Financial Decentralisation in Action

The Ministry of Regional Development, Construction and Housing and Communal Services of Ukraine under the auspices of the DESPRO Swiss-Ukrainian Decentralisation Support Project in Ukraine and with the technical assistance of the Swedish-Ukrainian Project "Support to Decentralisation in Ukraine" prepared the monitoring survey of financial capacity of the amalgamated territorial communities in which the first local elections were held on 25 October 2015 and which have direct inter-budgetary relations with the state budget in 2016. The monitoring survey allows to compare and reflect the dynamics of budget targets of territorial communities prior to becoming a part of the voluntarily amalgamated territorial communities in 2015 and the local budget targets approved for 2016 after the voluntary amalgamation of those territorial communities and the acquisition thereby of the right to direct inter-budgetary relations with the state budget Analytical and graphical materials are prepared on the basis of official information obtained by the Ministry of Regional Development from Oblast (Regional) State Administrations.
At the current stage, Ukraine persistently directs its efforts to the implementation of European integration course, performance of international legal obligations, including on the development of local and regional democracy. Further democratisation of the society, decentralisation of power on the principles of subsidiarity have been and continue to be the priorities of Ukraine.  The reforming of local self-government and territorial structure of power in accordance with the fundamental provisions of the European Charter of Local Self-Government which has become an integral part of the national legislation in this area plays an important role in those projects.
This was confirmed by the fact that the programme documents of the President, the Government, and the Verkhovna Rada (Parliament) of Ukraine contain such priorities as the decentralisation of power, transfer of financial resources and strengthening of the material and financial basis of the local self-government bodies, serving the interests of the citizens in all areas of life in the relevant territories, provision of high-quality and accessible public services to the population, coordination of interests of the state and the territorial communities.
The implementation of the reform started on the basis of the Concept of Reforming Local Self-Government and Territorial Structure of Power, the Coalition Agreement, the Government Performance Programme, the 2020 Strategy of the President of Ukraine, and relevant implementation plan thereof.
The task of financial decentralisation was the first priority step on the way of local self-government reform, which decentralisation began by amendments made to the Budget and Tax Codes of Ukraine, in particular regarding the transfer to the local self-government bodies of additional budgeting powers and steady sources of income for the implementation of such powers; encouragement of territorial communities to amalgamate and move to direct inter-budgetary relations with the state budget, with relevant resource provision at the level of cities of regional subordination, etc.
The next important step was the adoption of the Law of Ukraine "On Voluntary Amalgamation of Territorial Communities" and the Methodology of Establishment of Capable Territorial Communities as approved by the resolution of the Cabinet of Ministers of Ukraine in April 2015 for the purpose of introduction of fundamental legal principles of establishment of capable territorial communities by increasing their financial and economic capability.  
The said legislative acts provided an opportunity for the local authorities to develop and approve in regions Long-Term Plans for the Establishment of Capable Communities in Oblasts (Regions) and submit them to the Government for approval.  
The Cabinet of Ministers of Ukraine approved the Long-Term Plans for the Establishment of Territorial Communities submitted by 23 (of 24) Oblasts (Regions) of Ukraine (with the exception of Zakarpatska Oblast).
In 2015, 794 village, town and city councils comprising 2015 settlements voluntarily amalgamated into 159 territorial communities (the "ATCs").
Ternopil Oblast has the greatest number of ATCs - 26 (490 settlements), and Khmelnytskyi Oblast - 22 (283 settlements).  The total area of all ATCs is 35,807 sq. km, which is equal to 5.9 % of the area of Ukraine (exclusively of the city of Kyiv and the Autonomous Republic of Crimea). The largest ATC by area is the Narodytska ATC in Zhytomyr Oblast, with the area of 1,284 sq. km, and the smallest one is the Mizhenetska ATC in Lviv Oblast, with the area of 8.7 sq. km.
The number of inhabitants living in the territory of those ATCs totals 1,390.5 thousand persons, that is 3.5 % of the total number of inhabitants in Ukraine (exclusively of the city of Kyiv and the Autonomous Republic of Crimea). The smallest by the population size is the Makiivska ATC in Chernihiv Oblast - 1.6 thousand residents. The largest by the population size is the Krasny Lyman ATC in Donetsk Oblast - 44.7 thousand inhabitants (the community is established on the basis of city constituting Rayon (district)).
For reference purposes:
By Decree No. 6718-XI of the Presidium of the Verkhovna Rada of the Ukrainian Soviet Social Republic, dated 17 October 1988, Krasny Lyman City and Krasny Lyman Rayon Councils in Donetsk Oblast were amalgamated in one Krasny Lyman City Council, and Krasny Lyman Rayon was administratively subordinated to Krasny Lyman City Council.
By Resolution No. 984-VIII of the Verkhovna Rada of Ukraine "On Change of Names of Separate Settlements and Rayons", dated 4 February 2016, the city of Krasny Lyman's name was changed to the city of Lyman.
All amalgamated territorial communities in which elections were held on 25 October 2015 have moved to direct inter-budgetary relations with the state budget in 2016.
In accordance with the Law of Ukraine "On the State Budget of Ukraine for 2016", there have been determined amounts of the inter-budgetary transfers to local budgets of the ATCs, in particular, the total amount of the basic governmental grant is UAH 285 million, the reverse governmental grant is UAH 65 million, the educational subvention is UAH 1,616 million, the healthcare subvention is UAH 844.2 million.
The basic governmental grant is being received by 125 communities. Budgets of 34 communities are financially independent of the state budget, including: 23 budgets are approved with the reverse governmental grant; 11 budgets are set without the basic and reverse governmental grant.
The amount of the educational and healthcare subventions is determined in accordance with the number of service receivers (pupils, inhabitants).
Thus, the Krasny Lyman ATC (that is established on the basis of the city of regional subordination) received from the state budget the educational subvention in the amount of UAH 50 million and the healthcare subvention in the amount of UAH 30 million in 2016. Since the city of Krasny Lyman is the city of regional subordination, the local budget received from the state budget the educational and healthcare subventions in 2015 (adjusted targets for the subventions totalled UAH 45 million and UAH 47 million, respectively). Also, the city budget provided for the planned proceeds from the personal income tax in the amount of UAH 42 million.
The approved amount of revenues of the general fund of local budgets of the ATCs of Ukraine for 2016, including transfers from the state budget, totals close on UAH 4,553 million, that is almost five times more than the adjusted local budget targets (of the communities comprising the ATCs) for 2015.
Because of the amendments to the tax and budgetary legislation in the context of decentralisation, the amount of earned revenues of local budgets of the amalgamated communities increased by more than twice (by UAH 1,046 million) in comparison with 2015 (from UAH 827 million up to UAH 1,873 million).
In accordance with Article 64 of the Budget Code of Ukraine, the ATCs received 60 per cent of the personal income tax (as established in accordance with the law and the long-term plan for the establishment of territorial communities), which tax, in budget targets, totalled UAH 1,020 million and is 55% of the amount of earned revenues of local budgets. The next tax in terms of size is the land tax - UAH 335 million (18 %), the volume of the flat-rate tax has been approved in the amount UAH 242 million (13 %), the excise tax in the amount of UAH 209 million (11 %).
The amalgamation of communities allowed to increase earned revenues per capita of the ATC budgets of the relevant territory, in average, the indicator regarding all ATCs increased almost by UAH 800 (from UAH 596 to UAH 1,385). In per capita terms, the Verbkivska ATC in Dnipropetrovsk Oblast receives the largest amount of funds - UAH 7,257.
Based on the financial resources, the ATCs, already from the beginning of the budget year, were able to allocate funds in respective budgets for spending on the development (capital expenditure) in the total amount of UAH 275 million.
For the purposes of determination of the amount of educational subvention for 2016, the standard of fiscal capacity per one pupil totals UAH 9.3 thousand and, subject to the relevant adjusting ratios taking into consideration the status of the locality and the number of pupils per class in average by political subdivision in the ATC, totals from UAH 8.6 thousand to UAH 16.5 thousand. Local budgets of the ATCs for 2016 provide for expenses per one pupil in an institution of general education in the amount of UAH 8.6 thousand to UAH 22.7 thousand. That proves both the financial capacity of the community to additionally channel its own resources for the funding of institutions of general education and the necessity of optimisation of the institutions since the charges for pupils in underfilled schools are expensive.
The councils of amalgamated communities established executive committees and approved their staffing level. The highest staffing level of the executive committee (officials) was approved by the Krasny Lyman ATC in Donetsk Oblast - 226 persons (the number of inhabitants in the ATC is 44.7 thousand), the lowest, by the Smolyhivska ATC in Volynska Oblast - 7 persons (the number of inhabitants in the ATC is 1.9 thousand).

