BUDAPEST — Budapest’s version of Silicon Valley is facing a number of difficulties as it attempts to expand and attract high-tech startups and international giants. The most immediate concern involves the very land that InfoPark is built on — 14 hectares of soil so highly contaminated in some places with toxic industrial waste that InfoPark Rt, the state-owned company that governs land-use at the park, will require a government bailout to fund a cleanup.
InfoPark sits on a parcel of land in south Buda between the Petéfi and Lagymanyos bridges. Decades earlier the swampy area was fouled with garbage and construction materials. While Infopark officials have long known about the toxic content of the soil beneath the park, several tenants have admitted to being unaware of the contamination.
“This is really surprising to me,” said András Gál, manager of finance and administration at Panasonic/Technics. “I think they may be deliberately concealing this.”
Panasonic, which employs 50 people, moved into two floors of an office building in InfoPark last summer. Gál said he was not informed of the contamination when Panasonic negotiated to move in.
InfoPark Rt was founded three years ago by the state with only Ft 10 million ($53,000) in capital, too little to cover the environmental improvements now needed, company executives said last week.
One result could be bankruptcy, according to a study completed by consulting firm KPMG, or a forced sale of shares in a lucrative joint venture with two German companies developing sites at the park.
“We may have to trade in our shares because of a cash shortage,” Ferenc Tátrai, InfoPark’s chief executive, told the Business Journal last week. “We don’t want to lose them, but we’re waiting to see if the Hungarian government can give us any more funding.”
The KPMG study urged the Hungarian government to funnel more than Ft 800 million to InfoPark Rt. That money could either come from the state budget or a variety of European Union and environmental protection funds available to the state, said Gábor Kiss, a corporate finance manager at KPMG who authored the report.
According to Kiss, the Prime Minister’s Office and the Economy Ministry have turned their backs on InfoPark Rt, a company they created in 1997.
“[InfoPark Rt] will have cashflow in the future, but they have to pay the bills now,” Kiss said. “The Prime Minister says they have a shortage of budget money, but I think they could find the money if they wanted to.”
Officials at the Prime Minister’s office denied there were any problems at InfoPark and referred questions to Tátrai.
Imre Gróf, chairman of the board of InfoPark Development Company Ltd, the joint venture between InfoPark Rt and the consortium of German Deutsche Telekom and IVG, said one government official told him “InfoPark Rt can go bankrupt because the private capital at InfoPark will continue to grow.”
Adding to InfoPark’s mounting problems is a delay in constructing a headquarters building on the site. Construction of the central structure was scheduled to begin in September last year but has been pushed back to August 2000.
Gróf cited architectural changes with the central building and assured it will be built this summer.
“It’s really no big deal, a minor delay,” he said.
The area was named InfoPark by the government in 1996, following a failed attempt to host the 1996 World’s Fair on the site. Officials wanted to create a science and technology park utilizing the nearby Budapest Technical University and Eötvös Loránd University (ELTE), emulating their counterparts in the West and attracting global companies.
Around the world, technology parks of all shapes and sizes are popping up, as the demand for high-tech equipment and services continues to grow, offering high-paying jobs and dazzling investment returns.
While Budapest’s Infopark currently has only seven tenants scattered in three office buildings, they carry such world-class names as IBM Hungary, Hewlett-Packard and Panasonic.
Matáv Rt is scheduled to move into its own, custom-designed building in the park sometime in May.
And despite the problems with InfoPark’s management, most of those linked to the park through a company, university or government office retain a belief that InfoPark is a good idea.
“Yes, there are some problems now, but this has nothing to do with InfoPark or its future,” Tátrai said. “InfoPark will continue to grow and attract new companies, students and the best technology available.”
Laying the groundwork
Government decree 46/96 set InfoPark’s wheels in motion.
An excavation of the soil two years later was the start of financial woes at InfoPark Rt.
“The northern side [of InfoPark] is heavily polluted,” Tátrai said. “When it was a lake, it began to fill up with anything possible and it now exceeds Dutch ‘C’ standards.”
The soil, he said, contains pollutants such as iron and heavy metals such as lead and barium. Dutch levels of contamination are the norms used across Europe, with C being the highest level, mandating immediate action.
Soil contaminated with heavy metals or barium have the potential to threaten the human nervous system, according to Dr. Gábor Zacher, the head of Erzsébet Hospital’s Toxicology Department.
The land under what is now InfoPark sat vacant for at least 100 years before being redeveloped. During the 1920s and 1930s it began being used as a dumping ground for many local companies. Eventually it was filled in with soil.
