Construction and Projects Handbook 2011/12
OVERVIEW OF THE CONSTRUCTION AND PROJECTS SECTOR
1. What are the main trends in the local construction and projects market? What are the most significant deals?
The general trend in 2010 was some upturn in the construction industry, with the number of construction projects increasing and
suspended construction projects restarting. This was a direct result of the economic recovery after the downturn.
Another trend involved more rigorous controls over constructions by supervisory and regulatory authorities. This trend manifested itself in the Supreme Arbitration Court issuing a number of decisions and circulars (that bind all state arbitration courts in Russia), in relation to both the:
Moscow projects also face tighter requirements. For example:
Primarily this was caused by almost complete replacement of the former Mayor Hall team including the Mayor himself.
2. Who are the main parties involved in a project?
The main parties involved in a project are the:
3. Which are the most common procurement arrangements if the main parties are local? Are these arrangements different if some or all of the main parties are international contractors or consultants?
The developer generally enters into the following agreements when implementing a project:
The following forms for transactional relations are also frequently used:
These arrangements are generally the same if some or all of the main parties are international contractors or consultants.
4. What transaction structures and corporate vehicles are most commonly used in local projects (when the main parties are based in your jurisdiction)?
The main forms of transactional structures and vehicles are relatively simple:
See also, Question 37.
5. Are the common transaction structures and corporate vehicles different when the main parties are international contractors or consultants?
The transaction structures are generally the same for both local and international contractors or consultants. However, international projects involve more sophisticated corporate and finance structures. In particular, corporate structures managed from a foreign jurisdiction (for example, Cyprus, BVI, Jersey, Guernsey and The Netherlands) are increasingly used. Vertical structures are sometimes used, made up of several special purpose companies, to comply with statutory limitations on foreign involvement.
6. How are projects financed? How do arrangements differ for major international projects?
Before the downturn, most real estate projects were funded through bank loans. Currently, banks and professional investors
provide loans only for the most marketable projects that are close to completion and are valued at more than the loan amount.
Another standard financing method is equity. Initial public offerings (IPOs) are not currently considered, due to the economic situation. In addition, instruments such as mezzanine finance, forward financing and bond issues are currently less common.
SECURITY AND CONTRACTUAL PROTECTIONS
7. What forms of security and contractual protections do funders typically require to protect their investments?
Funders typically require that one or several of the following forms of security be used to protect their investments:
If the investments drawn into the construction project are subject to foreign law, contractual tools such as warranties, step-in rights and assignments of contractual rights are used.
STANDARD FORMS OF CONTRACTS
8. What standard forms of contracts are used for local projects (when the main parties are based in your jurisdiction)? Which organisations publish them?
There are no Russian standard forms of contracts. Major local industrial projects, particularly those financed by foreign banks
and financial organisations, generally use standard forms of contracts developed by the International Federation of Consulting
Engineers (Fédération Internationale Des Ingénieurs-Conseils) (FIDIC). However, these require thorough adaptation to local reporting, tax, and bookkeeping requirements, among others.
9. How do construction contracts for international projects differ from those used for local projects? Which organisations publish them?
Construction contracts for international projects usually consist of FIDIC models adapted to Russian legislation. This applies, in
particular, to infrastructure and industrial projects.
10. What risks are typically allocated to the contractor? How are these risks offset or managed?
The main risk the contractor faces is that of accidental loss of, or accidental damage to, the construction facility before its acceptance by the employer/developer (except in cases where the construction facility is destroyed or damaged because of poor quality material or equipment supplied by the employer, or the execution of incorrect instructions from the employer). This risk is normally managed by taking out insurance.
In relation to the materials and equipment provided by the contractor, the contractor bears the risk of accidental loss or accidental damage, and the risk of being unable to use those materials and equipment in the construction. These risks can also be mitigated by insurance.
If, under the contract with the contractor, the price of the contractor’s work is fixed, the contractor bears the risk of additional
unforeseen costs arising in the course of construction. This applies even in relation to costs that cannot be accurately calculated
when the contract is concluded.
11. How can liability be excluded or restricted under local law?
Liability for non-performance and bearing of risk are differentiated under law. That is, in the event of force majeure (see Question 13), the contractor is released from liability but continues to bear the risk of accidental loss of, or accidental damage to, the construction facility.
The contractor can limit its liability to the following:
Caps on liability
12. Do the parties usually agree a cap on liability? If yes, how is this usually fixed? What liabilities, if any, are typically not capped?
