The Reform during the War

The Reform during the War

Today, one of the most successful “assets” in the government’s activity is reform of relations between the center and the regions, redistribution of powers between state authorities and local self-governments in favor of the latter, better known as decentralization. The irony of it is that a formal pretext for Russia’s fifth column and war in Ukraine was the absence of the center’s desire to pay attention to the needs of the Donbas region. Yet, while Russia is destroying Russian-speaking Donetsk and Lugansk and simultaneously cultivating an autocratic policy there, Ukraine has started to rapidly strengthen the competitive and financial basis of local self-government bodies.

It should be noted that this is the second government’s attempt to carry out the decentralization reform. The first one, rather “modest”, was made in 2005, right after the Orange Revolution. At that time, in accordance with the draft law on the territorial organization of power in Ukraine (better known as the Roman Bezsmertny bill), it was suggested that the number of territorial communities members be significantly increased (at least, up to 5,000), city-districts and city-regions be created. But, unfortunately, that absolutely correct reform was buried in endless discussions.

Before the war, as indicated in the Concept of the reform of local self-government and the territorial organization of power in Ukraine, there were some 12,000 territorial communities in the country. More than 6,000 communities were composed of less than 3,000 members, 4,809 – less than 1,000, and 1,129 – less than 500. 5,419 budgets of local self-government bodies were subsidized by over 70%, while 483 territorial communities were financed from the state budget by 90%. Needless to say that under such circumstances, it was impossible to discuss self-government, municipal development of territorial communities and their independence from the state budget. For comparison: in Poland, there are some 2.5 million gminas (a territorial unit similar to a Ukrainian community) for 38 million Poles, in Finland – 311 municipalities for 5.5 million Finns (the amalgamation process is also under way in Finland because in 2005, there were 444 municipalities there).

Decentralization was promised by all

The reform of relations between the center and the regions, the center and territorial communities was an election promise of the President of Ukraine Petro Poroshenko and political parties at the presidential and parliamentary elections of 2014.

In particular, under the presidential election program, “communities in the regions and districts will get more rights and money to exercise their powers.” Another direction of the self-government reform, proposed by the presidential electoral program, was an actual restriction of the President’s influence on local authorities. “Executive power in the regions will belong not to “governors” appointed from above, but to executive committees formed by regional councils and elected by people. The specifics of every region will necessarily be taken into account in language and cultural policies, education, and policy of historical memory with the simultaneous preservation and development of Ukraine’s common humanitarian space. And Ukraine will remain a unitary, conciliar state,” Poroshenko emphasized.

The decentralization rhetoric was also present in programs of political parties during the 2014 parliamentary elections. Specifically, during the early 2014 elections, the People’s Front defined decentralization and development of local self-government as the main priorities of reforms of the government and legislature. In compliance with the party’s program, communities should become a key element of the entire construction, on which the state is based, while local self-government bodies should be provided with a stable financial basis for the implementation of powers delegated to them.

The similar promises could be found in election programs of the Petro Poroshenko Bloc “Solidarity”, Self-Help, Fatherland, and Radical Party of Oleh Lyashko. Radical Party candidates said: “We will decentralize power. We will vest elected community heads with the right to freely take decisions that are important for community members, with no instructions from the center. A community will become a full administrator of lands, buildings, and facilities. What is more is that most local taxes will remain in the budgets of territorial communities.” Self-Help claimed that it would defend “decentralization of power and taxes, so that communities would have sufficient powers, means, and mechanisms of responsibility for their own development.”

The Petro Poroshenko Bloc “Solidarity” actually repeated some items of the election program of the President. They stressed: “Communities in the regions and districts should get more rights and means to exercise their powers. Executive power in the regions will belong not to “governors” appointed from above, but to executive committees formed by regional councils and elected by people.”

Things started happening…

Since 2014, Ukraine has formed the legal basis for financial decentralization and community merger. On 28 December 2014, the laws “On Amendments to the Tax Code of Ukraine and Certain Legislative Acts of Ukraine Regarding Tax Reform” (No. 71-VIII) and “On Amendments to the Budget Code of Ukraine Regarding the Reform of Inter-Budgetary Relations” (No. 79-VIII) were passed. On 5 February 2015, another decentralization concept was adopted by the law “On Voluntary Amalgamation of Territorial Communities” (later, the law was amended several times).

On 26 November 2015, the Verkhovna Rada of Ukraine passed amendments to the Budget Code regarding the specifics of the formation and execution of budgets of the amalgamated territorial communities. On 8 April 2015, the Cabinet of Ministers adopted the resolution No. 214 “On the Approval of the Framework to Form Capable Territorial Communities”. At present, it is a key document for the amalgamation of the territorial communities that sets criteria for their merger, such as areas of accessibility to potential administrative centers of capable territorial communities, which, among other things, are defined “with regard to the availability of services in relevant spheres, in particular the time of arrival of ambulance and fire emergency vehicles should not exceed 30 minutes.”

