Subcontracting As a Mirror of Capitalism in Civil Construction

Kyiv has recently seen the House of Artistic Collectives inaugurated as part of Year of Culture celebrations in the presence of President Leonid Kuchma. The house will be the rehearsal and performance stage for such gems of national art as the Virsky Ensemble, Dumka Chorus, and others. The state commission was much impressed with the work and signed its acceptance. The interior design and the acoustics of this house of the arts strike even cognoscenti who have made world concert tours. The facility was built in just two and a half months by the Planeta-Bud (Planet Construction) Company, so far little known outside the construction community.

We asked Valery Moshensky, chairman of the company’s supervisory board, why Planeta was awarded this contract over other companies. “There are not many companies in this country that can do good and quality work and hence, not so much competition,” he answered and added after some reflection, “If you do your job honestly and professionally, you will get endless offers...” The meritorious builder of Ukraine believes that there are only a few large state-of-the-art private construction firms — such as Planeta, Aerobud, Pozniakyzhytlobud — in Kyiv, where the business is now mainly concentrated.

Mr. Moshensky, of course, is all for competition. But today, when the building boom that usually follows economic growth is just beginning, most of the self-styled construction companies emphasize their work as intermediaries rather than producers, in an attempt to earn fast and easy cash by supplying various building materials and equipment. “In two or three years all this will end. The builders will oust the go-betweens from the sector, and if the economy keeps growing at the present rate, we will see a real building boom and a skyline teeming with construction cranes.” Mr. Moshensky believes the construction business is quickly picking up strength, as the economy in general makes progress. “Construction companies are the first to get rich in this situation, but should the economy start to limp, builders will also be the first to go bankrupt,” he predicts and continues, laughing, “So we are, of course, all for an economic boom. Because if somebody gets rich, he buys a new place to live. When a restaurant proprietor sees he is unable to serve all the customers, he’ll order a new project. The same with a factory manager: if his products are in greater demand, he’ll add to his production capacity. All this means more work and income for builders.”

What is now Planeta got off to an uneasy start in 1988 as a small cooperative, building experience being perhaps their only capital at the time. In particular, Mr. Moshensky himself had had an over fifteen years of experience in construction work by then, from an ordinary worker to a major shareholder in the large construction company that actually gave birth to the Planeta group. Incidentally, the group runs a high-profile design and architecture bureau that constantly draws from the best foreign expertise in applying modern materials and structures as well as in projecting and organizing the construction process. The Planeta group, a market-oriented entity with diversified business interests, closely watches the world market situation. For example, it is mastering the cost-effective production of print dyes hitherto not manufactured in Ukraine (last year alone this country spent about $100 million to import them) and is shortly to turn out high- quality and competitive finishing tiles using Italian technology, which will enable the company to enter and establish itself on the international market. The Planeta-Druk (Planet Printing) Company commissioned a printing facility in Sevastopol a year ago and one in Rivne this year. Experts have calculated that various high technologies account for 30% of Planeta’s revenues. This allows it to regulate its financial resources, reducing its borrowing costs in the current assets of construction organizations and, above all, boosting its construction capacity. The company consists of modern enterprises that produce state-of-the-art building materials and structures, thus reducing the cost and duration as well as increasing the quality of construction. In particular, Planeta makes its own aluminum windows, doors, and facades. The woodworking shop is equipped with integrated machinery to produce bonded flooring segments and other modern renovation items. Wide use is made of modeled decor, also made by the group. A stone-cutting shop works to finish the exterior of prestigious buildings. The company’s own fleet of trucks and other vehicles transport all the materials and structures it uses.

Planeta-Bud alone currently employs over a thousand workers. Last year the company’s turnover exceeded UAH 130 million, while in the first five month of this year it grew to 150 million hryvnias.

By comparison, such a very well- known company as Ukrrestavratsiya performs just a fraction of this work. Last year Planeta acquired 25% of Kyivmetrobud (subway construction authority) and now possesses almost a third of this powerful facility so important for Kyiv’s development. Planeta plans to invest up to UAH 30 million in this facility’s fixed assets and new technologies before the end of the year. According to Mr. Moshensky, Kyivmetrobud should be prepared to constructing tunnels. “This country will see very soon a broad program of building modern highways,” explains the company chief, also in charge of market studies, “so who else will be strong enough to do this kind of work in such a short time?” Moreover, the group plans to set up new facilities each providing several thousand production jobs in Ukraine’s most unemployment-stricken regions.

