6. Advances in Ukraine’s decentralisation reform process since 2014
This chapter explores advances in Ukraine’s decentralisation reform between 2014 and Russia’s large-scale aggression in February 2022. First, it provides a recap of developments as part of the country’s efforts to strengthen local self-governments, improve public service delivery and strengthen local democracy during the period. Second, it considers the challenges that have arisen during the reform process, including the discrepancies in existing legislation regarding the tasks of different levels of government, as well as the need to strengthen multi-level governance arrangements, and improve municipal fiscal and administrative capacity. Lastly, it reflects on how the government can leverage the success of the decentralisation reforms in the forthcoming post-war period, in order to support place-based recovery and improve local well-being in all territories.
By February 2022, when the Russian Federation launched its large-scale invasion of Ukraine, the Government of Ukraine had made significant progress towards consolidating key elements of its territorial and decentralisation reforms. Starting in 2014, the government passed a large array of laws with wide-reaching implications for the country’s territorial-administrative structure and which advanced administrative, fiscal and political decentralisation. In particular, the administrative and fiscal capacity of amalgamated municipalities was strengthened and municipal leaders were further empowered to directly support the development of their local communities.
As a result of the reforms, many municipalities reported improvement in the quality of local public services by 2021 (e.g. administrative services and education), alongside a consolidation of their administrative capacity. These advances, which were achieved despite the absence of a constitutional amendment to institutionalise the adjusted government structures, are highly relevant in the context of the current war. They have provided municipalities with experience, tools and skills to meet the challenges of the war, and positioned them to more effectively support place-based reconstruction and recovery in the medium to long term.
Building on earlier findings from the OECD’s 2018 report Maintaining the Momentum of Decentralisation in Ukraine, this chapter briefly discusses the main developments in Ukraine’s decentralisation reform process since 2018. Subsequently, it highlights challenges to the reform process in greater detail, and explores how these challenges may affect the current war effort and future reconstruction and recovery initiatives. In particular, it considers the legislative discrepancies in the assignment of tasks and responsibilities among different levels of subnational government, as well as institutional and economic challenges that stem from the decentralisation reforms. It also addresses the need to further update legislation pertaining to local democracy and accountability. The chapter concludes with a set of recommendations to place the current territorial-administrative structure and decentralisation reforms on a more solid footing in the post-war context.
The following recommendations should be considered in a timeframe that is appropriate to the current context of war and post-war reconstruction and recovery.
To improve the oversight of amalgamated municipalities, Ukraine is advised to:
Adopt amendments to reinforce municipal oversight, for example by:
Adopting a constitutional amendment1 that replaces oblast and rayon state administrations with a system of prefects, in order to provide local administrative supervision and facilitate the co-ordination of national-level priorities at the local level, or:
Amending the Law “On Local State Administrations” to circumscribe the function of Rayon State Authorities as being related to local administrative supervision (a posteriori) and the co-ordination of national-level priorities at the district level.
Specify, in either case, that while the oversight entity has the power to appeal suspected legal violations by municipalities in court, municipal laws can only be suspended and/or annulled by court ruling.
Verify that appointments are made on the basis of a competitive and transparent selection process.
To strike a better balance in territorial reform and ensure the conditions for successful decentralisation, Ukraine is advised to:
To further strengthen vertical and horizontal co-ordination mechanisms, Ukraine is advised to:
Reinforce the Congress of Local and Regional Authorities through the creation of a separate municipal chamber, and ensure a transparent and equitable process that enables municipalities to participate on a rotating basis.
Reinforce the Inter-Departmental Co-ordination Commission for Regional Development by granting municipalities a permanent seat in its official sessions.
Consider creating a national conference of local government associations, in order to improve the strength and coherence of municipal lobbying and advocacy at central government level.
To consolidate subnational strategic planning capacity, Ukraine is advised to:
Develop and implement training modules on areas of local administrative performance where municipalities are lagging (e.g. citizen engagement, performance monitoring).
Support national and international peer-to-peer exchanges between municipalities on issues of local administrative performance, in order to promote the sharing of best practices, innovative methodologies, etc. The support provided through these exchanges should be equitably spread among different types of municipalities (rural, settlement urban), and have built-in dissemination mechanisms to ensure that relevant knowledge, practices and tools are being shared more widely.
To strengthen subnational human resource capacity, Ukraine is advised to:
Develop and periodically update a subnational strategy for human resource management, including an expanded list of standardised training programmes with improved mechanisms for quality control of teaching content.
Conduct local needs assessments and encourage municipalities to prepare training plans based on those assessments.
Amend the Law “On Service in Local Self-government” to require local civil servants to be politically neutral and to ensure open and merit-based recruitment and performance management, while also setting out effective mechanisms for professional development.
Harmonise the remuneration of national and local civil servants in order to improve the recruitment and retention of skilled staff by municipalities.
To improve subnational fiscal and investment capacity, Ukraine is advised to:
Ensure that poorer municipalities and those with limited technical and financial capacities can compete with their wealthier and more capacitated peers for regional development funding, for example by:
Linking co-funding requirements to the fiscal capacity of municipalities.
Providing municipalities with more clarity on eligibility criteria.
Boosting their technical skills to develop competitive proposals.
Promoting the development of joint project proposals (i.e. by multiple municipalities). This can help them to pool resources and address shared development challenges.
To increase the uptake of inter-municipal co-operation arrangements, Ukraine is advised to:
Provide municipalities with additional support materials on inter-municipal co-operation (e.g. on relevant legislation, good practices, draft co-operation agreements, etc.).
Develop guidance for municipalities on how to set up and manage inter-municipal co-operation, particularly in sectors where uptake has been weaker in the past.
Integrate this guidance into the official decentralization.gov.ua portal, in order to enable municipalities to better familiarise themselves with inter-municipal co-operation and identify its benefits and challenges.
Encourage or even temporarily require increased inter-municipal co-operation whereby subnational governments share staff and expertise or the provision of services.
To strengthen the capacity of municipalities to support local business, competitiveness and job creation, Ukraine is advised to:
Provide guidance to municipalities on the policy options available to them to stimulate local economic development and to reduce the administrative burden on businesses.
Develop training modules for municipalities on aspects of local governance that require effective engagement with the local private sector (e.g. identifying investment needs or co-designing local investment projects).
Create new or modify existing regional development subventions2 to facilitate the implementation of projects to support small and medium-sized enterprises.
Provide capacity building support to municipalities on how to develop and manage local public-private partnerships.
To strengthen local democracy and accountability, Ukraine is recommended to:
Amend the Electoral Code to allow citizens living abroad temporarily to vote in local elections.
Develop clear standards for starosta performance and training modules on their core functions.
Consider increasing the basic salary of starostas to align financial incentives with their expected performance.
The vision guiding Ukraine’s amalgamation and decentralisation process was originally set out in the 2014 “Concept of Reforming Local Self-Government and Territorial Organisation of Power”, which called for a number of territorial challenges to be addressed. These included an adjustment to the high number of local councils (more than 10 000), many of which had small populations and lacked the administrative and/or financial capacity to fulfil their tasks and responsibilities effectively; local-level spending characterised by strong deconcentration and limited decentralisation; and a heavy reliance on central government transfers, due in part to a lack of municipal own-source revenues (CabMin, 2014[1]).
In response to these challenges, the Concept set objectives for broad political, administrative and territorial restructuring by:
Altering the political power structures at the oblast and rayon government levels to make room for stronger democratic governance;
Differentiating mandates and supporting decentralised administration and public service delivery by municipalities;
Simplifying the territorial administrative structure into three subnational tiers, with only one category of local self-government units;
Clarifying and adjusting the responsibilities assigned to each level of government (OECD, 2018[2]).
The Concept Framework has served as the foundation for all subsequent decentralisation reforms, including those related to the amalgamation of local self-governments. Key legislative steps in the reform process included the adoption of the Law “On Co-operation of Territorial Communities”, the Law “On Voluntary Amalgamation of Territorial Municipalities”, and amendments to the Budget Code of Ukraine (Table 6.1).
