Oleksandr Nosal

CEO and Founder

Oleksandr Nosal: Everything You Wanted to Know about the Reform of Local Self-Government and Decentralization

The necessary condition for modernizing Ukraine is changing administrative divisions and strengthening the role of local self-government. The current system of spatial organization of power was formed during the Soviet times and is an expression of command methods of administation. In fact, the last structural administrative-territorial reform in the Soviet Union was carried out in the early 60s. Despite Ukraine’s obtaining its independence, transition to the market economy, change in the democratic situation and multiple other factors, principles laid out 50 years ago, we are mostly still observing till now. Thus, in Ukraine the Decree of the Presidium of the Parliament of Ukrainian SSR from March 12, 1981, On the Settlement of Issues of the Administrative-Territorial Structure is still in force. It defines the procedure for changing the status of territorial units and their boundaries. Most of the rules set forth in this Decree directly contradict the norms of the Constitution.

Unfortunately, none of the Ukrainian Governments was able to align the administrative-territorial order with the challenges of time. At the same time, the situation becomes more complicated every year. For instance, the annual decline in the share of rural population is 0.2%, almost 50% of municipalities have fewer than 1000 inhabitants, more than 50% of all municipalitiws are at least on 70% dotation.

The urgency of implementing the reform is stressed by both Ukrainian and foreign experts. Having ratified the European Charter of Local Self-Government in 1997 and taken certain commitments, Ukraine, unfortunately, has done very little to implement the fundamental principles of local self-government laid out in this document. In fact, for 15 years this homework has been left undone. At that, governments of European countries and international organizations provided a huge amount of material and professional help aimed at implementing the reform. The Swiss-Ukrainian project Support of Decentralization in Ukraine (DESPRO) financed by the Swiss Confederation has been operating in Ukraine since 2005. Decentralization is an important part of the agenda of Ukraine-EU association. One of the priorities of this document is

“Strengthening the functioning of local and creating regional self-government, legal status of service in local self-government, including through decentralization that will provide them with substancial powers and appropriate financial resources according to standards laid out in the European Charter of Local Self-Government.”

Previous Attempts

The urgent need for reforming local self-government was felt by every Ukrainian government, but the implementation of the reform always faced the absence of political will and incompetence.

The first half-try at reforming dates back to 1998, when the President of Ukraine signed the Decree №810/98 On Measures to Implement the Concept of Administrative Reform in Ukraine. The authors did not dare to introduce radical changes to the Soviet in its essence administrative-territorial structure even on paper, and in the history of the document remains half-hearted theoretical, with no chance of practical implementation. The second attempt happened in 2005, during the days of the Government of Yulia Tymoshenko. To implement the reform there was created a position of the Deputy Prime Minister for Administrative Reform in the Cabinet of Ministers, which was handed to Roman Bezsmertnyi. A task force consisting of representatives of local governments, the public and experts was also formed, as a result of its activity a draft law on the reform of the administrative-territorial structure of Ukraine was produced. However, with the beginning of the political crisis of 2005 and the resignation of the Government, reforming was put on hold. In addition to the political situation, which took place against the background of the attempt to reform, many other important issues ensured the failure of the reform in the end. For example, the concept of the reform was not clear enough, the range of involved  specialists was narrow, no institution responsible for the reform was established, etc.

And, most importantly, the public campaign failed, for whom is the reform carried out? what public interests does it satisfy? Risks, dangers, support and pressure groups, as well as opponents of the reform were never identified, no one worked with them.

Indicative in this respect was the scandal surrounding the presentation of the reform by Bezsmertnyi in his native village Makariv, which locals met with aggressive resistance. On the same day he handed in his resignation, which, however, was not satisfied.

New Beginning

By results of 2014 Parliamentary elections, a coalition was created and a coalition agreement was approved. It has become the main strategic document for reforming Ukraine. As part of local government reform and decentralization, the coalition agreement consists of 25 points and is largely based on the developments of experts expressed in the Roadьap of the Reanimation Package of Reforms and the previously approved government Concept of Reforming Local Self-Government and Territorial Organization of Power in Ukraine. The action plan on the implementation of the Concept of Reforming Local Self-Government provides a list of laws and a timeframe for their adoption. The general logic of the Concept is based on the principles mentioned in the European Charter of Local Self-Government and points out the fact that effective local government is based on three pillars: the powers, resources and responsibilities. Moreover, the absence of at least one component destroys the whole system. Therefore, all laws written out in the Action Plan in some way are directed to:

  • securing exclusive powers of local authorities (through the division of powers between the executive and local authorities and among local self-government bodies of different levels);
  • provision of resources for these powers (primarily financial, for example, by increasing local revenues);
  • establishing accountability mechanisms of local government to the state and citizens.

As of today, the Parliament adopted the following laws:

– Laws of Ukraine On Amendments to the Budget Code of Ukraine (concerning the reform of intergovernmental relations) (№ 79-VIII of 28.12.2014) and On Amendments to the Tax Code of Ukraine and Some Laws of Ukraine (on tax reform) (№ 71-VIII of 12.28.2014) that are aimed at financial decentralization of local budgets and provision of local budgets with funds.

In particular they provide:

  1. Transfer of community budgets to direct inter-budget relations with the state budget and provision of such communities with powers equivalent to powers of cities with regional significance.
  1. Increase of local revenues through:

– fixing the regulation of the tax on personal income: budgets of regional centers and districts – 60%, regional budgets – 15%, the budget of Kyiv – 40%; and CIT of the private sector (regional budgets – 10%);

– transfer of payments for administrative services from the state budget;

– increase of environmental tax enrollment from 35 to 80%;

– introduction from 2015 of the fee for retail sale of excisable goods (beer, alcoholic beverages, tobacco, petroleum products) at the rate ranging from 2% to 5% of the cost of goods sold, which will be directed to local budgets;

– expansion from 2015 of the tax base of property tax by including taxation of commercial (non-residential) property.

