Traditionally, the Ukrainian leasing portfolio is dominated by vehicles and agricultural machinery. Accordingly, the transport and agricultural sectors have felt the benefits of this financial instrument the most. At the same time, many other sectors that could potentially benefit from financial leverage remain terra incognita for Ukrainian leasing.
To improve the situation in this area, and at the same time help the real sector to better understand its potential, the Association of Lessors of Ukraine, with the support of the USAID Financial Sector Transformation Project, conducted a number of analytical studies of economic sectors. Thus, during 2020, the sectors of road construction, renewable energy, leasing of agricultural land, as well as the medical equipment industry were studied.
Let’s talk about them in more detail.
Leasing potential in the field of medical equipment
According to forecasts, the market of medical equipment in Ukraine will reach 2.3 billion UAH. (about 84 million US dollars) by 2021. This will mean that the volume of the equipment market has grown by 78% over 5 years with an average growth rate of 15% per year.
The growth of the market is due to the new legislation on health care, which has changed the system of its financing, increasing the number of clinics, expanding the network of rural hospitals and cooperation with international donors.
97% of medical institutions, of which 20% are private institutions, switched to a new funding model in 2019. The state authorizes the newly created state agency, called the National Health Service of Ukraine, to reimburse the costs of medical institutions for medical services provided. According to this model, the agency compensated UAH 3.5 billion. in 2018 and UAH 16.7 billion. in 2019. Improving the efficiency of the health care financing model is likely to increase the demand for medical equipment.
The medical equipment market is expected to grow both globally and in Ukraine over the next five years. Thanks to the reforms, the market of medical equipment is gaining momentum in Ukraine. Sustainable growth of the medical market requires financing, which can be provided through leasing.
The main buyers of medical equipment in Ukraine are private providers of medical services, which are mainly small and medium enterprises (SMEs). SMEs as health care providers have a common problem in Ukraine: limited access to finance to support or expand their activities. Bank loans are difficult to obtain and expensive, the domestic capital market is shallow and there is a limited choice of instruments to attract investment capital.
A survey of market participants indicates that Ukrainian medical companies have used their own working capital to purchase medical equipment in recent years. However, they are now increasingly looking for external financing to expand their business.
At the same time, the volume of leasing of medical equipment is quite small. In the leasing portfolio of Ukrainian companies, the cost of medical equipment amounted to only 105 million hryvnias in 2019 and decreased by 5% compared to the previous year.
All of the above indicates that leasing has ample opportunities to expand this business segment.
Leasing potential in the field of agricultural land acquisition
Ukraine has 42 million hectares of agricultural land, 32 million hectares are cultivated annually. 75% of agricultural land is privately owned, the rest is state-owned. Most privately owned land is owned by 6.9 million Ukrainian citizens who acquired ownership of such land during the privatization process of state ownership in the 1990s.
Despite the fact that most agricultural land in Ukraine is privately owned, there was no market for such land. Since 1992, the Parliament of Ukraine has introduced a moratorium on the sale and purchase of agricultural land in Ukraine. This restriction remained unchanged until October last year, when the Parliament of Ukraine adopted a land reform that changed it.
According to the adopted reform, individuals will be allowed to buy agricultural land in Ukraine from July 2021, legal entities – from 2024. The legislation sets a number of restrictions on land ownership. Only citizens of Ukraine and legal entities registered in Ukraine and owned by citizens of Ukraine and / or the state of Ukraine and / or local authorities are allowed to purchase agricultural land. Banks have the right to own agricultural land only through the procedure of foreclosure as collateral, and the bank must sell such land within 2 years.
There were also restrictions on the size of the land bank that one owner could own. The limit for individuals is 100 hectares, and for legal entities – 10 thousand hectares.
Despite the restrictions, the reform is expected to launch a land market in Ukraine. In Ukraine, farmers and agricultural companies lease about 56% of arable land, and only 29% is cultivated directly by owners. It is expected that farmers who lease land from owners will be interested in purchasing at least part of the land they cultivate from them.
The study found that the demand for investment capital for the purchase of land by current operators of agricultural land can range from 18.8 to 56.4 billion dollars. US per year depending on land prices after market opening. For comparison, this is from 80% to 265% of the total cost of capital investment in agriculture in Ukraine in 2019. This indicates that agricultural producers in Ukraine will soon need significant financial resources to purchase land.
