Ukraine reconstruction underway

Financing reconstruction

The National Recovery Plan 2022-2032, announced by the government of Ukraine at the Lugano conference in July 2022, estimated that over USD 750 billion of funding would be needed for a three-stage post-war recovery over the course of ten years, with approximately two-thirds coming from partners such as governments, international financial institutions and donors in the form of grants, debt and equity. (The possibility of using frozen Russian assets to fund reconstruction is also being explored.) Private investment would mostly occur in the later ‘modernisation’ stage of the plan, although some is also envisaged for the ‘recovery’ section.

The plan naturally includes physical reconstruction and remediation, but also includes many measures to assist in the broader national recovery, modernisation, and EU integration, from energy efficiency programmes and the modernisation of water and wastewater systems to financing for cultural initiatives. As the war continues, the plan’s estimates will need to be revised. A second Rapid Damage and Needs Assessment (RDNA2) released in March 2023 by the government of Ukraine, the World Bank, the European Commission and the United Nations estimated that the cost of reconstruction and recovery alone covering the first year of the war amounted to USD 411 billion.

This was well up on the USD 349 billion figure in the first Rapid Damage and Needs Assessment, which covered the period from the start of the war to 1 June 2022. Inevitably, RDNA2 has also been overtaken by events, particularly the destruction of the Nova Kakhovka hydroelectric dam and the subsequent extensive flooding, which means that any estimate made today would be higher still. A recent World Bank report suggests that, if Ukraine undertakes a range of significant pro-competition reforms and interventions, the opportunities for private financing of RDNA projects could reach USD 130 billion by 2033, with another USD 282 billion of other opportunities, nearly half of them in energy and extractives.

Partner funding

Ukraine has already received some partner funding and more will follow. The European Parliament recently endorsed a proposed EUR 50 billion facility to support Ukraine’s recovery, reconstruction and modernisation from 2024. And Ukraine is now able to benefit from a number of EU programmes – for example, it is participating in the Connecting Europe Facility, enabling Ukrainian project promoters to seek financial support from the EU for projects that are of mutual importance in the transportation, energy and digital sectors.

Developing transportation

Two of the sectors likely to attract the most private sector investment are transportation and energy. Ukraine has a strategic location on trade routes between Europe, the Middle East and Asia. Its robust transportation infrastructure includes a well-developed railway network, national highways, significant sea and river ports, and key airports.

Russia’s blockade of sea ports initially stopped maritime exports but, at the time of writing, Ukraine’s three Black Sea ports are again exporting some grain and other cargo. Certain cargoes are also exported using ports along the Danube or inland routes connecting Ukraine with the EU. A current emphasis on logistics hubs reflects not only humanitarian and military needs but also the increasing need for export capacity. This includes investments in dry terminals, industrial parks, intermodal logistics projects and other initiatives, such as the EUR 200 million investment by Ireland’s Kingspan Group in a facility to manufacture advanced materials for use in energy-efficient buildings. Indeed, the substantial construction work necessary meet Ukraine’s rebuilding and infrastructure needs will provide an opportunity for the whole construction materials industry to thrive, both domestically and through nearshoring.

Ukraine’s State Agency for Restoration and Infrastructure Development has highlighted road, bridge and port projects which will be open to incoming investment. The road and bridge projects are a mix of new construction and reconstruction and will require funding in the range of USD 15-20 billion. Feasibility studies are underway for potential concession projects to include a national tolling system, as well as highway and tunnel construction, which together will require more than USD 7 billion.

The development of the Danube river ports and merchant fleet is slated to cost USD 400 million, with another USD 250 million needed to enable the resumption and expansion of shipping on the Dnipro. Ukraine’s deepest port, Yuzhny, requires USD 140 million of investment for modernisation. The Ust-Dunaisk Seaport has been privatised and other privatisations may follow. There are additional medium-term opportunities in railway infrastructure investment. These include the extension of four Trans-European Transport Network (TEN-T) railway corridors from the EU through Ukraine, using the standard European railway gauge rather than Ukraine’s broader gauge. Track electrification, the construction of freight cars and the purchase of locomotives are also on the agenda, and a high-speed passenger service connecting Ukraine’s regional centres and the renewal of existing tracks are under consideration.

Finally, investment is needed in export logistics infrastructure. New checkpoints and repairs to bridges and roads will need nearly USD 500 million, with the repair and reconstruction of main roads costing a further USD 1.3 billion. Railway projects worth USD 700 million include both newly built and reconstructed track, the increased electrification of rail lines, the addition of intermodal terminals and expanded handling capacity.

Promoting renewable energy

In 2022 nuclear power was responsible for about 55% of Ukraine’s electricity generation, with coal accounting for 22% and hydro 11%. Renewables and natural gas each provided about 6%. But the government has big plans for renewables, describing the transition to carbon-free energy as “the cornerstone of the recovery of Ukraine’s energy sector”. Ukraine plans to grow solar energy output from 6.6 GW in 2022 to 38 GW by 2030, and to increase wind power from 0.4 GW in 2022 to 59GW by 2032. A slew of regulatory changes have already facilitated more investment in renewables. The government is also encouraging the development of local manufacturing capacity by making sites available for the production of solar and wind power components, targeting 95% local production for solar and 90% for windfarm equipment.

The necessary upgrades to the transmission system are valued at around USD 2 billion. Again, Ukraine hopes to manufacture 95% of the equipment domestically. It also plans to construct 38 GW of storage capacity and to manufacture 80% of the equipment needed for that. It is estimated that Ukraine has sufficient reserves of lithium and graphite to produce cathode and anode materials for lithium-ion batteries with a capacity of 1000 GWh, equivalent to operating nearly 20 million electric vehicles annually.

Ukraine also has significant potential to produce biomethane, a sustainable alternative to conventional natural gas. It has adopted EU standards for biomethane production and the European Investment Bank is supporting the construction of five new biomethane plants in 2023, with the same number set to be financed in 2024. Ukraine’s first biomethane facilities have already been connected to the gas distribution network.

Looking ahead

Ukraine is not one of the countries at the top of the 2023 Infrastructure Index. But its unique situation may see it rise rapidly up the table in future years, as reconstruction and modernisation create numerous investment opportunities. As its ties with the EU develop further and the government continues to promote economic and regulatory reform, Ukraine looks set to become increasingly attractive to infrastructure investors.