  1. Introduction of new kinds of transfers (basic allowance, education grants, subventions for training labor, medical subsidy, subvention for providing medical activities of individual state programs and comprehensive measures of programmatic nature, reversible grants).
  2. Establishing a new system of equalization of budgets according to revenues, not costs and related to this opportunities for community participation and influence.
  3. Strengthening responsibility of Ministries for implementing the state policy in the educational and medical fields by defining them as main managers of relevant subventions.
  4. Granting the right of self-selection of institutions (in the Treasury or banks) to service the funds of the budget of development of local budgets and own revenues of budgetary institutions.
  5. Simplifying the procedure of granting local guarantees and lending from international financial organizations.

In general, the law can be assessed as a significant step forward in the financial support of local budgets. For example, the budget revenues of Sumy was increased by 2.6 times, Khmelnitsky – 2.6 times, Odessa – 2.2. However, some extremely important points of the Coalition Agreement still were not taken into account in the final version of the law. For instance, the clause 1.2.5 of the Coalition Agreement on “securing the payment of tax on personal income solely at the place of employment of a person whose income tax is being paid.” PIT is the main source of local revenues, at the same time the biggest taxpayers are usually registered in large cities. As a result, the smaller cities, towns and villages, are at a loss, places, since, in fact, economic activities are carried out there, but taxes are paid at the place of employer’s registration. A major problem is remaining, the approach to property tax, which is still not calculated based on the appraised value of the property, which varies greatly depending on the size of the settlement, but based on the minimum wage.

– The Law of Ukraine On Voluntary Association of Communities (№ 157-VIII from 05.02.2015) allows to form capable, self-sufficient municipalities that have relevant material and financial resources, territory and social infrastructure necessary for effective performance of tasks and functions of their local self-government authorities. The law stipulates that the state will support united communities financially by providing funds for building up infrastructure according to the plan of socio-economic development of this local community. The idea of ​​encouraging voluntary association is generally positive, though, as international experience shows, voluntary stage anyway, sooner or later, ends with forced association. Most of the questions are raised by the possibility of practical implementation of the provisions of the law. For example, unification of territorial communities can be initiated by rural, village and city mayors, members of village and city council, as well as members of the territorial community as a local initiative. The problem is that most communities do not have a statute or an approved procedure for submitting local initiatives. Therefore, initiating unification or rejection of it in practice is quite problematic for most members of the community, however paradoxical it may sound. It is very important to form a practical methodological document for the unification of a community, the Perspective Plan of Forming Territories of Communities, as soon as possible.

– The Law of Ukraine On Cooperation of Local Communities (№ 1508-VII from 06.17.2014) defines legal instruments for unifying territorial communities for joint projects and mechanisms for funding and monitoring such projects. In addition, the law provides state incentives and support for community cooperation, including through subventions to local budgets that are cooperating. This law is extremely important from a practical point of view, as it enables communities to implement complex resource-consuming projects such as, for example, gasification or water supply.

– The Law of Ukraine On Principles of Regional Policy (№ 156-VIII from 05.02.2015) defines the main legal, economic, social, environmental, humanitarian and organizational principles of state regional policy as part of the internal politics of Ukraine. According to the Law, the state regional policy is determined by a number of strategic documents that include the following:

  1. State Strategy for Regional Development Ukraine, which develops in the long term (7 years) and approve the Cabinet, and regional development strategies developed regional and city administrations for the duration of the state strategy of regional development. At the level of states and regions define these strategies, objectives, priorities, trends and main problems of socio-economic development areas; main objectives, stages and mechanism of their implementation; monitoring and evaluation system implementation.
  2. State Strategy for Regional Development of Ukraine that is developed for a long term (7 years) and approved by the Cabinet, and regional development strategies developed by regional and city state administrations for the duration of the State Strategy of Regional Development. On the state and region level these strategies define the following: objectives, priorities, trends and main issues of socio-economic development areas; main objectives, stages and mechanism of their implementation; the system of monitoring and evaluation of their implementation.
  3. Action plan on Implementation of the State Strategy of Regional Development of Ukraine and action plans on the implementation of regional development strategies, which are organized and approved by the Cabinet and executive regional powers, respectively.

Overall, it is a rather positive, largely ideological law that for the first time provides for the existence of a sustainable medium-term development strategy and assessment system of the implementation of this strategy.

Thus, as of now, out of 15 key local government reform laws only 5 are adopted. The pace is not too optimistic, especially considering the fact that most laws that were adopted had long existed as bills. The basic thing has not been made, amendments to the Constitution in terms of administrative and territorial structure and local governments have not been voted for yet. Since the amendment procedure includes voting during two sessions of the Parliament, local elections scheduled for October 2015 are in serious jeopardy or might have to be postponed. As you can see, the low performance of the Government and the Parliament not only break Ukrainians’ hopes for swift radical reforms, but also create new issues. At the same time, we are still on the easiest stage of voting for the law. There is a more complex phase of implementation ahead. Given the fact that a part of the state is occupied and the threat of separatism, inspired from the outside, is not so illusory in other regions, we realize the complexity of the challenge we are facing and how delicate the process of decentralization should be. Therefore, I would advise all of those who are responsible for the reform to think of the failure and reasons for setbacks of their predecessors. In practice, it is impossible to reform by just adopting the concept, or even voting for correct and necessary laws. The personnel, financial, and, most importantly, the information components are not less importan. Public demand for reforms should be actualized. Massive, powerful public awareness campaign with the participation of senior officials, experts and moral authorities should start now both in the media and on the ground. You can start in Makariv.