Group annual report 2020

Business name	Nordecon AS
Registry number	10099962
Address	Toompuiestee 35, 10133 Tallinn
Domicile	Republic of Estonia
Telephone	+372 615 4400
E-mail	[email protected]
Corporate website	www.nordecon.com
Core business lines	Construction of residential and non-residential buildings (EMTAK 4120) Construction of roads and motorways (EMTAK 4211) Road maintenance (EMTAK 4211) Construction of utility projects for fluids (EMTAK 4221) Construction of water projects (EMTAK 4291) Construction of other civil engineering projects (EMTAK 4299)
Financial year	1 January 2020 – 31 December 2020
Council	Toomas Luman (chairman of the council), Andri Hõbemägi, Vello Kahro, Sandor Liive, Andre Luman
Board	Gerd Müller (chairman of the board), Priit Luman, Maret Tambek
Auditor	KPMG Baltics OÜ

Nordecon group at a glance 4
Key figures for 2020 5
Letter from chairman of the council 6
Group chief executive's letter 7
Directors' report 8
Social responsibility 9
Market trends 10
Description of the main risks 13
Business and financial review 16
Quality service and customer experience 26
Local communities 27
Suppliers, subcontractors, purchasing and procurement 27
Digital construction and technological solutions 28
Employees and work environment 30
Environmental impacts 36
Giving back to society 41
Governance 43
Corporate governance report 46
Share and shareholders 54
Consolidated financial statements59
Consolidated statement of financial position 59
Consolidated statement of comprehensive income 60
Consolidated statement of cash flows 61
Consolidated statement of changes in equity 62
NOTE 1. General information about the group 63
NOTE 2. Statement of compliance and basis of preparation 63
NOTE 3. New standards, amendments and interpretations 66
NOTE 4. Significant accounting policies 67
NOTE 5. Financial risk management 80
NOTE 6. Group entities 85
NOTE 7. Changes in group structure 86
NOTE 8. Cash and cash equivalents 86
NOTE 9. Trade and other receivables 87
NOTE 10. Prepayments 88
NOTE 11. Inventories 88
NOTE 12. Investments in equity-accounted investees 89

NOTE 13. Investment property 91
NOTE 14. Property, plant and equipment 92
NOTE 15. Intangible assets 93
NOTE 16. Borrowings 96
NOTE 17. Right-of-use assets and lease liabilities 97
NOTE 18. Trade payables 99
NOTE 19. Other payables 99
NOTE 20. Deferred income 99
NOTE 21. Provisions 99
NOTE 22. Equity 100
NOTE 23. Earnings per share 101
NOTE 24. Share-based payments 101
NOTE 25. Segment reporting102
NOTE 26. Construction contracts in progress104
NOTE 27. Participation in joint operations105
NOTE 28. Revenue 105
NOTE 29. Cost of sales105
NOTE 30. Administrative expenses106
NOTE 31. Other operating income and expenses106
NOTE 32. Finance income and costs106
NOTE 33. Income tax expense 107
NOTE 34. Financial instruments and financial risk management 107
NOTE 35. Contingent liabilities111
NOTE 36. Assets pledged as collateral112
NOTE 37. Transactions with related parties113
NOTE 38. Parent company's primary financial statements115
Statements and signatures of the board and the council 119
Independent auditors' report120
Profit allocation proposal 127
GRI content index 128

Nordecon group at a glance

Nordecon AS (previous names AS Eesti Ehitus and Nordecon International AS) began operating as a construction company in 1989. Since then, we have grown to become one of the leading construction groups in Estonia and a strong player in all segments of the construction market.

For years, our business strategy has been underpinned by a consistent focus on general contracting and project management and a policy of maintaining a reasonable balance between building and infrastructure construction. Our core business is supported by road maintenance, concrete works and other services that provide added value, improve our operating efficiency and help manage risks.

Nordecon's specialists offer high-quality integrated solutions in the construction of commercial, residential, industrial and public buildings as well as infrastructure – roads, utility networks and port facilities. In addition, we are involved in the construction of concrete structures, leasing out heavy construction equipment and road maintenance.

Besides Estonia, group entities operate in Sweden, Finland and Ukraine.