The vast majority of this demand for investment capital will be needed by farmers and small and medium enterprises. According to statistics, these entities cultivate up to 84% of leased agricultural land. At the same time, farmers and SMEs have limited access to financial resources that would allow them to purchase land. As with medical equipment, bank loans are difficult to obtain and expensive, the domestic capital market is shallow, and there is a limited choice of instruments to attract investment capital. Financial leasing of agricultural land could be an effective tool for land acquisition by farmers or small and medium-sized enterprises.
It should be noted that currently there is a legal restriction and financial leasing of land is not allowed. The provision of the above services will be possible only if the state reviews such restrictions and allows leasing companies to own agricultural land for the duration of the lease agreement or during foreclosure for non-compliance with the terms of the lease agreement. Such rights apply to the banking sector in recently adopted legislation.
Leasing potential in the field of road construction equipment
Ukraine has the second lowest road density in the region (after Bulgaria). For comparison, Poland has about twice the level of road density compared to Ukraine.
Ukraine ranks 130th out of 141 countries in terms of road quality according to the Global Competitiveness Index (2018). For comparison with other countries in the region: Bulgaria ranks 93rd in the above-mentioned road quality index, Poland – 65, Romania – 120, Turkey – 30.
Ukraine ranks 59th out of 141 on the road according to the Global Competitiveness Index (2018). The index shows the ease of traffic among the 10 largest cities in the country. For comparison with other countries in the region: Bulgaria ranks 67th in the above road traffic index, Poland – 32, Romania – 55, Turkey – 34. Overcoming the distance of 1000 km in Ukraine takes 3-4 hours longer than in Germany or France.
The Ukrainian economy loses up to 3.4% of GDP annually due to road accidents (according to World Bank estimates). According to official statistics, in 2019 there were 160,000 road accidents in Ukraine, with 3,454 casualties.
According to some estimates, only 7% of Ukrainian roads are in good condition. The cost of reconstruction of the remaining 93% is about 2 trillion. UAH (about 75 billion US dollars).
Ukraine lags far behind other countries in terms of road conditions. This reduces national competitiveness and economic attractiveness. Low quality roads, they are narrow, unprotected. Due to road conditions, Ukraine is losing part of its GDP and also has a high level of road accidents and casualties. There is a need for systematic improvement of road conditions.
Previously, the responsibility for the condition of all roads belonged to the State Agency of Motor Roads of Ukraine (Ukravtodor). Reconstruction of roads was financed directly from the state budget through Ukravtodor. The government decided what funds and how to distribute them during a particular year based on political preferences and the availability of funds. The budget allocated for roads was too small to support the current road network. Moreover, often the amounts provided in the budget did not come either due to lower revenue of the State budget in a given year, or due to other priorities of the government.
Since 2016, the Ukrainian authorities have begun to take measures and increase funding for road reconstruction in Ukraine. To address the critical condition of Ukrainian roads in 2016, the Ukrainian parliament passed a series of laws aimed at reforming the country’s road reconstruction system.
According to this reform, the State Road Fund (DDF) was established to finance the reconstruction of roads in Ukraine. These laws also stipulate that budget revenues from certain duties and taxes must be directed to the State Road Fund to ensure consistent and predictable financing of road reconstruction.
According to the above law, the resources of the State Road Fund should be directed to the reconstruction of roads of state importance, regional and local roads and road safety. The distribution between these three positions is determined in the state budget for each year.
As a result of the reforms, the amount of funding for road works in Ukraine has increased significantly. Thus, in 2017, UAH 24.5 billion was allocated from the State budget for road construction. It is expected that in 2020-2021 an average of UAH 71.5 billion will be allocated from the State Budget.
It is expected that the derivatives market from road construction, namely the market for machinery for such works, will be growing in Ukraine. The growth in demand for road construction equipment will be based on the growing volume of road construction work in the country, which will require an increase in production capacity, and on the significant wear and tear of the existing fleet of equipment, which will need to be renewed. In total, these two factors will increase the demand for road construction equipment, as well as for financing instruments for the purchase of such equipment.
With the continuation of current trends, the growth of imports of equipment is expected, which forms this market. In 2020, imports are projected at $ 335.7 million. US and in 2021, 2022 the market will increase to 390.1 million dollars. US dollars and 399.9 million dollars. USA, respectively. On average, the market for road construction equipment will be higher by 16% in this period than in 2020.