Because of its proximity to the Technical University and ELTE, the government hoped to eventually use the land to expand the universities. But in 1993 the government changed its plans and began preparing the property to host the World Fair. A change of governments and a crunch in government finances dashed those hopes.
Three years later, in 1996, the legal basis to establish a science and technology park on the land was approved by government officials.
InfoPark Rt was set up in 1997 to grant land-use and building rights on the 14 hectares of state-owned land. The company is 75% owned by the Prime Minister’s Office and the Economy Ministry — the two offices own 37.5% each with the Economy Ministry holding more voting power — and 25% owned by the two universities.
A year later InfoPark signed its first development contract, with the U.S.-joint venture AIG Lincoln, to develop part of the site’s northern reaches. The park is split into northern and southern halves by the Buda end of the Lágymányos Bridge.
Following the terms of its contract, AIG Lincoln built three semi-attached office buildings. Those buildings are filled to capacity with the existing InfoPark tenants.
Soon after the AIG Lincoln contract, InfoPark Development Company Ltd won a tender issued by InfoPark Rt to develop the rest of the northern area. The company is 70% owned by Deutsche Telecom and IVG, and 30% by InfoPark Rt.
The two German firms funded InfoPark Development Company with Ft 1.2 billion, while InfoPark Rt contributed building rights valued at Ft 532 million.
InfoPark Development Company will develop the remaining land on the northern side of InfoPark, including finishing the Matáv telecom research center. The firm also has an option to build on the southern side after completing 50% of the north, Tátrai said.
With construction expected to begin on InfoPark’s central building this summer, the biggest concern facing InfoPark Rt is how to fund cleanup of varying levels of contamination at the site and across InfoPark.
Though the state has ordered InfoPark Rt to clean up the contamination, the company doesn’t have the cash.
AIG Lincoln paid for cleanup costs around its three office buildings, said Lance Bozman, the company’s managing director. He said his company could have sought reimbursement from the state, but declined.
Matáv’s site at InfoPark was cleaned up with funds InfoPark Rt received from selling building rights to AIG Lincoln, Tátrai said.
He estimates Ft 100 million has been spent cleaning up the AIG Lincoln and Matáv areas, an amount Tátrai said exceeds value of building rights in the same area. He said another Ft 600 million will be needed to clean the two-thirds of the park still fouled.
The northern area contains the highest level of contamination.
Tátrai is hoping the government will come through with funding to continue the cleanup. The state has so far refused to use its budget to pay for cleanup costs, even though the responsibility falls to the owner of the land, he said.
Despite funding shortfalls, the manner in which InfoPark handled the cleanup of contaminated soil has met environmental regulations, said Kiss of KPMG.
“The soil has to be taken out and decontaminated at a dump site. That’s been the process,” he said.
The Ft 800 million KPMG recommends the government to pay to InfoPark Rt will be used to continue contamination cleanup, Kiss said.
“I think right now the problems of InfoPark Rt are serious, but not hopeless,” he said. “The company could be profitable eventually if there was no contamination.”
A nasty surprise
While InfoPark executives maintain the soil contamination is and always has been public knowledge, several tenants of the park said they were never told of the problems.
Hewlett Packard’s Quality Manager, Judit Forgács, said she was never told the InfoPark land was contaminated.
Hewlett Packard moved into one of AIG Lincoln’s office buildings on Jan. 15. The company said it chose the site because of nearby universities, proximity of other information technology companies and a firm belief in the InfoPark concept.
Although the land developed by AIG Lincoln was cleaned from contaminants prior to construction, had Hewlett Packard executives known of the problems, they may have decided not to move to InfoPark, Forgács said.
“We’re a company that cares about the environment,” she said.
Gál at Panasonic said he heard rumors of soil contamination, but InfoPark management never offered any information on the problem. He said Panasonic moved to the business. park to be closer to a warehouse that it imports and sells goods from.
Motorola Hungary Kft has been negotiating with InfoPark regarding a global software center the company wants to build in Hungary, said Motorola Country Manager Tom Szoke. The center would employ 500 workers.
“We were given a proposal by them, it was very good with a lot of benefits, but it depends if it can fit into our time schedule,” he said.
Szoke said he was not told of the soil contamination, even though Motorola would occupy space in a new building at InfoPark, should it decide to move there.
“T can’t really comment on it yet. I have to get the details,’ Szoke said. “But we are always here to make sure our employees are safe.”