Nordecon AS is a member of the Estonian Association of Construction Entrepreneurs and the Estonian Chamber of Commerce and Industry and has been awarded international quality management certificate ISO 9001, international environmental management certificate ISO 14001 and international occupational health and safety certificate OHSAS 18001.

Nordecon AS's shares have been listed on the Nasdaq Tallinn Stock Exchange since 18 May 2006.

VISION

To be the preferred partner in the construction industry for customers, subcontractors and employees.

MISSION

To offer our customers building and infrastructure construction solutions that meet their needs and fit their budget and, thus, help them maintain and increase the value of their assets.

SHARED VALUES

Professionalism

We are professional builders – we apply appropriate construction techniques and technologies and observe generally accepted quality standards. Our people are results-oriented and go-ahead; we successfully combine our extensive industry experience with the opportunities provided by innovation.

Reliability

We are reliable partners – we keep our promises and do not take risks at the expense of our customers. Together, we can overcome any construction challenge and achieve the best possible results.

Openness

We act openly and transparently. We observe best practice in the construction industry and uphold and promote it in society as a whole.

Employees

We support employee development through needs-based training and career opportunities consistent with their experience. We value our people and provide them with a modern work environment that encourages creativity and a motivation system that fosters initiative.

Key figures for 2020

€296m	26.5%	€216m
Revenue	Revenue growth, year on year	Order book at the year-end
(2019: €234m)	(2019: 4.7%)	(2019: €227m)
€237m	136	708
Value of new contracts signed	Projects delivered to customers	Employees
(2019: €306m)	(2019: 130)	(2019: 687)
19 / 0 Accidents / Fatal injuries at work (incl. subcontractors) (2019: 19 / 0)	0 Environmental pollution, discrimination and corruption incidents (2019: 0)	€0.2m Donations to community projects and charities (2019: €0.3m)

Awards and public recognition

Cultural Endowment of Estonia Grand Prize in Architecture: Estonian Academy of Security Sciences Learning Centre in Narva
Wood Building of the Year 2020: Saue Municipal Office (Embach Ehitus); Arcwood Special Award for Use of Glued Laminated Timber: Estonian Academy of Security Sciences Learning Centre in Narva (Nordecon AS)
Named by the Digital Construction Cluster as the Deed of the Year 2020: Terminal D in Old City Harbour
A nominee for the Best Digital Innovation Project 2020 award set up by the Ministry of Economic Affairs and Communications: Terminal D in Old City Harbour
A nominee for the Construction Project of the Year 2020 award: Estonian Academy of Security Sciences Learning Centre in Narva
Top most competitive construction companies in Estonia according to the Estonian Chamber of Commerce and Industry: Nordecon AS, second place
Highest-rated employers according to technology students in the most attractive employers survey conducted by Instar EBC among the students of higher and vocational education institutions in 2020: Nordecon AS, first place
Winner of the Battle of Corporate Bands 2020: The Great Nordecon Band

Estonian Academy of Security Sciences Learning Centre in Narva (Nordecon AS)

Letter from chairman of the council

The situation in the construction market is quite unprecedented. On the one hand, four years of market growth and successful bidding for new contracts enabled us to break all our previous revenue records in 2020. For the first time, Nordecon delivered construction services of nearly €300 million per year across the four countries where we operate. Also, all of us remember how countries responded to the COVID-19 pandemic in the spring. Overnight we were faced with completely new priorities – how to protect the health of our employees both in the office and on our numerous construction sites, how to create a safe work environment for our subcontractors and how to complete projects for our customers despite disruptions in the supply chains. Revenue figures do not lie – considering the circumstances, we did exceptionally well in terms of maintaining the pace of construction work and meeting our targets and commitments under construction contracts.

From the point of view of value added, on the other hand, the year was much more uneven. Although productivity per employee improved by around 3% over the year, the rise in value added was mainly driven by growth in personnel expenses and depreciation while operating profit per employee decreased. It is economically acceptable that in a construction market which has been growing rapidly there is upward pressure on labour costs. However, as the representative of the controlling shareholder, I have to admit that the decline in operating margin is not as acceptable. Streamlining and improving the efficiency of the core processes must remain management's top priority. Particularly, as the economic environment will stay uncertain, at least for the foreseeable future.

