On 26 April 2022, CASE Ukraine think tank held a discussion on the topic of Is Ukraine Ready for Recovery and Economic Revival? The event featured Oleksandr Parashchiy, Head of Research at Concorde Capital company, and Power and Construction expert Oleh Palayda, and was moderated by CASE Ukraine Director Dmytro Boyarchuk.
Keynote points of the discussion and abridged expositions of speaker reports are published below.
Keynote Points:
A new well-conceived urban planning and development scheme is necessary to ensure the defence of territories.
Legislative amendments take time and amendments to construction regulations need to start already now. The recovery of infrastructure should commence immediately after the end of the war.
The recovery should be paid by the aggressor country that inflicted the damage.
A large and respectable international player must be responsible for organising and setting up a damage compensation and reimbursement fund to provide Ukraine with money to rebuild all the destroyed assets already now.
The rebuilding residential housing, infrastructure and businesses is important. It is also necessary to design mechanisms to compensate and finance indirect losses of partially damaged businesses that have not been completely destroyed.
It is necessary to attract investors and give them a higher rate of return than they have in a country with no risks and infrastructure already built.
Business recovery is possible if with financial assistance from the state. Preferential loans will be covered by state-owned banks against the repayment guarantee after compensation for lost assets is obtained.
Transcript of discussion (for the full video of discussion please follow the link – Ukrainian version)
– Many infrastructure and residential facilities have been destroyed during the war. Do we need to restore everything as it was before or should we rather create something new from scratch?
Oleh Palayda:
For us it is a chance of making use of the circumstances to rebuild those historic layers that were planned for the economy of another country. Previously, the urban planning was about large enterprises that employed thousands and around which bedroom communities were built – a progressive scheme at the time that has lost its usability now.
First of all, they now build big office buildings and commerce centres instead of manufacturing facilities. Individuals no longer need to commute to that single factory with dozens of thousands of employees that existed in Soviet times.
Secondly, it had been all geographically planned for the common state of the USSR. Now we have a rather dangerous neighbour so the border areas need a completely different type of urban development: there should be buffer zones, planned routes and bridges. There have to be defence facilities to allow defence. These territories should viably be left for agriculture without planning big manufacturing enterprises or cities there.
Such urban planning will require amended urban development regulations. Tower blocks and compounds should be rather replaced with two-three storey-high cottages – this will materially reduce threat levels.
It will be necessary to learn from the experience of the countries that have found themselves in comparable circumstances or have planned an economic breakthrough: Israel, China, Taiwan. E.g., each Israeli house has s shelter space.
– Is someone in the government thinking about construction regulations?
Oleh Palayda
There should be a consensus between civic society organisations and activists. There should be new initiatives on the table because the old legislative framework has already included many of the realities of today. E.g., the walls and the foundations of power plants were already built of materials able to withstand shelling from mortars of, at least, 120 mm calibre.
Urban planning should account for the number of entry points to the city. Kyiv was saved by its old urban planning scheme from 18th-19th centuries. Six brigades of 25,000 were securing the north-western direction (Irpin, Bucha, Gostomel). Three bridges were destroyed and a dam on the Irpin River was blown up effectively flooding the area; hence the invaders could do nothing about it. A single heavily-armoured infantryman of ours could contain in such conditions 10,000 barbarians for a month. Such a setting creates some discomfort and sometimes involves extra costs, but it does work.
There are no such initiatives yet. Meanwhile, we have to already start thinking about them and to start preparing a legislative framework because it will be necessary to take upon construction and restoration as soon as the war is over.
– Who has to pay for the recovery and where should resources come from?
Oleksandr Parashchiy
Speaking of making good for something destroyed, it is clear the losses should be compensated by the one guilty of them. The aggressor country, the russian federation, will have to make good for the inflicted damage. But our losses had actually began earlier than on 24 February – some eight years ago. Hence, all the damage inflicted on businesses and private individuals on the territory of the Donetsk, Luhansk Oblasts and the Crimea for the past eight years have to be included in this scope of compensation and responsibility of russia.
