KPMG analyses transport infrastructure construction market in Russia
KPMG analyses infrastructure construction market
This research report was prepared based on the interviews with representatives of the major Russian infrastructure companies.
KPMG experts concluded that currently the profitability of Russian infrastructure companies has been already constrained by the deteriorated macroeconomic situation. All this may result in a considerable fall in the contractors' profitability up to the loss situation, which will determine the risk of further waves of bankruptcies and severe crisis for the entire construction sector in Russia. As things currently stand, implementing efficient measures of state support may be the most important strategy to overcome the crisis in the construction industry.
Impact of the macroeconomic situation
It is expected that financial backing for the transport infrastructure construction market in 2015–2017 will be significantly reduced as compared to 2013–2014. Experience has proven that the cuts in government support will primarily affect large-scale projects, which are the target ones for the leading federal market players.
The market contraction in large-scale projects (more than RUB 5 billion) will force the major federal players on infrastructure market to expand the portfolio of mid-size projects (RUB 1–5 billion). This will lead to a substantial upsurge in competition with regional and local players, most of which are in a less stable financial position and have limited access to credit facilities in the current environment, so they will be gradually ceding the market.
The problem the contractors faced during the crisis of 2008 laid in the state customers' pressure on the construction costs of transport infrastructure, and as a result, they dropped by 15–20% for a number of projects. This trend primarily came from a considerable reduction of the building materials cost and other elements of construction costs due to the falling demand in Russia and globally.
Current situation is significantly different compared with past crisis episodes: an unstable macroeconomic situation, dramatic ruble devaluation and high import component in the construction costs have increased most of such cost items:
- cost of metal structures in 2014 rose by more than 30%, due to the ruble decline and the resulting growth in domestic prices over the export parity;
- high-tech imported building materials, used in the construction of artificial structures, have also significantly rose in price by 30–40% in 2014 due to the ruble devaluation;
- cost of imported construction machinery, equipment and spare parts increased by more than 20% due to the weakening of the ruble, and it should be noted that the Russian-produced equipment has appreciated by more than 10%.
Key measures of support
Under deteriorating market conditions, the infrastructure companies are actively taking retaliatory measures to increase their own efficiency, however, the successful overcoming of crisis requires support from the public sector.
Among other, the representatives of the major infrastructure companies have highlighted the following key state measures to prevent the crisis escalation within the industry: improve the process for indexing the costs of work and subsidizing loan and warranty expenses, as well as streamline the advancing and payment processes.
To read the full survey please follow this link. The survey is available only in Russian.
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