Already in the in the middle of last year I expressed my conviction that the construction market will hit the bottom in 2022 and my opinion has not changed. Yes, Nordecon delivered a historic revenue record in 2020 and in the second half-year it was again difficult to find subcontractors for certain projects – as if we were again in the growth phase. However, there are also some less visible negative trends. Firstly, demand from the private sector has dropped sharply, which increases the role of the public sector in the procurement of construction work, making it vital that the planned investment volumes are maintained and the financing available from the EU structural funds is used effectively. Secondly, the number of people employed in the construction sector is decreasing rapidly, reflecting a notable slowdown in certain subsegments. The ongoing housing boom is an indicator of people's investment behaviour rather than the robust health of the construction market. Thus, there is no doubt that Nordecon will have to face a number of external challenges. This, in turn, means that we need to be in good shape, make smart choices and seize every opportunity to improve our operating efficiency.

Toomas Luman Chairman of the Council

Group chief executive's letter

The year 2020 was a period of strong revenue growth for the Nordecon group. All our entities contributed and the group's foreign revenues doubled, particularly thanks to our Swedish operations. However, the COVID-19 pandemic, which affected the economy including the construction sector, lowered our profitability. Due to weaker demand, competition increased in all segments, putting pressure on the margins of construction services. In such an environment, it is more critical than ever to digitalise activities and tap internal resources to remain competitive and sustainable. We have made significant decisions aimed at internal streamlining, cost-cutting and improving our operating efficiency, the impacts of which should extend to the future, when the market is going to recover.

In the European Union, the output of the construction sector contracted by 8.5%. In Estonia, the decline was 3%, which is less than expected. The volume of new contracts signed by the Nordecon group dropped in the second and third quarter but the fourth quarter brought recovery and by the year-end our order book was comparable to the end of 2019.

The restrictions imposed in connection with COVID-19 have caused delays and disrupted our usual operations. The delays are mostly attributable to longer delivery times for building materials and the need to reorganise work due to the virus containment and self-isolation requirements. Our foreign operations have also been affected by travel restrictions, which have had a strong impact on the movement of people, requiring us to rearrange our work and overcome certain management challenges. All these factors have had an adverse effect on our profit margins.

The Estonian construction market developed relatively positively in 2020 but this was mainly due to continuing demand in the infrastructure segment. Building construction, which had grown vigorously through the first quarter, experienced a sharp decline, which stopped only in the fourth quarter when demand in the housing market recovered and work on several developments, which had slowed down for a while, resumed. It is likely that housing development will remain the main engine in building construction through 2021. Demand from the private sector will stay subdued while the volume of work procured by the public sector will remain at the same level as in the past two years because there are not enough newly designed buildings which could fuel demand in the segment.

Despite the decline in construction volumes and the number of people employed in the sector, there is still a lack of qualified engineers and skilled labour. The attractiveness of the sector depends largely on market players' ability to modernise their operations and to improve their productivity, that is to digitalise and to reduce their labour intensity. Nordecon has set itself a clear goal to be a leader of innovation in the construction industry and among the first users of new solutions. We see this as an opportunity to improve the image of the construction sector and to make the construction engineer's profession appealing to young talent by showing its future potential.

In 2020, the group's revenue grew by 26.5%, operating profit decreased and net profit remained stable. Our target is to achieve and maintain a 3% operating margin. To achieve this, we have to increase the margin of our construction operations and keep fixed costs under control.

One of the cornerstones of our strategy is to offer a broad spectrum of services, that is, to be represented in most construction segments in order to deliver long-term and balanced growth. Despite the unprecedented environment of 2020, our order book for 2021 and 2022 is strong, allowing us to develop sustainably and to move on to achieving our long-term goals.

I thank all people working for the Nordecon group for their commitment and contribution to the development of the company, all business partners with whom we create complete high-quality living environments, and all shareholders for their trust and investment in Nordecon.

