Ukraine’s Slow Struggle for Decentralization

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Decentralization reforms in Ukraine have begun to deliver results, but the government in Kyiv needs to find creative ways to ensure successful completion of the process.

The decentralization reforms that began in 2014, although incomplete, have already brought significant change to Ukraine. After two decades of power being concentrated in the capital, new regional administrations now have more responsibility for local services. Many of these authorities have larger budgets than their predecessors and are using these funds to improve roads and schools. The new administrations have greater prospects for economic development and enjoy more respect in Kyiv.

However, there remain many bottlenecks that prevent the successful completion of the reforms. The decentralization process has proceeded without a political consensus on what the role of the state should be in Ukraine in the wake of the 2013–2014 Euromaidan revolution. Civil society regards decentralization as a means of reducing the influence of what it perceives as a captured state on Ukrainian public life. Western donors, who have provided technical and financial assistance to help implement the changes, see decentralization as a tool of democratization that the country badly needs to reverse attempts by the administration of former Ukrainian president Viktor Yanukovych to appropriate power. The central authorities in Kyiv, wary of relinquishing too much power, do not show the same commitment to the reforms as do their Western partners.

The process is especially unpopular in Ukraine’s parliament, the Rada, where some opposition politicians allege that decentralization is an underhand effort by the administration of Ukrainian President Petro Poroshenko to exert new power over the regions via the appointment of presidential prefects across the country.

A further complication is that for many of Ukraine’s Western partners, decentralization is an instrument they believe can fix the problem of Russian-backed separatism in Ukraine’s southeast. That is why the constitutional amendments required for decentralization were put in the same legislative package as the proposed legal changes stipulated in the controversial Minsk agreements, which aim to end the war in southeastern Ukraine. But this move has helped make the reforms a target for opposition politicians. It is now highly unlikely that the ruling coalition will be able to muster the 300 votes it needs in the Rada to pass these constitutional amendments.

In this political context, Ukraine’s decentralization reforms have lost momentum. However, as the process is already delivering results on the ground, the government needs to find creativity to pursue it, even if it cannot be underpinned by constitutional changes.

Decades of Debate

Discussion of decentralization reform is as old as independent Ukraine. In 1991, the new country inherited a centralized state model that gave local councils very few responsibilities. Administrative divisions made for small and unviable territorial units. Ukraine had 24 oblasts (regions) as well as three areas with a special status: Crimea, Kyiv, and Sevastopol. At the next level down, there were 490 rayons (districts), including 458 towns, 783 smaller settlements, and 10,279 villages.

Several Ukrainian governments attempted decentralization reforms, but with limited success. Until 2010, most of the efforts were focused on fiscal rather than political and regulatory decentralization. A new budget code, introduced in 2001, established a system of direct fiscal transfers between the central government and regional administrations and a transparent formula for the allocation of intragovernmental transfers.
However, constant political infighting and a persistent reflex in Kyiv to maintain central control blocked the political devolution local authorities needed to manage their own spending. The Yanukovych administration, which took office in 2010, simply recentralized power, transferring important responsibilities back from rayons and oblasts to central ministries.

A New Impetus

The Euromaidan revolution reenergized the decentralization process. Both post-Euromaidan governments have declared decentralization to be one of the pillars of their reform agenda. At least on paper, progress has been swift. The main legislative framework for decentralization was outlined in the concept note on the reform of local governance that was approved by the Cabinet of Ministers on April 1, 2014. The initiative was justified by the need to address poor living standards, especially in rural areas, ineffective use of resources, and a lack of institutional capacity in Ukraine to provide services to the population.

The plan envisaged a country with the same 24 oblasts and three special areas as before, as well as approximately 100 rayons, while 1,500 hromadas (communities) would be created out of the towns, settlements, and villages. Each administrative tier would have both elected councils and administrative representatives appointed from above. The proposal included constitutional amendments that would replace the old local administrations with prefects appointed by the president and would confirm the rights of territorial communities to levy local taxes and fees.