Amalgamation in two stages: voluntary and mandatory
In the first stage of the amalgamation process (between 2015 and 2020), municipal mergers took place on a voluntary basis. Following the passage of the 2015 Law “On Voluntary Amalgamation of Territorial Municipalities”, most municipalities were afforded the right to amalgamate (merge) with one another (with the exception of cities of oblast significance, which received the same rights following amendments to the law in 2018 (Verkhovna Rada, 2015[4]). In addition, financial incentives to amalgamate were provided in the form of expanded own-source revenues, the right to negotiate annual municipal budgets with the oblast state administration, and access to regional development funding through the State Fund for Regional Development (SFRD) (OECD, 2018[2]). Amalgamated municipalities also received budget transfers directly from the state budget, avoiding the rayon level, and were eligible to receive funds from the Local Infrastructure Subvention. While the reforms led to a large number of voluntary municipal mergers—with over 4 882 municipalities merging to form 1 070 amalgamated municipalities by mid-2020—a minority of municipalities did not voluntarily elect to do so (CabMin, n.d.[8]; Vox Ukraine, 2020[9]). Reasons for this included a lack of understanding by some local leaders of the potential benefits of amalgamation, challenges faced by leaders in convincing neighbouring municipalities of these benefits, as well as local leaders’ fears of losing influence in their communities (OECD, 2021[10]).
The result was a second, mandatory stage of amalgamation. A 2020 Amendment to the Law “On Voluntary Amalgamation of Territorial Municipalities” superseded the principle of voluntary association by giving the Cabinet of Ministers (CabMin) the power to form amalgamated territorial communities in all regions of the country (Verkhovna Rada, 2015[4]). In June 2020, on the basis of this law, the CabMin issued 24 orders (one for each region) to approve the creation of 1 469 amalgamated municipalities throughout the country. This included municipalities that had voluntarily merged prior to 2020 (Table 6.2) (CabMin, 2020[11]).
Amalgamation as a platform for political, administrative and fiscal decentralisation
Ukraine’s voluntary municipal amalgamation process had a series of built-in incentives revolving around political, administrative and fiscal decentralisation3. This resulted in reported improvements in the quality of local democracy, administrative and public services delivered by municipalities, and an increase in their budget capacities (Freedom House, 2022[14]; Chatham House, 2019[15]; DESPRO, 2021[16]). It also led to some unforeseen challenges, such as an exacerbation of territorial inequalities.
Political decentralisation strengthened local democracy and accountability in Ukraine
One objective of Ukraine’s decentralisation reform was stronger local democracy and greater accountability to citizens by subnational governments. In order to harmonise the election cycle, following the creation of the 1 469 amalgamated municipalities a first and then second round of local elections were held in October and November 2020 in all amalgamated municipalities (OSCE, 2021[17]). Local democracy was then bolstered by different amendments to the Electoral Code in December 2019 that simplified electoral voting and registration. For example, they allowed unregistered voters to vote in a community’s local election, as long as they proved residence in the locality at the time of voting (UNDP, 2019[18]).
Local accountability was consolidated by further institutionalising the starosta. Starostas are local community officials that represent the interests of residents of so-called starosta districts (districts consisting of at least 500 inhabitants) in the municipal council and for liaising among them (Verkhovna Rada, 2021[19]). While starostas were previously elected by citizens, the rules were changed in 2020 requiring them to be appointed by the municipal council. At the same time, an element of local democracy is preserved in the current appointment process, as any starosta candidate must first be nominated by a certain percentage of the local resident population (the exact percentage depends on the size of the municipality). Starostas are responsible for a number of tasks, such as participating in the preparation of proposals for the draft local budget and providing administrative services. The type and number of administrative services is determined by the local council and depends, among other elements, on the starosta’s experience and qualifications, as well as on whether the municipality has an administrative service centre. Examples of administrative services include registration of place of residence, birth, death and marriage. In the context of Russia’s war against Ukraine, starostas have also started providing services for internally displaced persons (Zamfir, 2022[20]). In addition, starostas monitor local development projects and the use of public property and provide periodic reports on these issues to the local council. In October 2021, the government made the presence of starostas in all municipalities mandatory (Verkhovna Rada, 2021[19]). Amendments to the Law “On the Development of the Institute of Starostas” in 2021 increased the rank of starostas within the local government hierarchy. The law also enabled them to serve on local executive committees if approved by local council members, as a means to improve the accountability of local decision-making (Verkhovna Rada, 2021[21]).
Administrative decentralisation focused on improving service quality and access
The administrative decentralisation process included transferring responsibility for key public services—such as administrative services, education and health—from the rayon level of government to newly amalgamated municipalities. Municipalities that chose to amalgamate moved from being primarily executors of central administration policy to local self-government units responsible for managing, maintaining and financing infrastructure, and a wide range of local public services. These included all levels of education, primary, secondary and tertiary healthcare4, social services, waste, water and sanitation management, cultural institutions, public safety services (e.g. fire departments) and local public housing (Verkhovna Rada, 2021[19]).
In addition, several administrative tasks were delegated to municipalities including the registration of businesses, property or residence, and passport issuance and renewals (Verkhovna Rada, 2020[22]). This was accomplished by introducing administrative service centres (ASCs) in municipalities across the country. The result was a simplification of administrative transactions by creating a space for citizens to manage these services in their municipality. Prior to the ASCs, many people needed to travel long distances to regional hubs in order to accomplish the same tasks. Prior to Russia’s war in Ukraine, the intention was to have an ASC in each municipality by 2024 (OECD, 2021[10]).
To further encourage administrative decentralisation and support municipalities in their need for administrative infrastructure, the decentralisation reform transferred objects of common property, which were previously held by rayon state administrations, to the communal ownership of municipalities, per the 2020 Law “On Amendments to Certain Laws of Ukraine on Streamlining Certain Issues of Regarding the Organisation and Activity of Local Self-government Bodies and District State Administrations”. This transfer of local state property served to align communal ownership with the current municipal responsibilities for local infrastructure maintenance (Verkhovna Rada, 2020[5]).
Fiscal decentralisation increased local budgets, as well as local spending
Between 2016 and 2020, in nominal terms, local revenues increased substantially from just over UAH 7 billion in 2016 to over UAH 86 billion in 2020 (UAH 51.5 billion, when correcting for inflation) (CabMin, 2021[23]; World Bank, 2021[24]). Over this five-year period, the breakdown of municipal revenues changed substantially, with tax revenues becoming a growing share of municipal income, and intergovernmental transfers representing a reduced share. This reflects the fact that, as part of 2016 amendments to the Budget Code, amalgamated municipalities were rewarded with a 60% share of locally-levied PIT. A large part of the reduction in the share of intergovernmental transfers to total municipal revenues came between 2019 and 2020 (from 43% to 33%) (CabMin, 2021[23]; OECD, 2022[25]). This reflected the government’s decision to cut the size of several regional and local development funds, including the SFRD, to create the COVID Stabilisation Fund, as well as to changes in the mechanisms for funding healthcare and social services. Since 2019, a significant share of expenditures in both areas has been funded directly from the national budget.
Note: The table presents disaggregated local revenue data for amalgamated municipalities over the 2016-2020 period. No information on non-amalgamated local self-governments was available. The table excludes sources of revenues that contributed less than 1% of total subnational revenues. Besides PIT and local taxes, the category “tax revenues” includes: rent and payment for the use of other natural resources; internal taxes on goods and services; separate taxes and fees credited to local budgets; and other taxes and levies.
Source: Author’s elaboration, based on information provided by (CabMin, 2021[23]).
In 2020, Personal Income Tax (PIT), which is shared among the central government, oblasts and municipalities, made up 38% of total municipal revenues (up from 25% in 2016) (CabMin, 2021[23]). Between 2016 and 2020, there was only a modest increase in the share of local taxes as part of total municipal revenues: from 15% in 2016 to 18% in 2020. In 2020, PIT, subventions and local taxes (e.g. property tax, tourist tax and certain user charges and fees) were the three most important sources of municipal revenue.
Decentralisation reforms not only generated an increase in local revenue, they also increased local expenditures, given the assignment of new responsibilities, as presented in the previous section. Local expenditures of amalgamated municipalities increased significantly in nominal terms between 2016-2020, from just over UAH 6 billion in 2016 to nearly UAH 87 billion in 2020 (UAH 51.9 billion, when controlling for inflation) (CabMin, 2021[23]; World Bank, 2021[24]). During this period, the number of amalgamated municipalities also increased drastically, which may account for part of the rise in expenditure.