Gerd Müller Chairman of the Board

Directors' report

Strategic agenda for 2019-2022

The group's strategic business agenda and targets for the period 2019-2022

Business lines and markets

The group will grow, mostly organically, with a focus on a more efficient use of its existing resources.
In Estonia, we will operate, as a market leader, in both the building and infrastructure construction segments.
In Sweden, we will focus on general contracting in Stockholm and the surrounding area.
In Finland, we will focus on general contracting and concrete works in Helsinki and the surrounding area.
In Ukraine, we will focus on general contracting and concrete works, primarily in Kiev and the surrounding area.

Activities for implementing the strategy

Improving profitability through more precise planning of our design and construction operations.
Increasing our design and digitalisation capabilities.
Simplifying and automating work and decision-making processes.
Monitoring the balance between the contract portfolios of different business segments.
Valuing balanced teamwork where youthful energy and drive complement long-term experience.
Noticing and recognising each employee's individual contribution and initiative.

Financial targets

Revenue will grow by at least 10% per year.
Foreign markets' contribution will increase to 20% of revenue.
Real estate development revenue will grow to at least 10% of revenue earned in Estonia.
Operating margin for the year will be consistently above 3%.
Operating profit per employee will increase to at least €10 thousand per year.
We will, on average, distribute at least 30% of profit for the year as dividends.

Social responsibility

An organisation's social responsibility is determined by the decisions made by its members. Our employees' daily engineering and ethical choices provide the foundation which enables the entire organisation to contribute to creating effective, efficient and sustainable solutions.

We are aware that society's expectations regarding responsible corporate governance and business operations' more positive environmental and social impacts are consistently growing. In addition to the public sector, the private sector has started to pay more attention to these matters. This is a broad-based trend and we have to improve our capacity to meet those expectations.

Nordecon observes all applicable standards and requirements: from laws and regulations to honest contractual relations – this is the cornerstone of our corporate social responsibility. However, as a public company, we feel that it is our duty to exceed the requirements. This enables us to contribute more actively to the development of the construction sector and to set a good example to other market players.

Nordecon wishes to be an industry leader and to promote important changes in the construction industry which have a positive impact on society: sustainability, efficiency, digitalisation and climate goals, as well as transparency, collaboration and openness.

In the next few years, we are planning to invest in the responsible management of our construction sites with a particular focus on safety, efficient work arrangement, communication with stakeholders, sustainability and environmental awareness. Due to the state of emergency in 2020, major steps in this area had to be postponed.

Based on an internal analysis and the mapping of external stakeholder expectations, we have identified our role and responsibilities in society as follows:

Making a positive contribution to the development of society by creating jobs, paying taxes, buying goods and services, delivering capital growth for investors and supporting social initiatives
Operating openly, honestly, ethically and transparently, which is a critical factor in winning the trust of our business partners and managing large construction projects as well as a way for a listed company to improve business culture
Developing and maintaining good customer relations by collaborating with customers and business partners in an open and professional manner, offering our expertise and advice, and seeking the best available solutions for construction projects
Seeking continuously more efficient operating and engineering solutions by tapping into innovation and improving our technological capabilities and management competencies
Building safe high-quality buildings and infrastructure assets, while ensuring efficiency in an environment where prices are under pressure because customers expect good results quickly and at a favourable price even though solutions are becoming increasingly more sophisticated
Building sustainably and constantly improving our ability to carry out projects that meet the highest expectations for environmentally friendly buildings
Contributing to the creation of tastefully and comprehensively designed buildings and public space by participating, where possible, in the development of the architectural solution and the selection of materials alongside the customer and designers
Creating a safe and motivating work environment for employees and encouraging employee development in order to build qualified and skilled teams that have a common understanding of smooth workflows
Supporting the education of building and construction specialists to promote the engineering profession, alleviate the shortage of qualified and skilled labour and strengthen the group's image as a well-managed employer that offers employees an opportunity to work on ambitious projects

Market trends

In the year under review, a substantial share of Nordecon's operations was carried out in Estonia and developments in the domestic market had the strongest impact on the group's performance.

