MONEY-GROWING: Game of Strategy

Those, who secure access to the club will be granted building plots on a tender-free basis, provided the allotted sites are used for purposes specially defined by the city. They will also be allowed to pay lower investment royalties to the city budget.

Their projects will be granted the best conditions. Although the procedures for planning and securing permission from various agencies will remain the same as for ordinary investors, the strategic investors will enjoy wide support and special attention from city officials.

Each project will be overseen by a personal manager appointed by the city’s committee for investment and strategic projects, or KISP. Nikolai Asaul, deputy head of that agency, says: “It does not contradict St. Petersburg law and I don’t think that such an approach amounts to a violation of the rules of competition. It is logical that major projects in which the city government is interested should be given more attention.”

The criteria that make certain projects ‘strategic’, outlined in a St. Petersburg government decree, are rather vague. To be granted such status a project must contribute to a “substantial improvement of the socio-economic and cultural conditions of life” for local residents, boost the investment appeal of the city and further its cooperation with other Russian regions.

Moreover, the project has to boost investment and business activities in a particular territory or in a given sector of the city economy. The compulsory condition is that the project must be profitable. The minimum investment is set at 3 billion rubles, although Smolny (city administration) officials say that in some cases that barrier may be lowered.

“It is no big problem if the amount of investment is slightly below the set sum,” says Asaul. “The point is that foreign investors calculate their costs in foreign currency. For example, the first stage of the Toyota plant was valued at over $100 million, but should the Russian ruble strengthen, the size of the dollar-denominated investment may fail to reach the 3 billion ruble target.

“The project is clearly of strategic significance to the city considering that the international brand will bring with it dozens of suppliers who will launch production of spare parts in the vicinity, as well as large companies operating in other fields. The city needs some 20-30 special category projects, not more. Otherwise, the status aspect will be diluted and there will be no individual approach. By compiling our first list [of strategically important projects] we have sought to include projects where real work has already begun, not just some daring ideas.”

The list has quite a mixture. To begin with, there are ambitious plans for the development of the transport and social infrastructure, including the development of the Zapadny motorway, expansion of the Vassilyevsky Island territory, converting the Petrogradsky District to gas, development of a new football stadium, etc. The prospects of these projects being implemented are rather vague. Then there is an ambiguous “program for the development of hotel infrastructure” and an over-politicized project for building the Baltiiskaya Zhemchuzhina (Baltic Pearl) china town. In addition to those far-reaching, ill-defined plans the list also features ideas that are quite straightforward, envisaging the development of multifunctional commercial properties. In particular, they include a project for the redevelopment of New Holland Island and the territory of the Moskovskaya Tovarnaya train station.

New Robinsons

The idea of transforming New Holland Island into a cultural and recreational center was first voiced nearly 30 years ago. Until recently, however, the 7.6-hectare island situated within the city center not far from the Mariinsky Theater was occupied by a naval base. In late 2004 the St. Petersburg governor, Valentina Matviyenko, was handed the symbolic key to the island by the military.

In June, the interim plan for the development of New Holland was presented. Today there are 26 buildings with a total space of 68,000 square meters on the island. The landscape is dominated by a landmark brickwork ship timber drying and storage facility erected in 1765-1780 by the architect Vallen-Delamot.

The magnificent arch of the building is a typical postcard sight of old St. Petersburg. Other government protected landmark buildings are a former smithy and a prison tower.

For many years those buildings underwent no renovation. The future investor will have to handle them with special care without being able to change even their internal layouts. An inland pond and two canals also enjoy federal protection. Soviet-era buildings can be dismantled.

The authors of the interim town-planning program decided that it is possible to develop as much as 220,000 square meters of the commercial properties on the island. The height of future developments must not exceed 23.5 meters. “The economic conditions are tough, but we cannot agree to anything higher. We suggest that developers consider underground facilities where the geophysical situation allows it,” says the head of the committee for protecting listed buildings and monuments, Vera Dementieva.

A compulsory investment condition is the development of the Palace of Festivals, of 10,000-15,000 square meters. “However, if the prospective developer decides to use half of the island’s territory for the construction of a cultural center we will only welcome the plan,” Nikolai Asaul says.

The city government would also like to see the development of offices, shopping malls and hotels on the island, while residential projects are not particularly welcomed despite the quicker return on investments. The development of residential properties is possible, though the volume of construction is restricted.

The proximity of the Admiralty Shipyards (Admiralteiskiye Verfi) is considered to pose no problems for the project, according to the results of an expert inquiry. KISP believes that the island must not “die out” at nightfall, which may mean commercial properties will feature built-in residential apartments.

Smolny plans to grant the right to redevelop the island to the winner of an international tender; bids will be accepted from consortiums comprising investors, designers and developers. The terms and conditions of the competition are to be approved shortly by the city government and the federal authorities. The tender commission will be headed by Governor Valentina Matviyenko and will include cultural workers and officials from state culture agencies.

