Subscribe
Home About us Consulting service Ukraine Investment Projects Ukraine Market Review News Contact us

Industrial Construction: Ukrainian Prospects

New political leaders of Ukraine focus special attention on attraction of foreign investments in the economy of the country. In the second half of March the Prime Minister J. Timoshenko promised on the meeting with representatives of diplomatic missions, accredited in Kiev, that till summer 2005 a complete list of concrete investment objects in key industries of the economy will be presented to foreign investors. On the government head’s opinion, first of all, they are agriculture, transit transport arterial roads, light industry and house-building. The development of any of these industries, as however the whole economic complex, in light of the prospects of the European integration, presumes the solving scale problems of modernization and the construction of objects for production and service purposes. Though the industrial construction was not included in a narrow circle of the priority investment tasks of the government, it does not mean at all that the given industry does not present the proper interest for capital investors. On the contrary, it gives the impression that the industrial construction in Ukraine reached that level of the objective investment attractiveness, which need no longer additional advertising by influential circles.

The trend of the growing demand for production buildings was marked as far back as the beginning of the decade in Ukraine, when production objects made up approximately 72% of capital assets, being put into operation. Today the largest business circles of the world study seriously the possibility of the creation of their own production capacities on the Ukrainian territory. At once several factors favour this process. Firstly, political changes in the country promoted the sharp improvement of the investment climate in the economy and strengthening trust of potential investors. Secondly, the clear orientation toward the European Union means that Ukraine began the powerful and open motion to the integration in the European economy, starting with liquidation of all defects, to which the EU leaders referred most of all, trying to transform the border with Ukraine in a resistless wall, to barrier itself from the invasion of undesirable social and economic problems from the East. While the European politicians discuss how to answer adequately to the Ukrainian super democratic call in the form of the no visa entrance regime, saving at the same time, on the one hand, the image of the democratic and self-confident community, but, on the other hand, keeping as long as possible the borders locked, their colleagues-economists try to forecast the position of Ukraine in the European economy and not to miss the chance to use its economic advantages.

One of such advantages, and it is the third important factor, is comparatively low costs of highly qualified labour force. Over the last decades in chase of profitability leading world producers tried to draw their own production capacities nearer to cheap labour force, creating branches and affiliated enterprises in more poor regions of the globe. One more way has got a broad spreading in Europe: the usage of more cheap labour force from Asia, Africa, former countries of the Soviet Union, including Ukraine, at European plants and factories. It has led to an increase of legal and illegal immigration in the countries of the EU, which began to be threatening, aggravating in its turn many social problems. The placement of their own enterprises in regions of the residence of cheap labour force turns out very often to be unbeneficial due to remoteness from raw-materials markets and sales markets or too risky due to unfavourable investment climate.

Probably, in the early 90’s European producers got the unique possibility for the first time to reduce significantly prime costs of their products, not leaving for distant continents, but placing their own production capacities in the very centre of Europe, when number of former socialist states and soviet

republics became completely opened for foreign capital and took the course for joining the EU. Levelling of prices after the EU enlargement makes the creation of production capacities on the territory of new members of the EU already less attractive and naturally forces business circles to search for more profitable possibilities in countries of the second pro-European wave, first of all in Ukraine. Unlike the other countries, which took the course to the European integration, besides cheap labour force there are a variety of other economic factors in Ukraine making it, probably, the most profitable place for the location of production capacities in Europe. They are more cheap sources of raw materials, less expensive energy carriers, and closeness to potential sales market not only in the West and the East, but also in the North and the South, and also enough developed transport infrastructure. In addition the creation of work places in the country would allow to shorten significantly the inflow of Ukrainian workers in the EU and to remove international tension in the very Europe.

Many foreign investors valued long ago these advantages at their true worth. The business activity of Procter&Gamble can serve as a reading book model of a migration of production capacities in Ukraine. Thus, in 1990 the first product of this company appeared in the Ukrainian market, in 1993 a representative office was opened in Kiev, in 1995 company built the plant in Borispol, in 2002 it opened a large distributing centre in Lvov, and in 2003 completely closed its factory in Ley Park (Great Britain) and transfers its production to Borispol. Heads of Procter&Gamble have acknowledged that they had had to make such a step to keep their business competitive. Nowadays, the laws of market economy force not only small and middle producers, but also industrial grandees with world name to transfer their production for survival. One of the last examples is Rover Motor-Car Concern with their own affiliated enterprise in Europe, which had to close its production in Longbridge (Great Britain), to close more than 5000 work places and search for the salvation not even in Ukraine, but in Chinese Shanghai and other Asian countries. Possible reason of such a choice is low costs of labour force in China, even cheaper than in Ukraine, also the company may see more possibilities for itself in Asian sales markets, but most likely the reason includes both of suppositions.

