147
2591-2259/© 2022 University of Ljubljana, Faculty of Public Administration.
This is an open access article under the CC-BY-NC-ND license https://creativecommons.org/licenses/by-nc-nd/4.0/
DOI: 10.17573/cepar.2022.2.07 1.01 Original scientific article
Amalgamation and Local Finance:
A Case Study of Ukraine
Glen Wright
Public Finance and Local Government Consultant, Ukraine
glendalwright@yahoo.com
https://orcid.org/0000-0003-3057-8383
Sergii Slukhai
Taras Shevchenko National University of Kyiv, Faculty of Economics, Ukraine
sslukhai@knu.ua
https://orcid.org/0000-0001-8839-2042
Bohdan Yakymchuk
Taras Shevchenko National University of Kyiv, Faculty of Economics, Ukraine
bogdan.yakymchuk3@gmail.com
https://orcid.org/0000-0003-2574-3815
Received: 25. 12. 2021
Revised: 23. 8. 2022
Accepted: 15. 11. 2022
Published: 28. 11. 2022
ABSTRACT
Purpose: The article aims to measure the impact of the voluntary amal-
gamation approach applied in Ukraine in the course of the decentraliza-
tion reforms undertaken over a period of five years, and assess how much
these reforms have been successful in improving the local government
fiscal situation. Ukraine began a long-delayed decentralization process in
2015 through amalgamation based on a voluntary approach, with an em-
phasis on improving the fiscal resources of the amalgamated units. The
decentralization reform was based on three pillars: (1) voluntary amalga-
mation of the territorial units, (2) enhanced financial resources through
own source revenues and infrastructure grants, and (3) utilization of in-
ter-municipal cooperation to support improved service delivery.
Methodology: A time series of fiscal data from amalgamated territorial
communities in selected regions of Ukraine have been analysed to meas-
ure the impact of the amalgamation policy on the amalgamated territo-
rial units.
Findings: The fiscal improvements anticipated by the amalgamated ter-
ritorial units have not been demonstrated by the statistical data analysis
and no significant improvement in local government finances appears to
have been realized through the application of a voluntary merging ap-
Wright, G., Slukhai, S., Yakymchuk, B. (2022). Amalgamation and Local Finance:
A Case Study of Ukraine.
Central European Public Administration Review, 20(2), pp. 147–168
Central European Public Administration Review, Vol. 20, No. 2/2022148
Glen Wright, Sergii Slukhai, Bohdan Yakymchuk
proach. There have been significant regional and urban/rural variations
based on the population segments and access to financial resources.
Academic contribution to the field: While there has been considerable re-
search on the impact of merging or amalgamating local governments, there
has been very little, if any, on the voluntary approach to amalgamation.
The study seeks to address this problem and present evidence of the advan-
tage of utilizing a voluntary over a mandatory approach to amalgamation.
Significance: The study provides a unique opportunity to measure the im-
pact of amalgamation process in Ukraine over a five-year period based on
the voluntary approach to amalgamation and determine how much this
approach and the accompanying policies have been successful in improv-
ing the local government fiscal situation.
Keywords: amalgamated territorial communities, fiscal decentralization, voluntary
amalgamation, fiscal equalization
JEL: H70
1 Introduction
Ukraine began a long-delayed decentralization process in 2015 with amalga-
mation based on a voluntary approach, as well as an emphasis on improving
the fiscal resources of the newly-established territorial units. In 2014, follow-
ing the Revolution of Dignity, the political will for decentralization and local
government reform materialized as one of the primary policy decisions of the
newly reformed Ukrainian government. The policies chosen were to reduce
the over 10,000 small communities into approximately 1,500 amalgamated
territorial communities (ATC) by voluntary amalgamation, increase the fiscal
resources through financial incentives and targeted infrastructure grants,
and support the use of inter-municipal cooperation to promote service deliv-
ery and economic efficiency.
The key features of this reform rested on several policy pillars. First, the re-
structuring of the administrative-territorial composition to reduce the large
number of local government units. Second, applying a bottom-up voluntary
approach to amalgamation of these units through a defined criteria and lo-
cal decision-making and negotiation. Third, some reassignment of functions,
particularly in the health, education and social services areas. Fourth, the pro-
motion of inter-municipal cooperation as a means to enhance the service de-
livery through economies of scale and fiscal resources to overcome capacity
limitations. And, fifth, greatly increasing the fiscal resources through more
own-source revenues, primarily the personal income tax, property tax, and
other taxes and fees along with grants to promote infrastructure improve-
ments in the ATCs.
This paper focuses on the neglected research areas of researching the impact
of the amalgamation on the revenues of the merged units and those that
voluntarily merged in 2016 in Ukraine. The analysis presents the changes in
Central European Public Administration Review, Vol. 20, No. 2/2022 149
Simplification and Electronisation of Administrative Procedure in the Visegrad Group
Countries – A Sociological and Legal Approach
the fiscal resources based on per capita and selected population segments
within these voluntary merged units. The purpose is to test the hypothesis
that amalgamation of local governments into larger units produce greater fis-
cal resources. There is practically no research as identified by Tavares (2018)
that addresses the voluntary amalgamation approach and even the revenue
side of the fiscal equation.
