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Construction sector in Russia 2009 Development forecasts 2009-2012Publication date: October 2009Languages: English

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Word from the author:

The construction industry in Russia has been hit hard by the global economic downturn. The slowdown on the domestic construction market began in 2008 and deepened in 2009, with 80% of construction projects suspended and virtually no new residential and commercial property projects started. For the first time in the current decade the value of construction works will shrink this year, by over 15% in comparison to 2008. However, the worst for Russia’s construction is over now as the market will stabilise next year and return to a growth path in 2011.

In 2010, construction of buildings will remain subdued due to the still ongoing problems with financing, but the industry will be stimulated by picking up capital expenditure for infrastructure

development projects. Investment in roads, railways and airport expansion will be driven by the federal programme to modernise the country’s transport system, which envisages total outlays of $420bn, including $147bn from the federal coffers. Assuming a down-to-earth scenario that only 10% of the programme will be implemented, this will translate into a $7bn annual boost in construction activity each year through 2015. With federal budget deficit expected at 3-7% of GDP in the three upcoming years, much of the funding for Russia’s infrastructure projects will have to be attracted from private investors through schemes such as public-private partnerships and other non-budgetary sources, which will thus gain growing importance.

Robert Obetkon, Senior Construction Market Analyst

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About the report:

This third edition of PMR’s popular report, Construction sector in Russia 2009, Development forecasts 2009-2011 provides readers with a timely assessment of the construction industry in Russia as a whole, describes conditions in each major segment – engineering, non-residential and residential construction – and explores the major opportunities for the coming years. It supplies vital new information on planned energy and transportation infrastructure projects.

As lagging economic conditions slow development and construction around the world, this report examines the reasons why Russia remains a country of continuing opportunity for construction related businesses and investors. Government funded projects, an abundance of in-demand natural resources and an increasing need for housing continue to provide solid options for innovative construction related businesses in each federal district of Russia’s vast and varied economy. Profiles of the largest companies engaged in locating and seizing those opportunities enhance the informational value of this document.

The professionals at PMR have gathered all of the latest market intelligence and assembled it into this single clear, concise document – ready for delivery to you in convenient electronic format.

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In addition, Construction sector in Russia 2009, Development forecasts 2009-2011, third edition reveals all the details and plans of the market’s most successful players in a special section dedicated to insightful company profiles.

If you are looking for:

Russian economic conditions � , including domestic and foreign investment levels, inflation and exchange rates and current and projected GDPComplete coverage of the � Russian construction industry – output, top companies and profits, employment, wages, taxes, building materials and development forecastsRussian infrastructure development � – including planned projects for roads, railways, airports, gas and oil pipelines, power generation and environmental developmentNon-residential development status � – factories and warehouses, office facilities, hotels and trade and service facilitiesRussian residential construction market � conditions, including levels of housing stock and new construction, housing prices and federally funded housing construction plans…

…then this is the document you have been looking for!

Decreased availability of credit around the world has resulted in lower levels of foreign direct investment in Russian construction projects. Opportunities do exist, however, particularly in energy, infrastructure and transportation projects financed by government funding, and the steady demand for imported construction materials. Are you searching for the data, analysis and direction needed to locate these opportunities?



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Who will find the report Construction Sector in Russia 2009 most useful?

PMR has specifically targeted this report to meet the informational needs of top managers at regional construction companies, strategic planners and executive decision makers at companies considering market entry, regional producers and distributors of building materials and supplies, architectural and consultancy firms, developers, construction equipment producers, commercial and investment bank personnel and decision makers for real estate investment trusts will benefit from this concise yet comprehensive PMR publication. With a focus that is broad enough to present the complete market picture, yet specific enough to provide a solid basis for strategic planning, this report is a must-have resource for those interested in locating and maximising opportunity in the marketplace.



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Construction sector in Russia 2009 – Development forecasts for 2009-2012

Despite the doom and gloom brought about by the economic crisis, in the medium and long term, there is little doubt that the opportunities on the construction market in Russia are both lucrative and numerous. A mere fraction of domestic demand for housing and infrastructure development has been satisfied during the recent construction boom and so prospects for future development remain strong.

