Evaluation of the Russian Electrical Engineering Market

As of today, the Russian market for engineering services provides vast opportunities for growth and development to both Russian and foreign companies.

Electric power engineering is growing rapidly in Russia. In the next 5 years, investments in the power industry are expected to exceed 4.5 billion rubles—plans are in place to install 45GW of generating capacity. As a comparison, a total capacity of 8.5GW was installed from 2003-2007. The power engineering market for the next 5 years is assessed at 2.5 billion rubles—the market includes design, fabrication, erection, and maintenance services. The EPCM market is assessed at 0.8 billion rubles. The funding for the power industry will determine the primary focus of engineering companies. Tremendous investment programs change the accent from repair work to construction. The necessity for repair work will increase gradually with the growth of installed capacity, whereas construction work, expressed in monetary terms, should grow by an order of magnitude in the next 2-3 years. Construction of new network facilities and heat generating plants are the most attractive—these sectors account for over 70% of all investments in the industry.

The services being offered in the market by both Russian and foreign companies are rather limited right now, though there is a booming growth in demand for engineering services in the Russian market.

For many years, there was very little demand for Russian engineering services, and engineering companies experienced significant attrition of personnel. Now, in the year 2008, only 50% of the needed designers and installers are available; and only 30% of needed project managers. In addition, the existing organizations still maintain obsolescent operation procedures which do not allow them to effectively adapt to market needs—both in the quantity and quality of services.

At the same time objective barriers exist for foreign companies to enter the Russian market. The limitations include specific features of the existing equipment, personnel certification, specific technical standards and requirements, geographical distribution of the demand for services, and the generally higher prices charged for foreign companies’ services.

Therefore, Russian companies have vast opportunities for growth in the engineering service market. The most successful companies will be those that are able to consolidate a few still-operating engineering centers, remaining from Soviet times; and to introduce business-oriented models to these organizations. Another important area of development for engineering companies in the nearest future is vertical integration—it will enable them to provide such services as EPCM contracts, design, fabrication and erection services, maintenance, and repair work. We can see examples in the most successful players in the Russian market (E4 Group, Technopromexport).

Foreign companies may also find their place in the Russian market, as even the most aggressive growth of Russian companies will not provide sufficient resources to implement all the ambitious investment plans. Foreign companies should eventually comprise 40% of the Russian engineering market.

Pavel Ablyazov,
analyst