Shaping the development of an Industrial and Logistics Park

What is an Industrial and Logistics Park?

An Industrial and Logistics Park (ILP) is as “geographically demarcated area, developed and subdivided into plots according to a comprehensive plan with provision for roads, transport and public utilities, with or without built-up (advance) factories”.

Industrial Parks are considered by governments as one of the most effective instruments to achieve higher standards of industrialization and economic development. Sometimes these areas operate under different administrative, regulatory and fiscal regimes than the rest of the country. In China, for instance, they have become an important vehicle for economic growth and have been used as a successful tool in the form of special economic zones (in China, most of ILP are known as SEZs due to their differential tax regime) since the early 1980s. Other Asian countries have embraced the ILP concept to attract foreign direct investment, transfer technology and know-how and as a means to create jobs. Governments invest tax-payer money in ILP projects to promote industrial and economic growth, attract Foreign Direct Investments (FDIs), foster growth and generate employment at national, regional, and local level and spur an industrial dynamic.

Currently there are more than 3,000 ILPs scattered around the world in more than 130 countries:

ILP around the world. ALG newsletter
ILP around the world

Some key facts related to the impact of ILPs in the economic and industrial growth of countries are:

  • Asia has the largest number of Free Zones, with more than 1,200 (40% of the total), of which 444 are located in China;
  • About 66 million jobs are supported in free zones around the wold, 40 million of which are in Asia;
  • Almost half of the free zones today are privately managed.

Simplifying, there are 6 main types of free zones, highlighted in the table hereunder. The main criteria more commonly used to categorise and group them is the type of economic activities and purposes the IKLPS are focused on.

Types of ILP across the world. ALG News newsletter
Types of ILP across the world

Challenges faced when setting up a successful ILP

Despite their reach and the number of projects that have been started, unfortunately not all projects turn out successful. The history reveals a mixed picture in terms of success of ILPs, ranging from resounding successes to many stories of disappointment and struggle.

Some of the challenges faced by ILP developers are: coordination of key players involved, financing of infrastructure (resulting in shortage of infrastructure), creation of linkages with local economies inside and outside ILPs, weak planning or lack of the right institutional and legal frameworks (which may have a dissuasive effect on potential investors due to lack of legal reliability), etc.

ALG has devised a comprehensive framework that successfully addresses and harnesses the true potential of ILPs. Our experience supporting the development of ILPs worldwide proves that there are eight main success drivers (shown schematically in this figure), which are, in turn, shaped by two main forces: governments and markets.

Drivers of free zone industrial areas. ALG
Drivers of free zone and industrial areas competitiveness

All the previous have to be properly addressed in order to create an adequate value proposition that uniquely addresses the particularity of each ILP, shaping its future success. Once a new project has been shape a comprehensive marketing plan has to be develop to properly communicate such value proposition to the different stakeholder involved.

Each success factor entails a set features evaluated individually by investors during the decision-making process. These features affect the attractiveness, as well as competitiveness, sought by each individual investor. Ultimately, the aspects that better reflect ILPs’ competitiveness in a broader sense can be explained as follows:

  1. Location: proximity to markets / customers, urban developments, other competitor ILPs, ports, straights and canals
  2. Local utilities (power, water, telecom, etc.): the availability of; ease of access to; and the cost of power, water, natural gas, telecommunications; have a direct impact on the viability of a given business.
  3. Logistics (port, rail, road & air access): level of development and range of transportation modals that are on the reach of a given ILP.
  4. Tax, legal and regulatory system: ease of starting business, registration, obtaining permits, cross-border trade, protection of investors, law enforcement, ownership and profit repatriation.
  5. Availability and cost of labor and materials: existence of talent with the required skill levels, wage dynamics (minimum wage, total cost of talent acquisition including social security, mandatory health insurance, etc.), access to all material requirements for operation, total cost of acquisition of materials.
  6. Physical infrastructure: overall site plan, availability of office buildings, warehouses, road plans security and safety facilities within the Industrial Park.
  7. Local market attractiveness: demand; growth rate and market potential for the products; brand recognition; purchasing power of the population; access to sales channels; competition; cost to serve to markets; profit margins; as well as the politic, economic and social stability of the region.
  8. Lifestyle: availability of housing, schools, education, health services, leisure activities and general cost of living.