Employment and wagesIn 2008 the number of people employed in the construction industry increased by

6.5% to approximately 5.6 million. The economic downturn, however, resulted in H1 2009 employment levels falling by 4.8% in comparison with the same period of the previous year. The number of foreign workers employed on Russian construction sites decreased by almost 9% in H1 2009, to 730,700. As a comparison, in the first half of 2008, the number of foreign workers employed in the Russian construction industry rose by 80% in year-on-year terms.

Employment levels are expected to decrease further before the end of 2009 as companies still plan to lay off more workers than they intend to hire. The numbers of construction workers forced to drop from full to part time, or even accept unpaid leave, is also on the rise.

In the second quarter of 2010, the situation is expected to improve. Russian authorities recently announced that 75,000 construction jobs will be created in 2010 and 2011 as the country ramps up its preparations for the winter Olympics in 2014. At present, 11,000 workers are employed on Olympics-related construction projects in Sochi, of which 300 are foreigners. Construction projects related to the APEC-2012 Summit will also create new demand for labour. There are currently over 5,000 construction workers employed in these projects, almost 3,500 of which are working on the construction of two bridges: the 70-metre-high suspension bridge that traverses the Bosfor Vostochny Strait, which divides Vladivostok and Russky Island; and the bridge across the Golden Horn Bay. In 2010 and 2011, the expected peak construction period for these projects, at least 12,000 people will work on Russky Island alone.

Source: Rosstat, 2009

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Number of employed in construction industry in Russia (’000), 2005-2008

CSR019

4,916

5,073

5,268

5,610

2005 2006 2007 2008

In �00� the number

of people employed

in the construction

industry increased

to �.� million.



Traditional obstacles, such as high costs of building materials and structures, have ceased to pose such serious problems for constructors8. Instead, insolvency of clients has been the major problem for Russian constructors this year.

* Before 20

** Before 2008: over 200 workers

08: 101-200 workers

Source: Rosstat, 2009 www.pmrpublications.com

Capacity utilisation rate of construction companies in Russia (%),

by company size, 2006-2009

CSR027

including companies employing:All construction

companies

Fewer than 51 51-100 101-250* Over 250**

2006

Q1 61 50 60 64 70

Q2 60 49 61 64 68

Q3 65 54 65 66 73

Q4 66 56 65 67 72

Q1 65 55 62 65 71

Q2 66 57 65 67 72

Q3 68 58 68 70 74

Q4 69 59 67 70 75

2008

Q1 66 57 64 66 71

Q2 68 58 65 68 74

Q3 69 60 67 70 75

Q4 67 59 66 68 72

Q1 58 50 56 58 63

Q2 57 49 54 57 62

2007

2009

8 The same percentage of respondents now cite expensive materials as the main obstacle as was the case back in Q1 2006. Interestingly, at the beginning of 2006 just over half( 52%) of respondents cited high taxes as one of the main obstacles, which is 12 p.p. more than in Q3 2009.



Main barriers to doing business in the Russian construction sector

(% of all construction enterprises), Q4/2008-Q3/2009

CSR028

27

44 44

43

41

40

46

31

32

Q4/2008 Q1/2009 Q3/2009

Insolvency of clients High taxes Expensive building materials

�1www.pmrpublications.com


Investment Fund & PPPRussia’s Investment Fund (IF) was created at the end of 2005 with the aim of bolstering

the realisation of investment projects, particularly in the area of infrastructure. In 2006, RUB 69.7bn was earmarked for the IF, a figure that rose to RUB 72.9bn in 2007 and RUB 73.2bn in 2008. In 2009, as has been mentioned already, budget allocations for the IF are to be cut to RUB 64bn ($2bn). The IF is intended to become the primary source of funding for PPP projects and to act as a catalyst in attracting private investment. To date, the fund appears to have performed its task successfully – for every one rouble provided by the federal budget, just over two (2.2) roubles worth of private investment are attracted.

Investments from the IF may take the form of:direct financing of up to 75% of total capital project costs as equity investment or through the financing of certain assets in exchange for the ownership title to the assets

guarantee for 60% of the borrowings for the purposes of the project.