Estonian construction market in 2020

Estonian construction companies' turnover decreased by 6% in total and by 3% in the Estonian construction market. According to the preliminary data of Statistics Estonia, Estonian construction companies' total output in Estonia and abroad amounted to €3 billion in 2020, the figure comprising building construction of €2.1 billion and infrastructure construction of €0.9 billion. Building construction declined by 7% while infrastructure construction decreased by 5% year on year. Both the Estonian and foreign construction markets were strongly affected by a slowdown in building construction. The output of Estonian construction companies' foreign operations declined by almost a third, accounting for 6% of their total output in 2020 compared with 8% in 2019. The construction of new dwellings has been growing since 2012. According to the Estonian Building Register, 7,579 new dwellings received a permit of use in 2020, a rise of 565 on 2019. Most of the new dwellings (61%) were in apartment buildings. Three- to five-floor apartment buildings were the most popular types of residential buildings and the majority of new dwellings had either three or four rooms. The average area of a new dwelling was 93 square meters. As in earlier years, most of the new dwellings were located in Tallinn, followed by the surrounding municipalities and Tartu county. Demand for new dwellings remains stable. The number of construction permits issued for dwellings in 2020 was 8,833. The number of new non-residential premises that received a permit of use was 1,352 and their total usable area was 0.9 million square metres. Growth was the strongest in the commercial, warehouse and industrial space segments. Compared to 2019, both the area and capacity of non-residential premises that received a permit of use increased.

Peetri Park (Nordecon AS)

Outlooks of the group's geographical markets

Estonia

Processes and developments characterising the Estonian construction market:

Public investments, which have a strong impact on the construction market, are expected to increase in 2021. The market as a whole will be increasingly influenced by investments made by the largest public sector entities (the state-owned real estate company Riigi Kinnisvara AS, the Transport Administration, the Centre for Defence Investment, etc.) which will reach the signature of a construction contract in 2021, because due to the adverse impacts of the COVID-19 pandemic private sector investment will remain weak. Only the housing segment will see certain recovery because demand for new dwellings has not decreased significantly. The construction market will continue to contract at a moderate pace and the trend is likely to persist in the coming years.
Competition will remain fierce across the construction market, intensifying in specific segments based on market developments. This is reflected in the consistently high number of bidders for construction contracts that has grown even further during the economic downturn. Recent years' rapid rise in input prices was halted by a fall in new private sector contracts that hit the market in the second and third quarters of 2020. However, prices began to edge upward again in the fourth quarter, supported by a surge in the prices of raw materials such as steel. The construction sector's continuing shortage of skilled and qualified labour and growing labour costs will sustain growth in construction prices even in a moderately shrinking market. The construction market grew dramatically in 2018 and 2019 (compared to earlier periods). Thus, despite the slight downtrend which emerged in 2020, construction volumes are still at the past decade's highest levels. In an environment of continuously growing materials and labour costs, it is essential to focus not only on the usual activities that improve competitiveness but also on cost management and the capacity to respond swiftly to market changes.
In housing development, the success of a project will depend on the developer's ability to control the input prices included in the business plan and, thus, to set sales prices that are affordable for prospective buyers. A somewhat cautious market sentiment, credit institutions' more limited financing of buyers, and the COVID-19 pandemic, which has triggered an economic downturn and growth in unemployment, are prolonging real estate sales.
There is often a striking contrast between the stringent terms of public construction contracts, which impose numerous obligations, strict sanctions, different financial guarantee commitments, etc., and the modest eligibility criteria. Lenient qualification requirements and the precondition of making a low bid have made it relatively easy for an increasing number of builders to win a contract. However, they have also heightened the financial, completion delay, and quality risks taken by customers during the contract performance and the subsequent warranty period.
The shortage of skilled and qualified labour (including project and site managers) did not decrease in 2020 and the sector continues to need additional competent professionals, including foreign labour whose contribution has supported recent years' market growth. Labour mobility is currently restricted due to the COVID-19 pandemic and foreign workers who have gone to their home countries are finding it difficult to return.

Waterfront promenade in Sillamäe (Nordecon AS)

Ukraine

In Ukraine, we are mainly involved in general contracting and project management in the segment of building construction. Political and economic instability continues to restrict the adoption of business decisions but construction activity has increased in recent years. We expect that in 2021 our business volumes in Ukraine will remain at a level comparable to 2020. We assess the situation in the Ukrainian construction market regularly and are ready to restructure our operations as and when necessary. We continue to seek opportunities to exit our two real estate projects, which have been put on hold, or signing a construction contract with a prospective new owner.

