Building back better than before

It’s an old business maxim that every crisis presents an opportunity – and there is no greater crisis right now than the war in Ukraine. Buildings, roads and other essential infrastructure are being turned into rubble each day, and the time will come when all of this will have to be rebuilt. Despite there being no sign yet of any end to the war, many are already beginning to talk of the opportunities that reconstruction will offer – but how real are they?

The first question to ask is how Ukraine will ever be able to afford its reconstruction, especially given that it is ranked as the poorest country in Europe with a GNI per capita in 2020 of USD 3,540. And the costs of rebuilding are going to be phenomenal. “One of the lowest estimates I saw was from the Kyiv School of Economics, which was mainly for various types of buildings. In April 2023, it calculated the cost at around USD 150 bln. This estimate was actually on the low side, because this didn’t involve a broader look at business and social development, which is what the EU is doing with the Ukrainian government. Together with the European Bank, they came up with the figure of USD 400 bln in July this year. This sum includes both buildings and Ukraine’s further development to meet the terms of accession to the EU. The Ukrainian government believes that the cost will be higher and has prepared its own estimate, which was almost twice the amount, at around USD 750 bln. The European Investment Bank, meanwhile, has estimated even higher costs, at around USD 1 tln,” reveals Krzysztof Głowacki, an analyst at WiseEuropa. The second Rapid Damage and Needs Assessment report published by the World Bank, the Ukrainian government and the European Commission is more specific, stating that the direct damage to buildings and infrastructure will come to more than USD 135 bln across housing (37 pct), transport (26 pct), energy (8 pct), commerce and industry (8 pct) and agriculture (6 pct). Naturally, Ukraine cannot be expected to foot this bill itself. According to a press statement by the European Commission, “Ukraine will need USD 14 bln for critical and priority reconstruction and recovery investment in 2023. Meeting these needs will require USD 11 bln in financing beyond what the government has already allocated in its 2023 budget, including USD 6 bln in unfunded budget needs and another USD 5 bln in financing to support state-owned enterprises (SOEs) and catalyse the private sector.” The European Commission has added to this that “the International Monetary Fund on March 30th 2023 estimated the state financing gap up to 2027 will reach EUR 75.1 bln, and agreed with Ukraine a EUR 14.4 bln four-year programme to support economic stability and recovery, while enhancing governance and strengthening institutions to promote long-term growth in the context of post-war reconstruction and Ukraine’s path of accession to the European Union.”

However, the money that other countries have thus far pledged is far below that required – and this is not the only consideration. “Another big topic is insurance and the guarantees for investment in reconstruction. JP Morgan and BlackRock have already officially declared advisory agreements with the Ukrainian government for its reconstruction management. This includes an investment platform and an insurance mechanism. Germany-based MIGA (part of the World Bank Group) is also supporting the first projects with guarantee coverage for war-related damages. We are also monitoring the progress of state guarantee programmes in Poland, Switzerland and other countries, as these simply represent a crucial element for investing in a safer manner without waiting until the war is over. We believe that there are big financial resources to use (including frozen Russian assets around the world) for reconstruction insurance purposes available to investors ready to support economic and social projects in Ukraine,” explains Sergii Soliarchuk of the Immo Lab consultancy.

Current construction activity

All of this is not to say that nothing is happening right now. Despite the war, life is continuing relatively normally. “We have to remember that Ukrainian developers and investors are very active, even now. Over 150 projects have been started since the war began and 100,710 residential units were sold in 2022 alone,” explains Sergii Soliarchuk of Immo Lab. However, “many Ukrainians who lose their homes will have insufficient funds to buy a new one. Of course, the Ukrainian government is preparing special programmes for this, but this is not enough,” admits Daniel Puchalski of Immo Lab. Despite this activity, when it comes to international construction firms, their presence in Ukraine is currently almost non-existent. Eurobuild has reached out to some major construction companies to find out what they thought of the opportunities for the reconstruction of Ukraine, but the only one to reply was Eiffage, which told us: “Our group focuses its activities on the territories where it has a permanent presence. Ukraine is not a country where Eiffage had any activities before the start of the conflict. There are currently no plans for us to be involved in the reconstruction efforts.”

A question of graft

One reason why so few of these companies have entered Ukraine so far could be the endemic corruption in the country. In August this year, two top officials were arrested for embezzling humanitarian aid, and as Krzysztof Głowacki observes: “If officials embezzle money from humanitarian aid, you can only wonder what will happen when the really big money starts coming in.” He also points out that “we are talking about a country that has been very heavily burdened by its oligarchy and by corruption throughout the three decades of its independence after the collapse of the Soviet Union. At the moment, Ukraine lies in 116th place in the transparency international ranking of 180 countries.” While he admits that Ukraine is taking steps to clean itself up, he also concedes that “these things don’t change overnight. There is the stubbornness of institutions. You can change the law, you can change the sanctions – such as prison terms – and you can establish new bodies, but you have to populate them with new people.”

Nevertheless, the recent arrests could be evidence of a crackdown on such egregious behaviour. “We firmly believe that the pressure from governmental reforms as well as from the US and internal prosecutions will accelerate the end of corruption in Ukraine,” insists Sergii Soliarchuk of Immo Lab. “Of course, investors and organisations who are thinking about investing through public tenders may be more concerned than others. Anyway, there are many projects that have already been launched, such as in infrastructure, warehousing as well as light and heavy industry. US and UK firms are doing great deals right now. I think that the bigger problem is actually the war, whereas corruption is just another issue that can be resolved. If you want to make real estate investments there in 3 to 4 years’ time, you need to start building up your network, your know-how and your road map immediately – otherwise all you will see is the red light on the back of the departing train,” stresses Daniel Puchalski of Immo Lab.

How many years?

When the reconstruction effort does eventually get underway, the process is undoubtedly going to be long and drawn out. “According to the latest data, almost half of the Ukrainian budget is being spent on the war. If we were to imagine the hostilities ending next year, according to the estimates of the Ukrainian government, optimistically it would take them seven years to rebuild the country back to the same level as before the war – equivalent to the country’s GDP for the whole of 2021 – and even if they succeeded it would still be the poorest country in Europe. But these estimates are based on one optimistic assumption, which is that they will be able to attract back their emigrants. A more realistic scenario is ten years or longer,” admits Marek Budzisz of think tank Strategy&Future. Daniel Puchalski is of a similar opinion: “A minimum of 10 to 15 years will be required to rebuild the infrastructure and a minimum of 20 years is required to clean up the ruins and build new homes for most of the people in the bigger cities.”

One final aspect worth mentioning is that the destruction of Ukraine’s buildings and infrastructure also represents an opportunity to modernise. “There is the concept of building back better and smarter. So the investment for this is not just for the reconstruction of buildings and other infrastructure, but for improvements on what was originally there. This ties in with the EU’s concept for the future of Ukraine. The EU is clearly a major stakeholder here and given its plan for its members and prospective members, the most important aspect here would be ESG,” points out Krzysztof Głowacki of WiseEuropa.

Finally, despite all the caveats, most analysts remain optimistic about the future opportunities for the construction industry in Ukraine. “Just from looking at the numbers we mentioned earlier, this represents a huge opportunity. There’s going to be a lot of competition between companies and member states,” emphasises Krzysztof Głowacki. And Daniel Puchalski agrees: “There will be some huge opportunities for construction companies, but also a lot of business for all real estate market players, such as building materials producers, management, proptech, professional services providers, general contractors, developers and investment funds. Some of these are already involved in a number of open discussions and negotiations to form consortiums with the international and Polish investors who are poised to invest in Ukraine.”