Guiding Lines: Small Town Mayors Woo Investors

The city of Arkhangelsk has no prime shopping facilities, not a single nationwide grocery chain operator, Mayor Alexander Donskoi complained as he addressed a conference hosted by the Chamber of Industry and Commerce.

This fall the mayor arrived in Moscow to address investors of all hues. The official went all out to get them interested in his city. He presented a lengthy list of municipally-owned properties slated for sale through auctions within the next two years. The list featured Soviet-era movie theaters, inefficient shops and other obsolete buildings.

The mayor suggested that part of the facilities be sold to developers who will replace them with large retail centers, similar to those operating in Moscow and other European cities. He also welcomed well-known supermarket and hypermarket chains to the city.

Arkhangelsk movie theaters Mir and Rus, and Detsky Mir children’s department store have been put up for sale in the city.

The city does not only lack large and beautiful malls; modern movie theaters and fast food restaurants are not available, either. Hence, the city hall suggests replacing Rus theater, for example, with a hypermarket. The decision as to what to build on each particular plot will be made proceeding from considerations of potential profitability.

Anyway, over the next two years the city hall is set to sell all municipally-owned properties – nearly 300 facilities – at auctions. In 2007, the mayor’s office plans to put up 100 properties for sale, so as to raise cash for construction or even redevelopment of such buildings. Revenues from sales will be allocated for development of municipal infrastructure.

Following his public statement whereby he literally beseeched Moscow-based and international investors to visit the city, independent observers had their doubts dispelled. The time of small towns (with population below 500,000) has come. Just as experts augured, such towns will be the next in line after the cities with population of 1 million and over.

Arkhangelsk, perhaps, is among the first cities with a population of 500,000 where the retail sector is underdeveloped, to embark upon an active self-promotion campaign. This is done so aggressively that one cannot help feeling suspicious. For many years Arkhangelsk residents, their mayors and real estate operators lived in peace and quiet, building shops to their own liking, developing their own retail chains and keeping external operators at bay.

For example, two years ago a famous Moscow-based development firm A.N.D. Corporation who has built the Festival mall in southwestern Moscow tried to secure a plot in Arkhangelsk and failed. These days, the mayor of the city himself is opening doors to his estates.

The same could be said of any other city that still has no modern shopping centers and no major grocery chains or where such projects have meager presence. Tula, Kaluga, Orenburg, Ivanovo and many other towns are still waiting for major Russian and foreign operators to arrive. Arkhangelsk in this case is but a reflection of the general tendency taking shape in this country. But then, other cities have already followed its example and their envoys are beginning to arrive in Moscow.

For example, at the 1st Moscow Real Estate Forum (MREF) held in the capital on October 31 to November 1, co-hosted by Vedomosti, the government of Kaluga Region presented lucrative proposals urging investors to take part in some of its projects, although predominantly in industrial real estate. Governments of other cities who are yet to arrive in the capital announce sales of plots for construction and buildings on their official websites.

Everything is good in its season. While Moscow and St. Petersburg are already past the stage of booming kiosk retail in certain provincial towns such outlets are still popular. When the time comes for open-air markets to be replaced with covered grocery stores, those will emerge.

When the time comes for major European-style shopping centers, mall developers will arrive and launch construction of such projects. Nowadays, natural development of the market and acute shortage of retail formats forces local governors to create at least a semblance of favorable investment climate in their domains. In addition to the market economy laws, which override all others, the mayors are offered yet another stimulus – in the form of the federal bill on privatization of state-owned and municipally-owned properties passed and signed into law in 2001.

That law, along with amendments thereto passed in 2005 and 2006, officially entitles municipal authorities to sell their properties to replenish local budgets, and set clear-cut rules of the game for local rulers. In previous years local governments had such an opportunity, too, but no detailed rules that would govern the sale of property were available. (The law entitles municipalities to sell properties at auctions.) Admittedly, the 2001 law on privatization was passed only five years ago, and Russian provinces are slow in responding to it.

The governments of cities and towns have had enough time to open up and realize that the outer world is changing. Their move to sell municipally-owned properties namely to mall developers is easy to understand. Shopping centers and hypermarkets pay back much sooner than warehouses or offices. Bread and circuses is what most people need. “The main thing is to make sure that money goes to the budget,” mayors of small Russian towns reiterate. That is understandable. After all projects aimed to revive loss-making production facilities are far more time-consuming, labor-intensive and costly. But who is not after easier solutions?

Still, even in such cities as Arkhangelsk all good plots are scarce and expensive. To find more building plots for future shopping centers municipalities are ready to allow developers to pull down inefficient, obsolete properties. Alexander Donskoi says he will allow investors not only to redevelop existing facilities but to pull them down if need be. Some plots may be seized from previous owners to vacate space for builders from Moscow, or maybe even for foreigners.

For the time-being Moscow developers are in no hurry to break into small towns. Although some of those provinces may prove to have quite a potential. Developers want provinces to meet a number of requirements. To begin with, they demand favorable attitude on the part of local governors towards investors and chain companies from other cities, fair rules of the game at tenders, non-interference in details of the projects, presence of professional logistics operators, workforce, reliable construction companies – general contractors and developed construction facilities.

Economic and social parameters also play an important role and must be quite high if the government is to catch investors’ attention. To begin with a city or town in question must have a stable class of customers for shopping centers and hypermarkets. Incidentally, the average monthly wage in Arkhangelsk is 12,000 rubles. Once the province meets all those requirements market operators will move to the regions themselves, regardless of whether the doors are opened or closed for them.