Finland

In Finland, we have been offering mainly subcontracting services in the concrete work segment. The local concrete work market allows competing for projects where the customer wishes to source all concrete works from one reliable partner. However, in the past two years we have also secured some smaller general contracts. Our policy is to maintain a rational approach and avoid excessive risks, particularly in an environment of the COVID-19 pandemic, which has increased pressure on profit margins.

Sweden

In the Swedish market, we offer mainly the construction of residential and non-residential buildings in the central part of the country. In gaining experience in the new market, we have prioritised quality and adherence to deadlines, which has left its mark on profitability. The decline in real estate prices that emerged in 2018 has reduced demand for housing construction. As a result, the starting dates of many projects have been postponed. Compared to the peak in 2017, housing construction volumes have dropped by around a third. The slowdown has hit the Stockholm area the hardest. Even though the worst downturn seems to be over, there are no signs of growth and housing construction volumes are expected to shrink further in 2021. The trend is also influenced by the COVID-19 pandemic: there are signs that customers are deferring their investment decisions until the situation has stabilised.

Main building of Rääma Rowing Centre (Eston Ehitus AS)

Description of the main risks

Business risks

The main factors which affect the group's business volumes and profit margins are competition in the construction market and changes in the demand for construction services. The demand for construction services continues to be strongly influenced by the volume of public investment which, in turn, depends partly on the co-financing received from the EU structural funds. The construction market is also strongly affected by the COVID-19 pandemic, which has slowed down private investment.

Competition continues to be stiff in all segments of the construction market. Bid prices are under strong competitive pressure and bidders increasingly include not only rival general contractors but also former subcontractors. This is mainly attributable to the central and local governments' policy to keep the eligibility requirements for public contracts low. As a result, quality and timely completion are sometimes sacrificed to the lowest price. We acknowledge the risks involved in performing contracts signed in an environment of stiff competition and the current economic uncertainties. In setting our prices in such an environment, we focus on ensuring a reasonable balance between contract performance risks and tight cost control.

Our action plan foresees flexible resource allocation aimed at finding more profitable contracts and performing them effectively. According to our business model, Nordecon operates in all segments of the construction market. Therefore, we are somewhat better positioned than companies that operate in only one narrow segment.

Our business is also influenced by seasonal changes in weather conditions, which have the strongest impact on infrastructure construction where a lot of work is done outdoors (road construction, earthworks, etc.). To mitigate the risk, we secure road maintenance contracts that generate year-round business. Our strategy is to counteract the seasonality of infrastructure operations with building construction that is less exposed to seasonal fluctuations. Our long-term goal is to be flexible and keep our two operating segments in relative balance. Where possible, our entities also implement different technical solutions that help them work efficiently in changing conditions.

Operational risks

To manage their daily construction risks, group companies purchase contractors' all risks insurance. Depending on the nature of the project and the requests of the customer, both general frame agreements and special, projectspecific insurance contracts are used. In addition, as a rule, subcontractors are required to secure the performance of their obligations with a bank guarantee provided to a group company or the group retains part of the amount due until the contract has been completed. To remedy construction deficiencies which may be detected during the warranty period, group companies create warranty provisions based on their historical experience. At 31 December 2020, the group's warranty provisions (including current and non-current) totalled €1,309 thousand (31 December 2019: €1,314 thousand).

In addition to managing the risks directly related to construction operations, in the past few years we have sought to mitigate the risks inherent in pre-construction activities. In particular, we have focused on the bidding process, i.e. compliance with the procurement terms and budgeting. The errors made in the planning stage are usually irreversible and, in a situation where the price is contractually fixed, may result in a direct financial loss.

Financial risks

Credit risk

Credit losses of the period totalled €157 thousand. In 2019, credit losses amounted to €63 thousand. The overall credit risk exposure of the portfolio of receivables is low because the solvency of prospective customers is evaluated, the share of public sector customers is large and customers' settlement behaviour is continuously monitored. The main indicator of the realisation of credit risk is a settlement default that exceeds 180 days along with no activity on the part of the debtor that would confirm the intent to settle.