Prospective bidders will have to provide financial guarantees, have experience in implementing large-scale projects and possess architectural awards. A specific set of requirements will be published in the near future while bids will most likely be invited from the beginning of August. The city government promises to announce the results by the end of the year.

Projects focusing on the development of social and cultural facilities will have an advantage, Nikolai Asaul says. Original design, too, will add to the bids. But even the most daring projects will be discarded unless their authors are able to provide solid financial guarantees.

The market valuation of the island is yet to be finalized. Today it is impossible to say what investors will have to pay for the right to develop the territory. “The money is not the most important thing for this project. Otherwise, the island could simply be put up for auction and sold at the highest price. But the city will not share the costs with the developer, nor spend budget funds on pre-construction engineering. However, we are considering the possibility of conveying the right of use of the future Palace of Festivals to the investor pending payback on his investment,” Nikolai Asaul says.

The projected volume of investment in New Holland is $400,000 and over. “Clearly, the project cannot be particularly profitable considering the engineering costs, obligations under government protection, restrictions on height, etc. Nonetheless, we have tried to create the conditions for making sure it is profitable. Otherwise, bids will be made by those who lack professionalism, who cannot count and who are unable to implement their ideas,” says Asaul.

Despite all the ‘buts’ the city hopes to attract serious investors. City officials refuse to name the contenders, saying only that the interest on their part is quite substantial.

They are investment companies from Germany, the Netherlands, Sweden and Singapore. Reputable local firms that have expressed interest in New Holland are LenSpetsSMU and the LSR group. Both are involved mostly in residential projects financed by borrowing from interest holders. If they do make bids, most likely they will do so in tandem with foreign investors and designers.

LenSpetsSMU has already announced an agreement with Singapore’s Sampoerna Group. The latter is ready to spend $600 million on the island. The partners are considering the construction of two five-star hotels amid the historic buildings, as well as an exhibition hall, two theaters, a health resort and a 15-screen cinema.

Railway Land Redevelopment

An even more ambitious and capital intensive project envisages the redevelopment of the area around the Moskovskaya Tovarnaya railway station, the largest industrial estate in the heart of St. Petersburg. The project concerns a vast territory of around 317 hectares, between Nevsky Prospekt, Alexander Nevsky Square, Neva Embankment, Obvodnoi Kanal, Konstantina Zaslonova Street and Ligovsky Prospekt.

The area includes a warehouse depot, apartment blocks, the Botkin Hospital for Infectious Diseases, the Alexander Nevsky Lavra (monastery), several privately-owned auto transport companies and factories including Bummash, Yasen, and a citric acid plant. The housing density is 3-5 times lower than elsewhere in the city.

The discrepancy between the potential of this enormous section of the old city center and the way it is currently being used is flagrant, not to mention the poor control over operations at the obsolete warehouse facility where bulk shipments of all kinds of goods coming and going gives rise to all sorts of illegal schemes.

At the end of last year the Institute for the Problems of Entrepreneurship (IPP) was commissioned by the city government to prepare a concept to redevelop the zone. The institute won the contract at a tender held by Smolny.

Overhauling the 300-hectare territory occupied by numerous privately-owned facilities is hardly feasible.

“We have proved that the development of the area should begin with the withdrawal of the warehouse depot. That will vacate an area of 22 hectares stretching from the platforms of the Moscow train station almost to Obvodnoi Kanal. We think housing construction here would be inappropriate. Instead, a single commercial complex featuring business centers, conference halls, hotels, parking areas, exhibition halls, etc. should be tried,” says Alexei Shaskolsky who heads the group of IPP experts.

“But then, we cannot completely rule out the possibility of building a government compound here for ministries and agencies to be transferred from Moscow to St. Petersburg. Preliminary calculations show that the area could accommodate over 200,000 square meters of commercial properties. Incidentally, with no rigid town-planning restrictions in effect in the area, the most modern types of architecture can be used,” Shaskolsky adds.

The St. Petersburg government and the Oktyabrskaya railway company have already tentatively agreed on the relocation of the warehouse depot to the southern outskirts of the city – Shushary train station. In summer the parties are due to sign an agreement on the relocation of the property. The company Lengiprotrans sets the cost of constructing a new railway depot at about 900 million rubles.

The site at Shushary allotted for the depot is also burdened with private owners. Two – Resurs Ekonomia and Resurs Mezhdunarodny – of the three companies that own the site have already agreed to sell their plots to the city, or to vacate them in exchange for alternative locations, Nikolai Asaul says.

At the same time, the city will continue to work on a plan for the site that is being vacated by the depot. After that work is finalized it will be clear whether the territory needs to be divided into smaller lots or sold to a sole investor in bulk. KISP advocates the latter option, IPP experts share that opinion.

Another problem that arises in the context of the project is that the railway land is federally owned and cannot be alienated without the federal government’s approval. Nikolai Asaul is still optimistic that the tender will take place as early as next year.