Decentralization is often identified with the process of amalgamation of the territorial communities. But it is not quite so. The amalgamation, or in fact enlargement of the territorial communities, is only part of the decentralization process as it is necessary to form an entity, to which the state will delegate part of its powers at the local level. A territorial community with 500-1,000 members has no opportunity to establish an economic basis for its functioning or to implement powers delegated by the state. That is why it is necessary to set up a powerful basis for the local economy and local government.

After the first elections in the amalgamated communities in the country, 5,258 population centers have amalgamated into 414 territorial communities as of 30 April 2017, according to the State Register of Voters of Ukraine. As reported by the Ministry of Regional Development and Construction, another 102 territorial units will soon be formed. This is a good result, given the short period of the reform implementation.

The amalgamation of the territorial communities in Ukraine is encouraged in the following ways:
1) The amalgamated territorial communities receive direct transfers from the state budget, analogous to communities of the districts or cities of regional importance;
2) Privileges are established in the administration of proceeds of local budges of the amalgamated communities, analogous to communities of the districts or cities of regional importance (the largest “incentive” is 60% of the income tax transferred to the budget of the amalgamated territorial community);
3) Funding of the amalgamated territorial communities from the State Fund for Regional Development (SFRD) (local budgets finance, on co-financing terms, only 10% of each project, whereas the SFRD covers the rest or 90%. In 2016, UAH 3 billion was allocated from the SFRD for the implementation of local projects, in 2017 – UAH 3.5 billion).

However, it should be noted that there were cases of the use of administrative recourse by authorities to obtain positive results.

Not only the amalgamated territorial communities felt the improvement of the economic situation. In 2015, own resources of local budgets increased up to UAH 98.2 billion (comparted with UAH 68.6 in 2014). In 2016, the influx of own resources of local budgets amounted to UAH 146.6 billion, in 2017 – UAH 170.7 billion.

At the same time, it should be noted that the share of local budgets, including transfers, in the Ukrainian consolidated budget has increased. The dynamics is positive – a little less than 2% annually – but not “ground-breaking” (2015 – 45.6%, 2016 – 47.5%, 2017 – 49.3%). The reason is that the success of today’s decentralization is, first of all, in the improvement of the system of allocation of budget resources to the benefit of communities, not in radical changes in revenues of local budgets.

But there are still some problems

Today, the amalgamated territorial communities consist of 59 cities, including 56 cities of district importance, 3 cities of regional importance, and 141 urban-type settlements. They are merged pursuant to Article 6 of the law “On Local Self-Government in Ukraine” as of 5 February 2015. At the same time, Article 140 of the Constitution of Ukraine reads: “Local self-government is the right of a territorial community – residents of a village or a voluntary association of residents of several villages into one village community, residents of as settlement, and of a city – to independently resolve issues of local concern within the limits of the Constitution and the laws of Ukraine.”

The decision by the Constitutional Court of Ukraine No. 12-rp/2002 as of 18 June 2002 gives clear definition for entities participating in the association of communities: “The provision of Part 1, Article 140 of the Constitution of Ukraine… should be understood in such a way that this provision define... a territorial community as residents of a village, settlement, city or a voluntary association of residents of several villages in a rural community.”

In actual fact, this means that according to the decision by the Constitutional Court, the associations of territorial communities of settlements and cities is recognized unconstitutional. In our opinion, it is therefore necessary to urgently amend the Constitution regarding the procedure for the amalgamation of the territorial communities, which would provide for the possibility of the merger of residents of villages, settlements, and cities into one community.

The community merger mechanism is completely incompatible with the legal principle of voluntarism in the amalgamation of territorial communities. To date, the process of amalgamation of the territorial communities primarily depends on local self-government bodies, not on community members. Specifically, the merger could be initiated either by the community head or by one-third of the local council or by bodies of self-organization of population (only in rare cases as under the law, these bodies should represent 1/3 of community members) or by members of the territorial community as local initiative. At the same time, the exercise of the right to local initiative is governed either by the regulation adopted by the local council or by the charter of the territorial community, which is also approved by the same council. A draft decision on local initiative is submitted to the council for consideration, and the council may accept or decline it.

The public discussion on the amalgamation of the territorial communities is also conducted according to the procedure established by the council. The community head studies proposals for the initiation of community merger, sends proposals to other communities, forms a joint working group to prepare a draft decision on the voluntary merger, and exercises other powers in the process of amalgamation. In the long run, the decision on the amalgamation of the territorial communities is taken not by their members during a referendum, but by relevant councils.

Such dependence on the will of local councils and community heads significantly slows down the process of community consolidation. It is because for all, except the only one, community heads this means the end of municipal careers. And for most deputies of local councils of communities that are going to merge this means the termination of their mandates and non-participation in solving land, property, and other issues.