Unlike local revenues, however, the composition of local expenditures did not change much over time (Table 6.3). Education has remained by far the largest component of local expenditures, accounting for over half of municipal spending (53%) in 2020 (CabMin, 2021[23]). This reflects both the importance placed on education throughout the reform process and the increased responsibilities attributed to municipalities for its provision. Municipalities are responsible for delivering primary, secondary, vocational and higher education services, including the maintenance of educational institutions through their local budgets and paying teachers under the educational subvention provided by the government (Ministry of Education, 2022[26]). Regarding higher education at the municipal level, expenditures only include payments for the training of specialists, scientific and scientific-pedagogical staff of higher education institutions established by municipal councils. Other important components of expenditure in 2020 included general public services (16%), economic affairs (10%) and utilities (8%), the latter two both decreased in the same period (CabMin, 2021[23]).
When assessing expenditures of amalgamated municipalities by economic classification for the period between 2016 and 2020, important changes can be identified. The most significant increase has been in the share of remuneration and payroll expenditures as part of total municipal expenditures; from 43% in 2016 to 59% in 2020. Conversely, share of capital expenses declined from 31% to 15% over the period (CabMin, 2021[23]). This likely reflects the fact that the national minimum wage increased annually over the period, without a commensurate increase in the revenue-raising capacity of municipalities or in the education subvention to cover teacher salaries, which put a substantial strain on the financial resources of municipalities (SKL International, 2019[27]).
Despite the advances and the unquestionable success of Ukraine’s decentralisation reforms, a number of challenges remained at the start of the war, which are examined in the following sections. These centre around various aspects of the country’s multi-level governance system, and include legal discrepancies in the assignment of tasks and responsibilities among the rayon and municipal levels of government. Furthermore, there is a need for greater co-ordination among levels of government, for example in dealing with overlapping assignments in areas such as the maintenance and construction of roads. Reinforcing vertical co-ordination is also necessary to ensure that municipalities are properly informed about relevant legislative and regulatory changes that may affect them, and can effectively communicate their needs and priorities to higher levels of government. Additional challenges include: the need for improved municipal planning; greater human resource, fiscal and investment capacity; a potential deepening of local inequalities; and the need to better support municipal economic development.
Ukraine’s amalgamation and decentralisation processes favoured the development of local self-government over that of the intermediate (rayon) level in order to fulfil the core aims of the decentralisation process. These included improving access to good-quality public services through a more optimal distribution of sub-national government powers, based on the principle of subsidiarity (CabMin, 2014[1]). Furthermore, the amalgamation and decentralisation reforms created territorially larger municipalities that are responsible for a core set of public services while empowering them to manage their own budgets, which was a clear break from the 2015 reforms (OECD, 2018[2]). Originally, the establishment of municipalities as local self-governments, the shift in responsibilities from rayon governments to municipal governments, and the system of territorial administration was to be enshrined in a constitutional amendment. Despite various attempts, however, the amendment has remained elusive. The impact is threefold there is a need to: i) manage legislative inconsistencies governing subnational government responsibilities; ii) address the question of how to ensure oversight of municipalities in a way that does not stifle local decision making processes; iii) resolve the open question as to the role of rayon state administrations as government units.
Managing legislative inconsistencies governing rayon versus municipal responsibilities
Today, there are inconsistencies between the Constitution of Ukraine and various pieces of legislation on the respective functions of municipalities and rayon state administrations. These inconsistencies present a risk not only to local democratic governance, but also to the functioning of government as a whole. A lack of clarity in the assignment of responsibilities could undermine the effective and efficient use of valuable resources supporting the war effort and in the subsequent recovery.
On the one hand, certain legislation grants municipalities broad powers and funding to directly manage service delivery tasks on behalf of their local communities. According to the Law “On Local Self-Government”, municipalities are now responsible for the infrastructure and funding and financing of administrative services, education and healthcare, which were formerly under the remit of the rayon level (Verkhovna Rada, 2021[19]). Meanwhile, Budget Code amendments have transferred locally-levied PIT income and ownership of state property from rayon state administrations to municipalities, providing them with additional funding and assets with which to manage their new responsibilities (Verkhovna Rada, 2020[28]; Verkhovna Rada, 2020[5]). These laws drastically reduced the responsibilities and funding of rayon state administrations for delivering local public services.
On the other hand, the Constitution and the Law “On Local State Administrations” have not been updated since the decentralisation reform process began. Among other elements, the Constitution describes the general mandate and functioning of the different subnational government units (e.g. oblasts, rayons, cities, city districts, settlements and villages), some of which have been subject to profound changes as part of the decentralisation reforms. The Law “On Local State Administrations”, by contrast, specifies the general competences of oblasts and rayons, as well as their sectoral responsibilities. For example, the law indicates that rayons are responsible for socio-economic development in their territories, as well as for science, education, culture and healthcare, among other areas (Verkhovna Rada, 2021[29]). However, as indicated earlier, many of these tasks have been transferred from rayons to amalgamated municipalities through a series of legislative and regulatory reforms (Table 6.1). This legislative discrepancy undermines the local democratic governance principle that is set out in the Concept Framework, which presupposes, that a simplified territorial administrative structure should be based on subsidiarity and a clear assignment of responsibilities among levels of government.
Another area of legislative ambiguity is related to the legal status of local self-governments, and whether they have legal personality. Currently, legal personality is attributed to various local government institutions, and not to a local community per se, which puts Ukraine in contrast with many European countries (CoE, 2021[30]). The fact that municipalities do not possess explicit legal personality creates ambiguity about their status. There have been concerns that this could, for example, give way to the creation of “fake municipalities” to manipulate local state property, try collecting taxes, or more broadly, to promote destabilisation (Rabinovych, 2020[31]). At the same time, a 2021 report found that “there is apparently no major obstacle for guaranteeing the rights of citizens, the integrity of the local public property system, or against having functional budgets, although the conflicts of competences between institutions in the same municipality remain a possibility” (CoE, 2021[30]). There are, however, several potential benefits to granting municipalities legal personality through legislative reform. These include simplifying the relation between the local mayor and municipal council. Moreover, it could contribute to preventing the possible mismanagement of funds, as there would no longer be numerous legal persons within municipalities who may be looking after their own interests (CoE, 2021[30]).
The allocation of different tasks among levels of government should be further clarified
With the decentralisation reform, communities saw significant improvements in service delivery. In terms of administrative services, for example, 79% of municipalities that were surveyed by the OECD in 2021 reported an increase in local service quality since 2014 (OECD, 2021[32]). The investment in establishing ASCs throughout the country has been particularly relevant in the context of Russia’s large-scale aggression in Ukraine, as the centres have demonstrated flexibility by taking on new tasks such as registering internally-displaced people, and co-ordinating humanitarian aid distribution (Prosto, 2022[33]).
A majority of surveyed municipalities also felt that the decentralisation reforms led to significant improvements in the quality of social services (71%) and education (70%) (OECD, 2021[32]). Since the transfer of social care responsibilities to local self-governments in 2019 and 2020, data from the Ministry of Social Policy indicate a significant rise in the number of smaller municipalities that are providing social care services for the elderly and families. This suggests that local access to social care has improved (OECD, 2021[10]; Verkhovna Rada, 2022[34]). Educational outcomes are reportedly better but remain more difficult to quantify. This is due to the challenges in identifying a direct link between the scores and grades of students in a particular municipality and the overall decentralisation process. Yet, results from the 2021 OECD survey of municipalities suggest that many amalgamated municipalities are satisfied with reform outcomes in this area. Indeed, 70% reported an increase in service quality since 2014 (OECD, 2021[10]).
Effective local service delivery also depends on sufficient clarity in the assignment of responsibilities among levels of government. A clear division of tasks enhances policy and service effectiveness, spending efficiency, and greater accountability (OECD, 2019[35]). Clarity in the assignment of responsibilities among Ukraine’s subnational governments has been elusive. For example, over 82% of the 741 municipalities surveyed by the OECD in 2021 reported that they have sufficient clarity in the division of tasks and responsibilities with other levels of government in the field of education (Figure 6.2). This high share reflects a relatively clear legal framework. The central government is a funding provider, regulator and standard-setter for education, as well as a source of capacity building support. Meanwhile, municipalities have the power to directly manage educational institutions (OECD, 2021[32]).
