Ukraine Infrastructure Report 2007

Ukraine's construction industry has recovered well from the 8.8% decline in 2005 and expanded 7.6% year-on-year (y-o-y) in the first three quarters of 2006. In 2005, the industry contributed a little over 8% to the nation's gross domestic period (GDP) and was valued at just under US$7bn. BMI's newly released Ukraine Infrastructure Annual Report 2007 forecasts the construction industry will grow at an average of 11.5% over 2006-2010.

After the sluggish 2.6% growth in 2005, Ukraine's economy bounced back in the first three quarters of 2006 with 6.2% growth. The construction industry along with rising exports and private consumption were the major drivers of this revival. Major infrastructure projects on the anvil include a new ring road around Kiev at a cost of US$4.98bn; the Donetsk-Dnipropetrovsk-Kirovohrad-Uman-Khmelnytskyi- Ternopil-Lviv motor road at an estimated cost of US$3.38bn; four electricity generating plants in Odessa at a cost of US$1.4bn; and a toll road from Kharkov to Dnipropetrovsk at a cost of US$1.2bn.

However, the industry faces obstacles on the path to revival. Since domestic manufacturers are strong only in the production of basic materials, Ukraine is heavily reliant on imported construction materials, pushing up the cost of construction considerably. Moreover, the imposition of 20% value-added tax on the sale of new dwellings has made housing unaffordable for a large section of the population. There is also an overall macro risk that prices of gas imports will rise further this year, eating into margins and competitiveness.

Ukraine also suffers from a poor business environment characterised by economic mismanagement, corruption and cronyism. Above all, Ukraine has little experience in party-based politics, leading to difficulties in forming coherent and stable parliamentary majorities, as well as weak policymaking capabilities.

The lack of political stability and a poor competitive environment comprise the key negatives in the case of Ukraine. In emerging Europe, the nation has currently been ranked a joint 13th among 14 peers on BMI's Business Environment Rankings. However, the construction industry is expected to pick up over the forecast period. According to BMI, it should be worth around US$11bn by 2010, contributing over 7% to the GDP.