Construction can contribute up to 10% of Ukraine's GDP. What pre-war and post-war challenges need to be overcome for this

For the Ukrainian construction sector, Ukraine's reconstruction can become a growth factor that will ensure that this sector will account for up to 10% of Ukraine's GDP in the future, instead of the 3% it had before the war.

First and foremost, we are talking about clear and transparent working conditions that will allow international companies to invest in this sector, minimizing corruption risks, regulatory and human resources issues, etc. But their solution requires the efforts of all stakeholders - both at the government level and at the level of international and domestic potential players and investors.

This is the opinion of the participants of the conference “Construction and Infrastructure: Key Sectors of Economic Growth” organized by the We Build Ukraine think tank. The conference examined the market and its prospects from three key perspectives: development partnerships for Ukraine's recovery, barriers to infrastructure projects, and the challenges of the war and post-war period and how the construction sector will adapt to them.

Laszlo Juhasz, Managing Director of BCG Central and Eastern Europe, whose company has been working intensively on a comprehensive Strategy for Ukraine's Economic Growth in the Postwar Period in cooperation with experts from the We Build Ukraine think tank over the past year, believes that construction could account for up to 10% of Ukraine's GDP in the future, while before the war this sector accounted for 3% of GDP. But because of the war and overcoming its consequences, it will be extremely important not only in terms of exports but also in terms of reconstruction.

"If we break down the construction sector into sub-sectors, not all of them are affected by the war equally. Residential, commercial, industrial facilities - the impact is different. In some sectors, the supply of concrete and metal is more important, while in others it is drywall, plastic, etc. But from a global perspective, there is very high volatility here, and in a way, this sector is cyclical. We see key players in different markets trying to achieve high results by scaling up," says Juhasz.

He adds that we can talk about different areas - for example, there are heavy and light construction materials with EBITDA margins of about 14%. However, it is important to look at each segment not only in terms of reconstruction, but also in the context of international needs, and thus build different strategies and look at the importance of other sub-sectors.

"To summarize, there are certain categories where it is important to develop capacities in Ukraine, as some materials are expensive to transport. In other areas, it is necessary to attract imports, but exports are not very relevant in some categories. And vice versa, in the case of steel, for example, exports will be relevant and we can talk about GDP growth. As for other categories, such as concrete and cement, the EU currently has excessive production capacity, so supplies to Ukraine can play an important role," Laszlo Juhasz emphasized.

According to Oleksandr Kubrakov, Chairman of the Supervisory Board of the We Build Ukraine Foundation, construction can become an engine of Ukraine's growth, providing jobs, attracting investment and increasing the country's resilience. Today, it is a sector with a

significant multiplier effect, which the war has put in front of unprecedented challenges.

“The paradox is that the sector that directly affects economic growth and quality of life is still one of the most overregulated, with outdated regulations, blurred areas of responsibility and, frankly, a corrupt environment that scares investors away,” says Kubrakov.

"To attract international investors to Ukraine's recovery, we need not loud declarations of fighting corruption, but a consistent, predictable and open policy. It is transparent conditions, fair rules of the game, regulatory stability and development of human resources, not the illusion of change, that open up real opportunities for partnership, overcoming barriers and successful adaptation of the construction sector to the challenges of the war and post-war periods," said Deputy Business Ombudsman Tetiana Korotka.

Olena Shulyak, Chairman of the Verkhovna Rada Committee on the Organization of State Power, Local Self-Government, Regional Development and Urban Planning, agrees. She recalls that back in the early 2000s, IKEA wanted to invest 1.7 billion euros in Ukraine, but stumbled over the process of land allocation. The company's position is clear: it does not pay bribes, so it cannot agree to work in Ukraine under such conditions.

“The latest NABU case - information on whether it is possible to build on a particular land plot now ”costs" $4 million. We know that the issuance of urban planning conditions and restrictions is the most corrupt stage in construction today. Moreover, any expertise can be bought for a few thousand hryvnias," Shulyak says.