Note: Question: Do you consider that there is clarity in the division of tasks and responsibilities in the following fields between your municipal government and other (local) governments: other municipal governments, rayons, oblasts and central government)? Full response options: Waste management; Water and sanitation management; Public procurement; Housing; Healthcare; Social services (e.g. support for families, children, elderly, etc.); Public transport and roads; Education; Cultural facilities and services, and leisure (sport); Tourism; Parks/green space; Public security; Fire protection service; Spatial planning; Land and resource management; Support to SMEs; Energy; Administrative services; Other. The questionnaire was filled out by 741 municipalities (51% of all Ukrainian municipalities in 2021).
Source: Author’s elaboration, based on responses to the OECD project survey.
In contrast to education, a majority of surveyed municipalities felt that clarity for responsibilities in public transport and roads was lacking. This reflects the sector’s complex and overlapping legal framework. For example, the Law “On Roads” states that oblast state administrations are responsible for maintaining public roads of local importance, the Law “On Local Self-Government” maintains that such responsibility lies with municipalities, and the Law “On Local State Administrations” assigns this particular responsibility to the rayon level of government (Verkhovna Rada, 2021[36]; Verkhovna Rada, 2021[29]; Verkhovna Rada, 2021[37]). At best, the differences between the different laws can create uncertainty as to which level should act, for example in the construction or maintenance of local public roads. At worst, it undermines the effective delivery of public services and accountability as actors may avoid taking responsibility by “passing the buck” to other levels of government. It also risks contributing to inefficiency in service provision, for instance through a duplication of activities. Local road repairs will play a particularly prominent role in post-war reconstruction. As such, the government should urgently look to harmonise the legislative framework in order to provide clarity on the responsibilities of different levels of government and ensure an effective and efficient allocation of recovery funding. To assess and improve the effectiveness of the assignment of responsibilities among levels of government, policy makers should consider applying a subsidiarity framework (see Chapter 2, Box 2.7). More specifically, Ukraine could be guided by article 4.3 of the European Charter of Local Self-Government, which stipulates that “[p]ublic responsibilities shall generally be exercised, in preference, by those authorities which are closest to the citizen. Allocation of responsibility to another authority should weigh up the extent and nature of the task and requirements of efficiency and economy” (COE, 1985[38]).
A key challenge that lawmakers identified early on in the decentralisation process was the lack of clarity regarding the way in which decisions by subnational governments in general, and municipalities in particular, would be overseen by higher levels of government. This is problematic given the vast increase in administrative and service delivery responsibilities of amalgamated municipalities. In addition, representatives from Ukraine’s national and subnational levels of government, as well as non-governmental stakeholders signalled the importance of clarifying and updating the role of oblast and rayon levels of government (OECD, 2021[10]).
In order to address these challenges, in November 2021, the government prepared draft amendments to the Constitution that proposed replacing the oblast state administrations and the rayon state administrations by prefectures. The intention would be to appoint a prefect at the Oblast level, with sub-prefectures at the Rayon level, to oversee—not control—the legality of municipal decision making. At the same time, Oblast and Rayon councils would see their own executive committees, which are elected by the councils, empowered to execute council decisions in lieu of oblast and rayon state administrations, as is currently the case (Office of the President of Ukraine, 2021[39]). This would result in a shift from state administrations playing a direct territorial management role, as is currently stipulated in the Constitution, to a role focused on representing central government interests at a subnational level. This would ensure the legality of municipal decisions through legislative oversight and greater co-ordination among the various levels of government.
The constitutional amendments did not garner sufficient political support to be brought up for a vote prior to Russia’s large-scale invasion of Ukraine, and any actual constitutional reform is banned while the country remains under martial law. However, the proposed prefecture system has acquired even greater salience in light of the war and forthcoming recovery period5. Ensuring oversight of municipalities and strengthening co-ordination among different levels of government will be particularly important given the expected vast inflow of recovery funding and pressure on municipalities to allocate resources swiftly, efficiently and effectively.
The proposed constitutional amendment would see Ukraine’s territorial-administrative structure shift further away from a deconcentrated model to a mixed system that fuses elements of both deconcentration and decentralisation. In this regard, it would mirror, to some extent, the current system in France, where prefects are appointed by the President as heads of regions, and work together with democratically-elected regional and local councils. While the councils both adopt and execute decisions at regional and local levels, prefects are tasked with overseeing the legality of subnational decision-making and ensuring effective co-ordination between different levels of government.
Similar to France, the Constitutional reform proposed in 2021 in Ukraine would give prefects the power to appeal legal violations by subnational governments in court a posteriori. However, whereas under French law, only the courts can suspend or annul a subnational law, under Ukraine’s proposed constitutional amendments, the prefect would have the power to temporarily suspend legislation that it deemed inconsistent with Ukrainian law even before the courts had ruled on the legality of such legislation. This would provide prefects with broad powers to disrupt local decision making in the short term. In order to avoid this, any legislation that deals with municipal oversight should ensure that the power to suspend or annul local decisions is left to the courts. Moreover, as indicated in the recommendation of the Committee of Ministers of the Council of Europe “on supervision of local authorities’ activities”, any law or statute on supervision of municipalities should provide the possibility of effective recourse to judicial remedies against improper use of supervisory powers (COE, 2019[40]). Moreover, Ukraine is advised to ensure that any efforts to strengthen oversight of municipal decision making follows the principles of proportionality and subsidiarity.
A key challenge to institutionalising a prefect system in Ukraine is the need for a constitutional amendment that requires a two-thirds majority vote to be approved by the Verkhovna Rada. Given that past draft constitutional amendments were not passed due to a lack of political support, the government has explored the possibility of amending the Law “On Local State Administrations”, and enable rayon state administrations to play a prefect-like role in overseeing the legality of municipality decision making (Verkhovna Rada, 2021[29]). This would be consistent with the legislative approach to decentralisation that the reform process has taken to date. Subsequent draft amendments to the Law “On Local State Administrations” were presented to the Verkhovna Rada, with a final draft that had been pending approval when the war started (CabMin, 2021[41]).
A key difference between the first and second drafts of the bill relates to the proposed appointment system for heads of rayon state administrations. In the initial draft, heads of rayon state administrations would come from the civil service, and be appointed based on a competitive selection process that complied with national civil service legislation. In the more recent version of the bill, however, such elements are absent (CabMin, 2021[41]). This modification could open the way for a politicisation of the prefects. In addition, the appointment of an oversight actor that is not seen as vocationally impartial could lead to tensions between prefects and amalgamated municipalities. Policy makers should consider revising the bill to ensure that the appointment of prefects is based on a transparent and competitive selection process. In the same vein, in 2021, the G7 Ambassadors Support Group for Ukraine called for a constitutional reform that makes prefects accountable only to the Cabinet of Ministers and not to the President of Ukraine (Box 6.2). This follows an earlier statement by the G7 made in June 2021, which also emphasised the need to ensure that “any supervision from central authorities is proportionate and defined by law” (G7 Ambassadors, 2021[42]).
In December 2021, the G7 Ambassadors Support Group for Ukraine, which is comprised of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States, released a statement underscoring their support for the implementation of decentralisation reforms in Ukraine. They also provided a list of priorities for the country to consider in the context of the proposed constitutional reform, which could help to align Ukraine with European good practices. These recommendations have become even more relevant given that Ukraine was granted EU candidate status in June 2022.
1. The Constitution of Ukraine should be aligned with the European Charter on Local Self-Government, including on safeguarding the role of municipalities, providing adequate funding for delivering their responsibilities, defining their rights and powers and introducing a structured system of supervision;
2. Municipalities should be granted the status of legal entities;
3. Prefects should be accountable only to the Cabinet of Ministers (rather than doubly accountable to the President and the Cabinet of Ministers), and;
4. The central government, political parties, local government associations, civil society and other stakeholders should all be engaged in consultations on the draft Constitution of Ukraine.
Source: Author’s elaboration based on (G7 Ambassadors, 2021[43]).
In the context of Ukraine’s post-war reconstruction and recovery process, it will be important to further strengthen its vertical and horizontal co-ordination mechanisms. Effective co-ordination and communication among and across levels of government will be necessary to ensure that the design, funding and implementation of reconstruction initiatives meet territorially-differentiated needs and build on local assets, while also contributing to national priorities. Since 2015, different co-ordination bodies have been created and there is ad hoc consultation of municipalities and non-governmental actors. However, there are various opportunities for improvement.