Making sure a new success story is framed

All happy families are alike; each unhappy family is unhappy in its own way (Leo Tolstoy)

Every successful ILP has its own success story, and the failures have their own particular causes. That is why the first steps in designing a successful ILP are to set the adequate legal framework, set the location and find the right investment for a given area. The regulatory and legal framework is a fundamental aspect that will shape the development drivers of the new ILP.

ALG uses a methodology that combines the hinterland opportunities, trade and value propositions to find the most suitable industry to be targeted.

Methodology followed in identification of industries ALG
Methodology followed in identification of industries

Once the most suitable sectors are lined up, the value proposition is defined (or redesigned) taking into account the investment requirements of each sector. Then a proper gap analysis is conducted and an action plan devised so that the gaps can be filled-in. As a result from the previous, certain sector may be regarded as a non-suitable for the given ILP. The following scheme shows how ALG approaches this process:

action plan ILP. By ALG
Prepare an action plan to develop a successful ILP

Governments, as the primary promoters of the ILPs (both directly or, more commonly, through public holding companies), need to carefully consider the success factors during the planning and inception phase. The competitive landscape is constantly changing and many developing economies are closing the gaps in terms of infrastructure and regulatory framework. Consequently, it is important to keep up to date with market conditions. That is why IKLPS’ value proposition must be defined and updated according to the actual markets’ expectations at a certain point of time.

The importance of each success factor varies individually among investors. As a matter of fact, value propositions should be tailored attending to the investors targeted. However, the combination of all the success factors does not always guarantee positive results. Markets, as well as governments, play a key role as external forces in the achievement of the return on investment expected for Industrial Parks.

A. Government Forces can have from a passive role—only providing the infrastructures- to an active role which is developing the right incentive package (sometimes not directly but acting as an enabler to catalyst the service to be provided) to prospective investors.

The control of all legislative power resides with the governments. They are therefore, expected to provide solutions to major concerns of the investors in order to attract capital, especially during early stages of ILPs: long and short-term credit at preferential rates, subsidized tariffs for water and electricity, remission of taxes and duties, guaranteed demand, etc.

As governments manage to secure investments from major companies, the popularity of the ILPs arises. Existing preferential trade agreements can be systematically used to attract investors from certain areas (namely Far east: China, South Korea, Japan, India and Malaysia), promoting, at the same time, joint ventures with local companies leading to quick knowledge transfer. The trade agreements are also important to grant access to major consumer markets like NAFTA or the European Union.

Flexibility of the Government in implementing policy measures, together with the use of preferential trade agreements, will help increase the productivity and specialization ILPs, enabling their success;

B. Market Forces comprise access to capital, interest rates, the cost of capital, global growth rates and predictions, fluctuations in exchange rates, global energy / oil prices, international trade agreements, etc. They are critical economic, social and politic indicators that have an impact on the success of ILPs. They are hard to influence or control, and are carefully considered by investors during the investment decision-making process.

Devising a Marketing Plan to attract target companies

Once governments have set the adequate framework, and the adjusted value proposition is designed, it is time to deploy a marketing plan to properly communicate and attract the targeted investors.

It is important to communicate ILP’s products and service in a broader sense, while being able to tailor, when necessary, the value proposition for each specific sector. At the same time, if there are success stories of investors already implemented in the ILP, the marketing plan should heavily leverage on them. They are the best example of how the specific ILP can help investors increase the competitiveness of their business, improving their benefits.

The following figure shows the various types of companies that can be potentially involved in the development of an ILP. Each type must be adequately and individually addressed in a Marketing Plan.

Advanced Logistics Group
Potential types of companies to be targeted

The marketing plan has to address various audiences and must contain compelling messages to make sure the target companies clearly understand how the ILP’s value proposition fits their strategic and business objectives. It is also worth noting that investment promotion agencies can become an important “vehicle” in communicating the ILP’s marketing plan.

Advanced Logistics Group
Definition of a comprehensive Marketing Plan

The development of industrial parks has been part of the strategy of governments to promote economic growth since the 20th century. However, competition is fierce among countries, given the high number of ILPs worldwide. And each one can compete at local, national and/or international level. Therefore, in order to foster competitiveness, governments (and developers) should carefully develop value propositions and be pro-active if they want to meet expectations and address the concerns of the investors. Finally, they should constantly monitor global economic, social and political climate to adjust their value proposition if they want to guarantee the success of their ILPs.

About the authors
Pablo Ruiz del Real is MSc in Civil Engineering, Partner at ALG and Head of Middle East operations
Flaviano Moreira is MSc in Industrial Engineering and Manager at ALG
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