In a Month of Sundays or Special Features and Prospects of Developing Hotel Business in Ukraine


Considering current social and economic conditions and foreign-policy objectives declared by Ukraine, we could say that hotel business operation in Ukraine is in-demand and promising. In particular, progressively increasing population incomes, Ukraine’s growing attractiveness for foreign citizens, as well as general growth of business activity within the country for the last decade have resulted in the considerable expansion of demand for temporary accommodation services. The existing demand, unfortunately, still cannot be adequately met.

Causes and Effects

The current situation is evidently caused by long-term lack of effective state programs for the development of the tourist industry in general, and its hotel sector in particular.

Hotel development is one of the most complex and capital-intensive developments and needs great care both in pre-project activities and construction & interior finishing, and subsequently - in organizing the further management of hotel operation. Hotel projects have a rather long investment return time as compared to commercial properties, for instance, offices or trading properties. The above factors, complicated implementation, as well as lack of adequate legislative regulations, cause investors to focus on projects with short payback time and put hotel projects on ice.

The financial crisis having adversely affected the construction and the real estate markets in general has worsened the situation in the hotel business in particular. And, although, according to experts of Jones Lang LaSalle Hotels, the largest downfalls period, which was in the first quarter of 2009, has passed, today, the country faces an even more acute problem of shortage of different category hotels than earlier. This was brought on not only by the lack of financial stability, but also by social and political circumstances and, first of all, by the inevitability of the upcoming UEFA Euro-2010, for which Ukraine jointly with Poland has to hold the final competition. And such right is not absolute but implies the fulfillment of a number of UEFA’s strict requirements, including those related to the ability to accommodate all the championship guests.

Thus, all of the above makes it even more pressing to develop the hotel & recreation sector via the introduction of effective legal remedies and state economic incentive programs.

Some Improvements

Over the last several years, the government turned some of its attention to particular issues of hotel business organization. This refers mainly to reducing fiscal pressure on the hotel & recreation sector.

In the previous year, in continuation of the earlier cancelled special hotel tax, law-makers offered an opportunity to construct hotels included into the State Target Program on Preparation and Holding UEFA EURO 2012 Finals in Ukraine, approved by the Resolution of the Cabinet of Ministers of Ukraine dated 22 February 2008 No. 107, without the payment of the participatory interest for the development of an engineering and transport infrastructure in a population center. Such opportunity was offered via amending the Law of Ukraine “On Planning and Development of Territories” and the Law of Ukraine “On Organization and Hosting the Final Tournament of the European Football Championship Euro-2012 in Ukraine” on 5 June 2009.

The same year, according to the Law of Ukraine “On Amending Certain Legislative Acts of Ukraine with Regard to Development and Preparation of Lodging Infrastructure for the Finals of the European Football Championship (Euro-2012)” (hereinafter - the “Hotel Business Facilitation Act”) adopted on 8 July 2010, law-makers established the 10-year tax holiday (effective since the beginning of the next year) for five-, four-, and three-star hotels and exempted from taxation profits earned from hotel services at hotels of the above categories.

For fairness’ sake, it should be noted that some principles of simplifying authorization procedures in approving design documents and in construction are secured in the Law of Ukraine “On Organization and Hosting the Final Tournament of the European Football Championship Euro-2012 in Ukraine”. Among those related to championship properties as a whole, including hotels the following principles deserve special attention: (1) priority ranking in considering documents by licensing authorities, related to a property under construction/reconstruction; (2) emergency of holding the public examination of design documents; (3) top priority of obtaining permits for construction activities; (4) cooperation of central and local executive authorities, and local self-government authorities.

At the same time, the above principles are of declarative nature, and should no efficient tools for their implementation be developed and subsequently set forth by special regulatory legal acts, such principles will remain non-feasible declarations and intentions.

Required Systemic Approach

As it was stated above, measures undertaken by the government are aimed, first of all, to reduce fiscal pressure on the hotel business. They are undoubtedly of vital importance for hoteliers, since they allow reducing costs related to the construction of hotel infrastructure properties, and subsequently – accumulating all profits earned from hotel operation and shortening the payback time of a hotel project.

At the same time, taking into account today’s reality, we could state that it is not enough to provide only tax liberalization. A systemic and integrated approach to reforming the hotel business is required to persuade investors to develop hotel projects in Ukraine.

