The FINANCIAL -- Seventy-three per cent of construction companies in Ukraine expect a decrease in construction in 2009, according to The Ukraine Construction Qualitative Study 2009, based on 47 face-to-face interviews with representatives of construction companies doing business in Ukraine .. Thirty-six per cent of respondents expect the sector to fall by more than 20%. In general, sales are expected to fall in 2009. Research reveals that increase in sales could come during the 2010-2011 period.

According to the research conducted in  partnership with KPMG Czech Republic, one-hundred per cent of companies in Ukraine experience limitations to their business growth. Insufficient financial resources – the most frequent limiting factor introduced by 68% of companies. Problems with insufficient demand and tough competition swiftly increased leading to lower sales and a decrease of capacities utilisation. Bellow is the full details of the research.

The economic crisis: What has changed in Ukraine ’s construction sector?

Ukraine’s construction sector is experiencing significant and unexpected changes. The research results show that the first signs started to appear at the beginning of 2008, nevertheless the companies did not perceive it as the start of a potentially broader and longer crisis. This has quite visibly changed during the last 12 months.

For the year 2009, 73% of respondents expect construction in Ukraine to decrease, 9% on average (from the 2008 basis, which was already a 16% decrease on the 2007 results). At a more detailed level, the reality could be even worse (36% of respondents expect a decline of more than 20%). As a result the companies forecast a decrease in their sales, on average 2%, but a closer look is necessary as there are visible differences in performance among the companies (about onethird of the companies still expect moderately positive results, but 25% of respondents forecast a sales drop of more than 20%).

Companies also reported highly increased pressure on their performance. In March 2007, 36% of construction companies felt unlimited in their growth, this swiftly decreased to 18% in 2008 and further in 2009 to 0% (all respondents are limited). Also the average number of limiting factors per company has visibly increased from 1.8 in 2007 to 4.4 in 2009.

A closer look at a portfolio of limiting factors clearly shows the impact of the economic crisis. Insufficient financial resources is the most often mentioned growth limit experienced by 68% of espondents (increased from 22% in 2007); companies also indicated it was the one with the largest impact on their results. Insufficient demand grew significantly from a 0% share in 2007 to 20% in 2008, and then further to 51% in 2009. This resulted in tougher competition (68%) and also a quick drop in sector capacities utilisation from 81% in 2008 to 56% in 2009 (swiftly leading to lower sales). Capacities utilisation has most heavily dropped in the low performers segment (the lower quartile), which has fallen from 70% to 30% during the last 12 months.

Companies’ increasing limitations (insufficient demand, tougher competition, etc.) made new contract acquisitions more difficult. Nevertheless, as the interview results show further, there has been a limited impact on the overall process/habits used during new deal acquisitions (until now).

The most frequent (and at the same time the most useful) source of information about potential new deals are still long term contacts used by 91% of respondents (a slight increase from the previous year). A similar situation can be seen in the next step of the deal acquisition process – the methods/sources used by the companies to acquire new contracts. During the last 12 months all of these sources kept their ranking (the only exception was direct requests from customers, which fell as a result of falling demand). The two most important sources are preferred partnering agreements (framework contracts) and long term contacts/networking (personal contacts) used by 84% of respondents and 70% respectively; both sources received the same score as the most useful.

Also the experience with bribery - 19% of respondents said that they have never been asked for a bribe while trying to acquire a business deal - and breaching risk management policies have not changed significantly: 71% of respondents confirmed that they breached their risk management policy in order to win a contract; 66% in 2008.

Construction companies’ enthusiasm towards the potential inclusion of Ukraine in the EU waned slightly, but 72% of them still expect this step to have a positive impact on their company results (85% in 2008). The main change in this area during the last year has been an increase in the share of companies expecting possibilities for expansion into new markets from this step (increased from 39% to 69% of respondents) as a chance to offset ebbing local demand.

The economic crisis has visibly hit Ukraine ’s construction business volumes and also placed significant pressure on survey participant’s performance. What it has not changed (until now) is the process/habits common for new deal acquisitions in this sector. The coming periods will show whether the pressure intensifies, leading to a further strengthening of the current methods or to their change. The major factor companies have introduced as a key factor for their future is the development of their financial situation, therefore the direction in which the economic crisis moves will be one of the key drivers for overall industry development and its future processes structure.

Expectations for the development of the Ukraine ’s construction sector

Developments in Ukraine ’s construction sector, and especially the situation of local construction companies, have significantly changed over the last twelve months.

These changes, which have developed mainly due to the financial crisis, were mostly unexpected by construction companies, but the first signs might have already been seen by the beginning of 2008. Clearly, at that time respondents did not consider most of the problems as the beginnings of an upcoming crisis.

In March 2008 all of the respondents forecasted a construction growth for 2009. According to the latest interviews (performed in March 2009), growth expectations have mostly disappeared. The results highlight more than uncertain expectations about construction development for 2009 as 73% of respondents expect the industry to decline this year. On average companies forecast the decline of the sector to be 9%, but if we look at a more detailed level the reality could be visibly worse: 36% of respondents expect a decline of more than 20% .

