Spring Legislative Update

Re-elected in autumn 2014  the Verkhovna Rada of Ukraine (Parliament) actively continues to develop legislative initiatives regarding all spheres of Ukrainian life. In this section editorial staff has involved experts to comment upon certain of them. Our last digest includes, in a large measure, initiatives that touch energy sphere, anti-terrorist operations, banking and advertising spheres.

 

Acts of Ukraine On Introduction of New Investment Opportunities, Guarantees of Rights and Legitimate Interests of Businesses for the Purpose of Major Energy Modernization of  9 April 2015, No.327-VIII and On Changes to the Budget Code of Ukraine concerning Introduction of New Investment Opportunities, Guarantees of Rights and Legitimate Interests of Businesses for the Purpose of Major Energy Modernization of 9 April 2015, No.328-VIII  that recently came into effect, establish principles of energy services for energy efficiency of public sector facilities. Can you give examples of efficient implementation of legislation on cooperation between energy service companies and budget organizations/institutions abroad? How do they differ from the Ukrainian approach? What could the Ukrainian government borrow from that experience?

Alexander Burtovoy, partner, Antika Law Firm

Ukraine is a country of paradoxes because it was among the first in the post-Soviet area to have adopted the Energy Saving Act in 1995 as well as other acts and regulations aimed at developing the energy saving market. This despite the fact it is no secret that Ukraine is an energy-dependent country and has to import resources, particularly natural gas from Russia.

Despite a huge need to attract financing measures on energy efficiency in the private sector (this especially concerns apartment houses, budget field as well as that part of industry that is lacking investments), nowadays there are no mechanisms in place to support the energy saving market or such a widespread global mechanism as ESCO, which in fact does not function in Ukraine.

In international practice ESCO projects are quite popular in the USA and EU countries. The USA, by the way, does not have such problems with energy resources, the persons from the public sector do not have restrictions related to attracting ESCO to implement energy saving projects taking into account that ESCO has to finance the project by itself and to provide its functioning for a term that is no more than 25 years. In addition to this, ESCO takes all the risks and receives income from achieved economy, in other words, the scheme relates to guaranteed savings. The ESCO market in the USA is quite powerful and has been increasing for many years. As to Europe, we would like to cite as an example, the experience of the Czech Republic, where the forfeiting scheme of energy savings project implementation is quite widespread. In practice, it is realized in the public field at the expense of private sector funds. Thus, ESCO, performing responsibilities pursuant to the long-term agreement concluded between the state and a municipal establishment, performs all the measures required for successful project implementation. These may be preliminary examination, stipulation and implementation of all necessary measures, monitoring and checking results, providing energy management services. The responsibilities for achieving a certain level of economy are secured. The costs are attracted from banking establishments at the expense of cession of rights of monetary claims pursuant to the long-term agreement for the benefit of the bank. In addition to this, banks are more likely to purchase such right from ESCO due to the fact that public sector establishments are the most stable and secure creditors. In their turn, public establishments not only receive profit from a project’s implementation but they remove a number of problems related to operation of old objects. Such projects are becoming more widespread in the countries of Eastern Europe and Asia.

Back to the topic related to the energy saving market establishment, it should be mentioned that one of the main barriers in the budget field is lack of cession of rights of monetary claims for a term exceeding more than one budget year. In order to create the background for occurrence and development of the ESCO market and for removing the main barriers on the way to creating such a market, the respective acts were adopted, namely, the On Introduction of New Investment Opportunities, Guarantees of Rights and Legitimate Interests of Businesses for the Purpose of Major Energy Modernization of 9 April 2015, No.327-VIII and On Changes to the Budget Code of Ukraine concerning Introduction of New Investment Opportunities, Guarantees of Rights and Legitimate Interests of Businesses for the Purpose of Major Energy Modernization of 9 April  2015, No.328-VIII.

Thus, in case further by-laws and normative acts are adopted, the private sector and, in particular, ESCO shall have a positive sign to commence collaboration with budget institutions.

 

Are the mechanisms in these Acts sufficient to ensure efficient operation of energy service companies? Do they need any further improvement?