Co-ordination and communication challenges among levels of government are both top-down and bottom-up (see Chapter 4) (OECD, 2021[10]). On the one hand, many municipalities have a relatively poor understanding of changes in the rapidly evolving legal framework that they are bound by, and are not always systematically consulted on matters of relevant laws, as is required by Article 4 of the European Charter of Local Self-Government, which Ukraine ratified in 1997 (COE, 1985[38]; OECD, 2021[10]). On the other hand, municipalities often struggle to communicate their development needs and challenges to higher levels of government, which could limit their access to much-needed support (OECD, 2021[32]). These challenges reflect the way in which existing mechanisms have been established for the co-ordination and implementation of regional and local development policy and decentralisation reforms between national and subnational governments.
A first example relates to the Inter-departmental Co-ordination Commission for Regional Development (ICC), which aims to co-ordinate the design and implementation of the State Regional Policy at national and subnational levels. Several of its tasks relate to the design, implementation and monitoring of Ukraine’s regional development policy at the municipal level. However, whereas the ICC’s regulations indicate that municipalities may be involved in the commission’s work, their participation is not guaranteed, only that of several ministries, CabMin, the Office of the President, and the Verkhovna Rada (CabMin, 2015[44]).
The Congress for Local and Regional Authorities presents a second example. The Congress was created in 2021 and serves as an advisory body that is convened and chaired by the President of Ukraine. Its purpose is to represent, protect and advance the interests of regional and local authorities, for example by promoting effective vertical and horizontal co-ordination between state and local government bodies. OECD interviews with local stakeholders indicated that municipalities’ participation in meetings of the Congress has, at times, been minimal and ad hoc (e.g. based on the invitations extended to a few select municipalities by the national government and oblast state administrations). There are also concerns that the Congress acts less as a forum for upward communication and two-way exchange, and more as a platform for the central government to present its national priorities to subnational governments (OECD, 2021[10]).
Ukraine’s multiple local government associations play an important role in supporting communication and co-ordination among levels of government. They are commonly set up to facilitate exchange between their members, identify common needs and priorities and advocate these at the central government level. They also support local authorities in implementing new legislation and regulations. However, the overlapping memberships in certain Ukrainian local government associations (e.g. the Association of Ukrainian Cities and the Association of Amalgamated Territorial Communities) have created competition among them, which risks fragmenting the strength and coherence of their advocacy to the central government (OECD, 2021[10]). Given that the government has been closely consulting with local government associations in the development of a national recovery plan, an approach that enables them to speak with one voice should be adopted as soon as possible.
Vertical and horizontal co-ordination mechanisms should be adjusted to promote more effective cross-government communication
With regard to strengthening vertical co-ordination and communication, the government could consider different actions. For example, it could provide municipalities with a permanent seat in the ICC’s sessions in order to strengthen multi-level communication about progress in implementing local development strategies, as well as challenges faced by municipalities. This would be particularly valuable during the reconstruction and recovery process given that municipalities may likely play a major role in defining and/or implementing reconstruction projects, making effective co-ordination even more important than usual.
Bottom-up communication between municipalities and higher levels of government could also be improved by the Congress of Local and Regional Authorities. While the Congress clearly has the potential to serve as a useful forum for municipal consultation, steps should be taken to ensure that consultations are more systematically carried out. This could be done by ensuring that two chambers are established, as envisioned when the Congress was created: one for municipalities and another for regions. This would enable more active and systematic municipal participation and exchange. In order to ensure that all municipalities can participate in the Congress on a rotating basis, an equitable process for selecting subnational representatives would be needed. At the same time, bottom-up communication could be improved by avoiding the fragmentation of municipal lobbying and advocacy (OECD, 2021[10]). In this regard, the different local government associations could consider creating a national conference of local government associations, which could facilitate exchanges between them and enable them to speak with one voice to the government when needed.
It should be noted that co-ordination between MinRegion and the donor community has been carried out by the Decentralisation and Regional Development Working Group, which is headed by MinRegion and co-chaired by the European Union (EU) and the Government of Canada. The Working Group enables MinRegion and international partners to exchange on updates to their work programmes, while providing a forum for feedback and learning, and enabling stakeholders to align their respective work and projects (MinRegion, n.d.[45]). However, the workstreams underpinning this co-ordination body may have been partially disrupted by the current war.
The differentiated process by which municipalities received their responsibilities through amalgamation has compounded differences in municipal planning, administrative, fiscal and investment capacities. Addressing these challenges effectively will be critical to supporting the post-war recovery so that all municipalities are able to deal with local challenges and improve local wellbeing. Broadly speaking, three relevant groups of municipalities can be identified.
Amalgamated municipalities that were formerly categorised as cities of oblast significance, which already had extensive responsibilities at the outset of the reform process. Many of these cities had a well-developed administrative capacity by the time the reform process had begun (OECD, 2021[10]).
Former local communities that amalgamated voluntarily at the outset of the reform process, and that received new tasks and responsibilities on a relatively incremental basis (OECD, 2021[10]). This gradual transfer of responsibilities afforded these municipalities time to develop their administrative capacities accordingly.
Communities that were amalgamated administratively in 2020 received all of their administrative responsibilities at once. These municipalities had the least amount of time to develop the various capacity dimensions necessary to effectively manage and execute their new responsibilities. In addition, they were not eligible for some the financial incentives that their peers who amalgamated voluntarily received (e.g. access to the Local Infrastructure Subvention) (OECD, 2021[10]).
This reform context should be kept in mind when developing policy solutions to strengthen municipal capacity. In particular, municipalities in the third reform group may require additional time and support, in order to ensure that they are able to meet their responsibilities effectively and benefit from the reform process.
Strategic planning capacity at the municipal level could be further consolidated
Capacity to manage all phases of the strategic planning cycle—from developing a diagnostic and designing a plan, to implementing it and monitoring and evaluating progress—helps municipalities identify development priorities, set clear targets and guide public investment. It can also enable municipalities to contribute more effectively to regional development strategies, ensuring that these strategies reflect local needs and capacities. In the post-war recovery, a robust strategic planning capacity will be critical for making sure that recovery initiatives are coherent with local realities and capacities, while building on local assets. Results from the OECD project’s online survey suggest that there may be a disparity in the strategic planning capacity of municipalities, which could weaken a place-based approach to the recovery process. By the end of 2021, half of the municipalities did not have an officially approved local development strategy, hampering their ability to guide local development efforts towards clear objectives and monitoring progress. (OECD, 2021[10]). In 2022, the Verkhovna Rada approved amendments to the Law “On the Principles of State Regional Policy". This law specifies, among other elements, that municipalities are required to develop local development strategies (Verkhovna Rada, 2022[46]).
One strategic planning capacity gap identified by the OECD survey relates to monitoring. Forty percent of surveyed municipalities indicated they do not have the necessary expertise to develop a monitoring and evaluation framework with clear objectives and indicators (OECD, 2021[32]). This reflects OECD interviews with local stakeholders, in which it was suggested that many municipalities lack the capacity to set appropriate indicators and define realistic targets (OECD, 2021[10]). Another capacity gap identified by the OECD relates to the involvement of non-governmental actors in preparing the municipal development strategy. Among surveyed municipalities, 39% indicated that they lacked the capacity to involve public or private non-governmental actors when preparing a local strategy (OECD, 2021[10]). This suggests that the development priorities identified by municipalities may not reflect the needs and/or capacities of other local stakeholders, such as the private sector and academia, which could ultimately lead to a poor allocation of municipal investment resources.
In order to address these strategic planning capacity gaps and ensure municipalities can make a substantial contribution to the post-war recovery, the government and other development actors should, among other measures, provide systematic capacity building support to municipalities in all phases of the strategic planning life-cycle, especially in the fields of citizen engagement and performance monitoring. This could take the form of training modules or guidance from MinRegion, the local government associations or the regional development agencies. A more systematic facilitation of peer-to-peer exchanges by local government associations and/or international development partners could also help municipalities to learn from the strategic planning good practices of other local governments at the national or even international level. These exchanges should be available to all types of municipalities (rural, settlement, urban), and include dissemination mechanisms to ensure that relevant knowledge, practices and tools are widely shared.