These losses must be tallied and presented to russia. Some companies already have court decisions at the international level: e. g., Oshchadbank received a verdict awarding it more than a billion of US Dollars for the assets it had lost in the Crimea. It was in 2019. Three years ago the bank spent millions on lawyers and won the case in the court – but received nothing. In order for this not to happen again, the work on compensations has to start already.
Obviously, a special fund needs to be established to accumulate russian money. Canada has decided to create such fund with money from russian assets seized and frozen on its territory. The U. S. has made certain steps towards it. However, the money and the assets frozen in other countries will not be enough to fully compensate for the losses inflicted by the aggressor on our infrastructure. It shall be therefore necessary to set up more serious funds. Levying compensations and collecting resources from russia will take years while Ukraine will have to rebuild rather fast.
The infrastructure will have to be restored as quick as possible to create normal conditions for businesses and life to rebound. No one will want to return to ruined cities.
The money is needed right now as there is also the need for a respectable international player able to seize additional money from russia via courts and international and diplomatic mechanisms.
The government will do everything to reimburse the ruined buildings either in cash or in kind. Another question is how and at whose expense the infrastructure will be restored. It is not yet clear whether it will be at the expense of the national budget or international organisations.
How to recover damaged businesses? It will be necessary to demand compensation for damage to premises, equipment, lost and stolen grain and other material and technical stock.
However, the money available right now will not be enough to cover all the recovery needs. Who will decide on compensation priorities: to those who lost their homes or those who lost infrastructure and business? It would be desirable to recover each of the components parallel to each other. If people will not return to their places of residence, the infrastructure will surely have to be reconsidered.
There are two components in the economy, people and assets. Making people return will be much harder a task than that of returning assets. It will primarily depend on how fast the infrastructure will be restored and whether it will be attractive for businesses and individuals.
The moment individuals and businesses are compensated in cash for their lost assets they will actually become potential investors who will sit on the sack of money looking for options where to use the money – where to redevelop houses or businesses. There will be multiple options then, the simplest one being to rebuild at previous locations to reduce problems with documents and permits. It may still happen that other locations – possibly, even in other countries – will offer better business development opportunities for the same amount of money. It is rather important for Ukraine not to lose this competition because of the risk of huge human and financial capital losses.
The revival of international financial and industrial corporations, e.g., of Trostyanets Chocolate Factory, Coca Cola and other big manufacturers who sustained rather serious damage, can become a good indicator. If we are unable to keep these manufacturers at their previous positions, we should at least offer them alternatives on the territory of Ukraine – or risk colossal losses.
When it comes to destroyed assets, premises and broken machinery, one can precisely estimate the cost of their restoration and agree on compensation. However, there are other, more complex cases. Take, for example, a petrol pumping station on the highway. The highway is completely destroyed and beyond repair; the pumping station has actually remained unaffected but ceased commercial operation. How to compensate in cases like this? If we talk about social responsibility, the role of the state in the recovery, then such situations need to be proactively addressed too. Obviously, there will be more difficult situations when, for example, a business or customer base are partially lost. There should be some compensation mechanisms for this, if not direct then at least through preferential loans or other mechanisms to fund such losses.
– What should businesses that suffered and went out of the market do? The moment of compensation is far ahead but business owners need to move on.
Oleksandr Parashchiy
All assets lost, whether tangible or intangible, must sooner or later be compensated – better sooner than later, though actually there may not be resource for this early on. There are two options here:
First: to start establishing a sizeable fund with money from international financial corporations already today. The recovery money will be issued to Ukrainian nationals and businesses against future compensations from russia.
Second option: to find solution inside the country using preferential funding. These can include loan facilities from state banks. A large proportion of the banking sector is currently owned by the government and may be proactively involved into preferential lending schemes, possibly at flat rate or a rate covered at national budget expense with guaranteed repayment following the compensation of lost assets.