In most cases, the law does not prohibit the parties from setting a cap on liability, including a fixed amount. However, in practice, a monetary limit is applied very rarely and the parties usually limit their liability by other means (for example, they provide for reimbursement of actual damage only, without covering lost benefits, interest and so on (see Question 11)).
13. Are force majeure exclusions available and enforceable?
Under Russian law, force majeure releases parties from liabilities. Russian law outlines key characteristics that constitute force majeure, but does not list force majeure events specifically. Situations that are urgent and irresistible can constitute force majeure. The following events may be treated as force majeure:
In addition, the law specifies circumstances that cannot be considered force majeure, in particular:
14. What contractual provisions are typically negotiated to cover material delays to the project?
The parties usually establish a penalty for delayed construction.
The penalty can be determined as either a:
Russian legislation provides for the employer’s right to terminate a contract if the contractor either:
In addition, the contract often provides for the employer’s right to terminate the contract if there is a significant delay in the contractor’s execution of the works. In this case, the employer can also claim damages from the contractor.
Performance bonds, insurance, banks and parent company guarantees are also used in large scale projects.
15. How are material variations to the works usually dealt with in the contract?
Construction and related works should be carried out in accordance with the design and technical documentation defining the
scope, content and other related requirements. This should be supplied with a calculation of the cost of works. The employer
has the right to amend the design and technical documentation under the condition that the cost of any additional work caused
by the amendment does not either:
Revisions of a greater scope are subject to agreement between the parties.
16. What other main contractual provisions do the parties usually heavily negotiate?
The following terms and conditions are the most heavily negotiated:
APPOINTING CONSTRUCTION PROFESSIONALS
17. How are construction professionals usually appointed? How are their liabilities dealt with in the contract?
If the employer is a commercial organisation, contractors and other construction professionals are usually selected by either a:
In the public sector, selection of a contractor is usually made on the basis of a binding bidding procedure. The procedure is
usually very formal, strictly regulated and differs from the tender procedures held by commercial organisations.
PAYMENT FOR CONSTRUCTION WORK
18. What are the usual methods of payment for construction work? Are there ways for the contractor and consultants to secure payment or mitigate risks of non-payment under local law?
The procedure for paying for construction work is similar in most construction projects and consists of the following:
19. How do the parties typically manage their relationships with subcontractors?
The general contractor generally engages subcontractors to perform certain types of work without seeking the employer’s prior
consent. The parties can agree that the general contractor should seek the employer’s prior consent for engaging subcontractors or agree on the list of potential subcontractors in advance. For example, information on approved subcontractors can be specified in the general contractor’s offer for participation in the tender.
In both cases, the general contractor continues to be liable towards the employer for work performed by subcontractors as if it
performed the work itself.
The employer does not usually interfere in the relations between the general contractor and its subcontractors. However, the general contractor and the employer can agree that the employer will employ and pay the subcontractors directly.
In certain cases, subcontractors must have a Certificate of Admission issued by a relevant self-regulating organisation (SRO) (see Questions 3 and 20).
20. What licences and other consents must contractors and construction professionals have to carry out local construction work? Are there any specific licensing requirements for international contractors and construction professionals?
On 1 January 2010, the reform of regulation of construction activities and the transition from licensing of construction activities
to self-regulation was launched. The key regulation governing self-regulation in construction works is the Town Planning Code
of the Russian Federation. Construction work affecting safety can now only be performed by parties holding a Certificate of Admission issued by a relevant SRO (see Question 19). The SRO consists of professional developers. Before the reform, licences were issued by the state agencies.
There are more than 370 types of work requiring a Certificate of Admission, ranging from engineering surveys and preparation of design documentation to specific construction works, and works associated with organising construction.
In most cases, the general contractor, the designers and the technical employer should be members of an appropriate SRO, and
hold a Certificate of Admission issued by one of the relevant SROs.
21. What licences and other consents must a project obtain:
Before construction work starts, a project must obtain all of the following:
During construction, the construction supervisory authority (either regional or federal, depending on the project) makes inspections in accordance with the schedule specifically issued for each construction site. For some minor construction projects, state construction supervision is not carried out.
On completion, a project must obtain all of the following:
22. What types of insurance must be maintained by law? Are other non-compulsory types of insurance maintained under contract?