Certainly, costs of mentioned above economic factors, defining prime costs of finished products in Ukraine, will be levelled and will approach to European and world ones during the process of the integration. However, as minimum, the next one and a half or two decades it will be lower. Anyway, approximately such a time limit was set for Ukraine to integrate the EU by the most "high speed" for the whole history of the country political leaders. It is well known that 15-20 years are quite enough to repay the construction of practically any production object.

 

At the same time it is necessary to remember that businessmen either in Ukraine, or in the West or in the East, all of them treat more suspicious to revolutionary changes in countries, regions and spheres of their economic interest. Thus, one hardly can expect the boom of investments in new production capacities in Ukraine until the definite ratio of forces is fixed between ambitious political leaders and not the less ambitious, economically strong opposition, and until definite game rules concerning questions of privatization and property are formed. The first half of 2005 has shown that this process can be delayed for years, but the conversion of Ukraine into Eldorado for investors as early as the current year cannot take place. Even the leading politicians and economists become more careful in their own forecasts. Thus, at the beginning of this year it was spoken about $2.5 billion of direct foreign investments in the economy of Ukraine in 2005 in the new government, then the Minister of Economy forecast as far back as the middle of May $1.5 billion that is higher

by 40% comparing with 2004, but comparing with the Ukrainian scale far from the "boom" and does not at all correspond to that cardinal changes of the foreign policy course, which have occurred lately. Most likely the peak of investments, both national and foreign, will happen in production branches of the Ukrainian economy approximately in a year, in 2006, after parliamentarian elections under conditions of saving stability in the society.

Exactly at this time one can expect an increase in the demand for production constructions, which can be satisfied differently. First, for production needs already available empty buildings can be used, which are in excess supply in Ukraine. There are both advantages and disadvantages in this. Positive is that old production premises, as a rule, are located in suitable places and have ready infrastructure of all communication. However on the other hand such premises, as a rule, are in a kit with the whole set of old problems, including ambitions of previous owners, who very often try not just to sell completely the object, but leave for themselves the right of the participation in a new business that does the enterprise less beneficial for a new owner. Additionally repair-reconstruction work can turn out to be more costly, and a social value of specificity of an old enterprise for a concrete city or a region can create additional problems for new owners.

The second way differs from the first one only that gained old production constructions are not remade and are not repaired, but are just demolished and new ones are built on their place. At the same time a communications structure is also saved, however takedown can turn out to be more labour-consuming and more costly, than the very new construction, in addition waste burial or utilization under the conditions of ecological sensitivity of the society will also cost considerably.

The third possibility is the construction of new industrial buildings on a new place. In this case one can win relatively time and even costs, since new speed building technologies allow very often to manage without many traditional labour-consuming and road building operations, such as brickwork or concreting on a worksite. Usage of principally new building materials allows to produce the whole complexes of buildings under plant conditions and transforms building and assembling works into erection-assembling operations. However in this case an area under new construction can turn out to be not in the most suitable place and the building of motor and rail roads, electric and other communications will require significant expenses.

 

The construction of new production buildings, both on a place of old objects or on a new place, looks the most attractive in Ukraine, especially for foreign investor. Different data for the last years concerning the preparation and putting production buildings and objects into construction confirms this fact. Approximately 50% of constructions is new buildings, about 30% : reconstruction and 20% : enlargement, a part of new buildings exceeds 60% amongst engineering objects, in both cases there are trends to growing. As the experience of our western neighbours, such as Poland, Hungary, Czechia, Slovakia shows, serious investment companies prefer to start business from zero, sometimes even in spite of the fact that this can turn out more costly. It is current, especially, for Ukraine, since an old fund of production real estate in the country at present time qualitatively differs significantly from the similar fund of the newly made EU members at the time of the beginning of the investment boom in these states. First, in Ukraine the bigger part of existing production constructions are morally outdated and physically old, particularly that, which were empty already not for the first decade or built more than 30 years back. In the countries, being compared, a big part of production capacities were built in 1980’s, in addition, over all these years

the level of their service was much higher. On the other hand, the specificity of the very buildings is different. During the times of the Council of Mutual Economic Aid and the Warsaw Treatment the majority of enterprises of Hungary, Czechoslovakia, Poland as well as the Baltic Soviet Republics represented themselves plants and factories of light industry or enterprises, oriented on an output of final products that made them more modern technologically, are wearproof and more suitable for changes in their production specialization. Ukraine together with Russia are more specialized on primary processing raw-materials, output of half-finished products and completing parts, where more stressful technologies for building constructions are used.

Thus, it can hardly be expected that capital investments in acquisition of already existing production buildings in Ukraine with the following their reconstruction even under the most favourable investment climate will be comparable on its scale with that ones, which existed in Poland, Czechia, Slovakia, the Baltic states and particularly Hungary in the first half of their transformation period, when almost the largest part of direct foreign investments in these countries accounted for acquisition of real estate. It should be noted that the best old production objects in Ukraine have their new owners by now.