A more professionalised system for training municipal civil servants could strengthen human resource capacity
The need for further support of local capacity building in key areas like strategic planning raises broader questions about the quality of Ukraine’s municipal human resource training system. While municipalities have some access to vocational training programmes through the National Civil Service Agency, the programmes are not standardised and quality control mechanisms remain limited (Goncharuk, Kurniewicz, A and Swianiewicz, P, 2020[47]). In addition, with priority topics chosen by the National Civil Service Agency, local civil servants are unable to request the development of new training programmes that better meet their human resource needs (OECD, 2021[10]). OECD interviews with local stakeholders indicated a decline in the number of civil servants who have completed training courses in recent years, including at the municipal level. This may be attributed to a growing dissatisfaction with or disinterest in the training provided by the civil service training system (OECD, 2021[10]).
In connection with the post-war recovery and Ukraine’s EU candidate status, the need for building municipal expertise in key areas such as strategic planning, economic development, public financial management and donor relations will become increasingly urgent. In order to cater to this demand, and to enhance the professionalism of the local civil service and its capacities, the government, in collaboration with the different local government associations, could support municipalities by developing a subnational strategy for human resource management. This could include establishing an expanded list of standardised training programmes, with teaching content that is subject to effective quality control. It could also include conducting local civil service needs assessments and encouraging municipalities to prepare training plans that reflect their local needs. Training needs will likely change as the reconstruction and recovery process advances, which makes it necessary to review and update the human resource management strategy periodically, based on input from public servants and citizens (OECD, 2019[48]).
To improve municipal human resource and administrative capacity, the government also should prioritise updating the 2001 Law “On Service in Local self-government” (Verkhovna Rada, 2001[49]). In particular, it should make political neutrality a requirement for local civil servants, introduce mechanisms for professional development and ensure open and merit-based recruitment, performance management and appraisal processes. The latter is particularly relevant as many municipalities will likely receive significant funds for local reconstruction projects. Finally, concerns have been raised about an increasing gap in the remuneration of national versus local civil servants, which undermines the ability of municipalities to attract and retain skilled staff. Several of these elements were addressed in the draft Law “On Service in Local Self-Government Bodies" that was prepared by the National Agency of Ukraine for Civil Service. In August 2022, the law did not receive sufficient votes to pass the first reading in the Verkhovna Rada (MinRegion, 2022[50])
Strained municipal fiscal and investment capacity may call for adjustments to the fiscal and public investment frameworks
Municipalities face formidable fiscal and public investment challenges, which undermine their ability to effectively fund service delivery and support local investments. The first is the inequitable distribution of fiscal incentives for amalgamation. The second is the impact of the decentralisation reform period on municipal investment capacity. The third is the metastasis of Russia’s war against Ukraine in February 2022, which, while having put the financial stability of all local governments under serious pressure, has affected some municipalities more than others. Because of these elements, in the forthcoming post-war recovery, municipalities will face strained revenues, while also being expected to respond to increased demand for service delivery (e.g. clearing debris, building temporary or permanent housing for internally-displaced people and repairing damaged infrastructure).
With regard to fiscal capacity, as fiscal incentives for amalgamation were gradually scaled back, municipalities that merged relatively late in the process received fewer resources than their peers to meet their new service delivery needs and boost their administrative capacity. For example, as part of 2016 Amendments to the Budget Code only municipalities that voluntarily merged were rewarded with a 60% share of locally-levied PIT. Municipalities that did not amalgamate voluntarily were ineligible to receive this contribution until they were mandatorily merged in 2020. In addition, only municipalities that merged before 2020 were able to receive funding from the non-competitive Local Infrastructure Subvention, which was allocated to fund municipal infrastructure projects (OECD, 2021[10]). This subvention was scrapped in 2020 due to COVID-19 budget cuts.
The fiscal capacity of municipalities has been shaken by the recent dynamics of the war (and prior to that by the COVID-19 pandemic). On the one hand, the demands on municipalities are increasing as new tasks that are specific to meeting the challenges of the war are added. On the other, particularly in the first months of the war, municipalities faced large drops in local budget revenues (Chatham House, 2022[51]; World Bank, 2022[52]). This “scissor” effect on municipal public finance, i.e. an increase in expenditure and a decline in revenue, could lead to increased deficits and municipal debt, which will limit municipalities’ ability to fund recovery activities (OECD, 2019[35]).
With regard to public investment, there are indications that municipal public investment capacity was weakened over the voluntary amalgamation period. Between 2016 and 2020, the share of capital expenses in total spending by amalgamated municipalities declined from 31% to 15% (CabMin, 2021[23]). As mentioned earlier, this may be explained, in part, by hikes in municipal spending on staff salaries due to increases in the minimum wage (SKL International, 2019[27]). Moreover, evidence suggests that the decentralisation reform period has either had no significant effect on (or even weakened) the capacity of municipalities to carry out key public investment-related tasks. For example, less than half of municipalities surveyed by the OECD felt that the reforms had improved their ability to a) involve non-governmental actors in the identification of investment needs and b) monitor and evaluate the impact of investment projects. Moreover, certain characteristics of competitive investment funds that are available to all municipalities (e.g. SFRD), such as a 10% co-funding requirement for municipalities, have hampered the ability of municipalities with weaker fiscal capacity to obtain the funding necessary to fulfil their investment needs (MinRegion, 2019[53]).
In the post-war period, the government could consider multiple complementary policy interventions to improve local capacity to fund service delivery and finance subnational public investments. First, to improve the access of less affluent municipalities to central government funding for local development, the selection criteria of funds such as the SFRD could be modified, for example by linking (or better matching) co-funding requirements to local fiscal capacity. Municipalities with the weakest fiscal capacity could be exempt from providing co-funding or, barring this, they should be eligible for a reduced co-funding rate. This could be coupled with measures to improve the efficacy of regional and local development spending. This could be done, for example, by promoting projects that are designed by multiple municipalities and have a cross-jurisdictional focus to achieve economies of scale (see Chapter 5). Second, the government could support further outreach to and capacity building for municipalities to improve access to the multiple competitive subventions for regional and local development. This could include providing municipalities with greater clarity on eligibility and application procedures, while strengthening their ability to develop competitive proposals.
Rebuilding service delivery capacity after the war may depend on additional inter-municipal co-operation
How to rebuild and further improve service delivery capacity will be an additional challenge facing municipalities in the post-war recovery period. Results from the OECD project’s online survey indicated that, prior to Russia’s recent and large-scale territorial aggressions, the decentralisation reforms had had an uneven impact on local service quality. While a large majority of municipalities reported that the reforms led to improvements in the delivery of administrative services (79%) and social care (71%), in other key service delivery areas, such as waste management, they reported no effect (59%) or decreasing quality (3%) (Figure 6.3). It should be noted that there is a general scarcity of territorially-disaggregated data that can objectively measure local service quality.
Note: Question: What effect have the decentralisation reforms (including the amalgamation process) had on the quality of service delivery by your municipality in the following areas? Full response options: Increased quality; Decreased quality; No significant effect. The questionnaire was filled out by 741 municipalities (51% of all Ukrainian municipalities in 2021).
Source: Author’s elaboration, based on the responses to the OECD project’s online survey.
One solution to rebuild infrastructure and further improve public service delivery capacity, especially if further amalgamation is not a desired path, is through greater inter-municipal co-operation. Sharing responsibility for providing public services can help alleviate chronic public infrastructure shortages, particularly in those municipalities where critical public infrastructure (e.g. schools and hospitals) has been destroyed or badly damaged. It is also a cost-effective action that local governments—especially those with limited fiscal resources—can use to deliver the services they are required to provide (OECD, 2019[35]). The use of inter-municipal co-operation arrangements was a key concept underpinning the 2014 Concept Framework given the arrangements’ ability to generate economies of scale and improve cost-efficiency in the delivery of municipal functions.
Alongside the municipal amalgamation process, which increased economies of scale and municipal capacity to provide public services, there has been a gradual increase in the number of inter-municipal co-operation agreements signed between two or more municipalities (Figure 6.4). Between 2014 and 2021, 769 inter-municipal co-operation agreements were signed, with over 200 in 2019 prior to a drop during the COVID-19 pandemic. In 2021, there was a slight uptick in the number of inter-municipal co-operation agreements signed. This might reflect the fact the amalgamation process concluded in 2020 and that municipalities were increasingly turning to inter-municipal co-operation agreements to improve economies of scale.
