Union of Lessors: an analytical study of the road construction industry

The Ukrainian Union of Lessors presented to the members of its association the first in the history of the industry analytical study of the state and prospects of the road construction sector. One of the main objectives of the study was to identify the potential for funding the road construction industry as a financial leasing tool. At the same time, analysts collected unique data on the condition, volume, and quality of construction equipment in Ukraine and the world, as well as on the capacity of players in this market in the global and national dimensions.

Ukrainian Union of Lessors, with the support of the USAID Financial Sector Transformation Project, is working to identify and promote potential sectors of the Ukrainian economy that could gain significant impetus for development through leasing services. At the same time contributing to the diversification, expansion and growth of domestic leasing itself. According to the forecasts of the experts involved by the Association, the market of equipment for road construction in Ukraine will reach a total of UAH 12 billion. ($ 400 million) by 2022. This will mean an increase in market volume by 24% over 4 years with an average growth rate of 8%.

It is expected that the growth of the market will be due to higher funding for road construction in Ukraine, which is a consequence of the reforms of public funding in the industry, launched in 2016. Thus, in 2017, the amount of funding for road works from the budget amounted to only UAH 25 billion, and in 2020 they reached UAH 70 billion. Thus, funding increased by 180% in three years. In the future, state funding for the road sector is also expected to grow, but not at such a rapid pace. Stable volumes of financing, which are much higher than in the past, should stimulate the market of road construction equipment.

Despite the rapid growth of the road market, researchers have found that most road construction equipment in Ukraine is obsolete and has a physical wear rate of 53% to 83%. This indicates a significant need to upgrade the entire park.

Companies that will increase their construction capacity and upgrade road construction equipment will need significant financial support and it is leasing that can provide it.

Thus, according to researchers, the value of leasing agreements in this market can range from 445 to 2360 million UAH per year for the next three years. Under the implementation of such a scenario, the growth of the leasing market may be from 2.5 to 8% relative to the level of 2019, which was the peak for the industry in recent years. Undoubtedly, leasing companies have taken into account this opportunity to develop their business.

During the presentation of the study, the risks for leasing companies were discussed, in particular, the risk of liquidity of the leased asset, as one of the main ones. The study suggested such options for their avoidance as the choice for leasing of universal equipment, the demand for which exists both in road construction and in other industries; coordination with the supplier of the possibility of repurchase; providing a balanced lease term for such equipment, etc.

Market participants, for their part, noted the risks associated with dependence on state budget revenues, which are extremely volatile. To which the researchers expressed the optimistic assumption that the state debt will be reduced and repaid as a result of the reforms. In general, the leasing of construction equipment is a widespread financing tool in the world. The study showed that in some countries the penetration of leasing in this industry for many years in a row is at least 50%. Undoubtedly, similar prospects for leasing exist in the road construction industry of Ukraine. This study will soon be illustrated by the relevant ministries and departments of the Ukrainian Government.

We also invite stakeholders interested in the development of this segment to get acquainted with the research materials and jointly promote the tools for the development of these industries.