Rebuilding Ukraine by Reinforcing Regional and Municipal Governance

Executive Summary

Part I: Supporting post-war recovery with place-based regional development

In 2014, the Government of Ukraine embarked on an ambitious overhaul of its multi-level governance structures to boost territorial development. It established a legislative framework for its State Regional Policy and adopted successive State Strategies for Regional Development. It also significantly increased public funding for regional development—a testament to the importance that the government assigned to it. Prior to Russia’s large-scale invasion of Ukraine in February 2022, the government was poised to further consolidate this framework to better meet its growth and well-being objectives.

The war has severely undermined progress and exacerbated existing territorial disparities and governance challenges. At the same time, it has demonstrated the critical importance of local human resource, administrative and service delivery capacities in dealing with the immediate consequences of the war. These capacities will be just as important in the recovery process and additional skills, for instance engagement with donors, will need to be developed in order for subnational governments to meet short-term reconstruction objectives, and create the conditions for increased resilience and improved citizen well-being. In this sense, while many of the findings outlined in this report reflect the situation on the ground prior to the war, their focus on institutional and structural challenges, such as limited public participation in subnational decision making and the dearth of territorially-disaggregated data on a wide range of indicators, will remain as relevant, and perhaps even more so, in the post-war period.

Key findings

• In the decade prior to Russia’s large-scale invasion in February 2022, Ukraine’s performance in several strands of development improved significantly. For example, between 2015 and 2019, the share of the population living below the nationally defined subsistence income level fell by over half, from 52% to 23%. Internet access increased significantly between 2010 and 2020 (from 23% to 63%), although this progress was more pronounced in urban oblasts than in rural ones. The share of the population that uses internet also remains lower than in comparator countries such as Poland (78%) and well below the average for OECD member countries (86%). Between 2015 and 2020, Ukraine’s performance on the Worldwide Governance Indicators also improved, particularly in terms of political stability and regulatory quality.

• On other metrics, however, territorial disparities have grown and inequalities have deepened over the past decade. For example, all but two oblasts and Kyiv City witnessed population declines. The reported population decline in several rural regions—where agriculture is the dominant economic sector—has been particularly stark, with some regions reporting a decline of over 10% between 2010 and 2021. In addition, between 2010 and 2019, the national economy became increasingly dependent on the Kyiv agglomeration, with other regions lagging behind. These trends set the backdrop against which Ukraine has designed and implemented its regional and local development policies. They should inform evidence-based decision making by national and subnational level policy makers as they advance with regional development policy in the context of reconstruction and recovery.

• A robust policy framework for regional development was established between 2014 and 2021, enabling governments at all levels to collaborate in the design and implementation of regional and local development initiatives. At the same time, the implementation of the framework has faced obstacles that, unless addressed, could undermine post-war recovery. For example, while strategic planning processes became more embedded at different levels of government, by 2021, mechanisms to help subnational governments implement regional development strategies were still embryonic. Moreover, by 2021, the main vertical and horizontal co-ordination bodies that were created to help implement the multi-level governance reforms were either not fully operational or lacked the systemic participation of municipal governments.

  • Enacting a national planning law that streamlines and clarifies planning requirements for all levels of government could support the coherent implementation of a national recovery plan, as well as Ukraine’s State Regional Policy. This was already a priority before February 2022, as a proliferation of development strategies and plans that subnational governments were required to create risked generating an overlap among planning documents and a fragmented use of resources. Enacting a national planning law will be even more important in the post-war context, as subnational governments will be responsible for developing an increasingly wide array of strategies, plans and programmes, which could strain the scarce human and financial resources that are available for supporting a swift implementation of reconstruction projects.

  • Reactivating Ukraine’s national co-ordination bodies to contribute to improving policy coherence and acting as a channel for national/subnational exchange can support the effective implementation of State Regional Policy and a national recovery plan at different levels of government. For example, ensuring that the Inter-Department Co-ordination Commission for Regional Development meets on a regular basis to review progress towards the country’s regional development goals and to co-ordinate the design of corresponding financing mechanisms would be beneficial. Moreover, by granting municipalities a permanent seat in official sections of the Commission, Ukraine could improve opportunities for communication and exchange among different levels of governments. This could, for example, help to better identify cross-jurisdictional reconstruction and recovery needs, design tailored projects and track progress.

  • Generating and leveraging the participation of non-governmental actors throughout the regional and local development planning cycle is also critical for supporting the post-war recovery. Participation could be enhanced, for instance, by reinforcing their involvement in the design, implementation and monitoring of regional and local development strategies. This will be particularly important during the recovery phase, as the magnitude of reconstruction needs requires the contribution of civil society and other non-governmental actors. In doing so, the government could build on the invaluable support that civil society organisations, the private sector and individual citizens have provided to the country’s response to the war.

• Between 2015 and 2019, public funding for regional and local development increased significantly. However, several challenges undermined funding effectiveness and risked entrenching regional disparities. While the creation of many new regional and local development grants increased subnational government access to funding, funding effectiveness, however, was constrained by a predominance of small projects with low economic impact. Another challenge has been the large number of grants for regional and local development, which often led to inefficiencies in spending and implementation. Moreover, there have been limited incentives for municipalities to develop joint investment projects that could address shared needs. Meeting these challenges will be even more important in the reconstruction and recovery phase, not least to ensure effective investment in (rebuilding) physical infrastructure and human capital.

  • As Ukraine advances in designing mechanisms to fund subnational recovery and contribute to long-term territorial resilience, bundling or consolidating funds (without reducing total funding values) could help to limit fragmentation. Moreover, prioritising the funding of projects that have a cross-jurisdictional focus could ensure a more efficient and effective use of scarce public resources.

