A French chemical company has embarked on a project to build its first factory in Russia. Having procured the land for it, however, it has come to light that connecting the manufacturing facilities to the utilities network will work out far more expensive than anticipated in the costing. The problem has failed to be resolved, and the French have had to build their factory in another region. As a result, the deadline for the production launch has passed. The company has incurred losses associated with moving construction to another site, as well as having to meet the costs of maintaining the plot of land they no longer need.
In order to avoid the problems associated with connecting a business to the utilities network, the French should have carried out a so-called energy audit at the time of the investment risk assessment. This would have indicated the costs required to connect the manufacturing facilities to the electricity and gas networks.
One should bear in mind that in Russia, the cost for businesses of connecting to the utilities networks can vary substantially from region to region. For instance, in the interests of attracting investors, such connection in several Russian regions is carried out free of charge. In another region, it might require a small payment, but in some places, the connection cost might require the outlay of a hefty sum. In some places, the electricity supply is limited, so the company will not be able to connect to the nearest substation. Generally, in such circumstances, the local authorities offer to extend a power line to a substation located at a further distance from the company’s production facilities at their own expense.
When planning a project in a given area, don’t necessarily take the promises of government officials offering a “turnkey” site at face value. To understand the real state of affairs regarding a region’s utilities networks, it is necessary to find out for yourself. Accurate information can be obtained from corporate lawyers specializing in the energy field in the region you are interested in. An energy audit will indicate any problem areas and identify ways of resolving them. The cost of such a survey is incomparable with the losses which a company risks incurring by acting at their own peril.
A German manufacturer of car components decided to expand its production network in Russia. They set up a new manufacturing works on an industrial estate. A year after production was launched, the company was issued with a writ regarding a breach of health and safety regulations. It turns out that those running the industrial estate provided the German company with premises next door to a food warehouse, which, under Russian law, is prohibited. The enterprise had to either shut down production or carry out a complicated an expensive refitting. In the end, the company was forced to relocate, which required a large outlay not envisaged in the budget. In addition to this, the company missed it product delivery deadlines.
The German company brought these problems on itself by not assessing the risks associated with the location of production premises. The Germans trusted the industrial estate’s management company insofar as the lease agreement stated that no kind of risks or consequences would be incurred from their being located on their industrial estate.
The foreign company did not take into account that it is virtually impossible to call the management company to account for breaching this clause of the contract, or to claim back losses resulting from it. Europeans are accustomed to contractual parties being scrupulous operators who discharge their responsibilities in good faith. But even a respectable Russian company can let its partner down and avoid taking responsibility for the consequences.
Russia’s health and safety, and environmental requirements are known for being amongst the most stringent in the world. Failure to comply with these regulations can cause a company a large number of headaches. Therefore, when siting production in Russia, it is vital to find out what else there is in the vicinity. In international practice, such a check is covered by due diligence. But foreign companies in Russia often neglect this procedure, relying on the assurances of partners or government officials that there are no such risks. Thus, the requisite attention is not paid in the negotiations to the question of each party’s responsibilities, as a result of which the injured party is unable to claim compensation for any losses incurred.
A health and safety audit is extremely important for foreign manufacturing companies. Any legal firm specializing in Russian corporate law can perform such an audit. This procedure will protect the company from conflict with the Russian regulatory authorities which can turn out to be very expensive.
An Italian producer of glass for general use built a factory in one of Russia’s peripheral regions. In doing so, they did not take account of the fact that they built their works in an agricultural area where the population are unused to working in large-scale industry. A year later, they had to release around half of the workforce due to their inability to maintain workplace discipline. The management of the enterprise was compelled to bring in workers from neighbouring areas and even another region entirely.
When choosing somewhere to set up production facilities, a foreign company has to bear in mind more than just the legal and financial risks. The first thing must be to analyse the socio-economic situation in the region, particularly the availability of a labour force. Inattention to this issue complicated the operation of this Italian enterprise, and led to a rise in its costs. Given the circumstances, resolving the problem in any other way was impossible.
Today, many Russian regions are tempting foreign investors with various incentives. Of course, the cooperation of the local authorities goes a long way towards developing a successful business. Even so, one should not forget that incentives are no use if there isn’t anyone to work at the company. So, when choosing somewhere to set up, a business should first of all evaluate the workforce potential of a given area: is it able to provide it with the right number of workers with the right level of skills? Such data can be provided by social scientists. If desired, a specific survey of the available labour market can be requested in order to build up a detailed picture. The costs will be comparatively small, not to mention the fact that the data received will assist the company’s management in avoiding making mistakes or acting in a way that is counter-productive.