There appears, however, to be room for improvement. Over half of municipalities surveyed by the OECD in 2021 indicated that the amalgamation process had either had no noticeable effect or a negative effect on their co-operation with other municipalities (OECD, 2021[32]). Research indicates that, in general, the complexity of the procedure for concluding agreements, limited awareness of inter-municipal co-operation by municipal staff, as well as reluctance among mayors to co-operate with other municipalities are all factors contributing to the slow take-up (OECD, 2018[2]; Wright and Slukhai, 2021[54]). This corroborates findings from analysis in different OECD countries, such as Poland, where a lack of knowledge by local authorities of inter-municipal co-operation agreements and the risks involved may have also slowed uptake (OECD, 2018[55]; OECD, 2021[56]). In the case of Ukraine, many municipalities reported a lack of understanding of the benefits of inter-municipal co-operation or the capacity to organise these arrangements (OECD, 2021[10]).
Note: The bar chart denotes how many inter-municipal co-operation agreements were signed in a given year. As such, it also includes co-operative agreements that have either subsequently expired or been made redundant through further municipal amalgamation between two or more partner municipalities.
Source: Author’s elaboration, based on data from (MinRegion, 2022[57]).
In the post-war recovery period, improving knowledge and awareness of inter-municipal co-operation arrangements could boost local service delivery and help financially strained municipalities free up funding for other investment priorities. In this regard, the government could consider providing municipalities with additional support material (e.g. on relevant legislation, good practices, draft co-operation agreements, etc.) and advice on how to set up and manage inter-municipal co-operation, particularly in service delivery areas that have not been targeted much in the past. In the context of the war, the national government could encourage or even temporarily require increased inter-municipal co-operation, whereby subnational governments share staff and expertise or the provision of public services to support those municipalities that saw their human resource and service delivery capacity severely reduced due to the war. There is some precedent in OECD countries for making inter-municipal co-operation mandatory in municipalities under certain conditions. In Greece, for example, smaller municipalities are required to enter into inter-municipal co-operation arrangements in order to meet their town planning and welfare benefits service responsibilities (OECD/UCLG, 2018[58]). However, mandating inter-municipal co-operation can be politically sensitive and legally challenging to establish.
The purpose of territorial economic development is to build the capacity of an area to improve its economic prospects and contribute to the well-being of its inhabitants. It can reduce disparities between more and less affluent communities, add to the stock of locally generated jobs and firms, while increasing private sector investment (OECD, 2014[59]). To support economic development, municipalities need a wide range of skills and capacities, for example for identifying and engaging with local businesses, as well as developing and implementing economic development and investment strategies and projects.
While the decentralisation reform process appears to have led to important improvements in the delivery of local public services, there are indications that it has not significantly reinforced municipal economic activity. This was already a salient issue before the war, given the large and growing economic disparities between Ukraine’s territories and the need to promote growth across all regions (see Chapter 3). For example, a 2021 survey by the European Business Association found that companies in many Ukrainian regions continued to face difficulties doing business. There was some regional variation to this trend, with surveyed entrepreneurs in Lviv Oblast rating the regional business climate as “satisfactory”, compared with “difficult” in the other surveyed regions. Overall, however, the survey results reflected a lack of improvements to the local business environment (European Business Association, 2021[60]). Empowering municipalities to more effectively support economic development will be key to rebuilding local communities and encouraging displaced residents to return. It will also help in improving the long-term economic potential of affected territories and in increasing Ukrainian’s well-being.
Many municipalities currently lack the knowledge and skills to effectively support municipal economic development. Among municipalities surveyed in 2021, 68% indicated that the decentralisation reforms had had no significant effect on support to small and medium-sized enterprises (SMEs) within their municipality (OECD, 2021[32]). This may reflect the fact that municipalities continue to have only limited explicit responsibilities for their economic development, with local leaders viewing the delivery of social services as their most important task (OECD, 2021[10]). Moreover, as is also the case in many OECD countries, some municipalities consider that there is a lack of clarity with respect to the division of responsibilities for supporting SMEs among levels of government—about 50% of municipalities in the case of Ukraine (OECD, 2019[35]) (OECD, 2021[32]). Furthermore, collaboration with the private sector to support economic development activity is extremely limited. Only 10% of the 741 surveyed municipalities indicated that they work with private sector organisations in public-private partnerships (PPPs). Regulatory uncertainty (26%) and lack of knowledge by municipal staff of how to develop and manage a PPP (17%) were cited as two important constraints to setting up and managing PPPs at the local level (OECD, 2021[32]).
There are a number of measures that the government should take to strengthen the mandate and capacity of municipalities to support territorial economic development. First, the government, together with the different associations of local governments, could provide guidance to municipalities on the policy options available to them to stimulate economic development and reduce the administrative burden on businesses. For example, municipalities could support collaboration between local academic, professional or vocational educational institutions and the private sector, in order to ensure that educational and training programmes meet the needs of local businesses. The effects of the war made this issue even more salient, as widespread population displacement caused by Russia’s aggression is likely to exacerbate territorially-concentrated labour shortages for the foreseeable future. The government could also provide training for municipalities to more effectively engage with the local private sector while also maintaining good governance practices (e.g. identifying investment needs or co-designing local investment projects).
Moreover, the government could consider adjusting existing regional development subventions to more actively support SMEs. In recent years, a large share of regional and local development grants have mainly targeted investment in building and maintaining local public infrastructure, rather than supporting territorial economic development or innovation (see Chapter 5). Adjusting this practice could help to spur additional economic activity in war-affected municipalities. Finally, the government could consider providing capacity building support to municipalities on how to develop and manage local PPPs, which could be a valuable financing tool to help local governments shoulder the costs of the post-war reconstruction of local infrastructure. However, such partnerships involve substantial risks, including regulatory capture, conflict of interest and long-term fiscal constraints on local budgets. Typically only larger municipalities possess the requisite fiscal and institutional capacity to establish a PPP. Moreover, PPPs should be undertaken only where they are affordable and produce greater value for money than would be provided by the delivery of public services or investment through traditional means (see Chapter 5). In the light of the post-war reconstruction and recovery period, the government may want to review the existing legislative framework for PPPs, which was updated in 2016, to see if it provides sufficient clarity on how municipalities can establish and manage a PPP, as well as establish the necessary guardrails to avoid misuse.
In broad terms, Ukraine’s decentralisation reforms improved local democracy and accountability. Yet there are gaps in the legislative framework that risk undermining elements of both. With regard to electoral reform, an issue with particular resonance in the context of Russia’s war is the lack of local voting rights for Ukrainians who reside abroad. Currently, these citizens are regarded as not belonging to any municipality and therefore do not have any right to vote in local elections (COE, 2020[61]), despite millions having been displaced from the country against their will as refugees (UNHCR, 2022[62]). Given the situation, the government should consider amending the Electoral Code to allow citizens temporarily living abroad to vote in national and local elections.
With regard to local accountability, while the starosta institution provides a promising foundation for improving public engagement in municipal decision making, there are a number of issues that should be addressed to improve its effectiveness. First, there is a lack of data regarding the activities of starostas. For example, there is no single starosta register, which makes it impossible to know the exact number of starostas in the country or what services they provide as per local council decision. This reflects the fact that there is no legislation or guidance stipulating how many starostas can be established within a single municipality. Moreover, there are no performance indicators with which to monitor the performance of starostas. This means that they operate with little oversight (OECD, 2021[10]).
Second, there are concerns over the expertise and skills of starostas, as well as the financial resources allocated to them. According to law, starostas do not receive any training for their role. As a consequence, many starosta appointees lack the necessary skills to work effectively with municipal governments on solving local issues (OECD, 2021[10]). Moreover, there is significant variation in the financial remuneration for starostas and additional financial support that they receive to carry out their mandate. While their basic salary is UAH 11 000, local councils can provide them with an additional salary and equipment (OECD, 2021[10]).
Strengthening the capacity of starostas to carry out their mandate (e.g. supporting the development of the local budget, providing administrative services, overseeing local projects) will be important for ensuring that municipalities remain accountable to residents. This is particularly so in light of the volume of programmes, investment, and service delivery that municipalities will be called upon to deliver as part of the reconstruction and recovery process. The government should consider developing clear standards for their role and some core training modules on their key functions as a priority. This would help to set concrete expectations and provide a baseline of knowledge and skills that can be used to accomplish tasks. To the extent possible, the government should also consider increasing the basic salary of starostas. Residents might then find these positions more appealing, which could improve the quality of candidates, while also ensuring that they are less dependent on alternative sources of personal income (e.g. a second job) and can commit to their responsibilities more fully (OECD, 2021[10]).