Yet, Planeta naturally focuses its attention on Kyiv. Here, it almost simultaneously took part in and won — absolutely fairly and undisputedly, according to the construction community — several tenders because it managed to prove that it has experience in construction, sound production capacity formed over the past eight years, sizable liquid assets, and a good credit history, which allows banks to lend the company new loans for its further development. Today, Planeta is implementing about fifteen diverse-profile projects and has signed a contract package worth UAH 500 million (but the company had to decline three lucrative offers, including one it secured in a tender, a cigarette plant in Pryluky, because its capacities are limited). Among priority projects are construction of a clinic for a well-known private medical institution and renovation of the Ministry of Culture building. What seems to be Planeta’s master project this year is construction of a high-rise office for the Kyivstar cellular phone operator. This will involve almost five times as much construction and finishing work (less the cost of equipment) as did reconstruction of the former Aeroflot tower block on Povitroflotsky Prospect, from now on to house the Ministry of Transport. This project, estimated at about UAH 120 million, is now at the feasibility report stage. The repairs of this rundown building were contracted by Ukrtransservis (Mr. Moshensky says the terrible condition of this high-rise played a crucial role when it was decided to hand it over to the Ministry of Transport). Contrary to speculations of some so-called well-wishers of the Transport Ministry, work will be financed by loans, not by the budget, as well as by company funds. Corporate experts estimate a 50:50 ratio, although the company will receive 15-20% prepayment at the first stage instead of the contracted 30%. For this reason they will have to work hard. In spite of this, work has already begun: the building’s foundation and other structural elements are being reinforced. After winning the open tender (Mr. Moshensky stresses that nobody legally disputed its results), the company took part in a subcontracting tender, with the best combination of price and quality being the main criterion. Mr. Moshensky guarantees that the reconstruction will have been finished by December 30, 2003. “Construction standards call for much longer periods for this kind of work,” the CEO says, “but our technologies will allow us to finish the work by the end of the year.”

“Is this the first instance of your cooperation with the Ministry of Transport?”

“Of course not. Had we not shown in the past few years that we are a company capable of doing a low-cost, high-quality, and timely job, nobody would deal with us. When the reconstruction of Kyiv’s Central Railway Station was left hanging, we were invited to help Ukrrestavratsiya. In fact, we carried this project, so to speak, on our shoulders. We also fully rebuilt the suburban railway terminal and a tunnel in the capital, along with putting up several major railroad facilities in other cities.”

“And what about your firm’s relationship with the Ministry of Transport?”

“Heorhy Kyrpa is a very tough manager. He judges everything by results. He’s never had any cronies. He’s a man of action, so in this case he won’t go easy on anybody or give out privileges for the sake of friendship or anything else. This man has a tremendous managerial capacity. Of course, there’s no love lost between him and those whose corrupt tails he’s stepped on. But even these people can’t help respecting him.”

We also asked Moshensky whether it’s easy to be a civil construction capitalist now and what one must possess in order to lead on this market. “To achieve success, one must have, if I may say so, a critical mass of subcontractors,” the builder said, “that is, experienced engineers and workers, production facilities, and, finally, wide acknowledgment. With all this in hand, our company is able, if it wants to, win any civil construction tender... And it’s by no means simple to become a capitalist in this field.” “Let me say a word,” Petro Borodaty, chairman of the Planeta- Bud board of directors joined the conversation. “You won’t believe me, but Mr. Moshensky had rented two rooms in Troyeshchyna before the last year, when we talked him into buying a decent apartment in Obolon. The point is our policy suggests two basic ways of spending our profits: we’ve been trying from the very beginning to invest as much as we can in our own production and in the company’s human capital. (It also turned out that Planeta donates generously to charity. It restored, for instance, a church in Cherkasy oblast, for which Mr. Moshensky was awarded the Order of Saint Volodymyr. Now builders have put up the scaffolds and are restoring, under investment from Odesa Railway, St. Catherine’s Church, which nobody who is entering Chernihiv can miss.) We spare no money on education and foreign travel for our employees, we pay for medical care, including the most expensive operations, compensate for recreation expenses (including vacations abroad), even for family members. And the company management works on a very tight schedule (the answer to ‘Is it easy?’ (V. K.). The whole company knows that the top managers have only three holidays: Easter, Christmas, and New Year. Other executives also live a far from easy life: their vacations are scheduled on a staggered basis. We are therefore convinced that none of the employees will betray the company’s commercial secrets for any amount of money, because our basic pay and fringe benefits stimulate people to treat the company like their own home. Nobody ever quits us.”

However, we met on the same day an individual who had previously worked at Planeta and not in the lowest position. Was Mr. Borodaty laying it thick? “I couldn’t stand the rhythm and intensity,” said the former Planeta man and now, incidentally, manager of a different company, “and now, believe me, I deeply regret that I quit.”