She emphasizes that today, there is a total monopoly on the part of local authorities to issue all permits, meaning that the decision is still made by an official. For example, a permit for the construction and commissioning of a CC2 facility is issued by local authorities, and a CC3 permit is issued by the State Inspectorate of Architecture and Urban Planning. And that is why there have been many cases when architects and designers, at the request of the customer, ask to raise the class of consequences in order to enter the project not through local authorities, but through the SACI, so as not to deal with local government officials and their demands for bribes.

"What to do? The answer is simple: eliminate the human factor from decision-making through further digitalization of permitting processes. We are adherents of total digitalization, as stated in our draft law No. 5655, which was adopted by the Parliament but not signed by the President. Yes, we have opponents who do not benefit from the destruction of the monopoly on issuing permits. Moreover, I believe that there should be criminal liability for officials who take bribes," says Olena Shulyak.

Her words are confirmed by market players themselves. For example, according to Bohdan Rublyuk, executive director of the Fomalhaut group of companies, the market is currently facing a huge number of problems, such as a lack of people for both companies and builders, and insufficient funding.

"Construction should be a driver of development, but the construction industry must survive to see an active recovery. Of course, there are government programs such as Oselya, 5-7-9, and Restoration, which have helped the sector a lot - without them, the industry would not have survived, but this is certainly not enough," Rublyuk said.

He said that 3 out of 8 plants were lost due to the war. At the same time, despite the difficult market, the company annually invests $1-1.5 million in opening new ones, as there are not enough plants in Ukraine that would produce dry construction mixes.

"Yes, we have opened a plant in Kovel, so we will continue to work. In addition, we have been present on the European market since 2014. We have seen how European standards work, so we congratulate Ukraine on its transition to them, even though we do not consider all European standards to be the best. But in general, the course is right," said Mr. Rublyuk.

At the same time, he emphasized that it is very important that Ukraine has begun to rebuild despite the ongoing hostilities. This is important for local players, so they can stay afloat. At the same time, he emphasized that the sector is currently waiting for foreign players, who have full support from the authorities, the population, and even understanding of the importance of their presence here from competitors.

Vasyl Danyliak, CEO of OKKO Group, also said that the group plans to fully launch the bioethanol plant next year.

"The total investment in the plant in 2023-2026 is EUR 110 million, of which EUR 35 million is the group's own contribution and EUR 75 million is loan financing. Of this, EUR 60 million was provided by the EBRD for a period of nine years, and another EUR 15 million by Raiffeisen Bank Ukraine for a period of seven years," said Danyliak.

The company is also looking for financing for its second wind energy project in Volyn region, which is estimated at €255 million

"We have not yet found financing, but we have firmly decided that we will follow the same path as last year, when we advanced the purchase of turbines (for the 147 MW Ivanychi wind farm in Volyn region - ER), road construction, and then structured financing. We will do the same with this project: we will pay for the turbines in the summer, build roads and lay cables in the fall."

Co-founder of the We build Ukraine think tank, Anna Yurchenko, drew attention to key aspects in the preparation and implementation of infrastructure projects. The first is the issue of strategic planning - understanding what the state's strategy is in a particular sector, how many infrastructure projects will be implemented, where they will be located, etc. The second, in her opinion, is the ecosystem of relationships in infrastructure projects and the contracting of all project participants.

Yurchenko also emphasizes that one cannot focus on only one form of contract - it is necessary to give customers and contractors variability. This is necessary for the Ukrainian public procurement market to become more civilized.

Also, according to her, a huge problem in the construction sector is pricing, as it is still Soviet in Ukraine. There have already been attempts to change it, but these attempts are currently being leveled, Yurchenko emphasizes.

