Climbing up the charts

Belarus occupied the lowly position of 82nd in the World Bank’s ‘Doing Business’ ranking just one year ago. This year it moved up to 58th position, overtaking Poland, the Czech Republic, Russia and Ukraine, among others. The country was also in the top ten of the best reformers

Emil Górecki

The World Bank in particular has appreciated the introduction of reforms in Belarus to encourage business activity, as well as simplifying the building permitting process, the recruitment of staff and the registering of ownership. This investor-friendly approach has been initiated by President Lukashenko, who wants Belarus to be included in the top 30 countries where it is easiest to run a business, and is a policy that requires thorough changes in the legislation covering investment operations. Last year alone, 40 different business zones were set up, making customs regulations and land legislation easier. A new system of company registration has been introduced, de-bureaucratizing business activity. A total of 232 new regulations have been passed, bringing Belarusian standards in line with those of the EU, and allowing the export to the latter of cement, building lime, sand, kermesite, ceramics and glass.

Success decreed

The importance of the construction industry as a sector of the Belarusian economy is continuing to grow, as evidenced by its increasing contribution to the GDP of the country. In 2005 the industry constituted 6.9 pct of the national income, whereas for 2008 this figure had grown to 9.4 pct, and in the first three quarters of 2009 it was as much as 11.5 pct. This result means that for this period the industry was worth 15.15 tln Belarusian rubles (USD 5.5 bln) – 124.1 pct of its value in the first three quarters of 2008.

However, maybe some things are changing faster than others. I was hoping to discuss the approach of the Belarusian authorities to business with Mikhail Trotsinski, the commercial counsellor at the Belarusian embassy in Warsaw. “Can you read in Polish, Russian or English? Then you can read about this on our website,” the head of the Belarusian trade mission informed me.

Despite this, I was not discouraged. My questions had a more favourable reception at the Ministry of Architecture and Construction of the Republic of Belarus. “Our results from January to September allow us to say that the construction industry is steadily developing in our country, in spite of the difficult economic conditions,” asserts Anatoly Nichkasov, the vice-minister of construction and architecture. To prove his point, he provided us with the statistics: “We planned to finish apartments with a total area of 6 mln sqm in 2009. By September we had built over 4.5 mln sqm, i.e. 100.5 pct of what was planned for this period. We also planned the modernization of 70 building material manufacturing facilities in the same period, to increase production capacities and enhance the possibilities for the sector as a whole. And we have now modernized more we than we had envisaged for this scheme, that is, 111 facilities,” Mr Nichkasov explains.

Another advantage enjoyed by Belarusian building material manufacturers is that they have not been adversely affected by the credit crunch. Heads of material manufacturing plants are now doing what they can to avoid stock building up in their warehouses. Between Q2 and Q3, the amount of stock fell by 18 percentage points when compared to monthly production. The government is hoping to achieve its target of a 62 pct reduction by the end of the year.

The Ministry is particularly directing its attention to the potential of this industry. According to Ministry statements, a thorough modernization of the manufacturing base is already in progress, in particular with regard to machinery and implementation of modern technologies. These issues are of course also included in the government’s investment programme for the sector.

In harmony with Europe

Foreign companies have two ways of officially entering the Belarusian market. One of these involves participation in so-called ‘experimental’ construction, which involves the introduction of new technologies into the country. Under this scheme, construction and design companies have to apply for a permit to build according to the standards and norms of their countries of origin. The second method involves submitting their projects for approval to the national commission, which can then verify whether they conform to Belarusian requirements and can then insist that a number of changes are made. There is also the possibility of entering into a partnership with a Belarusian company. This seems to be the easiest way if a suitable partner can be found. “The work on new regulations covering construction and the current review of the current legislation are aimed at the harmonization of Belarusian regulations with those that apply internationally. This should shorten the waiting period for the documentation necessary for projects, as well as lowering the prices of design and construction services,” claims Anatoly Nichkasov. He goes on to list a number of construction companies already interested in Belarus, such as firms from Germany, Turkey, Ukraine and Lithuania. However, what the country needs is both modern technology and the capital required for investment.

Will the regulations really help foreign companies to operate on the Belarusian market? “The proposals are going in the right direction, but their implementation has nothing to do with making it easier for foreign business entities. This is just in the realms of theory,” argues Dimitry Nikonov, Mostostal-Export’s investment preparation, realization and settlement specialist, who is responsible for the monitoring of changes in conditions for running enterprises in Belarus, which also happens to be his home country.