The SROs generally establish insurance requirements. In practice, the parties also agree that additional insurance must be maintained. The duty to maintain insurance is usually imposed on the contractor, although it is sometimes imposed on the employer, for example, when the construction is covered under the employer’s general insurance (including international insurance, primarily if the employer is an organisation that operates in several countries).
The following types of insurance are usually maintained:
SROs require insurance to be maintained as a condition for membership and also to reduce the burden on SRO funds. This is
because, under legislation, an SRO is subject to secondary liability for damage caused by its member and must pay out of its
23. Are there any labour law requirements for hiring (local and foreign) employees?
Local construction workers must both:
There are no other general limitations on the employment of Russian citizens.
Foreign nationals can be employed if they have a work permit issued by the Federal Migration Service. Work permits are issued for a term not exceeding one year (or three years for highly skilled workers), based on migration quotas that the federal government fixes annually. Quotas do not apply to all highly skilled workers.
A foreign employee is likely to be considered highly skilled if his average annual income is not less than RUB2 million (as at 1
April 2011, US$1 was about RUB28.5).
Foreign nationals can work without a permit if both:
24. Which labour laws are relevant to projects?
The federal Labour Code is the main legislation regulating labour relations. This establishes mandatory requirements on maximum working hours, night work, payments and so on. For example (Labour Code):
25. Must an employer pay statutory redundancy or other payments at the end of a project? Are all employees eligible?
Employees can be engaged on either a:
HEALTH AND SAFETY
26. Which health and safety laws apply to projects?
Health and safety laws are set out in numerous laws and standards. The main health and safety regulations applicable to construction work are set out in the:
The employer’s basic obligations are to:
27. Which local laws regulate projects’ effects on the environment?
The following local laws, among others, regulate projects’ effects on the environment:
28. Must buildings meet carbon emissions or climate change targets?
Russia has no legislation regulating carbon emissions or climate change targets. Russia acceded to the Kyoto Convention in 2010, but application of the Convention will commence after a transitional period of three years, during which the national legislation should be changed.
29. Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting the projects
sector)? What are the applicable civil or criminal penalties?
Individuals can by penalised for:
Legal entities can be held administratively liable with a fine of up to three times the amount of the bribes, but not less than RUB1
In addition, a legal entity’s officers can be criminally prosecuted.
Illegal transfer of money
Illegal transfer of money or any other assets to a company’s manager to take actions in the interests of the transferor is punishable with one of the following:
There are no construction-specific corruption laws
30. What rights do the client and funder typically require on the contractor’s bankruptcy or insolvency?
Under law, a contractor’s bankruptcy or insolvency does not generally constitute grounds for the other party’s unilateral withdrawal from the contract. For the employer, the main consequence of the contractor’s bankruptcy is that:
However, contractual agreements usually provide for the right of unilateral withdrawal from the contract in the event of the contractor’s bankruptcy or insolvency.
31. Are public private partnerships (PPPs) common in local construction projects? If so, which sectors commonly use PPPs?
In the last few years, Russia has increasingly considered PPPs and the need to develop them further.
A number of major PPP projects involving construction of plants or waste processing, road construction and upgrading of airports have recently been launched. These projects, with a few exceptions, are structured as concession agreements. PPP is also used at the local level in municipalities, mainly in relation to utility services and social welfare facilities.
However, Russian legislation requires amendments to provide for the implementation of PPP models commonly used worldwide (for example, build, own, operate, transfer (BOOT) and build, transfer, operate (BTO) models, and so on). A legislative framework is currently being developed for the application of some of the PPP tools, such as concession agreements, productionsharing contracts and so on.
32. What local laws apply to PPPs?
Major laws governing PPPs are the:
In 2010, to develop PPP in Russia, the PPP Expert Council of the State Duma (lower chamber of the Federal Parliament) developed a model law on PPP. This encouraged the regions to adopt their own regional PPP legislation. In addition, a series of amendments to the federal legislation aimed at further strengthening and developing PPP in Russia is currently under discussion.
33. What is the typical procurement/tender process in a PPP transaction? Does the government or another body publish standard forms of PPP project agreement and related contracts?
The procurement/tender procedure is regulated by statute for a few PPP forms and differs depending on the PPP form:
34. Which are the most common formal dispute resolution methods used? Which courts and arbitration organisations deal with construction disputes?