Along with a favorable tax regime, administrative procedures need to be qualitatively deregulated both in the construction of hotel properties and in the subsequent organization of hotel operations. In this regard, the deregulation is far from meaning neither the cancellation of all procedures, nor leveling investors’ liability for the quality of a constructed and/or operated property. Quite the opposite, this refers to the a justified reduction of the number of authorization procedures and their terms. This process requires reasonable balancing of public interests (in terms of satisfying the demand for temporary accommodation services), state interest (in terms of enhancing life-saving and health-care safety of constructed properties), and investors’ interests (in terms of eliminating bureaucracy and providing an opportunity to handle the hotel business in a free, lawful and economically sound way).

Obviously approval and authorization procedures during hotel properties design, construction, and commissioning stages may be simplified only in the context of reforming land and construction laws in general. For today, the draft Law “On Town Planning Regulation” initiated by Vice Prime Minister S. Tigipko is being completed. As of today, it is rather difficult to estimate whether there are any bright prospects in relation to the announced simplification of life of developers in general and hoteliers in particular, and how well such simplifications are balanced, since the draft law has not been made public yet.

In the mean time, such specific regulatory issues as certification of temporary accommodation services and hotels classification can be qualitatively and professionally regulated even now based on the available global experience and best practices. The issues of certification and classification definitely have to be harmonized in order to develop transparent and clear rules for operating hotel business upon construction completion and hotel (hotel complex) commissioning.

It is important to introduce a relevant system of hotels classification (hotel star rating), which could be understood by national and foreign tourists and would give a realistic view of particular services rendered in particular hotels. Such classification is also required for international hotel operators considering potentially entering the Ukrainian market.

Hotels Obligatory Certification

Currently, applicable Ukrainian law, in particular, Article 18 of the Law of Ukraine “On Tourism”, provide for the obligatory certification of hotel services.
Certification is provided in relation to human life & health safety and personal property & environmental protection under the state certification system UkrSEPRO.

It should be noted that according to obligatory certification results, an hotelier will receive a compliance certificate with a 5-year term that proves only the fact of meeting safety requirements in rendering hotel services. In such a case, a star category shall not be assigned to a hotel (hotel complex).

The procedure for obligatory certification is defined by the Order of the State Committee of Ukraine for Technical Regulation and Consumer Policy (Derzhspozhyvstandart) No. 37 dated January 27, 1999. This procedure contains a number of contradictory and intricate provisions, which means that there can be no talk about hoteliers’ access to a transparent and objective procedure for estimating conformity with the above safety requirements. Also, despite the fact that according to applicable laws, hoteliers shall undergo the certification procedure within 60 days, in reality one can hardly accomplish it within this term.

The imperfection and low feasibility of the procedure prescribed by legislation pose additional barriers for the hoteliers. Nevertheless, we should keep in mind that the provision of hotel services without any compliance certificates or using an expired compliance certificate may have adverse consequences in the form of liability established by the Code of Administrative Offences and the Law of Ukraine “On Consumer Rights Protection”.

However, generally, the existing safety certification procedure is not relevant today. The abovementioned safety requirements may and should be taken into account when developing and obtaining an approval of the design documents for hotel construction purposes.

As evidenced by the international experience, compliance certification in regards to life and health safety requirements, protection of personal property and environmental protection is not conducted in any European state or in Russia.

Furthermore, the certification procedure itself and the compliance certificate obtained as the result thereof do not sufficiently advise consumers of the level of services they may expect when accommodating in this or that hotel.
Such idea (although rather general) may be formed on the basis of a hotel star category only.

Voluntary Hotel Classification

In Ukraine, a hotel’s assignment to a particular category (in other words, “hotel star rating” or “hotel classification”) is a voluntary process and is usually done upon the request of the hotelier.

Hotels are classified in accordance with Ukrainian State Standard 4269 “Tourism Services. Hotel Classification.” The Ukrainian hotel classification system is based on a French approach: hotels are inspected for compliance with a long set of very detailed standards.

Upon a successful completion of the hotel classification procedure, a certificate is issued that a hotel is awarded a respective star rating, such as “five stars”, “four stars”, “three stars”, “two stars” or “one star,” with other accommodations classified on the basis of the level of services provided thereby (first, second, third, fourth and fifth level, respectively).

The validity period of such certificate on category assignment may not exceed three years in general or five years if the hotel has a quality management system.

The hotel rating and obligatory certification fees are determined by the requesting party and the certification authority on a contractual basis.

The hotel star rating procedure (hotel classification) is tightly connected to the obligatory certification and is implemented according to Order No. 37 dated 27 January 1999 of the State Committee of Ukraine for Technical Regulation and Consumer Policy (Derzhspozhyvstandart) (in terms of hotel certification and assessment) and according to the procedure approved by Resolution No. 803 dated 29 July 2009 of the Cabinet of Ministers of Ukraine (in terms of decision making on a hotel classification and issuance of a hotel classification certificate).