Liquidity risk

The group remains exposed to higher than usual liquidity risk. At the reporting date, the group's current ratio was 1.01 (31 December 2019: 1.01). The key factor that influences the current ratio is the classification of the group's loans to its Ukrainian associate as non-current assets and the banks' general policy not to refinance interest-bearing liabilities (particularly overdrafts) for a period exceeding 12 months.

Because the political and economic situation in Ukraine continues to be complicated, we believe that the group's Ukrainian investment properties cannot be realised in the short term. Accordingly, the loan receivable from the Ukrainian associate of €8,237 thousand was classified as a non-current asset at the reporting date.

For better cash flow management, we use overdraft facilities and factoring by which we counter the mismatch between the settlement terms agreed with customers and subcontractors. Under IFRS EU, borrowings have to be classified into current and non-current based on contract terms in force at the reporting date. At 31 December 2020, the group's short-term borrowings totalled €18,508 thousand (31 December 2019: €11,058 thousand). A significant share of short-term borrowings is made up of bank overdrafts, of which overdrafts of €6,205 thousand have been extended for the next 12 months after the reporting date.

The group's cash and cash equivalents as at the reporting date amounted to €12,576 thousand (31 December 2019: €7,032 thousand).

Interest rate risk

The group's interest-bearing liabilities to banks have both fixed and floating interest rates. Lease liabilities have mainly floating interest rates. The base rate for most floating-rate contracts is EURIBOR. Compared to 2019, the group's interest-bearing borrowings have decreased by €1,523 thousand. Both loan and lease liabilities have decreased. Interest-bearing borrowings totalled €25,860 thousand at 31 December 2020 (31 December 2019: €27,384 thousand). Interest expense for the year amounted to €1,078 thousand (2019: €1,002 thousand).

The main source of interest rate risk is a possible rise in the base rates of floating interest rates. In the light of the group's relatively heavy loan burden, this would increase interest expense significantly, which would have an adverse impact on profit. We mitigate the risk by pursuing a policy of entering, where possible, into fixed-rate contracts when the market interest rates are low. As regards loan products offered by banks, observance of the policy has proved difficult and most new contracts have floating interest rates. We have signed a derivative contract to manage the risks resulting from changes in the interest rate of the lease of an asphalt concrete plant acquired in 2016.

Currency risk

As a rule, the prices of construction contracts and subcontracts are fixed in the currency of the host country, i.e. in the euro (€), the Ukrainian hryvnia (UAH) and the Swedish krona (SEK).

The exchange rate of the hryvnia is unstable because the political and economic environment in Ukraine continues to be strained due to the conflict between Ukraine and Russia, which broke out at the beginning of 2014, and the discontinuance of the determination of the national currency's indicative exchange rate by the National Bank of Ukraine at the beginning of 2015. The hryvnia weakened against the euro by approximately 24% in 2020. As a result, the group's Ukrainian subsidiaries, which have to translate their euro-denominated loans into the local currency, recognised a foreign exchange loss of €1,485 thousand (2019: a gain of €1,044 thousand). Exchange gains and losses on financial instruments are recognised in finance income and finance costs, respectively. The translation of receivables and liabilities from operating activities did not give rise to any exchange gains or losses.

Our Ukrainian and non-Ukrainian entities' reciprocal receivables and liabilities that are related to the construction business and denominated in hryvnias did not give rise to any exchange gains or losses. The loans provided to the group's Ukrainian associate in euros do not give rise to exchange gains or losses in the group's accounts.

At the reporting date, the group's non-Ukrainian entities had no financial instruments denominated in hryvnias.

The Swedish krona strengthened against the euro by around 4% in 2020. Due to the change in the krona/euro exchange rate, the translation of receivables and liabilities related to operating activities resulted in an exchange loss of €48 thousand (2019: €16 thousand). The exchange loss has been recognised within other operating expenses. The translation of a loan provided to the Swedish subsidiary in euros into the local currency gave rise to an exchange loss of €24 thousand (2019: €196 thousand). The exchange loss has been recognised within finance costs.

We have not acquired derivatives to hedge currency risk.