A wide variety of building tasks and projects in comparison with the new EU members count in favour of a new construction in Ukraine. What building puzzles will building companies have to solve. Among new buildings of the nearest years in different industries of the economy are such interesting objects as the fourth energy block of the Rovnensk APP, the second energy block of the Khmelnitsk APP, the Novodnestrovskaya and Tashlitskaya HAPP, the construction of Kiev-Odessa and Vystupovichi-Ovruch-Mogilev-Podoliskiy motor roads, ring roads around Kiev and Chernovtsy, new metro stations in Kharkov, a car bridge across the Dnieper to Zaporozhie and a car-railway bridge in Kiev, the erection of a plant on production of on-board electric networks in Lutsk for Daymler-Kraysler cars of 3000 work places with participation of Kromberg and Shubert German investment company, which is to invest in the project €18 million. German, Dutch, Danish, Norwegian and Turkish investors are ready to invest funds in the construction of yacht centres in the Crimea. The construction of a new soccer stadium in Dnepropetrovsk, not having an analogue in Ukraine, was started, at which even final matches of Europe -2012 championship can be held. New regional Olympic sport complex and an international airport will be erected in Donetsk, where Tangelimann German trade group plans also to build a chain of Obi building supermarkets and Plus-Europe self-service stores. About € 500 million of investments is planned to attract for the construction of the continuation of the Odessa-Brody pipe line till the Polish city Plotsk. The construction of a new mixed fodder plant was started near Ternopol, and Gaya Italian company investigates the possibility of the construction of capacities for the processing of hard waste in Khmelnitsk, Mariupol and Chervonograd. The Southern African Company Palace Engineering Service decided to invest $250 million in the construction of a steam and gas power station in Izmail of the Odessa region.

 

These are just examples of the variety of building markets in the current and the nearest years in Ukraine. It is expected that its leading segment will remain the building of retail and wholesale trade objects, namely: large shopping centres and storage premises. For example, in the opinion of specialists on trade and office real estate, the keen demand for trade and storage premises will remain till 2007-2008 in Kiev. The similar situation is also observed in other cities. The food industry pretends on the second place. That attention, which government focuses today to the reconstruction of agricultural production, allows to expect that in the nearest future new modern enterprises on the processing of agricultural products will be necessary all over Ukraine, first of all, small and middle shops department and

plants in district centres and large-scale farms. An increase of the demand is expected simultaneously with the improvement of the investment climate for the construction of enterprises on the production of clothes and footwear, on the production or assembly of various electrical household appliances, other goods of the everyday demand.

Volumes of building orders in the nearest one or two years will depend, first of all, on the amount of funds, which Ukrainian, joint and foreign enterprises will find possible to invest in their business. In 2005 the government of Ukraine plans to shorten the state investments in capital construction by 50%. And though, in the opinion of the Cabinet of Ministers, such step will allow to remove significant funds from a shady building economy, their significance should not be exaggerated, since a joint share of the state and local budgets for the last five years seldom exceeded 10% in capital investments, while the rest consisted of investments of enterprises, organizations and the population. It is clear that an essential increase of the demand for building services is to be expected only in the form of significant increase of foreign financial support of target aid, credits and direct investments. The events of the first months of 2005 show that such expectations are not groundless. Thus, according to the words of its president Jan Lemier, in 2005 the European Bank for Reconstructions and Development (EBRR) is ready to enlarge two times the financing of projects in Ukraine comparing with previous years that can constitute € 500-600 million. The director of the World Bank on Ukraine, Belarus and Moldova Paul Bermingham confirmed in his turn that Ukraine can reckon on a credit of $1 billion in 2005-2007. Ukrdorstroy also reckons to get $100 million from the Deuche Bank for the construction of Kiev-Odessa highways. More than 200 American companies have already demonstrated their readiness to invest in the Ukrainian economy, among which are such worldwide known investors as General Electric, Rayteon, Hunt Oil, Huz Network Systems, 3М, Garris and others. That fact that American businessmen are interested most of all in the question about prospects of acquisition the land by foreign investors on the meeting with the Ukrainian Minister of Economy at the USA Chamber of Commerce, indicates, first of all, their readiness to invest funds in projects, connected with primary construction.

The president and the government of Ukraine from their side undertake active efforts for attraction of foreign investments. Besides the mentioned above meeting of the Prime-Minister with the diplomatic body it is necessary also to mark the Edict of the president "Concerning additional measures on increasing of the efficiency of the activity of the Consulting Council on Questions of Foreign Investments in Ukraine", dated of April. It seems that this organ under the president is called to level all possible administrative-bureaucratic and subjective-criminal obstacles, occurring on all levels of the economic hierarchy.