The head of one company at the park said that, regardless of the contamination, the decision to move to InfoPark was a solid one.
János Stark, managing director of U.K.-based ICL Hungary Kft said he knew of the pollution, but was not concerned. “We’re pleased overall. We have enough parking space, and the technical university is nearby,” he said.
It was the state’s Environmental Agency for the Middle Danube Region that first ordered InfoPark soil to be cleaned in 1998, said Zoltán Verrasztó, the head of the agency.
“Different areas had different contamination levels,” he said. “But either way it is a very expensive procedure to clean up the land.”
Several meters from where construction workers are building the Matáv research center, there is an area of contaminated soil roughly 10 meters wide, which is fenced off.
The general manager at AST, a German construction company clearing the land around the Matáv building, said he was waiting for a permit from the Middle Danube agency to take the soil away.
Last week, another German company, Sweitelsky, was loading trucks with soil to be taken to a nearby dump. The general manager there, who refused to disclose his name, said his workers dug 120 centimeters down into contaminated areas and loaded the soil onto trucks bound for the dump. A mixture of clay and soil was then put in the ground and 20 centimeters of fresh soil was laid on top.
“If you ask me, it’s not that big of a deal,” the manager said.
Lagging progress
While workers clean the soil and businesses fill up available office space at InfoPark, a timeline of scheduled construction and development at the pages falls behind.
Construction of InfoPark’s central building was due to begin in September 1999, Tátrai said. Instead, it’s been pushed back to August 2000.
The building will be a headquarters for InfoPark. One 1,200 square meter area will house high-tech startups, spinoffs of existing InfoPark tenants and small Hungarian IT companies, Tátrai said. InfoPark Rt will also move into the incubator area once it is built.
“It’s a pain for us because we take a financial loss from it,” he said. InfoPark Rt collects a lease fee from InfoPark Development Company Ltd for every square meter it uses.
Gróf, chairman of the board of InfoPark Development, said architectural plans for the central building received approval from the Budapest municipality in early February. Ground will be broken for the building sometime this summer, he said.
“Our plans were not ready in the beginning of September,” Gróf said. “There were architectural problems, and a change of space and location for the building.”
He estimates the central building will cost Ft 3 billion to Ft 4 billion to construct and will be finished mid next year.
The incubator section is an important part of InfoPark. It is what government officials had in mind when they first drafted the idea for InfoPark, KPMG’s Kiss said.
Once the building is constructed, the incubator will be financed through private and public funds, providing an estimated Ft 70 million in funding each year.
Tátrai said startup firms that move into the incubator will need marketing help, legal advice and rent subsidies.
“We need to find sponsors for this activity, but there’s no one on the horizon right now,” he said.
Unlike many business parks in the U.S., companies that move their business to InfoPark receive no tax incentives. Instead, the Hungarian government gives out such breaks to companies which invest more than $10 million setting up or building in the country. The tax abatements are not based on location or area.
We will survive
Despite problems at InfoPark, the officials, executives and university professors who worked to make it a reality believe it will survive in the long run.
The most obvious benefits for companies who move there are the two universities next door.
“After InfoPark is completed it will be a major employer of graduates,” said Peter Arató, head of the IT department at Budapest Technical University.
“Tt also gives security for the university and a chance for us to work with these huge companies,” he said.
Matáv has supported the university with a Ft 15 million grant this year, Arató said. IBM is drafting an e-business academic course, with sponsorship of more than $400,000.
“We have the chance to get involved with the whole international system of IT and research centers, not just here but also at business parks in the U.S. and the U.K.,” Arató said.
Technology parks around the globe fall into three categories, Kiss said. IT parks in the U.S. and U.K. are typically owned or attached to one or more universities. One example of this is the Research Triangle Park in North Carolina, one of the oldest and largest technology parks worldwide, he said. The park is owned by the state of North Carolina and operated in conjunction with three area universities.
The second type of technology park can be found in Western European countries, and are usually controlled by local municipalities, like the Sophia Antipolis Science Park in Southern France.
Budapest’s InfoPark represents the kind found in the East, Kiss said, where the state plays the most important role in the business park’s survival.
“But I don’t think size really matters in any of the cases,” Kiss said. “The role of Budapest’s InfoPark can be just as big and important as these larger parks.”
What’s most important in any business park worldwide, he said, is the proximity of companies related to each other, employable university students, access to high-speed communication and fiber optic cables.
“Money is a problem everywhere. Once the funding is solved, I’m convinced this venture will flourish,” Kiss said.
— Dávid Szepesi contributed to this report