Then, international pressure on Kyiv to adhere to the Minsk agreements complicated the issue. Separate legislation regulating local self-government in Ukraine’s eastern Luhansk and Donetsk regions, which are currently outside the control of the government in Kyiv, was added to the draft constitutional changes on decentralization. The amendments, which had already been approved by the Constitutional Court of Ukraine, were passed by the Rada in a first reading on August 31, 2015. But the process was effectively halted the same day when violent protests erupted outside the parliament building and four guardsmen were killed in a grenade attack. The violence vividly illustrated how fragile the political consensus in Ukraine is on these questions.

In May 2016, the Cabinet of Ministers attempted to get the process back on track by including decentralization measures in an ambitious five-point action plan. Using its executive power, the government has even sponsored draft bills to implement the constitutional changes whenever they are eventually approved by the Rada. The plan set the objectives of establishing viable local self-government by amalgamating small communities into larger ones, trimming the functions of higher-level regional administrations, and pledging adequate funding for local self-government, especially in the fields of health and education. A greater challenge is the as yet distant goal of giving communities the right to manage their agricultural land resources.

Several parties in the Rada continue to strongly oppose some of the changes. Opposition is focused on the proposed institution of presidential prefects who, after the constitutional amendments, would take over functions previously held by regional administrations and would oversee decisions made at the local level. Samopomich (Self-Reliance), a party in the first post-Euromaidan government coalition, has strongly criticized the proposal as a new form of presidential “centralization.” For this and other reasons, Samopomich has joined with other opposition groups in the parliament such as former Ukrainian prime minister Yulia Tymoshenko’s Batkivshchyna (Fatherland) party and the Opposition Bloc to vote down the government’s proposals to institute this change.

Incremental Progress

Against all the odds, the technical implementation of decentralization reforms has moved forward, thanks in large part to Western financial and political support.

The first positive step was a 2015 law on the voluntary consolidation of ''hromadas'', which allows for the amalgamation of existing communities into bigger units. So far, 367 new hromadas have been formed, or around 25 percent of the planned total. These newly amalgamated communities have received new responsibilities and are permitted to determine the size and structure of their own executive administrations, even though the central government still decides on the salary levels of local employees.

Support for this process varies widely across Ukraine’s regions. City, village, and settlement heads who were elected to office in 2015 and want to serve out their full terms are resisting the merger of their districts with others. Some mayors who enjoy popularity and are in conflict with local councils are more willing to start the amalgamation process to speed up the reelection of those councils.

Fiscal decentralization has set new rules for the allocation of taxes to local budgets. A total of 60 percent of personal income tax, 100 percent of state duty, and 100 percent of the fees for administrative services are now paid into local budgets. Meanwhile, the overall size of local debt should be lower than 200 percent of the average annual projected size of a budget’s development revenue (or 400 percent in the case of Kyiv). In a radical change, local administrations have gained the right to levy a local property tax and a local excise tax on alcohol, tobacco, and fuel. They are also allowed to borrow larger sums than before from the central government and banks to finance their spending projects.

Fiscal decentralization has brought opportunities and fresh challenges. In 2016, the budgets of the 159 communities amalgamated in 2015 increased by 49 percent on the previous year, to 132 billion hryvnia ($4.9 billion). Ukraine’s 2017 budget foresees a 23 percent increase in local budgets. Yet, there are concerns that the revenue base of these communities may not be sustainable, due to the climate of political uncertainty.

Moreover, the reforms have cut central subsidies to some areas and may widen the already-large inequality gap between different regions. The early winners are small western Ukrainian cities, and the losers are those that depend on heavy industry. Many people have criticized the process on the grounds that smaller settlements are losing out.

Most of the new funds have been spent on the repair of roads or on educational and cultural institutions—a rare treat in Ukraine. The repair of the country’s notoriously poor roads, made possible by a central subsidy for local infrastructure projects worth 1 billion hryvnia ($36.9 million), is probably the most visible and welcome result so far of the fiscal decentralization process.

In another significant change, the New Ukrainian School program gives local hromada administrations responsibility for primary and secondary education, including the provision of preschool places. A new network of high-quality hub schools is set to be created, to take on children from a wider geographical area and consolidate resources for providing better-quality education. Local hromadas are also due to be given responsibility for primary healthcare—doctors, paramedics, clinics, and obstetric centers—while secondary care will be provided on the basis of new hospital districts formed to correspond with new larger rayons.