The project approval procedure involves three stages: investment commission, governmental commission, and finally approval, which takes place during a meeting of the Russian government.

Financing can only be provided for projects worth over RUB 5bn ($156m) over five-year period. Two types of evaluation are used for project examination: qualitative (first of all, generation of social benefits) and quantitative, which include:

macroeconomic productivity – the implementation of the project should contribute to an increase in GDP on a national or regional level

budgetary effectiveness – the project should generate tax revenues for local and federal budgets

financial effectiveness – i.e. the project should have a negative stand-alone net present value (NPV) justifying state support for implementation. It should generate economic profit if support is provided (creating a positive NPV). Project profitability should be at least 4%, but no higher than 11%.

In 2008, five road construction and five railway construction projects received support from the IF. This support amounted to RUB 18.5bn ($578m) in total.

So far, 21 investment projects of national importance have been approved by the government for state support from the IF. Support for these 21 projects amounts to RUB 400bn ($12.5bn).

In addition, between September 2008 and mid-2009 the ministry of regional development received 53 project proposals from over 30 regions requesting funding from the IF. The value of claims associated with these projects amounted to a combined total of RUB 51bn (of which private investors would contribute RUB 247bn while an additional RUB 20bn would come from regional budgets). Nineteen of these projects have already been approved by the government commission for project review. The total combined value of these projects is RUB 103.6bn ($3.2bn), of which RUB 13bn is to be provided by the investment fund.



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Excerpts from the report:






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PMR MarketInsight Methodology:This report was prepared using PMR MarketInsight methodology developed by PMR which assists in the complex preparation of industry reports. It defines the ways in which data should be collected for such reports and outlines the methods to be used in analysing the information collected in order to obtain a true picture of the market in question. It also contains special procedures to follow in the case of incomplete market. PMR MarketInsight precisely defines report content and structure. Industry reports prepared using PMR MarketInsight are based on information from a variety of available statistical, industry, general and official sources as well as information from PMR’s own database and primary research independently carried out by PMR. The sources we use are individually tailored to each project.

Selected PMR clients:



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About PMR:PMR www.pmrcorporate.com a British-American company providing market information, advice and services to international businesses interested in Central and Eastern European countries as well as other emerging markets. PMR key areas of operation include business publications (through PMR Publications), consultancy (through PMR Consulting) and market research (through PMR Research).

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Despite the doom and gloom brought about by the economic crisis, in the medium and long term, there is little doubt that the opportunities on the construction market in Russia are both lucrative and numerous. A mere fraction of domestic demand for housing and infrastructure development has been satisfied during the recent construction boom and so prospects for future development remain strong.

Employment and wagesIn 2008 the number of people employed in the construction industry increased by

6.5% to approximately 5.6 million. The economic downturn, however, resulted in H1 2009 employment levels falling by 4.8% in comparison with the same period of the previous year. The number of foreign workers employed on Russian construction sites decreased by almost 9% in H1 2009, to 730,700. As a comparison, in the first half of 2008, the number of foreign workers employed in the Russian construction industry rose by 80% in year-on-year terms.

Employment levels are expected to decrease further before the end of 2009 as companies still plan to lay off more workers than they intend to hire. The numbers of construction workers forced to drop from full to part time, or even accept unpaid leave, is also on the rise.

In the second quarter of 2010, the situation is expected to improve. Russian authorities recently announced that 75,000 construction jobs will be created in 2010 and 2011 as the country ramps up its preparations for the winter Olympics in 2014. At present, 11,000 workers are employed on Olympics-related construction projects in Sochi, of which 300 are foreigners. Construction projects related to the APEC-2012 Summit will also create new demand for labour. There are currently over 5,000 construction workers employed in these projects, almost 3,500 of which are working on the construction of two bridges: the 70-metre-high suspension bridge that traverses the Bosfor Vostochny Strait, which divides Vladivostok and Russky Island; and the bridge across the Golden Horn Bay. In 2010 and 2011, the expected peak construction period for these projects, at least 12,000 people will work on Russky Island alone.