Given the shortage of equity and limited interest in lending by commercial banks, the underdevelopment of the secondary market for corporate securities, the weakness of the institution of collateral, leasing is becoming the most affordable way to reproduce fixed assets.
The study estimated that the entry of leasing companies into the market of road construction equipment could increase the market of leasing services by an average of 533 – 2 134 million UAH per year for the next three years, or from 1 600 to 6 401 million UAH for three years. Such leasing activity in the market of road construction equipment can increase the leasing market by an average of 2.5-7.7% annually relative to the 2019 market.
In turn, the study showed that access to such indicators will allow leasing to finance from 5% to 20% of the capital requirement for the purchase of equipment of road construction companies.
Leasing potential in the field of renewable energy sources
The market for renewable energy generation (RES) in Ukraine has significant potential for growth. Even according to conservative forecasts, the installed capacity of energy generation from RES may increase by 1433% by 2030. According to a more optimistic scenario, which corresponds to the implementation of the announced Energy Strategy of Ukraine until 2035, the growth of renewable energy generation capacity may increase by an impressive 1941% by 2030.
The study found that the implementation of the above projected growth in the most common areas of RES – wind and solar energy – will require investments of $ 780 million. The US annually in the conservative scenario, and in the optimistic scenario – about 1,256 million dollars. USA every year. It is estimated that about 70% of these investments will be directed to the purchase of equipment needed for energy production from RES. The purchase of this equipment can be financed on a lease basis.
According to researchers, the market volume of energy generation equipment from renewable sources, which can be potentially financed by leasing in Ukraine, will range from 575 to 925 million dollars. US on average per year until 2030, depending on the scenario of growth of generation capacity from RES. This market size is quite significant and can be interesting for leasing companies.
The study also identified the potential market for leasing services in this area, given the low and significant level of leasing penetration. Thus, if leasing enters this market at the level of 7%, the potential value of new leasing agreements may range from 450 to 730 million dollars. The US on average per year, depending on the scenario of developed energy from renewable sources in Ukraine. Such indicators will mean an increase in the leasing market by 45-72% compared to the level of 2019. This is indicative of the significant opportunities that this market provides for the leasing business.
A separate study examines the market for electricity storage, which is just emerging in Ukraine. According to Ukrenergo’s estimates, Ukraine will need to install 2,200 MW of storage capacity over the next 10 years. Electricity storage and storage equipment also needs funding. Leasing could be a great way to finance such equipment.
P erspektyvy and ways to overcome obstacles
The European Federation of Leasing Associations (Leaseurope) estimates the level of leasing penetration in the economies of 24 European countries at an average of 15.7% in 2019. This means that 15.7% of all capital investments in these countries were financed through leasing instruments. And in the segments of transport and equipment, the penetration rate of leasing in these countries was even higher and amounted to almost 28%.
For comparison, the level of leasing penetration into the economy of Ukraine in the same year, according to the Association, is at 5.8%. And only in the segment of passenger transport, the penetration rate reaches 13.5%.
It can be assumed that given the level of leasing penetration in Ukraine to the European average, the volume of the leasing market will be about 91.7 billion UAH, ie 170% compared to 2019. Therefore, the domestic leasing industry has a strong potential for its own growth.
At the same time, a number of obstacles stand in the way of this growth. In particular, the industry has almost no access to alternative sources of funding. And classic bank lending is complicated by regulatory policy, which makes it less profitable for leasing companies than for other businesses. In this regard, the Association has already addressed the National Bank with a proposal on how to resolve this issue.
In addition, changing the standards that limit funding within banking groups, which include many leasing companies, could help fund leasing operators as small and medium-sized business (SME) financiers. This issue is also under consideration by the Regulator, and in case of a solution will create a powerful impetus to the renewal of fixed assets and innovative development of lessees.
The regulatory framework, which has not been updated since 2004, also needs to be improved. The industry very much hopes that the draft Law on Financial Leasing, which it initiated in its time and which is being prepared in the Verkhovna Rada for the second reading, will take into account its proposals, eliminate obsolete legal mechanisms and create bright conditions for the development of the leasing market and other sectors. economy.
Thus, there are not many obstacles to prosperity, and the industry will be very much counting on the help and support of the new Market Regulator in overcoming them.
Roman Zherdytsky,
Analytical Department of the
Association “Ukrainian Union of Lessors”