• The differentiated territorial impact of the war highlights the importance of adaptable multi-level governance arrangements in the reconstruction and recovery process. As it finalises and implements a national recovery plan, Ukraine should also look to address structural socio-economic development trends and governance challenges that pre-date the war.

  • Involving representatives of subnational governments in defining immediate recovery support schemes and more long-term development strategies can help Ukraine design and implement reconstruction initiatives that meet territorially-differentiated needs and strengthen resilience. Moreover, it can enable the government to leverage the skills and experience that municipalities gained since 2014 in strategic planning, budgeting and investment. At the same time, it is important to recognise that the war has severely affected the human resource and fiscal capacities of many municipalities, undermining the progress achieved prior to February 2022.

  • Establishing mechanisms that allow for the transparent use of recovery funding by subnational governments and strengthening anti-corruption efforts, which tend to be exacerbated in post-disaster contexts, will also be needed. For example, digital platforms could be established that enable governmental and non-governmental actors to track recovery funds and projects. The government should ensure that anti-corruption mechanisms are designed in such a way that they do not stifle municipal decision making or reduce local absorption capacity.

Part II: Making the most of decentralisation for post-war recovery

Building on its ambitious territorial reform process launched in 2014, Ukraine implemented an array of political, administrative and fiscal decentralisation reforms to improve service delivery and strengthen local democracy. These included the creation of 1 469 amalgamated municipalities, which were allocated new responsibilities and financial resources to execute their mandates. Despite these pre-war advances, there were a number of obstacles that still needed to be addressed. These relate to the incomplete nature of Ukraine’s territorial-administrative reorganisation, the differentiated ability of municipalities to meet their responsibilities and the absence of a municipal performance measurement framework. Addressing these challenges will be equally important in the reconstruction and recovery phase to ensure absorption of local recovery funds, as well as the necessary capacity to design, implement and monitor projects, for example.

Key findings

• The shift in tasks and responsibilities from deconcentrated rayons (districts) to municipalities has made them the locus of local development efforts. Yet it also generated tension between different levels of subnational government and resulted in limited municipal oversight. Moreover, it accentuated a lack of clarity in the division of tasks and responsibilities among levels of government (e.g. in public transport and roads).

  • Adopting a constitutional amendment that replaces oblast (region) and rayon state administrations with a system of prefects, as Ukraine has been discussing at length in parliament, could help the country strengthen local administrative supervision and facilitate the co-ordination of national-level priorities at the municipal level. Oversight will be particularly important during the recovery period given the expected vast inflow of recovery funding and pressure on municipalities to allocate resources swiftly, efficiently and effectively. At the same time, the government should be mindful that efforts to strengthen oversight do not necessarily mean increasing control or burden, and need not undermine municipal autonomy or restrain municipal decision making.

  • Harmonising the legislative framework to remove duplication and provide clarity on the allocation of responsibilities in sectors where it is lacking will help all levels of government respond more effectively to reconstruction needs.

• Decentralisation reforms had a positive effect on the administrative, human resource and fiscal capacities of municipalities, as well as on service quality. The results of an OECD survey that was completed by 51% of Ukraine’s 1 469 municipalities show that rural and settlement municipalities appear to have benefitted more than urban ones. At the same time, prior to February 2022, many municipalities, in particular rural ones, considered that they still lacked the human resource capacity to carry out key strategic planning, public investment and budgeting tasks. For example, while 80% of urban municipalities reported sufficient capacity to design development strategies, only 67% of rural municipalities felt the same way. These challenges are likely to have increased since the start of the large-scale invasion of Ukraine, increasing the urgency for action on this front.

  • Investing in a robust training strategy for municipalities that can be adapted to different territorial contexts and needs is essential for ensuring that all local governments have the necessary expertise to design and implement reconstruction projects, absorb recovery funding, and ensure service delivery. In the short term, capacity building efforts should prioritise areas that are particularly relevant for the post-war reconstruction period, such as strategic planning, project appraisal, procurement, implementation and transparency.

  • Promoting and facilitating peer-to-peer exchanges among municipalities on issues of local administrative performance, such as procurement and stakeholder engagement, can also foster the sharing of good practices and innovative ways of working. Moreover, facilitating peer-to-peer exchange with local governments in the European Union (EU) could support EU accession.

• OECD analysis identified various elements that can explain variations in municipal performance and development. These include population size, differences in the amount of time since amalgamation, and variations in administrative and fiscal capacity. These findings can help the government as it considers further territorial and multi-level governance reforms as part of national reconstruction and recovery efforts. Next steps could include legislative, regulatory and fiscal reforms to ensure that municipalities have the necessary resources and flexibility to carry out their mandates.

  • Increasing inter-municipal co-operation could be a particular focus as it can enable municipalities to pool scarce financial and human resources, share fixed costs and achieve economies of scale. During the recovery period, inter-municipal co-operation will be particularly important for enabling municipalities with fewer resources to rebuild critical physical infrastructure more efficiently. In order to do so, Ukraine could develop both financial incentives (e.g. granting a higher tax-share to municipalities that deliver joint services) and functional incentives (e.g. establishing a condition of municipal size for the delivery of services including utilities, healthcare, etc., which have been hit particularly hard by the war). However, such functional incentives can be politically sensitive and legally challenging to establish.

  • Setting up a robust municipal performance measurement framework is another area of importance, as it can help all levels of government identify where progress has been made and where gaps remain or indeed have increased or emerged since the war. It can also help improve accountability. This requires investing in the capacity to generate, collect and analyse territorially-disaggregated data on a wide range of socio-economic, demographic, fiscal, service delivery and governance indicators, as well as ensuring the data are widely accessible and regularly updated.