Employee and work environment risks

Finding a permanent quality workforce is a challenge for the entire construction sector and one of the main factors that influences business performance. To strengthen Nordecon's reputation as an employer and make sure that we will have employees in the future, we collaborate with educational institutions. Consistent employee development is essential and one of our acknowledged priorities. We also rely on our subcontractors' ability to find personnel with the required skills and qualifications.

We strive to minimise the health and safety risks of people working on our construction sites, including our own teams and those of our subcontractors, by applying all measures required by law and our own management systems. Subcontractors are responsible for ensuring the safety of their operations and employees and our role is to create conditions that enable and foster compliance with safety regulations.

Environmental risks

Construction activities have a direct impact on wildlife, soil and the physical environment. Therefore, in conducting our operations we strive to protect the surrounding environment and nature as much as possible. The group's assets and operations which have the strongest impact on the environment and, thus, involve the highest environmental risks are asphalt plants, quarries used for the extraction of construction materials and road construction operations. The main environmental protection measures on construction sites include efficient use of materials and proper waste management. Excessive waste, leakage, spillage, pollution, destruction of wildlife and other damage to the environment is prevented by complying with legal requirements. All of the group's construction entities have implemented environmental management standard ISO 14001.

Corruption and ethical risks

Nordecon is one of the leading construction companies in the Estonian market. Therefore, it is important for us to be aware of the risks involved in breaching honest and ethical business practices. We have put in place internal procedures and policies, observe the rules of the Tallinn Stock Exchange and work with external and internal auditors as well as supervisory agencies. We make every effort to ensure that our entities' management quality, organisational culture and internal communication emphasise zero tolerance for dishonest, unethical and corrupt behaviour. Transparent decisions and open communication are underpinned by effective internal cooperation and external communication. Openness is also supported by the continuously increasing implementation of IT solutions.

Production complex of Tallinn City Theatre (Eston Ehitus AS)

Business and financial review

Group structure

The group's structure at 31 December 2020, including interests in subsidiaries and associates*

* The structure does not include the subsidiaries OÜ Eesti Ehitus, OÜ Aspi, OÜ Linnaehitus, OÜ NOBE, OÜ Eston Ehitus, Infra Ehitus OÜ, Kalda Kodu OÜ, Kastani Kinnisvara OÜ, EE Ressursid OÜ, SweNCN OÜ, Nordecon Statyba UAB, Eurocon Bud TOV, Technopolis-2 TOV and the associate V.I. Center TOV, which currently do not engage in any significant business activities. The first five were established to protect business names. Nor does the structure include investments in entities in which the group's interest is less than 20%.

Significant changes in group structure

Increase in ownership interest in Embach Ehitus OÜ

A change in the capital structure of Nordecon AS's former associate Embach Ehitus OÜ was finalised and entered in the Commercial Register on 5 March 2020. As a result of the transaction, Nordecon AS increased its ownership interest to 51% and Embach Ehitus OÜ became a subsidiary of Nordecon AS. The share capital of Embach Ehitus OÜ amounts to €30,000 of which €15,300 is held by Nordecon AS. Embach Ehitus OÜ has been accounted for as a subsidiary and its financial information has been consolidated in the financial statements of Nordecon AS since 1 March 2020.

Merger of Eston Ehitus AS with Nordecon AS

Nordecon AS and its wholly-owned subsidiary Eston Ehitus AS signed a merger agreement on 2 September 2020. The purpose of the transaction was to improve the group's internal efficiency and to streamline its management structure. Consistent with the merger agreement, the acquirer was Nordecon AS that became the legal successor to Eston Ehitus AS which was dissolved. The merger was finalised on 15 October 2020.

Sale of the associate Pigipada OÜ

Nordecon AS's subsidiary Tariston AS and Tõrvatilk OÜ signed an agreement on 8 December 2020 for the disposal of Tariston AS's 49% interest in Pigipada OÜ. The purpose of the transaction was to resolve the issue of the entity's ownership and to dispose of the investment on terms favourable for Tariston AS. The total transaction price was €3,596 thousand. As a result of the transaction, control of Pigipada OÜ changed, which is why the completion of the transaction, including the transfer of the rights and obligations, required the consent of the Competition Authority, which was granted on 28 December 2020. The disposal of the investment in the associate Pigipada OÜ was finalised on 30 December 2020.