Eduard Mkrtchan
In 2014, the Government of India initiated the program industrial investment Make in India. The localization of production was determined there as a condition for concluding any contracts with state funding. Read more in the exclusive blog for the Channel 24 website.
Post-war challenges for Ukraine
A year later, the country with the volume of foreign direct investment 60.1 billion dollars ahead of the United States and China. And by the end of 2017, it had risen by 42 positions in the Doing Business Index and by 32 in the Global Competitiveness Index.
The experience of Make in India is instructive for Ukraine, which, after the end of the war, will turn out to be a big investment hub. Its dominant in the next 10 – 15 years will be the world's largest construction market. It can become for Ukraine both an economical driver and an exchange platform for the development of budgets for imported personnel and building materials.
It is in the interests of Ukraine to form the rules for entering this market according to the Make in Ukraine principle. Defining localization as a priority and offering the subjects clear investment formats. But first, a number of post-war challenges must be answered.
The main ones are overcoming the shortage of building materials and logistics. Without this, the “stock exchange” bias will become dominant. Then, instead of industrial investments, we will get a collector that will flush out donor funding from the country.
What is the situation in the raw materials markets
The priority is the speedy restoration of existing and the creation of critically needed production of building materials. Such targeted investments should be invested in the start of large-scale construction. The government should formulate a request for renewal of key industries and propose an action plan. And also – calculations of the range and volumes of products that can be produced in Ukraine, and – critical imports.
Even before the war, the share of imports in the production of building materials was critical. In 2021, my team designed a new microdistrict in Kramatorsk. According to our calculations, the import component of this comfort-class development reached 30%. If we consider imported components in formally Ukrainian products, then even higher. Today, I assume, this figure would be 80%. The reasons are the loss of capacities and a decrease in production volumes due to the lost commodity markets, the decline in construction and the rise in the cost of energy resources.
The most critical situation is in the market of metal products. Before the war, most of it was formed by Azovstal and MMK Ilyich. I know that their shareholders are moving production to other sites. However, it will be difficult to provide Mariupol volumes and nomenclature there. Before the war, about 30% of metal tiles and corrugated board in Ukraine were made from Chinese steel. These volumes went along with suppliers from China.
The critical situation in the glass market, which was formed by 90% due to imports from Russia and Belarus. According to the calculations of the Industrial Marketing Agency, the market of dry building mixtures lost 60% of the annual volume. Some of the factories have been destroyed, many in the occupied or de-occupied territories. The production of gypsum mixtures fell by 75% after the destruction of the flagship Knauf plant in Soledar. A significant part of the manufacturers of thermal insulation materials, expanded polystyrene and aerated concrete has been lost.
According to expert estimates, the decline in production at existing facilities reaches 75%. These are devastating figures in the context of the expected growth in construction volumes by hundreds of times. Despite the fact that the market is critically lacking in many commodity items, such as sheet glass, plaster and fittings. Demand for them exceeds pre-war levels.
Imports won't help
The easiest way to solve the problem may seem to be to expand the government's preferential import programs. However, in the future, this path will lead to a dead end:
- Firstly, there is a shortage and appreciation of many positions on the world market. In Ukraine, they will be non-competitive;
- secondly, the total washing out of the “import” currency will critically weaken the country;
- thirdly, our cross-border logistics is not designed for a sharp increase in imports. The situation will change only after the resumption of sea traffic.
The most balanced solution is to reduce the import component in the cost of construction due to the restoration of old and localization of new industries. By defining a clear format for the event in a promising market for interested players. At the same time, imports will in any case remain at a fairly high level due to the cost of energy, equipment, fuel, machinery and a number of commodity items.
When planning a localization strategy, it is important to take into account the factors of war. The modern construction market differs markedly from the pre-war one, focused on construction in large cities. In the coming years, I think, the focus will shift to the construction of administrative buildings and industrial facilities. The need for a new market is easy to determine by assessing the damage to the capital's Palace Ukraine. Glass, heat-insulating materials, metal-plastic structures, plaster are required there.
The importance of restoring industrial facilities
So, investments in the production of sheet metal are still relevant. glass, brick, metal, mineral wool, roofing… The complexity of some investment projects lies in high gas prices and the lost raw material base. There you will have to wait for de-occupation or create longer chains of suppliers.
The most important aspect is to determine the construction strategy for the first few years. A new type of competition will become a marker of the market – the availability of building materials for the contractor. Until the launch of related industries, they will not be enough to activate all market segments. Therefore, you will have to choose the most promising ones.
For the time being, it is advisable to selectively determine housing construction programs. It takes as many materials to create 1 meter of new housing as it does to restore 5 meters of damaged one. Consequently, the problem of citizens whose housing was taken away by the war, the state should solve not only by building new houses, but also by restoring the destroyed ones, completing unfinished buildings and buying ready-made apartments on the market. According to various estimates, from 20 to 45 million square meters of housing have been damaged in Ukraine as a result of hostilities. The maximum is 4.5% of the housing stock. Approximately so much was built in the country in 5 years. With stable financing and provision of building materials limits, these volumes can be provided in 2-3 years.
In the context of a shortage of building materials and a stake on the growth of economic activity, it makes sense to invest the main resources in the restoration of industrial facilities and fast business projects. In this way, we will multiply the attracted financing, rationally use the available building materials, create jobs and in the near future we will be able to count on added value. These dividends would be the ideal results of the implementation of the Make in Ukraine principle.