Formal dispute resolution methods
The majority of disputes are settled in state arbitration courts. If the contract includes commercial arbitration clauses, disputes
between the parties are referred to the appropriate court of arbitration (see below, Courts and arbitration organisations). The
arbitration court’s decision is binding and can generally only be challenged in state court on procedural grounds.
Courts and arbitration organisations
There are no special courts to deal with construction disputes. These disputes are usually resolved by state arbitration courts.
Foreign parties often establish a contractual clause requiring adjudication in an arbitration court of the International Chamber of
Commerce (ICC), the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (ICAC) or other international arbitration institution.
35. What are the most common alternative dispute resolution (ADR) methods used?
In 2010, the Federal Law “On Alternative Dispute Resolution Process Involving a Mediator (Mediation)” came into force and appropriate changes were made to the Arbitration Procedural Code. In particular, mediators can now be engaged in resolving disputes even if the Court of Arbitration has already begun the trial. The main purpose of the law is to offer a fast and convenient method for resolving disputes, which is flexible and ensures that enforceable decisions can be made during mediation to save costs.
36. What are the main tax issues arising on projects?
Value added tax (VAT)
VAT rates. VAT on transfer (sale) of real estate generally applies at 18%. (No other transfer or turnover taxes apply to the transfer of real estate, although it is subject to profits tax.)
There are special rules on the calculation of VAT arising under investment agreements, construction with the company’s own resources and other specific types of agreement.
Refund of input VAT. Developers face a considerable amount of input VAT during construction, which can be refunded on completion. The amount of output tax at the early stages of an object’s use does not generally allow the input VAT to be used in full. Even though the Russian Tax Code allows developers to recover the difference between input and output VAT in cash, the tax authorities tend to refund large amounts of input VAT only via a court order (that is, litigation is required).
Agreements for the avoidance of double taxation
Many double taxation treaties (DTTs) signed by Russia establish a period within which a construction site cannot be deemed to
be a permanent establishment of the developer. Income tax is not due during this period. However, the conditions for application of tax benefits under the relevant DTT should be carefully reviewed, as the Russian tax authorities’ practice tends to challenge the application of these tax privileges.
Interest deduction for loans is limited to:
The Central Bank rate is determined at the date of receipt of the borrowed funds (for borrowings establishing a fixed rate for the duration of the loan) or at the date of interest deduction (for other borrowings).
Russia also has thin capitalisation rules. These apply to Russian companies with direct or indirect foreign ownership exceeding
20% of the Russian company’s capital. For these companies, deduction of interest is restricted on loans either:
In this case, deduction of interest arising under controlled loans is restricted if the loan exceeds three times the borrower’s net assets (or 12.5 times for leasing companies), calculated according to Russian accounting rules. The interest exceeding these limitations is reclassified as dividends for profits tax (withholding tax) purposes.
The current legislation includes a loophole that exempts from thin capitalisation rules any loans extended by foreign sister companies. In addition, Russia has signed agreements with several jurisdictions on avoidance of double taxation, to provide protection against thin capitalisation rules. These agreements allow full deduction of interest to companies owned by residents of the particular DTT jurisdiction.
37. Are any methods commonly used to mitigate tax liability on projects? Are there any tax incentives to carry out regeneration projects?
The following methods are commonly used to mitigate tax liability:
There are no tax incentives to carry out regeneration projects.
See also, Question 36.
OTHER REQUIREMENTS FOR INTERNATIONAL CONTRACTORS
38. Are there any specific requirements that international contractors or construction professionals must comply with?
Since 2010, companies that perform design and construction no longer need to be licensed in Russia. Currently, these companies must become members of an SRO and obtain a Certificate of Admission to perform the relevant works (see Question 20). This applies equally to both Russian and foreign companies.
Real estate construction is generally regulated by national legislation. In particular, this greatly affects the application of the
FIDIC model contracts, which are subject to material adaptation and adjustment.
In addition, the rules for employing foreign and Russian workers must be complied with (see Question 23).
39. Are there any proposals to reform construction and projects law?
The current legislation on construction and projects may be affected by the overall reform of the civil law, which is now under
discussion. This includes significant amendments to the Civil Code, for example in terms of rights to land plots for construction,
authorised construction, and the rights to real estate facilities under construction.
The Town Planning Code is scheduled for revision to define the concept of standard design documentation and include terms for
its repeated use without state examination.
Certain other legislative acts are scheduled for revision to:
Finally, the laws regulating PPPs are under discussion for amendment, to increase investment attractiveness of PPP projects.