This research paper intends to shed light on the most anticipated result of the
decentralization reform in Ukraine: the revenue impacts on voluntary amalga-
mated units over a period of five years based on the population classifications
and rural/urban categories. This is to test the proposition that larger popula-
tion units would have increased fiscal resources as a result of the amalgama-
tion and these correlate to different population segments of the units.
The paper is structured into the following sections. In the introduction we
present the general context of Ukrainian decentralization reform. We then
deliver a short literature review in order to present recent studies on decen-
tralization emphasizing developments in Ukrainian local government sector.
The third section presents the methodology developed by the authors to pro-
duce some meaningful conclusions on trends in ATC regarding revenue en-
dowment and budget spending. The fourth section presents the main results
of the study. This is followed by a fifth section that discusses the results. In
the sixth section the authors’ vision of future development and possible poli-
cies which can be considered for further research.
2 Literature Review
Amalgamation of local government units has been one of the main political
and policy options open to sub-national governments to improve locally pro-
vided services and enhance their fiscal resources. The large and significant
amount of research addressing amalgamation for the various reasons and
purposes has been well documented by Tavares (2018).
There have been a substantial number of researches focused on studying the
impact of amalgamation of local governments on the efficiency and effective-
ness of service delivery, municipal expenditure levels and fiscal sustainability.
These studies have analysed several variations of the amalgamation process,
including the mandatory and voluntary approaches. The studies have concen-
trated primarily on the European countries as this is where the largest num-
ber of amalgamations have occurred and the data and analytical capacity has
been more pronounced for this research purpose.
While the efforts to implement decentralization and amalgamate the mul-
titude of local government units were long delayed in Ukraine, the research
and reports supporting these changes began at an early stage. As early as
1995, in a paper by Wright (1995), the outlines of the final local government
reform policies were formed. This included the need to reduce the number of
local government units, the use of inter-municipal cooperation, and enhanced
local government own source revenues. Many Ukrainian students also formu-
Central European Public Administration Review, Vol. 20, No. 2/2022150
Glen Wright, Sergii Slukhai, Bohdan Yakymchuk
lated similar proposals considering that the state of the public administration
sector was excessively centralized over the past decade.
The decentralization process that started in 2015 in Ukraine launched a boom
in decentralization studies. More recent studies have addressed the aggre-
gate levels of fiscal resources and the effects of the changes from the amal-
gamation and local revenues (Hamaniuk and Palchuk, 2020; Newmaier et al.,
2019; Romanova and Umland, 2019; Solodkyy et al., 2020).
Some differences in the findings of these studies became apparent. The
research by Hamaniuk and Palchuk (2020) indicated that the smallest units
with population under 5,000 had seen a higher increase in the per capita own
source revenues than the larger ones. However, other research conducted
under the Ukraine-Local Empowerment, Accountability and Development
Programme (U-LEAD) project that sampled 15 amalgamated units of various
population size indicated that the larger the amalgamated unit the greater
the increase in the revenues (Zubenko et al., 2020). These studies were of a
limited duration and number of units to provide a definitive analysis of the
situation across all amalgamated units.
The latest and more definitive analysis of the success of the local government
reform program that examined the voluntary versus mandatory impacts, the
use of inter-municipal cooperation and the relationship of population size
to revenues is provided by Wright and Slukhai (2021). This study indicated
that the voluntary approach applied in Ukraine was not very successful and
resulted in the use of the forced amalgamation of the local government units
in 2020. It also concluded that the use of inter-municipal cooperation did not
reach a critical mass across the regions to significantly impact the delivery of
services. And, finally, the study addressed the fiscal resources changes based
on the data for the ATCs with different population segments.
Ukrainian researchers on the ATC finances pointed out some flaws in the cur-
rent approach associated with ignoring the fiscal sustainability criteria that
might foster horizontal inequality, increase the gap between resources and
expenditure needs and lead to stagnation of most small ATCs which appeared
to remain non-sustainable after amalgamation (Ivanova and Ivanov, 2020;
Vozniak and Zherebylo, 2020). Other researchers indicated that low fiscal vi-
ability of ATCs is predetermined by the fact that ATCs were formed under
administrative pressure, with no regard to economic and fiscal criteria (Bara-
nivskyi, 2017). Some studies with a macro-approach concluded that the ATC
size does not correlate with the ATCs’ per capita own revenues (Liutyi and
Spasiv, 2019). The empirical studies carried out with data of some specific
ATCs and regional samples concluded that in course of amalgamation a sig-
nificant increase in ATC own revenues was observed (Hrynchyshyn, 2019; Spa-
siv, 2019; Vartsaba, 2018; Zakhidna et al., 2020). Some researchers outlined
policies to measure (Blazhivska and Petrovskyi, 2020) and improve the ATC
fiscal viability through fostering amalgamation that would involve big cities
of regional significance on order to form agglomerations with high economic
potential which would lead to increase in total revenues of territorial units
Central European Public Administration Review, Vol. 20, No. 2/2022 151
Simplification and Electronisation of Administrative Procedure in the Visegrad Group
Countries – A Sociological and Legal Approach
(Patytska, 2019). One of the recent empirical studies (Klyuchnik et al., 2020)
emphasized the lack of link between infrastructure development and sup-
porting the ATCs’ competitive advantages.