Needless to say that the optimal way would be the introduction of changes in legislation, according to which community merger (consolidation) would be decided exclusively at a local referendum. Yet, this requires the elimination of the situation that is absolutely abnormal for a democratic European country – to pass a law on local referendum provided for by the Constitution of Ukraine (it should be reminded that this law is absent for more than four and a half years). The arguments of some politicians that the adoption of the law on local referendum could create a legal basis for separatism, in our opinion, do not stand up to criticism because: 1) the law would clearly define the subject of the local referendum; 2) the law would establish grounds for a refusal to register the initiative to hold the local referendum (in case of violation of requirements regarding the referendum subject); 3) finally, it should be remembered that the “referendums” on changing the status of the Autonomous Republic of Crimea, Sevastopol, and ORDLO were conducted in the absence of the law on local referendum and failed to prevent separatism.

The introduction of forms of direct democracy at the municipal level could affect the decentralization process. In particular, one of the current problems is that the “rich” communities are unwilling to merge. The most typical example is the Kyiv region where only two amalgamated communities of 9 settlements have been established. Traditional incentives do not work in case of the Kyiv region because the budgets of its communities are already large, while community heads and local elected officials are in no way interested in losing power. Hence, we are sure that in such communities, the institution of local referendum would substantially facilitate the consolidation process.

Regional councils are another factor that needs to be eliminated in the process of amalgamation of the territorial communities. Pursuant to the law “On Voluntary Amalgamation of Territorial Communities”, regional development strategies should be approved by regional councils. In our opinion, this is a completely unnecessary procedure that slows down the amalgamation process. The function of developing and approving regional development strategies could be performed by regional state administrations and the Cabinet of Ministers of Ukraine.

It should also be noted that the territorial communities often do not have an incentive to consolidate due to the lack of guarantees of the development of their territories as part of new (amalgamated) communities. We believe that it would be appropriate to introduce the institution of a community amalgamation agreement – non-compliance with such agreement could serve as grounds for the withdrawal from the amalgamated community. However, there are still no legal mechanisms for withdrawing from the amalgamated community and forming new territorial units.

A big drawback of decentralization is that ahead of the implementation of decentralization projects, including the amalgamation of the territorial communities, the e-government elements were not introduced into practice of local self-government bodies. The creation of electronic registers would remove many problems for villagers within the newly formed territorial units. In our viewpoint, if such registers are introduced and e-consultations with members of the newly formed territorial units are held, there would be no need for community heads.

Today, the time is ripe for legal regulation of the system of power in districts, whose boundaries coincide with those of the amalgamated territorial communities, e.g. the Letichivka or Narodychi amalgamated communities. As a rule, these are small districts with population of 10-20,000. Also, there are cases when districts consist of two amalgamated communities. It is obviously not normal when the same territory is governed by the district state administration together with its chairman, the district council that delegates executive powers to the district state administration, the head of the amalgamated community, the executive committee of the amalgamated community, and the council of the amalgamated community.

Returning to the parties’ political programs, it is possible to conclude that decentralization has been actually blocked regarding the liquidation of local state administrations as bodies of general competence, which were substituted with executive bodies of local councils. That is not to say that political forces refused to fulfill their promises. On 31 August 2015, the Verkhovna Rada of Ukraine preliminary approved the draft constitutional amendments on changes in the system of regional authorities, including the establishment of executive bodies of regional and district councils, the introduction of the institution of prefects, etc. Yet so far, the issue of regional decentralization has been shelved.

Hence, the following results have been achieved after three years from the approval of the Concept of the reform of local self-government and the territorial organization of power in Ukraine:
1) A huge work has been done to prepare for the actual transfer of powers from executive authorities to local self-government bodies. Conceptually, decentralization still has its addressee not at the regional and district levels, but at the level of communities;
2) The amalgamation of territorial communities has become a key element of the decentralization reform at its current stage. 414 amalgamated territorial communities, involving more than 10% of Ukrainian population, have been formed;
3) The high pace of community amalgamation is explained by the incentives provided for in the Budget Code, as well as by the significant expansion of powers. At the same time, Ukraine’s legislation lacks appropriate mechanisms and procedures for the participation of community members in local decision-making;
4) It is possible to predict a slowdown in the pace of community consolidation because at the initial stage, the consolidation took place among more developed communities with more developed infrastructure, including the amalgamation of communities of cities, villages, and settlements. The merger of “incapable” territorial communities would require a significant increase in budget funding;
5) The first 2.5-3 years of the implementation of the reform of relations between the center and subnational self-government units has demonstrated the need for developing additional incentives for expanding the range of business entities at the basic level.

By Svitlana Gorobchyshyna and Andriy Duda,
Ukrainian Center for Independent Political Research, 16 May 2017

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