Decentralization

The Ukrainian governance system has several fundamental flaws embedded into the Constitution. One of them is unclear distribution of responsibilities between popularly elected local councils and state administrations which belong to the executive power representation at regional and district levels. An elected mayor or head gets a complete executive power only in cities, villages and - since 2015 - united territorial communities (a new administrative unit). Moreover, the local authorities were financially dependent on the resources allocated by the national government. The central government used to [partly] cover the gap between projected revenues and expenditures of local governments, which were obliged to provide certain minimal amount of public services. This resulted in an extremely centralized state where regional elites exchanged their loyalty for higher subsidies from the centre (e.g. prior to 2015 about 45% of Ukrainian communities received 70% of their budget as a subsidy from the central level).

Decentralization reform aims to change this political system by providing local authorities with higher financial autonomy and more responsibility over the everyday issues of their communities. As a result, accountability of governing bodies to general public should increase. For example, people vote more carefully if they know that their elected mayor together with the city council or the community head is directly responsible for schools, roads and hospitals. Additionally, such delegation of power should result in the emergence of ‘grassroot’ politicians, i.e. those who paved their way to politics by hard work and good results at the local level, rather than by ‘bribing’ higher-level politicians.

Decentralization reform started in early 2015 with amendments to the Budget Code and adoption of the law "On voluntary merger of communities". These two laws lay the ground for two key elements of decentralization – greater financial autonomy of local governments and formation of larger, self-sustainable, communities (prior to the reform, there were 12 thousand territorial communities in Ukraine, over a half of them with less than 3 thousand people).

Today, while the share of local budgets in the total public finances remains rather stable, local governments have more freedom in spending this money. Since education and healthcare are the largest expenditure items at the local level, local governments receive educational and medical subventions and can spend this money freely based on the needs of these sectors. For instance, small schools can be closed, with bus services to larger schools organized instead, which could result in a higher quality of education and more efficient spending. In addition, local authorities are now responsible for most administrative services, such as property and enterprises registration, construction permits issuance, etc.

The mechanism of leveling-off local government revenues is adjusted in such a way that a community/city now retains a higher share of its revenues which provides local governments with more incentives to create business-friendly environment.

The process of amalgamating cities, towns and villages into new administrative units - United Territorial Communities (UTCs) is on the way. During 2015-2017, over 500 UTCs were formed from over 2,500 smaller communities, covering 18% of Ukraine’s territory. 414 of them held local elections by the end of 2016 (see map). To encourage the process, UTCs are allowed to apply for funding of infrastructure projects to the Regional Development Fund financed from the central budget. Many of them have already launched investment projects such as renovation of schools, kindergartens, roads etc.

The decentralisation has already changed the spending pattern of local authorities. As Figure 6 shows, local budgets now invest more into roads, communication systems, construction and transport.

Figure 6. Shares of Local Budgets in Spending on Economic Activities

Note: X axis shows the shares of local budget spending in 2013, Y axis - in 2016. Dots above the unit line show items for which the share of local budget spending increased in 2016 compared to 2013.

The decentralization reform faces several challenges. First, some of the incumbent raion officials oppose formation of united communities, as this means less resources to manage. Second, negotiations about mergers into UTCs are sometimes tough since some “rich” towns/villages do not want to merge with their “poor” neighbours, despite all the synergies that mergers could provide. Third, there is a lack of human capital and other capacity constraints at the local level which prevents local communities from pursuing all the opportunities that decentralization process offers (e.g. apply for the infrastructure projects financed by the Regional Development Fund). As a result, local government accounts accumulated large amounts of unused funds (UAH 34 bn at the end of 2015, UAH 57 bn at the end of 2016, of them UAH 16 bn at bank deposits). Hence, there are over 20 international projects (e.g. PULSE or U-Lead) to develop capacity of local governments and local civil society organizations.

The decentralization reform cannot not be completed without amendments to the Constitution and without forced merger of those communities which fail to do that voluntarily by a certain deadline. These legislative changes are still to be adopted by the parliament, but exact distribution of responsibilities between central and local governments has to be carefully scrutinized.