Prerequisites of post-war rebuilding of Ukraine’s industry

Prerequisites of post-war rebuilding of Ukraine’s industry

The impact of russia’s war against Ukraine has been tremendous for Ukrainian industry, notably with the destruction or military occupation of key industrial sites. As of September 5, 2022, KSE estimates industry and business service damage to have reached $9.7 bln so far. Major Ukrainian production sites such as Mariupol’s Azovstal and Severodonetsk’s Azot chemical plant have been destroyed; while many others of all types have been damaged due to their locations in or near big strategic cities.

Therefore, post-war reconstruction efforts present a unique opportunity to upgrade Ukraine’s productive capacity and attract foreign capital in industry sector transformation through the development of manufacturing sector, green modernization and modern technologies transfer. This is expected to lay the foundation for long-term growth, and facilitate Ukraine’s tighter integration into the global economy.

Manufacturing sector development

In general, prior to war Ukraine had a large industrial and manufacturing base, with prevailing heavy industry, including mining, railway rolling stock, machine tools, aircraft engines, as well as light manufacturing and the food industry. The manufacturing sector represented 10% of the GDP, while industry as a whole (including the construction sector) generated nearly 24% of the GDP. Traditionally, manufacturing accounted for more than 1⁄4 of total FDI in Ukraine. The leading manufacturing industries by FDI stock volume included food-processing industry, metallurgy and the production of rubber and plastics.

In terms of global value chains, the war in Ukraine could cause disruption for the products that remain Ukraine’s largest export positions. These products are integrated to the following GVCs: steel (iron ores, ferro silico manganese, pig iron), heavy manufacturing (flat and rolled steel products), semiconductors (neon gas), cars (ignition cables), titanium-dependent industries.

Nevertheless, current situation can be viewed as a window of opportunities for green rebuilding from the ground up and solving the problem of under-investment. With average labour costs well below the EU average and a global trend to regionalize supply chains, Ukraine has the potential to become European manufacturing hub due to significant reconstruction investments. Besides, many private investors are already interested in developing projects within building materials production, logistics, engineering, procurement and construction services.

The government also encourages potential investors to apply for state support of up to 30% CAPEX for investment projects with significant investments in Ukraine.

Green modernization perspectives

Due to history, inefficacies and the presence of heavy industry, Ukraine’s industry is one of the most energy intensive in Europe and Central Asia. Energy intensity of GDP is more than twice Europe’s average. Industry causes at least 25% of Ukraine’s CO2 emissions, as well as waste and pollution issues.

The industry sector plays a key role in this issue, as it accounts for 35% of the final energy consumption in the country. Ukraine’s industry’s CO2 impact is therefore multiplied by its reliance on a heavily carbonated energy sector. Last, in terms of waste production and management, the imperfection of Ukrainian industry’s outdated technologies does not allow a comprehensive processing and use of resources, in particular for mineral resources.

However, to decarbonize industry is not easy. The main obstacle is conversion costs. Therefore, energy efficiency is typically a good place to start, as it combines decarbonization and cost savings. According to the International Energy Agency (IEA), replacing system components with more efficient alternatives can provide 2% to 5% savings, and improving production systems can generate savings exceeding 30%.

IEA experts believe that if Ukraine were to rise to the EU’s energy efficiency levels, it would bring savings valued at around €7bn annually for Ukraine’s economy. Technology solutions are available. A first step is process optimization and automation, as well as improved energy management systems and procedures in line with EU best practices.

A second step would be at-scale deployment of sub-metering systems in Ukraine’s industrial companies, since only a limited number of companies currently use sub-meters. A final and costlier step would be equipment technology upgrades such as heat recovery and cogeneration technologies.

Modern technologies transfer In regulatory plane, the rebuilding of Ukraine’s industry will definitely entail the transformation of industrial model on the principles of efficient use of natural resources and circularity (use of co-products, emissions of pollutants, energy efficiency, waste management, etc.) – in particular through Industry 4.0 models with a concentration of resources on industrial parks that could achieve a green-based competitive advantage. Attracting significant investments to rebuild or retrofit Ukraine’s industrial sector with Industry 4.0 technologies and processes would turn Ukraine into a low-cost decarbonized higly industrial economy turned toward the EU. Industry 4.0 refers to the intelligent networking of machines and processes for industry, with the help of information and communication technologies.

Another use case is on the energy generation side: Industry 4.0 takes into account the potential on-site production of energy either through available renewable energy or through the use of by-products for energy generation (e.g. heat generated in the pulp and paper sectors). As regarding massive infrastructure war damage, the creation of a modern, low carbon, industrial infrastructure should be a key priority of the support delivered by both the Ukrainian government and the international donors and investors.

The industrial parks serve as a best alternative to introduce modern technological solutions whereas companies can gain a competitive advantage through the physical exchange of materials, energy and by-products, thereby fostering inclusive and sustainable development.

To this end, even in war times, Ukrainian government continues to provide significant state incentives for industrial parks development, including certain tax exemptions, full or partial compensation of interest rates on loans, compensation for connecting to engineering grids.

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