Tourism Infrastructure: New Investment Opportunities for Faster Recovery After the Pandemic

23 February 2021

The article is published in The Ukrainian Journal of Business Law

The COVID-19 pandemic and the subsequent quarantine have significantly changed the global economic and social landscape. One of the sectors for which mobility restrictions had a very direct and destructive impact was tourism. While most industries were able to find some digital solutions to continue operations during lockdowns, hotels remained almost empty during the spring lockdown in Ukraine, and reported significant falls in occupancy in the following months compared to previous years.

At the same time, 2020 brought new opportunities for the Ukrainian hospitality industry too, both due to the slight increase of interest in local tourism and adoption of several legislative acts. In particular, 2020 saw the adoption of at least three laws which could significantly increase the investment attractiveness of the tourism sector.

State support for investment projects with  significant investments

In January 2020, during the World Economic Forum meeting in Davos, President Volodymyr Zelensky announced the introduction of a new mechanism of state support for large investment projects, providing them with a dedicated manager, a so-called “investment nanny”. The initiative was further widely discussed, and by the end of the year, on 17 December, Parliament adopted the Law of Ukraine On State Support to Investment Projects with Significant Investments, creating a legal framework for the aforementioned mechanism. While due to procedural issues the law has not yet been signed by the President, we can expect it to come into force in the near future.

The adopted law outlines requirements to investment projects that may receive state support, the procedure for application for such state support, as well as the scope of possible state support. Among other industries, tourism and recreation were included in the list of the sectors, projects which are eligible for state support under the mentioned law.

2020 brought new opportunities for the Ukrainian hospitality industry too, both due to the slight increase of interest in local tourism and adoption of several legislative acts

In order to receive state support under the law, an investment project must meet certain requirements: to be aimed at building, reconstructing or modernizing objects of investment; the total amount of investment must be at least 20 million euros and at least 80 new jobs must be created. Such projects may receive tax preferences, custom duties exemption for certain equipment, the preferential right for purchase of land plots, needed for realization of the project, and building of infrastructure, required for implementing an investment project using state budget or local budget funds.

Legalization of gambling

Perhaps one of the most contested reforms of the past year was the legalization of gambling after a ban that lasted over 10 years. The return of gambling gives another opportunity for the hospitality sector to attract new investments. The current version of the law prescribes that all land-based types of gambling facilities may be opened exclusively in the premises of hotels of a certain category and number of rooms. There are only two exceptions: for casinos with an area of over 10,000 square meters in special gambling zones created by the Cabinet of Ministers of Ukraine, and betting stations situated in hippodromes.

Once the law on gambling regulation was adopted and came into force, experts drew attention to the fact that the existing hotel infrastructure is insufficient to cover the demand for gambling facilities. For example, there are three options for opening casinos (apart from the mentioned special gambling zones): on the territory of a 5-star hotel with at least 150 rooms for Kyiv; on the territory of a 5-star or 4-star hotel with at least 100 rooms for other cities; or on the territory of a recreational complex situated outside the city, with an area of over 10,000 square meters and a 5-star hotel located in the complex.

As present, the number of hotels that fit such requirements is very limited even in Kyiv, not to mention other cities. Therefore, we may expect that potential casino operators will be interested in investing in the building of new premium hotels where casinos may be opened. Anticipating such a situation, lawmakers have introduced a special 10-year free investment license for operators, investing in building a new 5-star hotel with at least 200 rooms for Kyiv, or 150 rooms for other cities.

For other types of land gambling requirements made of the class of the hotel and the number of rooms are less strict, though there still may be some issues for gambling operators with finding premises which are compliant with the law’s requirements. Betting stations, as slot machine halls, may be situated in 3*-5* hotels with at least 50 rooms (in Kyiv) or 25 rooms (in other cities). At the same time, slot machine halls can be situated no closer than 500 meters to educational institutions, which is a requirement that the majority of existing premises do not meet. While the legalization of gambling provides new opportunities for the development of the hospitality sector, there are some problematic issues that may impact it.

Categorization of hotels

While Article 19 of the Law of Ukraine On Tourism prescribes that it is prohibited to provide accommodation services without a valid certificate of attribution of category, many existing hotels have not received such a certificate. By the end of 2019, in the Registry of certificates regarding attribution of categories to hotels and other accommodation objects, attributed by the Ministry of Economy, there had only been 384 certificates issued, many of which had expired in 2019-2020. At the same time, due to changes in the structure of state authorities, it is currently not possible to obtain such a certificate, as the Commission, attributing them, is not operational at the present time. Taking into account that the law on gambling prescribes that the category of hotel is determined by a certificate on attribution of the respective category, such a situation may also slow down the process of opening land gambling facilities in Ukraine.

Another related issue that is discussed by experts is the fact that existing categorization criteria (outlined in the state standard of Ukraine 4269:2003 Tourism services. Classification of hotels) differ significantly from the ones that are used in other jurisdictions. Representatives of the industry advocate the development and approval of updated criteria for hotel categorization, based on global best practice as a necessary step for further development of the hotel infrastructure in Ukraine.

Hotel room capacity requirements

The law on regulation of gambling sets a universal requirement regarding the number of rooms in hotels outside Kyiv, regardless of the size of the community. Hotels in big cities like Kharkiv and Odesa and those in small towns should have the same capacity to be able to accommodate a gambling facility. Some Members of Parliament had proposed differentiation of this requirement by setting a different minimum number of rooms for hotels in localities with a population of over 500,000, and with a population of less than 500,000 people, but this approach was not supported. Instead, a concept allowing the opening of casinos, slot machine halls and betting stations in hotels other than 5-star ones, was chosen.

Even before the pandemic, experts considered low occupancy rates as one of the main obstacles in the way of development of the market. In this regard, building a 5-star hotel with 100 rooms in a small city may be unprofitable, even taking into account additional revenue from the casino.

Along with numerous challenges, 2020 became a year when the government made significant steps towards giving the hospitality sectors the possibility to grow

Reduced VAT for hotels

On 4 November Parliament adopted the Law of Ukraine On Amendments to the Tax Code of Ukraine regarding state support for culture, tourism and creative industries, which introduced certain tax preferences for the mentioned industries. The aim of the law was to support the mentioned industries during the pandemic and quarantine restrictions by providing them with a special taxation regime. For hotels, this law, which came into force on 23 December 2020, cut the VAT rate from 20% to 7%. It is expected that such tax preferences will help those industries hit hardest by the pandemic to recover easier.

Positive signs from investors: privatization of Dnipro Hotel

In addition to developing a legal basis for state support of strategic investors, the government has managed to showcase a successful case of privatization in the hospitality sphere. On 15 July 2020, the Dnipro Hotel, located in downtown Kyiv, the sole shareholder of which was the state, was sold to a private investor for over UAH 1 billion, while its initial price on the electronic auction was around 80 million hryvnia.

This case can be regarded as a positive sign that there is interest in investing in the modernization of the hotel infrastructure in Ukraine. There are a large number of hotels owned by the state. Though situated in good locations for attracting business and leisure travelers, most of them require major repairs in order to be competitive on the market.

According to the State Property Fund of Ukraine, another hotel in central Kyiv — President Hotel – is also being readied for privatization. Along with numerous challenges, 2020 became a year when the government made significant steps towards giving the hospitality sectors the possibility to grow. The legislative changes that have been made will hopefully lead to development of the country’s tourism infrastructure.