Practice contradicts the theory

Mostostal-Export has been trying to win contracts in Belarus for a number of years. In 2000 the company signed a letter of intention for construction work on a furnace for a foundry in Zhlobin, followed two years later with another letter for the construction of a sports hall in Brest Oblast. Neither of the contracts has actually been signed. “So far our Belarusian partners are not fulfilling their obligations – in particular over receiving bank guarantees. Instead, their suggestion is national guarantees, which are not really acceptable for us. We need guarantees from a recognized bank. The Belarusian investors would like us to secure funding for them so that they can build with this money. We are trying to help them with the finance, but they do not understand how we operate,” relates Jan Targosz, director of Mostostal-Export’s Belarus branch. He has not noticed much liberalization himself; however, he does believe in the future potential of this country – otherwise the company would not have had an office there for 4 years. According to Mr Targosz: “Mostostal-Export has a uniform mode of operating in the Eastern countries such as Russia and Ukraine, but Belarus does not fit into this mode in any way. Here everything is still steered manually and from the very top, and the liberalization that has been announced is just empty sloganeering.”

Przedsiębiorstwo Robót Inżynieryjnych Pol-Aqua has so far had a similar experience. In 2008 the company reached an agreement to cooperate with a Belarusian partner in the construction of a shopping centre and a residential estate. Małgorzata Akimowicz-Pruszewska, the press spokesperson of the company, admits that there have been a number of similarly promising potential deals. “None of them has actually been carried out. There is nothing else for us to do but to survey the possibilities Belarus offers. But we are certainly not giving up on the idea of expanding into the country,” she declares.

Cooperation with Belarusian partners would be safer if there was anything resembling a land ownership law in the country. In Belarus, however, the law only allows for 40-year leases with extension options, and this is why plots of land cannot be used as contributions to SPV companies. Jan Targosz adds that there are also problems with Belarusian partners as they often seem not to know what they actually expect from a contractor or a partner. Moreover, they are unable to adequately draw up the business plans that are required by foreign banks and insurance companies. “Fortunately, a generational change is becoming apparent, with western standards gradually being more understood – and there is a greater desire to adopt them,” claims Jan Targosz. He goes on to add that there are small, foreign companies in Belarus that have few problems in securing contracts worth up to USD 1.5 mln, but at a risk level that is also considerably smaller. Mostostal, on the other hand, is only interested in contracts worth at least EUR 10 mln.

Strabag Umweltanlagen (Strabag Environmental Plants), which first came to Belarus in mid-2008, is currently limiting its services in the country to environmental technology. The company is now working on two projects. The first contract, which was signed in June 2008, is to build a biogas producing sludge treatment plant. The second, signed in January 2009, and is a turnkey project to construct a mechanical biological waste treatment plant in the city of Brest. The facility, which is designed to have a capacity of 100,000 tonnes of urban waste per year, will be divided into two parts: a sorting plant for the recycling of valuable waste and a fermentation plant for biogas production. The facility should be finished at the end of 2010 and operational by mid-2011. “Belarus offers great opportunities for us, both because of the lack of modern technology and due to the strong demand levels there. What attracted us was the current liberalization process in the country,” remarks Ingo Sattlegger, managing director of the environmental technology department of Strabag in Austria.

Hi-tech and high finance needed

In spite of all the economic liberalization, Belarus is still run by a regime which allows limited freedom of travel for its citizens. There is also the familiar Eastern Bloc way of doing business. All in all there are many restrictions and potential pitfalls, but Strabag’s management team seems undeterred by them. “Our talks with local authorities aren’t always easy, just like with our subcontractors and suppliers. All our discussions and negotiations are similar to those in other Eastern European countries, such as Ukraine or Russia,” Ingo Sattlegger adds.

The Americans are also becoming interested in the Belarusian market. Hudson Capital, a development and investment company, has taken over a Belarusian construction firm licenced for general construction in Russia and Belarus. The company has planning permission for a residential district in Minsk.

From the beginning of next year, Belarus is to introduce EU norms and standards for safety, building materials and construction. This basically consists in integrating the relevant EU decrees into Belarusian legislation. Thanks to this harmonization process, cooperation between Belarus and its western partners in the fields of design and construction in the future should become much easier. ν