As for infrastructure, we need to have new security standards. While Ukraine has a plan to integrate with the European Union, not all our standards, especially in respect of energy efficiency and emissions, meet the European ones. It is necessary to move fast for a big breakthrough, also along the same national plan of harmful emission reduction.
There are many other matters related to European integration, which also need to be included in infrastructure projects already today. Most importantly, we need to plan for the restoration of infrastructure not only with due regard to new standards and innovations, but also with account to who will be living in the completely destroyed areas. Not all everyone, not every business will return. It is necessary to start urban planning for these areas, especially with regard to such infrastructure facilities as hospitals, kindergartens and schools. And it will have to be done rather quickly for the longer the infrastructure restoration is delayed, the less likely it is that people will return to the areas they once lived.
– Has the matter of power line connectivity been solved in our country?
Oleh Palayda
The situation is consistently bad. The Doing Business rating clearly states that, unfortunately, no major change has taken place.
We with a group of like-minded people identified for ourselves the countries we had to visit to see how they were able to achieve such level of development. These were Israel, Türkiye, Poland, Taiwan, South Korea. We were looking for some common features that had allowed them to make an economic breakthrough.
There is no magic pill. Each country has its own particularities and a way of its own; still, there also are exist common features like earning opportunities for businesses. Investments are made with one goal in mind: to make as much money as possible; hence, the rate of return in the countries should be higher than elsewhere. Business comes and invests not only when completely risk-free. Investments come to oil fields and diamond development because extra big profits cover all the risks.
Ukraine needs to make it profitable for international companies and our national producers to do business here. By implementing all environmental etc. EU regulations we will engage the handbrake. The rate of return on our territory will become the same as in Europe but with overwhelming risks.
The period of recovery and economic growth will require completely different legislative provisions to be made. Let us have a look of China: there was one-country-two-systems model in general. Most of China lived by socialist-communist laws but there were also territories, such as Shanghai, Hong Kong or Macao, with completely different rules, laws and treatment of foreigners.
Investors need to be attracted but we do not need to repeat the mistakes we have been repeating for 30 years. We are a developing economy; we should not implement the legal framework of developed economies with sustainable businesses, normal regulators, legislation and well-developed infrastructure. There must be one legal framework for this country configuration. A country that needs to go along this way needs a different type of Legislature. We need to fight for investors, we need to attract them and give them a higher rate of return than the one they have in a country with no risks and infrastructure already in place.
–What is your estimate of chances of restoring destroyed businesses through the establishment and development of industrial and technological parks?
Oleksandr Parashchiy
It is about creating certain preferences; it will allow higher return on investment rates in some areas – and this will actually need to be done. We must comprehend it already today that risks to doing business and to the integrity of the infrastructure in the Left-bank and Right-bank Ukraine will for quite a long time look completely different. From here, in order to encourage investors to build a plant not in Western Ukraine, but in Zaporizhzhya or Kherson Oblast we will need much more preferences, otherwise, due to the difference in risks, we will have two different Ukraines.
Oleh Palayda
While industrial or technological parks are nice to have, but there are some aspects related to distortion of competition. Those companies that fall under this program will win the competition. A good example in Ukraine is Vasyl Khmelnytsky who is developing several innovative technology parks on a rather successful model.
This model is linked to the problem of power connectivity. Take an example of Shanghai: in order to reduce time costs and risks for investors, the government prepares 1/2/3 hectare plots, connects all the utility lines – power, water, natural gas and sewerage – builds access roads, tower blocks or cottages. This is done at the public expense or with money from foundations. An investor already comes to a site with no risks: the land plot is there; all connections are ready so all he has to do is build a plant or production facility. This reduces the risks and the investor is willing to pay for everything without wasting his time. The is a rather successful model worth borrowing.