Undoubtedly, that general positive trends of the Ukrainian economy growth, being observed over the last 3-4 years will promote the development of industrial construction in the nearest years. Thus, in 2004 more than 80% of $15.1 billion of the total investments were invested in fixed capital, including capital construction, at the same time an increase of capital investments in fixed capital in 2003 and 2004 exceeded the mark of 30%. In 2004 an increase of only industrial production constituted 12.5%.

 

In spite of political convulsions at the end of 2004 and the beginning of 2005 trends of the economic growth are saved. The results of the first quarter of 2005 have allowed the International Monetary Fund to correct its forecast of a NGP growth in 2005 from 6% up to 7% in Ukraine.

Positive indices of activity of Ukrainian building companies will also promote the attraction of investments in building projects. The long period of the decline and sluggishness in the building industry was finally changed by a sensitive breakout. Thus, a volume of works, executed on building contracts, increased in 2003 and 2004 by 26.5% and 17.2% accordingly and constituted more than $3.7 billion for the last year. The industry finished 2004 with a profit, though only 65.5% of approximately 5300 building enterprises turned out to be profitable. For comparison, in 2000 this index made up a little more than 40% and in 2003: 56%.

In its turn there are some misgivings, whether the Ukrainian construction industry can cope with the quickly rising demand for building works. But, under all positive shifts in this industry in 2004 builders did not execute the volume of works on building contracts (93%), thus having not used about one and a half billion of UAN, and one thirds of enterprises finished the year without any profit. In addition, from year to year a number of specialists of all levels, occupied in the industry continues to shorten, which as far back as 2003 lowered below a half of million mark in spite of the fact that the industry rose from the 29th to the 5th place in 2000 on a level of an average salary. There can be the situation, when in the presence of investments and customers in the Ukrainian building market the deficit of the workers will appear. And this happens when thousands of Ukrainian specialists work or try to find jobs at construction sites of other countries. In this case an inflow of foreign building companies in the Ukrainian market is to be expected. First of all, it will be building companies, which have already worked in Ukraine or have an experience of the use of the Ukrainian labour force in their own country and dispose known channels of quick hiring specialist-builders of all profiles. Now they invest 1-2% of capital investments per year totally in Ukraine, saving at the same time a stable profitability of more than 3%. However this part can rise with an increase of direct foreign investments in building projects, since most likely foreign investors will give preference to their home companies. Those, being represented by only several leading specialists, first will try to complete their own crews with local builders, offering the best terms comparing with Ukrainian companies. This can cause a flow-out of high-qualified labour force from Ukrainian companies that will worsen their competitiveness and will allow foreign contractors to get more profitable contracts. On the other hand, it can promote the return of Ukrainian specialists, working overseas, on their native land, though, indisputably, at the same time it will attract in the country more cheap labour force from the former Soviet republics that can aggravate social problems in the country. First of all companies from Poland, Czechia, Slovakia, Hungary, Portuguese, Belgium, Russia, Turkey are most likely to be interested in the Ukrainian building market.

 

The forecasts of a production construction growth in Ukraine are confirmed also by analysis of processes, having occurred in building branches on the step of transition to the market economy in the other countries. Thus, the similar building process lasted during 1997-1998 in Poland. Fortunately, polish colleagues had managed to reform basically their building enterprises by this time. Almost 90% of building works volume has been already executed by private or privatized companies. Exactly in this period a growth of the part of non-house building was observed in a general volume of building works up to 85%. Main performers of building works are also collective and private enterprises in Ukraine. State builders account for 30% of required capital investments, and a part of the house building in general volume of capital investments went down to 12% though at the same time an annual increase of its absolute volume is provided.

Stages of transformation of the Ukrainian building industry are similar to processes, having occurred in the states that became recently the EU members. However a housing problem has never been a sharp question in Poland, Czechia, Hungary and, as effect, a segment of house building in the building industry could not create a large-scale competition for the industrial construction as in the case with Ukraine. The program of the Cabinet of Ministers on house reconstructions and building, incommensurate with European ones, concerning a volume of works, can distract significant building funds, since they are more attractive relatively to the return of capital investments and do not need specific specialization. Nevertheless, despite the formed ratio of these two directions of building market in Ukraine, an absolute growth of the demand for construction of non-house objects is inevitable in the following 5-6 years. In spite of the facts that the sum of contracts, provided for performance in 2005, makes up only $ 1.9 billion, that the volume on building contracts is executed only for 93% in 2004 and that certain decline occurred in January-March in contrast with 2004 (94.1%), rates of growth, that began to show in the construction industry, allow to expect that it is able to cope with a volume of building contracts not less than $ 4.8 billion per year.