly over 100 hectares. All in all, there are about 20,000 hectares of downgraded lands in Moscow. Hence the scale of prospect investments is exorbitant. I hope the 30% to 70% share of investments will for the next 5 to 10 years remain a standard approach. Later, we will probably accept a more market-guided mechanism, set a real estate fund. Its statutory capital may include monetary resources, properties and lands. After that, the agenda will include putting currently downgraded municipal lands in the economic process.

In my view, within next 20 to 30 years Moscow is able to regain its status of an industrial megacity.

Reaching out to Egypt

– What about your Egyptian project?

– At some point, when some while ago we came to realize that the project cycle of creating Technopolis Moscow is nearing its finalization, we started considering what else could be done. It happened, that at that moment the Ministry of Industry and Trade invited us to be their consultants on setting up a Russian industrial zone in Egypt. So, last summer we won a government contract and drafted the concept of the zone. That was a really applicative development. On an area of 500-something hectares of lands (not the territories of Russia) with their own rules and regulations and logistics specifics, we had to design an open hub for the entities interested in expanding their export presence. That open hub is not aimed at Egypt alone but at entire Africa which over the past decade is the fastest growing continent.

I would not forget about Middle East and Western Asia either, since these areas are of great interest. We see huge demand there stimulated by economies attempting to get rid of their oil dependence. As we comprehend it is impossible to start a purely national project there, we came up with a suggestion to set an open hub, implying Russian and not only Russian exporters will join it as well. We have made up the concept and joined the process of drafting an intergovernmental agreement. Those issues were discussed during the last visit of the Russian President to Egypt. We assume the intergovernmental agreement will be fully ready in January. Most likely, it will be signed in February. We will then take part in a tender to obtain the status of the management company for the project. I believe we do have the required potential. We have a good idea of the markets of Egypt and Africa in general. We know perfectly well how the practical regulation is arranged there, how the power mechanisms are arranged in Egypt – which is always essential in the East. Therefore, Egypt for us is an extremely interesting project. And it is most interesting for the two countries.

Understanding required

– These days, technoparks are being established in many regions. What are the common mistakes committed in the process of establishing them?

– It is often the case, that authorities say, ‘let’s develop a network of technoparks’. In our country, many entities of the Russian Federation are actively promoting technoparks, but very few comprehend what they really do. Many such entities approach us and ask to help and teach them. They have not yet identified the demand which a technopark should meet. They have not apprehended the advantages and disadvantages of their regions. They have not realized in which sectors and subject to which minimal but necessary decisions such a mechanism can operate. One can not merely build a vessel. There must be proper calculations to make sure it will not sink right away. In our case, that is the understanding of the solutions which can attract investors.

By Konstantin Frumkin

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