Seventy-three per cent of construction companies expect a decrease in construction in 2009.
Thirty-six per cent of respondents expect the sector to fall by more than 20%

For the mid term period (2010-2011), the expectations are improved and companies expect a minor growth on average, approximately 3%. Nevertheless it is important to mention that companies expressed palpable uncertainty during the interviews, and limited forecasting possibilities for 2010 onwards under the current crisis conditions.

In regard to sales development for 2009, companies expect their sales to follow the overall construction sector’s development and for sales to drop an average 2% in 2009. Nevertheless it should be mentioned that in the area of sales, the differences among participants in the respondent group are important. From the attached chart we can see that there are more visible differences among the segments, showing that some of the companies could still experience a slightly profitable business, and that some forecast a heavy fall in their sales: e.g. one of the segments, consisting of 25% of respondents, expects a sales decrease of more than 20%, while on the other hand, 38% of companies forecast their sales as maintaining a moderate growth of between 0 to 10%. One of the reasons for the different forecasts is the “insufficient demand” more often mentioned as a business growth limit by the companies forecasting a decline in their sales than the ones that expect their sales to remain stable or to grow moderately.

The first signs of relief are forecasted as coming during the period 2010 – 2011, when survey participants expect an average sales improvement of 8%.

In general, sales are expected to fall in 2009.
Increase in sales could come during the 2010-2011 period.
Twenty-five per cent of companies expect a fall in sales of more than 20% in 2009.
Possible improvements in 2010-2011 at the earliest.

Respondents were also asked to estimate their companies´ market share development. On average they expect their market share to stay stable (0.1% decrease) in 2009, about one-fifth of them expect to lose more than 10% from their current levels, and an improvement is expected in 2010-2011. As a result of the swift decrease in sales, the average utilisation of survey participants’ capacities has experienced a significant drop from 81% in 2008 to the current level of only 56%.

On closer analysis of the respondent sample, we can see that the greatest impact is on the segment of companies with the lowest utilisation (the utilization of the lower quartile of the sample has dropped from 70% to only 30%), which highlights how heavily the low performers have been hit. When asked about the plans for upgrading capacities 36% of the below average performers plan to decrease their capacities, visibly more than in thesegment of above average performers, where it is only 10%.

On average, market shares are expected to stay stable in 2009.
Sharp decline in capacity utilisation: from 81% last year to 56% currently.
The low performers segment hit the hardest.

What are the growth limits for construction companies in Ukraine ?

All interviewed construction companies (100%) confirmed that they are experiencing limitations to their business growth. It is a significant increase from the previous years – only 64% in 2007 and 82% of companies in 2008. The increasing share of companies with business growth limitations has been further accompanied by a growing average number of limiting factors per company, which increased from 1.8 factors in 2007 to 3.5 in 2008, and currently to 4.4 factors (seriously high).

If we take a closer look at the selection of the factors companies introduced (in the attached chart), we can see that the main factor limiting companies’ business growth is insufficient financial resources which has increased from 22% of respondents in 2007 to 68% of companies in 2009, and also its impact (influence on the companies results) has reached the highest levels among the examined factors (measured since 2008). The next factors were tough competition (increased from 15% in 2007 to 68% in 2009) and high material costs (which have doubled from 33% in 2007 to 66% in 2009). Limitations due to insufficient demand has grown significantly since the beginning of 2007 (a sharp increase from 0% of respondents in 2007 to 51% in 2009), and it is also one of the main reasons for the tougher competition leading to a decrease of average capacities utilisation (resulting in lower sales).

One-hundred per cent of companies experience limitations to their business growth.
Insufficient financial resources – the most frequent limiting factor introduced by 68% of
companies.
Problems with insufficient demand and tough competition swiftly increased leading to lower sales and a decrease of capacities utilisation.

Most of the factors are receiving more attention among construction companies in Ukraine , but there are still some that have moved in the opposite direction. The lack of skilled labour resources is no long such an issue for the respondents and has fallen from the most frequently mentioned limitation in 2007-8 to fifth position in 2009 and, at the same time, has decreased its impact rating to a below average level. As labour resources are more available, companies have also decreased their employment of foreign workers on their projects from 16% to 7% in 2008-2009.

During the same period, problems with labour cost escalation are affecting more companies, but the impact rating has moved below the scale average. Key areas for the long-term in the long-term, most survey participants predict that the major factor determining their future will be the development of their companies’ financial situation (increased from 63% in 2008 to 73% in 2009).

Other factors were mentioned by a visibly lower share of respondents and they even decreased their share in comparison to the previous year’s results, which highlights the higher polarisation and importance of development in the companies’ financial situation. Respondents were also asked to provide information about the key areas in which they plan to invest in the 2009-2010 period and to prioritise the selected areas (1 =high priority, 3 = low priority, bubble size = share of respondents). As we can seefrom the attached chart, the results show that the most frequently mentioned andalso the highest rated investment target is project management processes (increased from 38% in 2008 to 51% in 2009). Construction mechanisation (a top priority last year) has slightly decreased its share in the respondents’ samples, nevertheless the rating score showed a visibly decreased priority.

