Farther apart

23 June 2017, 17:47

The delegation of additional financial resources and powers from the center down is one of the key reforms after the Maidan. The Cabinet of Ministers approved the Concept of Local Self-Governance and Territorial Organization of Governance back in April 2014. In late December 2014, the Rada passed amendments to the Budget and Tax Codes. This increased the sources of revenues for local budgets as some of the funding was passed to them from the central budget. A new excise duty on sales to final consumers was introduced. The tax base expanded to include real estate tax. Self-governing authorities got more control over local taxes, including the power to determine tax rates and privileges. New subventions from the central budget were introduced to help education and health care systems perform their new functions. A legislative mechanism was designed in 2015 to make cooperation of territorial communities horizontal: nearly 400 of those have already signed deals on cross-community cooperation in various fields ranging from road repair and transport maintenance to education, health care and fire security services.

Meanwhile, a sharp rise in local budget revenues of the first two years of decentralisation has slowed in 2017. In 2015-2016, local communities saw a 42-49% increase in their own revenues compared to the previous year. In 2017, the expected rise is a mere 16%, which is slightly over the current inflation rate. In the past years, the most attention has been focused on the creation of amalgamated territorial communities and priority funding for them.

Mergers progress

The mechanism for community amalgamation was designed in 2015. It enabled them to switch to direct work with the central budget, eliminating intermediary levels, such as oblast or county, and thus allowing them to receive funds for infrastructure directly. A number of powers were delegated to the merged communities from the county administration level: they will now provide social assistance, administrative services, run schools and kindergartens, organize the work of primary health care facilities, as well as culture and sports facilities. This brings along subventions for education, health care and infrastructure development from the central budget.

As a result, 794 old village and town councils that covered 2,015 settlements merged voluntarily into 159 amalgamated territorial communities (ATC) as soon as 2015. The initial process was the most dynamic in Ternopil and Khmelnytsky Oblasts in Western Ukraine where 26 and 22 ATCs emerged in 2015, merging 673 settlements out of the 2,015 that year. Elsewhere, however, a few or no new ATCs were created. As of the early 2016, ATCs covered more than 5% residents in four regions only, and more than 5% of the territory in ten regions.

That year, the pace of amalgamation accelerated, taking the number 159 to 366, and doubling the population covered to over 3.1 million. For now, these ATCs number at 1,740 or nearly 15% of former town and village councils. The geography has changed too: Zhytomyr, Dnipro, Vinnytsia and Zaporizhzhia oblasts have the lead now, while the pace of mergers in the two abovementioned oblasts has slowed down.

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Overall, as of April 2017, Ukraine has 413 ATCs where elections of local self-governing authorities have already taken place, most recently on April 30 in 47 of those. According to the Ministry of Regional Development, another 102 potential ATCs are finalizing their merger.

On March 14, 2017, President Poroshenko signed Law No5520 “On details of voluntary amalgamation of territorial communities in cross-county territories”. It will allow a number of ATCs to hold the first elections and speed up the creation of new ones.  

Financially, the key difference between the ATCs and old unmerged village and town councils is as follows: ATCs pool the revenues and exercise the powers, which local or county councils used to have previously. As a result, 60% of personal income tax generated at the ATC territory goes to its budget. So does 100% of the administrative tax on the registration of individuals and legal entities, the revenue that previously went to the county budget.

In addition to that, ATCs get 100% of natural resources rent, excise duties on alcohol and tobacco sold on their territory, flat tax, land tax, real estate tax, utility company income tax, property lease tax, transport tax, parking and tourist taxes, administrative fines and more. In unreformed communities, these still go to village or county budgets.

Problems remain

The amalgamation of communities is hampered by many reasons. The first one is that almost half of the 12,000 old local councils lived on subsidies. The financially independent ones are reluctant to share their revenues with the poorer settlements. Another reason is that local officials want to retain their posts and influence: even subsidized communities offer plenty of opportunities for illegal enrichment. Plus, the officials employed in village councils are likely to lose their jobs after the mergers.  

When an ATC is created in a given county, the latter no longer exists as it loses its income and powers. Therefore, county elites either try to craft new ATCs along the county administrative borders, or halt the process when they are unlikely to keep control over local self-governance after the merger and election. Lately, experts have spoken of the sabotage of ATC creation by county state administration as the central government tries to preserve this key instrument in its administrative hierarchy in order to use it in the general election process.

The experience of existing ATCs can be discouraging, too. It looks nice in government statistics. According to official statements, the budgets of the first 159 ATCs grew almost sevenfold over 2016 compared to 2015 revenues for the local councils before the amalgamation. First and foremost, this resulted from the allocation of UAH 1bn in subventions to set up the infrastructure of merged communities, and the sharp rise in education and health care subventions sent directly to the ATCs. While the old local councils received UAH 39 and 42mn for these purposes, the post-merger ones got UAH 1.62 and 0.85bn respectively. This looks like a drastic change.

But things are more nuanced than that. It would be inaccurate to compare the budgets of ATCs and the local councils operating within their boundaries previously. The newly merged ATCs took over part of the revenues and functions from the county administrations. As a result, it was not the spending on education and health care that grew in ATCs, but the ability to administer that funding on the local basic level.

125 ATCs out of the 159 merged by the beginning of the 2016 fiscal year had to be subsidized. The average level of that need varies by the regions, from 42% in Ivano-Frankivsk Oblast or 31% in Lviv Oblast to 13% in Khmelnytsky and Zhytomyr Oblast, or 8-9% in Dnipro, Cherkasy or Odesa Oblasts. This may not seem much but it shows how diverse the new ATCs are. Even one region can have communities where subsidies cover half of their needs, and those that have a surplus budget and transfer excess funds to the central budget.