Number of employed in construction industry in Russia (’000), 2005-2008

CSR019

4,916

5,073

5,268

5,610

2005 2006 2007 2008

In �00� the number

of people employed

in the construction

industry increased

to �.� million.



Traditional obstacles, such as high costs of building materials and structures, have ceased to pose such serious problems for constructors8. Instead, insolvency of clients has been the major problem for Russian constructors this year.

* Before 20

** Before 2008: over 200 workers

08: 101-200 workers

Source: Rosstat, 2009 www.pmrpublications.com

Capacity utilisation rate of construction companies in Russia (%),

by company size, 2006-2009

CSR027

including companies employing:

All construction

companies

Fewer than 51 51-100 101-250* Over 250**

2006

Q1 61 50 60 64 70

Q2 60 49 61 64 68

Q3 65 54 65 66 73

Q4 66 56 65 67 72

Q1 65 55 62 65 71

Q2 66 57 65 67 72

Q3 68 58 68 70 74

Q4 69 59 67 70 75

2008

Q1 66 57 64 66 71

Q2 68 58 65 68 74

Q3 69 60 67 70 75

Q4 67 59 66 68 72

Q1 58 50 56 58 63

Q2 57 49 54 57 62

2007

2009

8 The same percentage of respondents now cite expensive materials as the main obstacle as was the case back in Q1 2006. Interestingly, at the beginning of 2006 just over half( 52%) of respondents cited high taxes as one of the main obstacles, which is 12 p.p. more than in Q3 2009.



Main barriers to doing business in the Russian construction sector

(% of all construction enterprises), Q4/2008-Q3/2009

CSR028

27

44 44

43

41

40

46

31

32

Q4/2008 Q1/2009 Q3/2009

Insolvency of clients High taxes Expensive building materials

�1www.pmrpublications.com


Investment Fund & PPPRussia’s Investment Fund (IF) was created at the end of 2005 with the aim of bolstering

the realisation of investment projects, particularly in the area of infrastructure. In 2006, RUB 69.7bn was earmarked for the IF, a figure that rose to RUB 72.9bn in 2007 and RUB 73.2bn in 2008. In 2009, as has been mentioned already, budget allocations for the IF are to be cut to RUB 64bn ($2bn). The IF is intended to become the primary source of funding for PPP projects and to act as a catalyst in attracting private investment. To date, the fund appears to have performed its task successfully – for every one rouble provided by the federal budget, just over two (2.2) roubles worth of private investment are attracted.

Investments from the IF may take the form of:direct financing of up to 75% of total capital project costs as equity investment or through the financing of certain assets in exchange for the ownership title to the assets

guarantee for 60% of the borrowings for the purposes of the project.

The project approval procedure involves three stages: investment commission, governmental commission, and finally approval, which takes place during a meeting of the Russian government.

Financing can only be provided for projects worth over RUB 5bn ($156m) over five-year period. Two types of evaluation are used for project examination: qualitative (first of all, generation of social benefits) and quantitative, which include:

macroeconomic productivity – the implementation of the project should contribute to an increase in GDP on a national or regional level

budgetary effectiveness – the project should generate tax revenues for local and federal budgets

financial effectiveness – i.e. the project should have a negative stand-alone net present value (NPV) justifying state support for implementation. It should generate economic profit if support is provided (creating a positive NPV). Project profitability should be at least 4%, but no higher than 11%.

In 2008, five road construction and five railway construction projects received support from the IF. This support amounted to RUB 18.5bn ($578m) in total.

So far, 21 investment projects of national importance have been approved by the government for state support from the IF. Support for these 21 projects amounts to RUB 400bn ($12.5bn).

In addition, between September 2008 and mid-2009 the ministry of regional development received 53 project proposals from over 30 regions requesting funding from the IF. The value of claims associated with these projects amounted to a combined total of RUB 51bn (of which private investors would contribute RUB 247bn while an additional RUB 20bn would come from regional budgets). Nineteen of these projects have already been approved by the government commission for project review. The total combined value of these projects is RUB 103.6bn ($3.2bn), of which RUB 13bn is to be provided by the investment fund.

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