The lack of skilled labour resources is no longer the most important limit to companies’ growth.
Investment priority for 2009-2010: Planning and project management processes

Process of acquiring new business contracts in Ukraine construction

What are the most frequent and most successful methods for acquiring new contracts in Ukraine Construction? Has the financial crisis changed any of the previous behaviour patterns in this area? Is the process of new contract acquisition sufficiently transparent? And do companies behave differently when they are on the other side of the table and selecting their suppliers? These and many other related areas are part of this chapter, which analyses the process of new business deal acquisitions in the construction industry in Ukraine .

During the last twelve months the construction companies mostly have not changed the methods/sources they use for new order acquisitions (see attached chart). The only source that companies mentioned visibly less frequently than in 2008 was direct requests from customers (this source was ranked first in 2007 but since then its share has been consistently falling in parallel with decreasing demand, as mentioned in the section above).

The most frequently used sources of new deals were preferred partnering agreements (framework contracts), which was followed by long term contacts/networking (personal contacts). Both sources were rated with the same score as the most beneficial methods for new contract acquisitions. The position of the other sources is shown in the attached chart. On average companies use between two to three sources (the same as in 2008, an increase from 1.6 in 2007).

Key sources for getting new deals: preferred partnering agreements and long term contacts/networking.
On average, companies use two to three info sources.
Both top info sources for new business deals are also rated as the most useful ones (by the same score)

A closer segment view shows that there are two main differences in the behaviour of the top and low performers. In both segments there are minor differences in the share of companies using long term contacts/networking, tenders or other sources for new deal signing (6%, 10% and 6% respectively).

The main difference is in the share of companies using preferred partnering agreements, which is 31% higher in the top performers’ segment, showing how important this source is for them (only one company in this segment does not use this source). The second difference, not that high but still visible, is in the sourcing of new deals from the direct requests of customers. The top performers segment has a 17% lower share of companies relying on customers to come to them by themselves than the low performer segment.

In connection with the process of new contracts sourcing, companies were, in addition, asked about three related topics. The first one regarded their experience with bribery during the deal acquisition process, the second concerned the level of tender transparency, and the third was related to the level of risk management policies and the frequency of breaching them in order to win a new contract.

Experience with bribery

Survey participants were queried: “Have you ever been asked for a bribe during the selection process/tender?” The results are summarised in the attached chart.
From 2007 till now, a major share of the companies decided to select the “no comment” option in reference to the high sensitivity of this topic (it is also an important finding as a clear “no” reply option was not provided by them).
Nineteen per cent of respondents replied that they have never been asked for a bribe and the same share of companies replied “yes”.

Only 19% of construction companies confirmed thatthey have never been asked for a bribe

Risk management frameworks and their use

Almost all of the respondents (92%) rated the level of their risk management as at an intermediate or basic level. The share of companies that have never breached their risk management has slightly decreased to 29%, 5% less than in 2008. We can see also a moderate increase in the share of companies that often breach their risk management policies in order to secure a potential contract (from 2% in 2008 to 11% in 2009).

Key criteria during the supplier selection process

What are the most frequent criteria used by construction companies for selecting their suppliers? The key criterion for 2007 – 2009 is the price offered by the supplier, applied by 74% of respondents (a moderate decrease from the previous years). In second position companies placed the experience of the supplier (used by 68% of respondents, an increase from 2008) and applied technologies (60% of respondents). The company size criterion has almost disappeared (moving
from 33% in 2007 to 6% in 2009). See more information in the attached chart.
On average, firms use between two to three criteria for supplier selection (the same was valid for 2007 and 2008).

The impact of potential EU enlargement on construction in Ukraine

Seventy-one per cent of the Ukraine construction companies expect that the potential inclusion of Ukraine in the EU would have an influence on the local construction industry (89% in 2008, 85% in 2007). The heaviest impact is expected to be on costs (69%) and also, with a visible growing share of respondents, on possibilities for expansion into new markets (69%). Interestingly, an impact on the low transparency level (analysed above) is expected by only19% of companies.

Overall, the major part, 72% of construction companies, expects that Ukraine ’s accession to the EU would have a positive impact on their business, 4% forecast a negative impact and 24% were not able to estimate this. The segment point of view shows a very similar structure of expectations by the top as well as the middle and low performers in this area.
 
The Ukraine Construction Qualitative Study 2009 is one of the research studies carried out as a part of the Central and Eastern European Construction Research project, which focuses on the construction industry in the CEE region (Czech Republic, Slovakia, Ukraine , Hungary, Poland, lithuania, Latvia, Estonia and Croatia).

The Ukraine Construction Qualitative Study 2009 is based on 47 face-to-face interviews with representatives of construction companies doing business in Ukraine . The interviews ere finished in March 2009.

During the interviews, the company representatives responded to approximately 30 questions on four key areas that have been crucial for a qualitative analysis of the current status of the Ukraine construction sector and its potential development in the coming years.


 

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