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Government statements and the media tend to focus on individual success stories. This would be perfectly normal if the success resulted from good management in the respective communities. Which is not the case simply because they have not had enough time to actually deliver. Most current success stories have secrets that are not managerial talent. Some are based on industrial, energy or transport enterprises built in the pre-reform years or inherited from the soviet times. Others are located along key transport channels that support their gas stations, hotels, restaurants and the like.

Ternopil Oblast is one example. Out of 26 ATCs there, only four did not need any subsidies from the central budget.
Baykivtsi ATC, the most affluent one, is right next to the oblast capital. Zavodske ATC has a large sugar plant on its territory. Husiatyn ATC was merged around former county capital: it has inherited industrial facilities and a central county hospital, and it is a tourist destination. This generates good personal income tax revenues.

In Dnipro Oblast, own revenues exceeded subsidies in four out of fifteen ATCs whose financial statements of 2016 are available. Slobozhanske ATC is a former suburb of Dnipro, the oblast capital. Zelenodolsk ATC hosts Kryvyi Rih thermal power plant, one of Ukraine’s largest TESs, while Verbivka and Bohdanivka ATCs are close to Pavlohrad, a county capital, and their economies rely on coal extraction that generates good flows of individual income tax from miners’ salaries.

Thus, the sources of tax revenues that used to form the budgets of entire counties are now heading to the budgets of specific communities. These success stories cannot be easily replicated by other emerging communities. A comparison of the surplus and deficit ATCs shows that the major difference is specifically in the volume of personal income tax and the revenues it generates, and less so in land tax or excise duties from the goods sold on their territory.

This makes the benefits of ATC creation very unequal: the winners are the communities that retain large enterprises and employers which used to fill county budgets with personal income tax even before. As these revenues concentrate in the budgets of some communities, others that used to be covered from the same county budget suffer. Because all ATCs, regardless of what they inherited from the dissolved county, have to take over kindergartens, culture facilities, outdated transport infrastructure and the like.

Another problem is whether personal income tax is paid where an individual resides or works. Some large enterprises located in “successful” communities employ many residents from subsidized ATCs, which means that the budget-filling tax is not paid where these residents receive public services, but elsewhere.

Prior to the reform, the fact that county administrations had been in charge of important public services, such as education, health care and others, was seen as a problem. For many decades, the premises of schools and hospitals in many settlements were unrepaired. As new communities are merged, this will go under their local control.

Therefore, one of the major result of community amalgamation at the current stage is the change in the approach of local authorities and the residents of the new communities that comes with transitioning from passive expectation of changes to proactive development of own communities. The entry conditions, however, often vary greatly.

This problem can partly be solved through subsidies from the state budget, but only at the initial stages. According to the Ministry of Regional Development reports, almost 2/3 of all development spending (UAH 1.2bn out of UAH 1.9bn) in 159 ATCs were funded with subventions from the central budget. UAH 1bn went to build ATC infrastructure, which largely focused on repairing and upgrading roads, education facilities, water and waste facilities, street lighting, cultural and health care facilities, and public service centers.

In the mid to longterm prospect, this will not change the huge financial disproportions in own capacities of ATCs. With an almost twofold growth in the number of ATCs in 2016 compared to 2015, the state budget is expected to allocate only UAH 1.5bn to their infrastructure development, compared to UAH 1bn in 2016. This means that the financial support to show the benefits of ATCs to the unmerged communities is going down as well, even though current ATCs cover only 20% of the population in former administrative counties.

The newly merged communities vary by sizes, too. The largest one, Nadornytska ATC in Zhytomyr Oblast, is 1,300 sq km. The smallest one, Mizhenets ATC in Lviv Oblast, is only 8.7 sq km large. The least populated community in Chernihiv Oblast has 1,600 residents, while the most populated one in Donetsk Oblast has 44,200 people.  

With these differences, one of the key arguments in favor of the merger (to reduce the spending on administrative staff to an adequate scale) remains unaccomplished. A report on the absorption of local budgets in 2016 shows that the average spending on civil servants in 159 ATCs is 15%, ranging from 44% in a small community in Ternopil Oblast to 4-5% in communities that cover 15-20,000 residents.

It will become increasingly difficult to maintain schools or hospitals in communities with less than 5-6,000 people. One ATC in Zaporizhzhia Oblast with 3,800 residents has 320 children which is not enough even for one full-scale school. For now, the community has four, including two junior schools and one nine-grade school.

The maps of some oblasts that have made the most progress in community merging look like the territories divided between feudal lords in old times. They leave an impression of chaotic amalgamation based on ambitions of local elites or reluctance of some settlements to merge with others. Some new communities cover up to half of former counties while others have only one or two former village or town councils merged. In some, the farthest settlements are 25-30km away from the ATC center and only 5-10km away from the center of the neighbouring ATC.

Under these circumstances, the initial goal of the reform will hardly be accomplished. It does not create a prospect of financially self-reliant communities or basic public services brought closer to people. When old county structures seize to exist and small settlements find themselves too far from the centers of the merged communities, the flaws of the chaotic amalgamation will be experienced in full. This will hamper the communication of residents with ATC centers, including hospitals and schools. People will have to go to the nearest centers in neighouring communities or travel far to get to their own community centers for quality services. If the infrastructure in less successful ATCs is underfunded (and most ATCs will be less successful if the current trends prevail), this can discredit the concept of decentralization in the eyes of most residents. 

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