Voluntary Amalgamation, Inter-Municipal Cooperation and Fiscal Incentives in Ukraine

How has Ukraine’s Decentralization Policy impacted the local government system?

Ukraine provides a unique insight into the decentralization and local government reform programs that were a centerpiece of the democratic transition from the former Soviet system. It was one of the very last countries in the region to undertake decentralization reforms and did it in a rather comprehensive manner. It was a long-delayed reform beginning in 2014 as a result of the “Revolution of Dignity” that introduced a more European-oriented government. The highest priority of the national government was at the time was to finally implement the decentralization of the government system and structures in Ukraine.

Decentralization reform in Ukraine

Prior to the current reforms, the subnational government structure was formed by a complex set of regional and local authorities: the country was divided into 25 regions and two cities of national importance (Kyiv City and Sevastopolin Crimea), 490 districts, 460 cities and more than 10,000 rural councils. The average population for these small rural governance units was approximately 1,500.

The decentralization reform program was based on a rather unique approach and three pillars: (1) a reliance on voluntary amalgamation of local government units, (2) the use of inter-municipal cooperation, and (3) enhanced financial incentives.  In general, the decentralization strategy of Ukraine involved important components that could support its success if implemented steadily and systematically. These included: (1) changes in administrative-territorial composition; (2) a voluntary approach to amalgamation that allows considering the interests of involved communities; (3) a reassignment of functions among the levels of government, (4) inter-municipal cooperation to provide accessibility and higher quality of public services; and (5) expanding amalgamated territorial communities (ATC) revenues sources.

The reform objective was to amalgamate over 10,000 territorial units into 1,441 ATCs by the end of 2020, excluding the Donetsk, Luhansk and Crimea regions.   There was some substantial success in these early years with regard to the implementation of the reforms. By the end of 2019, the creation of 1,029 ATCs was accomplished. There were 530 inter-municipal cooperation agreements covering some 1,188 local government units, primarily in the area of communal services, infrastructure rehabilitation, fire safety, and education, health and social protection. The local government revenues increased by nearly fourfold (from 68.6 billion Ukrainian hryvnia in 2014 up to UAH 267.0 billion in 2019) and the amount of state support to local economic development rose by a factor of five (from UAH billion 3.7 in 2015 to 20.8 in 2019).

The decentralization reform in Ukraine is arguably one of the most heavily supported through technical assistance and financing of any decentralization reform in the region. There were over a dozen donor technical assistance programs with funding amounting to between $150-200 million over the past five years. In addition, there have been numerous reports and papers describing the pros and cons of the reforms and impacts through  2020. Many of these have focused on a narrow area of the decentralization reforms and done mid-course of the reform implementation.

An assessment of Ukraine’s decentralization policy

The most recent and most comprehensive paper dealing with the full scope of the reforms from the voluntary amalgamation, inter-municipal cooperation and fiscal incentives is contained in a recent analysis by Glen Wright and Sergii Slukhai.

This paper assesses the success of the voluntary approach to amalgamation, the extent to which inter-municipal cooperation was utilized and impacted service delivery, and the increase in the fiscal sustainability of the amalgamated units from the enhanced fiscal resources.

The analysis presented in the paper reveals the following:

  • The voluntary approach was not a complete success as it plateaued at about 1,000 ATCs in 2020 and met considerable resistance from the district level of government and the antagonism between richer and poorer communities to amalgamate. Eventually, mandatory amalgamation was resorted to in order that local government elections could be held in late 2020 across all the local government units in Ukraine.
  • The use of inter-municipal cooperation achieved modest success with approximately 530 agreements covering 1,188 territorial units, approximately 10 % of the total number of units. The areas of communal services, education, health, and social protection, and the “other” category have the largest number of inter-municipal cooperation agreements projects. There is great variation on a regional basis in the use of the inter-municipal cooperation agreements. In addition, there was a lack of awareness among communities on how these cooperation agreements could be utilized and the high level of mistrust across communities for these purposes.
  • The enhanced fiscal resources of the local level included revenue-sharing of 60 % of the personal income tax (PIT), 25 % of an ecological levy, 5 % of excise revenues, 100 % of a unified small business tax, 100 % of corporate income tax (CIT) receipts on communal enterprises, and 100 % of the property tax. Based on the statistical analysis of the available data on the local government finances, it is highly questionable if these units are of sufficient size to be financially sustainable.  The sharing of PIT and the basis on which the sharing takes place has proven insufficient to provide a robust fiscal base for many of the amalgamated units. The strategic mistake here was not to expand the revenue sources to a broader base. It is unlikely that the local revenue sources, as presently constituted, will be sufficient to provide the fiscal sustainability that is needed.
  • Popular acceptance of the amalgamation also turned out to be quite limited.  When the local government elections were held the turnout in the first round was 35% nationwide, the lowest turnout ever recorded.  In the second round of voting, the turnout was even lower at about 25%.  Some people went to the polls not knowing their local government had been amalgamated into a larger unit and were not familiar with the candidates for the local offices.

Perhaps the best that can be said about the impact of the long-awaited decentralization reform in Ukraine is that it appears to be no better or no worse than other decentralization efforts in the region and internationally.  However, given that other countries in the region undertook decentralization much earlier, it is regrettable that Ukraine seems not to have learned and applied those experiences. This is probably the greatest failure of the Ukrainian implementation of decentralization.

Read the entire study, which was published in the latest issue of the Network of Institutes and Schools of Public Administration in Central and Eastern Europe (NISPAcee) Journal of Public Administration and Policy:

Glendal Wright and Sergii Slukhai.2021. “Decentralization Policy in Ukraine: How Voluntary Amalgamation, Inter-Municipal Cooperation and Fiscal Incentives Impacted the Local Government System” NISPAcee Journal of Public Administration and Policy; Bratislava Vol. 14, Iss. 1,  (2021): 311-343. DOI:10.2478/nispa-2021-0012