– How can we estimate war-related losses of the labour market? There are salaries unpaid to employees, specifically, to three million of those who worked informally and about 10 million who were on the Pension Fund of Ukraine’s list of insured. Just the official page roll stands at about 1.4 trillion Hryvnias a year, and this is the money people might not receive because of the war. What we can expect?
Oleh Palayda
With a large shadow economy sector we have there is no technique to fully accommodate for precise loss estimate. The domestic consumer market of Ukraine has been hit very hard. Not just big businesses, but also SMEs have sustained huge losses. Many people have left, the consumer demand has decreased so the task of rebuilding and calculating it as a loss would be a rather non-trivial task. It is necessary to spur – create – the domestic demand.
– Are there specific proposals for the affected businesses to retain them in Ukraine? How we could entice them to stay?
Oleh Palayda
For any business, moving to another country is a great stress, and it requires a lot of investment. However, we need some programs that would allow us to restart production here because many companies – especially those that have worked for foreign markets – will really choose a less risky location with all the infrastructure in place.
Those companies that have worked in the domestic market of Ukraine should consider changing the location inside the country, that is, moving somewhere further away from the dangerous borders.
Oleksandr Parashchiy
There are no enterprises that have been 100% destroyed; most of them can still be restored. However, it should be borne in mind that they will consider different options for locations, proposals and conditions for business restoration in another location or country. We need to think not just about how to attract foreign investors but also about how not to lose those we already have.
– Which construction sectors will be the prime target for reconstruction and development?
Oleh Palayda
The basic infrastructure comprises bridges and roads, which we need. Of course, the scale will be large and the question whether the existing construction companies will be able to ‘digest’ the scope of works or some foreign companies will have to be involved, remains.
Then comes residential housing because in five months the next heating season will begin and at least 600,000 people are now homeless. Some extraordinary ideas will be necessary and we will have to either build or find the houses pretty quickly. One alternative is modular houses that can be built within a month or two, extraordinary land allocation procedures and correct location of the land. All this must be done already now.
– What the energy policy should be to ensure the energy independence of Ukraine?
Oleksandr Parashchiy
This year we will face a rather serious decline in the industrial and economic output in general. The issue that arose six months ago – about natural gas or coal supplies – will not be as relevant at least in the coming season. Our gas consumption will be much lower than in the last year as Ukraine still covers 2/3 of its natural gas demand. The question here is rather not if it will be necessary to buy russian or any other natural gas this year but whether we will be able to maintain natural gas output volumes at the level we had before. The main natural gas extracting area are the Poltava and Chernihiv Oblasts, which have suffered huge losses. Therefore, if we manage to resume production of processing gas at pre-war levels, then at least we should not have problems during the next heating season.
Oleh Palayda
Yes, before the war 60% natural gas was of our own production and 40% were imported. The main extraction facilities are in the Kharkiv and Poltava Oblasts, which are currently under attack, so it is unclear what will happen in a matter of months and if the infrastructure will remain operative. At present, the GDP and the economy are forecasted to shrink by 30-50%.
As for the renewable energy, it is expensive, i.e., at least 3.5 times more expensive than the standard energy generation so, given all the extraordinary circumstances, we need not developing it in the near future.
We have to count every penny. If we are willing to overpay three times more for a resource, we need to clearly understand why or whether we can afford it. Now we need to do everything as efficiently as possible.
We are in the war now; then the post-war reconstruction will come; then, after we solve these issues, we will return to matters of environment and rather expensive innovations.
Oleksandr Parashchiy
The risks to the power system today are quite high. The hostilities, perhaps not so intense now, are taking place near our largest natural gas producers and there may be problems with power supply. There is a difficult military situation near Kurakhovo where one of the largest thermal power plants is located. Questions about operational conditions at Slovyansk and Bilohorivka TPPs remain. Pavlohrad, the only energy coal producer, is not far from the hostilities area. The situation remains very risky. We hope that the Armed Forces of Ukraine will be able to repel all attacks and protect these serious infrastructure facilities.