Bigger budgets pose another challenge to local authorities, as they require greater managerial competence, which is often lacking. Local governments need professionals in public health, education, infrastructure, communal services, energy efficiency, and economic development. However, depopulation and urbanization make it very difficult for small rural communities to attract qualified personnel. International technical assistance projects aim to tackle this problem, but Ukraine needs a long-term overall improvement of its education system to train the necessary public administration professionals.

How to Move the Reforms Forward

Much work is needed to see the decentralization process through to a successful conclusion. The current plan for the creation of new hromadas does not contain a clear sequence of steps, and there is no clarity as to when the voluntary amalgamation of communities becomes a compulsory process. A more concrete implementation plan with clear deadlines for each stage of reform is necessary. Policymakers also need to improve the constitutional framework for decentralization and streamline the legislation for the amalgamation process to allow the merger of territories from different rayons. Yet in the current fragile political situation, there is little hope of the Rada passing the relevant legislation. That puts a responsibility on the executive to move the reforms forward on its own.

The government needs to communicate more effectively the importance of the reforms to the public, which supports the process in general terms but does not understand it properly. The government should also send stronger messages on the sequencing of the reforms and the need for clear deadlines. The Central Reform Office for Decentralization can play the key role in managing this process and making it accountable to donors.

Another problem is that the legal status of the powers delegated to local communities has not yet been defined, because the necessary constitutional amendments have not been passed, leaving the reforms that have been enacted so far vulnerable to changes in the political climate. Moreover, under current rules, hromadas from different neighboring rayons are not allowed to merge. A draft law allowing the amalgamation of 28 hromadas across rayon boundaries was voted down in the parliament on December 6, 2016.

A paradox of the decentralization reforms is that while most of the Ukrainian public supports it, the majority of those same people hold a paternalistic outlook and expect the central government to take care of them. Polls show that only 32 percent of citizens are ready to engage in local-level decisionmaking, and just 15 percent believe that they can influence the situation in their own municipality.

Ordinary Ukrainians are cautious in part because politically and economically strong patrons are emerging or reemerging in the regions, using the decentralization process to benefit themselves and their clients. Local oligarchs still have the most resources to compete in and win elections.

Yet at least local government enjoys a higher level of trust among Ukrainians than do national institutions, which are regarded with cynicism. More than half of Ukrainians support the delegation of more authority to the local level. Anecdotal evidence suggests that citizens in amalgamated communities tend to engage more in public hearings and community meetings to discuss local issues than those in nonamalgamated areas. According to a report by the EU’s Committee of the Regions, local citizens are particularly engaged “when it comes to issues that are of paramount importance to individuals, families and communities, such as schooling, public safety and the environment.”

On the local level, the new amalgamated communities now face the challenge of how to properly manage the extra funds they have been allocated. They have a chance to increase economic development in their regions and make them economically sustainable. But this will not happen without necessary data collection and monitoring of the process by both the central government and Western donors. A more transparent process should in turn spark more engagement from local citizens.

Ideally, decentralization reforms would press forward against a background of political consensus at both the national and the local level. However, this is not feasible, unfortunately. The current ruling coalition is too weak to push the reforms forward, while the Poroshenko administration’s main immediate objective is to conserve the present political rule.

The key may lie in public engagement. If the Ukrainian public can get behind the decentralization efforts, this will inspire the government and civil society to expend more energy on the process and save these reforms from being aborted by political infighting—as has happened on previous occasions over the last two decades.

This article was originally published by Carnegie Europe in cooperation with the Konrad-Adenauer-Stiftung in Ukraine. It is part of Carnegie’s Reforming Ukraine project and is supported in part by the Konrad-Adenauer-Stiftung, the Open Society Foundations and the Zentrum für Osteuropa- und internationale Studien (Center for East European and International Studies - ZOiS).

Authors:

Yulia Yesmukhanova is a Ukrainian expert on decentralization reform and good governance.
Balázs Jarábik is a nonresident scholar at the Carnegie Endowment for International Peace.

published

Ukraine, March 14, 2017

Decentralization

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