Yuriy  Draganchuk, senior associate,  Sayenko Kharenko

The legal framework for the concept of energy performance contracts (EnPC) in Ukraine is highly important and anticipated in the current economic circumstances, and we are proud to be part of the team drafting the relevant legislation. By adopting so-called ESCO Acts the Ukrainian Parliament has eliminated existing legal barriers for the implementation of energy efficiency measures in public and municipal buildings without spending additional budgetary funds.

The EnPC concept provides that energy efficiency measures in buildings are implemented by the energy service company (ESCO) with its own funds. Payments to ESCO for such energy efficiency services from the budget depend on the level of achieved savings. Hence, ESCO is only entitled to payments for its services in case the actual savings are achieved and, most importantly, in the amount and out of the funds released as a result of such savings.

Of course, there is some work to be done in terms of secondary legislation. However, this process is ordinarily faster. Further regulatory work will require drafting and adopting the underlying regulations governing certain technical issues and more detailed procedures in support of the framework established by the Acts, including: (i) template provisions of EnPC; (ii) certain technical regulations and procedures (e.g., for calculating a baseline for EnPC); (iii) detailed procedures for approving the key terms of EnPC by the relevant government authorities; (iv) template amendments to the regulations of the central and municipal financial authorities regarding budget allocations and adjustments during the existence of an EnPC.

 

The Resolution of the Cabinet of Ministers of Ukraine On Special Regulation of Relations in the Energy Sector in the Territory where the Public Authorities Temporarily do not Exercise Their Powers or Exercise only Limited Powers of 7 May 2015, No.263 states that Lugansk Energy Association and DTEK Donetskoblenergo in the uncontrolled zone of the ATO will purchase electricity directly from local generating entities and supply it to local consumers without the participation of state company Energy Market. How would this influence the electricity market in Ukraine?

Andriy Nikitin, partner, FCLEX Law Firm

The commented Resolution formally separated producers and electricity providers located in the uncontrolled areas (including Lugansk Energy Association and DTEK Donetskoblenergo) from the single power system and wholesale electricity market, and discerned a special manager to service the local electricity market − Donbass electric power system. It would seem to mean the loss of a section of participants to the wholesale market, suspension of imports through the aforesaid territories and the necessity to establish a separate control service operations on electricity in the uncontrolled territories. In fact, all except the last has de facto occurred. Since the summer of 2014 the wholesale market has ceased to function normally, the supply of electricity to the uncontrolled territory continued in the absence of any payments for electricity; however, there was a gradual reduction in supply of electricity from the uncontrolled territories (up to zero in January 2015); 90% of electricity imported to Ukraine through the so-called DPR, LPR simply did not reach the destination and, instead, was consumed on the territory of the unrecognized republics.

With the adoption of the Resolution, there will be no longer any need for the CMU to take temporary emergency measures on the wholesale electricity market and there will be no problem with the transfer of funds to the uncontrolled territory.

However, we must note that the CMU has essentially legalized the energy independence of the uncontrolled territories and created the conditions for its consolidation.

 

The Verkhovna Rada of Ukraine passed the Act On Changes to the Act of Ukraine On Advertising of 12 May 2015, No.386-VIII (on advertising in television and radio) and On Changes to Certain Legislative Acts of Ukraine on Broadcasting (re-broadcasting) of the Advertising Contained in Programs and Broadcasts of Foreign Broadcasters of 14 May 2015, No.422-VIII. In what way should broadcasting companies adjust their operation in view of these acts?

Aleksandra Odinets, attorney at law, Konnov & Sozanovsky

The Act No.422-VIII provides a ban on the broadcasting of commercials within shows of foreign TV and radio companies on the territory of Ukraine in case foreign TV and radio companies are not subjected to the jurisdiction of EU countries, or countries that had ratified the European Convention on Transfrontier Television. Such broadcasting is allowed only if broadcasting of such commercials is paid to a legal entity of Ukraine despite the way of such broadcasting. The other Act, No.386-VIII,  cancels daily TV and radio advertising quotas, and reduces hourly quotas for TV channels from 20% to 15% (from 12 to 9 minutes). Nothing has changed for radio stations — their hourly quota is still 20%.