"There is a certain rollback to the old systems, and foreign companies like to say, ‘your 'smetas’, we don't understand them, what you want from us, how you created them, we don't understand how they are formed, why wages should be hidden somewhere. They ask: “Give us a clear cost of the scope of work, clear documentation, we want to work honestly, normally and transparently.” We will have to work on this," emphasizes Anna Yurchenko.

Lev Partskhaladze, President of the Confederation of Builders of Ukraine, believes that the need to build faster will require the development of standard projects. According to him, this will double the speed and reduce the cost of the construction process.

"When I worked as Deputy Minister of Construction, we developed 4 standard projects for outpatient clinics for rural areas. Such a facility cost $1.3 thousand, and we handed it over to communities for free. In general, we have developed several standard solutions - about 20 projects, from small to large, in Kherson, Kharkiv, and other cities. Now it can also be very relevant, provided that all this is as open and transparent as possible," Lev Partskhaladze said.

He said that work is currently underway with Finnish colleagues who are already allocating funds for the development of standard solutions for hospitals. But we need to develop 20-30 standard solutions for schools and kindergartens.

Olena Kolesnikova, Head of the Industry Council of the Federation of Metallurgists of Ukraine, emphasized another crucial issue in the context of reconstruction and the construction sector in particular: human resources. According to her, Ukraine is working on reforming the Classifier of Occupations, as it has not been revised for 70 years.

"We have a trolley driver, but we don't have drone operators. And no specialists in engineering and technical specialties in general. The Ministry of Education believes that they are not in demand. Employment centers say there is a need for 120-150 thousand people. And this is just an example," Kolesnikova added.

In her opinion, the staffing problem directly affects investment attraction, as a potential investor wants to understand whether he or she will have people who can ensure the operation of enterprises.

"These are the main resources, in fact. One will not work without the other. The first one is access to cheap money, such as our competitors have, so that we can be competitive. The second is human capital. The third is predictability in tariff policy, especially from state monopolies," Kolesnikova added.

In his turn, Timur Bondarev, founding partner and managing partner of ARZINGER, notes that a lot has been done in recent years in the field of urban development in terms of organizing a transparent business environment, that is, there is definitely positive progress - revolutionary reforms have been implemented without overstating the case.

He also emphasized that international investment in the construction sector in general is now crucial, even in the context of security. For example, if IKEA had been able to invest $1.5-2 billion in Ukraine in 2005, and if other international players, such as global pension funds and hedge funds, had followed suit, Russia would have seriously considered whether to attack Ukraine.

Sevara Melibayeva, the World Bank's Program Manager for Infrastructure and Sustainable Development for Eastern Europe, spoke about the efforts that Ukraine as a country and its municipalities should make to deepen the support of international financial institutions.

According to her, the World Bank Group began cooperation with Ukraine before the war and has continued it since the beginning of the war. This includes $77 billion in assistance for infrastructure and people, with 94% coming from donor countries. As part of this initiative, $2 billion in grants have been provided to rebuild infrastructure, and the World Bank will continue to support at all levels.

"If we talk about what Ukraine and its municipalities can do to ensure that this cooperation continues, it requires building trust through clear commitments, sustainable reforms, strengthening institutional capacity, and active citizen engagement. This is very important for donors. And it is necessary to ensure Ukraine's sustainability in the long run," Melibayeva emphasized.

She emphasized that municipalities play a very important role in these processes, as they must ensure the transparency of future projects for investors. Moreover, an important element for further recovery and continued cooperation with donors is the continuation of reforms. Therefore, the role of municipalities is crucial for their implementation.

"In addition, it is important to involve citizens in all decision-making processes at the local level. In particular, through public consultations. Citizens should be part of the reconstruction. It is municipalities that can send clear signals about the need for, for example, inclusiveness in these processes. This is important not only for donors but also for Ukraine as a whole. It is important to have trusting relationships, and cooperation between the government and citizens is important. This will show that the reconstruction is sustainable and important for people," Sevara Milibayeva summarized.