Based on the calculation of the number of inhabitants in the communities and the number of officials, it is possible to note that the highest workload per one official in charge of providing services to the population is stipulated in the Zelenodilska ATC in Dnipropetrovsk Oblast, the lowest, in the Baikovetska ATC in Ternopil Oblast - 6[02]8 inhabitants (the staffing level is 82 persons).
The specific weight of charges for officials in the financial resources of the ATCs (exclusively of the subventions) falls on the budget of the Teterivska ATC in Zhytomyr Oblast - 58 %, the lowest, on the budget of the Kalynivska ATC in Vinnytsia Oblast - 6 %.
Also, the ATCs received the subvention from the state budget for the formation of an infrastructure of the amalgamated territorial communities in the total amount of UAH 1,000 million. The largest amount of the subvention is allocated to the Krasny Lyman ATC in Donetsk Oblast - UAH 23.2 million, the smallest, to the Zavodska ATC in Ternopil Oblast - UAH 957 thousand.
The allocation of the subvention to the ATCs was carried out subject to the area of the territory and the number of rural population (Resolution No. 200 of the Cabinet of Ministers of Ukraine "Some Matters Pertaining to Granting a Subvention from the State Budget to Local Budgets for the Formation of an Infrastructure of Amalgamated Territorial Communities", dated 16 March 2016). The more is the number of rural inhabitants and the area of the territory, the larger is the amount of the subvention to the amalgamated territorial community.
The subvention shall be granted for the establishment, modernisation of the infrastructure of an amalgamated territorial community and may be channelled to new construction, modernisation, capital repair of communal infrastructure facilities (including for the development of design documentation).
Further implementation of the decentralisation policy should become an effective factor of stabilisation of the social and economic situation, overcoming the financial crisis, overcoming disagreements between various levels of power, establishment of relationships between the centre, regions, and territorial communities on the principles of allocation of the spheres of responsibility and competence, as well as partnership in the area of providing governmental and local benefits to Ukrainian citizens; it should promote the enhancement of the efficiency of use of budgetary funds at all levels of public management. The implementation of the decentralisation should rely on the administrative and territorial reform in Ukraine and the new ideology of public administration determining the content of activities of the bodies of state power and local self-government as the activities of providing effective services.

Source: the Ministry of Regional Development