Both Acts aimed to harmonize Ukrainian legislation with European standards, namely: the EU Directive 2007/65/EU, which stated that only one Member State should have jurisdiction over an audio-visual media service provider and pluralism of information should be a fundamental principle of the European Union. We believe that adoption of the above Acts will be favourable to the Ukrainian telecommunication companies as well as for creating a balance between the financial interests of the service providers, advertisers and general public.

On 12 May 2015, the Verkhovna Rada of Ukraine approved the On Legal Regime of Martial Law Act of Ukraine. What risks with regard to restricting the rights of citizens and legal entities can be found in this document?

Volodymyr Lavrynovych, associate, LCF 

Martial law in Ukraine or in certain regions of the country is introduced by the Order of the President of Ukraine, approved by the Verkhovna Rada of Ukraine. Martial law shall be immediately declared in the mass media or by other means. 

On the territory, where the martial law was introduced, the military command together with military administrations (in case of their establishment) can impose labor duty with job-protected leave for individuals able to work and can engage them in public works. The military command may also impose military duty regarding accommodation of military staff on legal entities and individuals, impose special regime of crossing checkpoints, restrict freedom of movement of individuals and transport vehicles, check documents and belongings, baggage, goods, inspect office and living accommodations, except for cases envisaged by the Constitution of Ukraine. 

During a period of martial law curfew restrictions (restriction with regard to presence during certain time in public places without special permits) and special light discipline can also be imposed. During this period  the freedom of peaceful assembly may be restricted and the freedom to reside  on the territory where the martial law was imposed. The military command may use resources (inter alia, labor resources) of enterprises, other institutions for the needs of military defense. The military command may also change their working hours. 

In addition, the assets of legal entities and individuals can be expropriated during martial law. In this case the owner may demand full reimbursement of their value pursuant to the special procedure, envisaged by the law. After repeal of the martial law the owner may demand the return of his assets in a judicial proceeding (if the assets were preserved) or provision of similar assets (if this is possible). Respective authority is obliged to issue the document confirming the fact of expropriation. 

Martial law is temporary and suggests an exhaustive list of restrictions of constitutional rights and freedoms of individuals and legal entities. The term of restrictions must be specified.

The Act of Ukraine On Changes to the Tax Code of Ukraine on Credit Obligations of 9 April 2015, No.321-VIII came into effect recently and served as the basis for practical implementation of the Memorandum On Restructuring Consumer Loans in Foreign Currency. What impact would these documents have on borrowers who fail to meet their obligations? What trends may arise in judicial practice addressing banking disputes in connection with these documents?

Igor Semenov, attorney at law, senior associate, AstapovLawyers

Adoption of the On Changes to the Tax Code of Ukraine on Credit Obligations Act of Ukraine of 9 April 2015, No.321-VIII (hereinafter — the Act) will encourage debt restructuring and pre-trial settlement of the debts between banks and debtors. 

In particular, the Act provides that debtors should not include in their taxable income the sum of proceeds received from the sale of the pledged property in case of property foreclosure by a bank due to the debtor’s default under the loan agreement. Therefore, the Act makes voluntary sales of the pledged property in the course of pre-trial dispute settlement more attractive for debtors, since it gives them the possibility to avoid relevant tax payment. 

In addition, under the Act, the debtors shall not include in their taxable income the amounts of interest, fees and penalties which were written off by the bank. This amendment will make partial debt writing-off in the course of debt restructuring more economically attractive for debtors. In turn, it will provide the parties with more flexibility in debt settlement. 

The application of the abovementioned Act will definitely encourage out-of-court debt settlement between parties on mutually advantageous terms with minimum time and costs expenditure. The cost saving may also become more important in light of adoption of the Act of Ukraine On Amendments to Certain Legislative Acts of Ukraine Regarding Payment of Court Fee, which increased the amount of court fees and abolished the maximum limit of the court fee for legal entities.