Experts from the KSE Institute have presented the study “Local governments’ legal, institutional, and financial landscape in Ukraine”, prepared with the support of Bank Gospodarstwa Krajowego (BGK). The report highlights the main challenges and opportunities faced by hromadas during the war and provides specific recommendations for their development.

Key findings of the report:

Local governance in Ukraine maintains autonomy under martial law but adapts to new conditions. This is evident in the creation of only 146 military administrations across hromadas, including 49 in Kherson, 37 in Zaporizhzhia, and 36 in Donetsk regions. At the same time, many local self-government bodies retain their functions even under challenging circumstances and continue to ensure the provision of public services.

Local budgets remain the primary financial tool for hromadas, demonstrating resilience even in difficult conditions. Tax revenues constitute 76.4% of local budget income, with personal income tax (PIT) forming 67%. Other important income sources include the unified tax (13%) and property tax (10%). However, the financial situation in frontline regions remains vulnerable due to infrastructure destruction.

Financial autonomy of hromadas has significantly strengthened due to decentralization reform. Following the reform, all 1,438 active hromadas gained equal rights to direct intergovernmental relations, with their budgets receiving 60% of PIT (temporarily increased to 64%), which enhanced their financial independence.

Municipal enterprises are key tools for service delivery but require greater transparency and efficiency. Ukraine has approximately 15,000 municipal enterprises, most of which operate in housing and utilities, transportation, and healthcare sectors. While many rely on local budget subsidies, only 10% of these enterprises are self-sustaining.

Mid-term budget planning is being introduced in hromadas but needs improvement to ensure long-term financial stability. Budget forecasts now span three years, which will return in full in 2025 after being suspended at the start of the full-scale invasion. This planning improves stability and predictability but requires strengthened analytical support.

Infrastructure and socio-economic challenges in combat zones require coordination with international partners. Many hromadas operate under military administrations due to significant destruction. The DREAM platform is used to coordinate recovery projects in affected regions, enabling better management of resources provided by international donors.

Legislative regulation of local borrowing and guarantees creates opportunities for financing large-scale projects. In 2023, 31 hromadas utilized local guarantees to secure funding, with a total guaranteed debt of 10.7 billion UAH. This allows investments in infrastructure even in times of crisis, though municipalities need to enhance debt risk analysis.

Decentralization supports financial resilience in hromadas but requires further reforms to address regional inequalities. In 2023, hromada budgets grew by 25.5% compared to pre-war 2021, demonstrating resilience. However, growth was uneven, with frontline territories facing significant population and resource losses. Further support for these regions should be a priority for state policy.

The study “Local governments’ legal, institutional, and financial landscape in Ukraine” was prepared by the KSE Institute team with the support of Bank Gospodarstwa Krajowego (BGK) in 2024. The views expressed in this report reflect the authors’ perspectives and do not necessarily represent the positions of BGK.

Read the full report here.