The escalation of Russia’s war in Ukraine has exacerbated municipalities’ development challenges. Pre-existing municipal disparities have widened substantially because of the war, as can be seen through the near-total destruction of some local communities. Yet, in others governance structures are emerging relatively unscathed. In addition, the human resources capacity of many municipalities has been severely hampered as local civil servants have fled to safer places in Ukraine or abroad, or joined the armed forces. Moreover, the war’s pressure on municipal public finance—increasing municipal expenditures and declining revenues—has compounded the fiscal challenges that many municipalities were facing prior to 24 February 2022.
During the recovery period, policy makers should look to ensure that the reconstruction of war-torn infrastructure goes hand in hand with a strategy of long-term socio-economic development that harnesses the economic potential of all of Ukraine’s territories. Failing to do so will not only thwart the rebuilding of local economies and livelihoods, it may also create the impression that reconstruction is not equitable, thus undermining trust in government. In order to prevent this, subnational recovery efforts should, among other elements, account for the territorial socio-economic development trends and governance challenges that municipalities were facing prior to February 2022. These include large differences in regional GDP and local competitiveness, as well as significant divergences in the administrative and fiscal capacity of municipalities.
The government should ensure equitable subnational reconstruction, tailored to local needs and assets
A priority for Ukraine should be ensuring that it adopts a place-based approach to the post-war recovery, at both the regional and municipal levels. Such an approach would take into account the starkly differentiated reconstruction needs of local communities. At the same time, it would enable the recovery process to be tailored to account for the divergent development challenges and capacities facing local communities, while building on local assets. This would support a more equitable reconstruction process, and ensure that all municipalities can share in the fruits of the recovery.
In this regard, as Ukraine moves forward with the implementation of a national recovery plan it should involve subnational governments, including municipalities, in the definition of immediate recovery support schemes, as well as more long-term strategies to strengthen their economic potential. This will help to ensure that recovery implementation and funding mechanisms reflect local needs and assets. In addition, the recovery should build on the skills and experience that municipalities have gained since the launch of the decentralisation reforms in providing citizens with a wide array of public services, as well as managing investment funding. Key in this regard will be developing a more effective civil service training system, in order to further bolster local human resource capacity.
In addition, existing vertical and horizontal co-ordination mechanisms should be reinforced to improve communication among and across levels of government in order to establish how to meet local needs and priorities while avoiding a fragmentation of recovery efforts. Co-ordination bodies such as the Congress of Local and Regional Authorities and local governments associations could be used to promote and facilitate discussion and exchange on prospective legislative reforms impacting municipalities, and/or changes to (reconstruction) funding mechanisms. Furthermore, they could help to identify municipal capacity building needs on issues that are particularly relevant for the post-war reconstruction period, such as procurement, project appraisal, transparency and donor relations, and promote the development of corresponding training material. Concurrently, in order to streamline reconstruction and recovery processes and ensure policy coherence, further efforts should be made to clarify development and reconstruction planning requirements for the different levels of government.
The recovery could create space to re-evaluate Ukraine’s territorial governance structure
The post-war recovery period will also present an opportunity to review Ukraine’s territorial governance structure. The need for more effective municipal oversight, which was already apparent prior to February 2022, will increase further due to the large volume of external funding that will likely flow to municipalities in the aftermath of the war, and the need for such funding to be allocated as quickly as possible to recovery initiatives supporting economic development and well-being. Ensuring the legality of local decisions in relation to recovery initiatives will be paramount for corruption to be avoided and recovery funding to meet its stated objectives.
As discussed above, reforming Ukraine’s territorial governance structure could help to improve oversight of municipal decisions, as well as strengthen co-ordination and co-operation among levels of government. Preferably, this would take the form of a constitutional reform, which would replace the oblast and rayon state administrations with a prefecture system. In the absence of a change to the Constitution, the government could consider amendments to existing legislation that would assign municipal oversight tasks to rayon state administrations. At the same time, it will be important to ensure that the role of any entity in charge of oversight is impartial, and does not unduly interfere with the day-to-day business of municipalities.
Other reforms related to the country’s administrative-territorial structure were also under active consideration prior to the war. For example, legislative proposals to amend the governance model of Kyiv City have been a source of robust public debate. Currently, the positions of elected local mayor and state-appointed head of the Kyiv City state administration are combined in a single role, which creates a confusion of functions and a conflict of interest. The 2021 Draft Law “On the City of Kyiv—the Capital of Ukraine” aims to separate the two positions, with the mayor of Kyiv tasked with implementing a political strategy, organising the work of the city council and implementing municipal decisions, and the head of the Kyiv City state administration tasked with responsibilities such as ensuring that the decisions made by the mayor comply with the law. Debates have arisen in relation to this issue of administrative supervision. For example, previous versions of the draft law did not clearly specify the principle of proportionality (i.e. preventing oversight from becoming disproportionate with regard to the interests being protected) in administrative supervision. If these previous versions of the draft law had been approved, the ability of the mayor to run the city’s affairs independently could have been severely limited (COE, 2020[63]; COE, 2022[64]). Policy makers will need to revisit these issues in the post-war recovery period, in order to ensure that an appropriate balance between local democracy and accountability is struck in the capital.
Any reform of the country’s territorial-administrative system should be evidence-based
In the context of Russia’s further encroachments into Ukrainian territory since February 2022, there is an ongoing debate regarding whether the country’s administrative-territorial organisation may need to be further adjusted after the war has ended. The debate has been ignited as the war has: a) transformed the demographic situation across territories and b) wrought widespread infrastructural damage in certain areas. Additional (voluntary) amalgamations could be considered, though such reforms take time to generate results and any decision on additional reconfiguration might be premature as there is insufficient data to determine how performance has changed over time given the recent reform cycle.
Moreover, a sizeable minority of municipalities were only amalgamated in mid-2020, and had less than two years—which coincides with the COVID-19 pandemic—to develop their capacity to meet more extensive responsibilities before the outbreak of war. Even municipalities that have the potential to meet their responsibilities will likely require additional time to develop their capacity. Increased inter-municipal co-operation may provide an alternative for improving the cost-efficiency and quality of local service delivery that stops short of further municipal amalgamation.
Any future amalgamation decisions made should be evidence-based. However, as discussed above, municipal performance data are currently limited. Particularly challenging is the lack of data to measure access to (or the quality of) various local public services. Based on the data available and a survey of over 50% of the amalgamated municipalities on Ukrainian territory, the OECD conducted an assessment of how Ukraine’s municipal performance has changed over the past few years. As discussed in the next chapter, the results of this analysis, which may help to inform the discussion on any future adjustments to the multi-level governance system, identify clear progress in the performance of amalgamated municipalities over the reform period, while highlighting several ongoing and new challenges, including those created or exacerbated by Russia’s war in Ukraine.
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Notes
← 1. Note: owing to Russia’s war and the imposition of martial law in Ukraine, constitutional amendments in the country are currently banned (Just Security, 2022[67]).
← 2. The Budget Code of Ukraine defines subventions as inter-governmental transfers of funds to be used for specific purposes through procedures defined by the authority that decides to provide the subvention (Verkhovna Rada, 2020[6]).
← 3. Administrative decentralisation focuses on a reorganisation and clear assignment of tasks and functions among territorial levels of government in order to improve the effectiveness, efficiency and transparency of national territorial administration; fiscal decentralisation involves delegating taxing and spending responsibilities to subnational tiers of government. The degree of fiscal decentralisation can depend on the amount of resources delegated and on the autonomy in managing these resources. Autonomy is greater if local governments can decide on tax bases, tax rates and the allocation of spending (OECD, 2017[66]).
← 4. While most health facilities are under local government ownership, following the recentralisation of most healthcare financing in 2017, the financing and delivery of public health services are currently a mix of central and local government responsibility (WHO, 2021[7]).
← 5. Discussions regarding the necessity of constitutional reform are long-standing in Ukraine. A related issue in this vein includes the possible reform of legal personality at the local level. A 2021 report by the Council of Europe notes that unlike in most European countries, territorial communities in Ukraine currently lack a legal personality, which is instead awarded to institutions of local government (whose personal composition is by nature changeable). Ongoing debates on both constitutional reform and legal personality in Ukraine aim to provide a clear and transparent status for municipalities within the country’s territorial-administrative structure (COE, 2021[65]).