The St. Petersburg government has also decided on the relocation of the Botkin hospital occupying some 13 hectares of land. However, this will only be possible after two new patient care institutions have been built in St. Petersburg at the expense of the city budget. For the time being, the city is deciding on the location of the new buildings.

Money Hole

A plot near the Moskovsky train station – at 26-38 Ligovsky Prospekt – falling within the boundaries of the Moskovskaya Tovarnaya zone, is occupied by one of the city’s most famous uncompleted developments: the foundation pit of the train station complex RAO VSM. After the company was declared bankrupt the former Ministry for Property Relations assigned the property to the federally-owned VPK Invest Company in 2002.

Under the terms of the agreement between VPK Invest and the Briz construction company, by the end of 2008 the company is to build a multifunctional commercial facility worth $380 million on the site. The investor will take over 78% of the property while the rest will be owned by the federal government.

Until recently Briz was owned by the Veda-Sistema group (62%) and the Balt-Invest-Oil company (37%). After Veda’s CEO Kirill Ragozin was killed the project was put on hold and then the holding decided to withdraw from it altogether. In June Veda transferred its stake to a Moscow-based company, Nafta Capital, involved in the oil business.

The value of the deal has remained a secret. Yevgeny Yelin, the general director at Briz, says that currently the project is at the drawing-board stage. The total space of the first stage of the new shopping and leisure center will include about 198,000 square meters, including a 50,000-square-meter parking area. Shopping areas will occupy the first three stories of the building while the fourth floor will house leisure facilities and a multi-screen movie theater.

Comprehensive Development

The St. Petersburg authorities are paying ever-increasing attention to the comprehensive development of the city’s vast territory. Several other complicated and ambitious projects have been widely discussed lately. In terms of the costs involved, those projects can also claim the status of being strategically important for the city.

Admittedly, it remains unclear whether any of those projects will be granted the honor of being included in the privileged list in the long run.

For example, the company Izmailovskaya Perspektiva has been granted the status of an agency for the development of the 364-hectare territory in between the Obvodnoi canal, the Baltic railway branch line of the Oktyabrskaya railway, Blagodatnaya Ulitsa and Moskovsky Prospekt.

The area in encumbered with nearly 200 freeholds and tenancies. The largest landlords here are the state-owned FGUP Oktyabrskaya Railway with an 80-hectare plot, the Defense Ministry with 49 hectares, OAO Elektrosila, and others.

The plan presented by Izmailovskaya Perspektiva envisages the development of 1,135,000 square meters of housing and 4.5 million square meters of commercial properties, as well as the reconstruction of 75,300 square meters of existing properties. The project is estimated to be worth $3 billion. The concept is yet to be approved by the city government. Smolny is expected to review it this summer.

In May 2005, the agency for the development of Sinopskaya Embankment was established. The abandoned industrial estate is situated not far from Smolny, the seat of the city government.

The project by ZAO Sinopskaya Naberezhnaya (Sinopskaya Embankment) stipulates the resettlement of residents from several dilapidated apartment buildings and the development of an office center with a two-level parking area, a shopping and leisure mall and a hotel on an area of 7.2 hectares. The projected total space of the new development is put at 242,000 square meters. The cost of the project is estimated to be worth some $300 million; the payback period is expected to be 11 years.

Other daring ideas include the construction a government compound in Degtyarny Pereulok [lane] to house the St. Petersburg executive bodies and the redevelopment of the Badayevskiye warehouses.

However, the city has still not seen any of these large-scale projects implemented. So far, private ‘non-strategic’ investors have not ventured to ‘re-profile’ industrial estates.

As regards the companies granted the status of agencies for territorial development, given their ambiguous legal status and poorly defined powers, they are experiencing serious difficulties in coming to terms with the proprietors, primarily, with industrial companies who are unwilling to move to new locations or to change their core businesses.

The most vivid example is Bekar’s project on Vyborgskaya Embankment. In 2001 the company was assigned control over a 100-hectare territory that was home to 15 industrial enterprises.

Over the past four years Bekar managed to change the image of the once unattractive zone. The market value of land grew from $30 to $200-600 per square meter. Over 30 investment projects have been launched. Six medium-class business centers have been commissioned; 15 are under construction; 10 residential and four hotel projects are being implemented.

However, there remain numerous facilities and sites situated within Bekar’s territory whose owners – industrial enterprises – are not interested in doing anything about their derelict properties despite their poor financial situation, moribund production and mounting debts to the government. They still hope for orders from the government as well as subsidies. Bekar is convinced the reason for their unwillingness to cooperate is the meager land taxes that the plants pay.

But if the city authorities have decided that the area has to be transformed into a business zone, tax rates should be revised accordingly. Since 2003 Bekar has been lobbying for legislation that would set forth a procedure for the development of the Vyborgskaya Storona district. The new law should contain the functional zoning of the territory, set tax rates and outline punitive measures against landlords who obstruct the adopted concept of development. But the law has still not been adopted and its adoption is unlikely in the near future.