The hotel star rating is based on the results of obligatory certification and is carried out by the committee created by a certification authority, but the results and opinions of such committee are handed over to another committee to be set up by the Ministry of Culture and Tourism of Ukraine (an authorized body in charge of hotel classification), which, in turn, decides on the hotel assignment to a particular category (hotel star rating) and issues a relevant certificate. Both committees, however, have almost an identical list of members.

Considering an absolutely voluntary nature of the procedure and bearing in mind its complexity and inconvenience involving additional costs and time constraints for the hoteliers, most of the national hotel operators carry out their activities using a compliance certificate (obtained within the obligatory certification procedure) without any rating awarded to their hotels. As opposed to them, international hotel operators that established their presence in Ukraine use hotel classification into stars in accordance with international hotel standards.

Generally speaking, such certificate on category assignment, even if obtained by foreign hoteliers and by conscientious national hoteliers that are primarily aimed at foreign tourists, does not substantially change the situation: in Ukraine hotel “stars” ignite in rather rare cases.

Such situation adversely affects, first of all, the quality of hotel services rendered in Ukraine and forces consumers to make a rather intuitive choice in favor of this or that temporary accommodation (hotel).

Potential Additional Licensing Requirements

What also deserves attention is the fact that under Ukrainian laws, certain additional (related) services which, together with temporary accommodation services, constitute an integrated hotel service require prior authorization and/or licenses.

Such related services include, for example, a fitness center, a beauty salon, a hairdressing salon, a massage room, an travel agency, a box office and other related services which bring additional value to hotel guests.

That such licenses need to be obtained in addition to the standard certification/hotel star rating procedure creates an additional burden on hoteliers both in terms of time and money and has a negative impact on their ability to run their hotel business in a systematic and well-coordinated manner.

The government of Ukraine has recently announced its intention to reduce the number of the types of business subject to licensing requirements. However, these deregulation measures will only solve part of the problem.

A totally different approach is needed to secure a permanent fix to this problem: possibilities for engaging in additional lines of business should be explored during the standard certification/hotel star rating procedure. And only when the decision to enter a certain line of related business is made after the compliance certificate / certificate on category assignment is obtained, the general licensing requirement should apply. The hotelier will then have a choice to either apply for the license under the standard procedure or obtain it during the next certification/hotel star rating procedure.


Draft Law No. 7293 on amending the Law of Ukraine “On Tourism” by introducing the mandatory hotel classification requirement involving the assignment of the relevant star category and on abandoning current safety-focused certification and standardization practices was registered with the Verkhovna Rada of Ukraine in October 2010.

The authors of the draft law suggest imposing a statutory requirement for mandatory classification of Ukrainian hotels banning the provision of temporary accommodation services without first obtaining a certificate on category assignment (hotel star).

As it was already mentioned above, the Hotel Business Facilitation Act introduced a tax holiday for five-star, four-star and three-star hotels, effective from 1 January 2011, and those hoteliers who wish to enjoy these tax preferences will obviously be very much interested in securing the relevant star categories for their hotels.

Meanwhile, it is a matter of particular importance that the introduction of the mandatory category classification requirement should be accompanied by the abandonment of the current safety-focused certification and standardization practices. Otherwise, the implementation of two mandatory procedures will hardly be viewed as a positive signal for hotel business development.

In general, the current legislative initiative is justified. The approach involving mandatory hotel category classification (hotel star rating) in the absence of any other certifications is in line with both European and international hotel business practices.

It should be mentioned in this context that the State Department for Tourism and Health Resorts of Ukraine is now considering integrating the standards of the Hotelstars Union, as approved by HOTREC members Sweden, Germany, Austria, Switzerland, Hungary, the Netherlands and the Czech Republic, into Ukrainian State Standard 4269 “Tourism Tourists. Hotel Classification” currently governing the hotel category classification procedure in Ukraine.

The Hotelstars Union classification system was developed in accordance with the German hotel classification system based on two types of criteria: mandatory and optional. To get a one-, two-, three-, four- or five-star rating, a hotel must score a certain number of additional points for compliance with recommended (optional) criteria in addition to the mandatory criteria established for the respective star rating. The hotel is then rated on the basis of the results of such assessment.

The Hotelstars Union criteria are often believed to be more effective and transparent. But only time will show if it can be effectively implemented in Ukraine.

At the same time, in the context of the fast-approaching Euro-2012 football championship, there is a pressing need for decisive action to reform the Ukrainian hotel category classification system and the entire hotel business regulation system to make them more understandable for Europeans and more acceptable for Ukrainians.

Property Times magazine, # 45( 339) December 6-12, 2010

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