As can be seen from this review, the researchers of Ukrainian decentralization
process do not observe unequivocal developments in the local government sec-
tor and this makes a topical further study of trends in this field more essential.
3 Methodology and Data
The methodology of the research undertaken for this paper relies on a multi-
prong macro and micro analysis of the available data on the fiscal resources
of the amalgamated units beginning from 2016. The prior research done by
donor organizations, primarily the U-LEAD project (2018, 2019), focused on
the national level aggregated data that examined the overall national level
trends in revenues and expenditures. This high level of aggregated data did
not reveal many of the underlying trends and differences across the amalga-
mated units.
On performing the initial data analysis of the aggregated data for one year
(Wright and Slukhai, 2020), it was determined that a further and deeper analy-
sis would reveal possible trends in ATC performance over the years from 2016
to 2020. On this second level of analysis, the intent was to see if the different
population segments may have significant differences in the growth of their
revenues on a per capita basis. Additionally, it was considered that there may
be regional differences as well and between urban and rural amalgamated
units. The urban ATCs were defined as those which have more than 50 per
cent of urban population to total population, the rural ATCs, respectively,
were those which have more than 50 per cent of rural population to total
population.
Four regions representing the different areas of Ukraine were selected
(Dnipro, Poltava, Khmelnitsky and Ternopil) to determine if there were dif-
ferences across the regions. These regions belonged to those which were at
the top of Ukrainian regions regarding the number of ATCs formed in 2016.
All amalgamated units that were formed in 2016 were tracked in these four
regions over five years. The number of amalgamated units that fit to the re-
quirements amounted to 72, approximately 5 per cent of the total units amal-
gamated, and included only those ATCs which did not change their composi-
tion (as some of ATCs formed in 2016 later expanded through inclusion of
some new communities). The regional distribution of the sample is provided
in the Table 1.
Central European Public Administration Review, Vol. 20, No. 2/2022152
Glen Wright, Sergii Slukhai, Bohdan Yakymchuk
Table 1. Regions and populations segments of the sample selected
Region >15,000
15,000-
10,000
10,000-
5,000
<5,000
Total
number
of units
Ternopil 4 3 7 11 25
Dnipro 3 3 2 6 14
Poltava 1 2 2 6 11
Khmelnitsky 6 3 11 2 22
Total 14 11 22 25 72
Source: The data from the yearly fiscal reports prepared by U-LEAD and
published on the Decentralization website (www.decentralization.gov.ua).
Sixty-five per cent of the amalgamated units from our total sample have pop-
ulation of 10,000 or less. Approximately 35 per cent of the merged units have
less than 5,000 in population and are considered the least fiscally viable units.
While there was a substantial amount of fiscal data available, the analysis
mostly focused on the trends in the revenues, capital expenditures and the
donations (transfers) of the ATCs over these years.
To identify insights that corresponds to the results of decentralization reform
we constructed Machine Learning models based on a dataset of 72 ATC per-
formance metrics on the period from 2016 to 2020. The features that formed
the dataset are:
1. Binary: urban dominating ATC.
2. Nominal: region (Ternopil, Poltava, Dnipro, Khmelnitsky).
3. Continuous:
– per capita own revenues;
– ATC area;
– ATC population;
– the share of basic donation in total revenues (as target);
– the share of expenditures for the government bodies in general revenu-
es (as target);
– per capita capital expenditures and own revenues (as target).
The key machine learning methods that dominated in our approach were:
1. Gradient boosting, which is based on a step-by-step search for the optimal
model. It starts with differential loss function initialization
0
1
argmin ,
n
i
i
F L y F x
[1]
and after each step improves model accuracy metrics by determination of the
optimal multiplier to conduct the appropriate descent
Central European Public Administration Review, Vol. 20, No. 2/2022 153
Simplification and Electronisation of Administrative Procedure in the Visegrad Group
Countries – A Sociological and Legal Approach
( ) ( ) ( )1m m m m iF x F x h xγ−= + [2].
2. Random Forrest and Extra Trees Regressor that combine decision tree
framework and ensemble learning to randomly simulate decision trees and
by mixing their results improve model accuracy metrics.
4 Research results
The revenue enhancements that would be made available to the ATCs were
primarily greater collection effort for property taxes and other local taxes and
fees. This was also to be enhanced by a grant fund that would be specifically
targeted to the ATCs for infrastructure improvements. This State Fund of Re-
gional Development would provide funds on a priority basis for regional devel-
opment through competitive grants based on financial capacity of the units,
cost-sharing of the projects and some social and economic considerations.
The amended Budget Code and Tax Code allowed for the ATCs to receive 60
per cent of the PIT, 5 per cent of the excise tax, 100 per cent of the small busi-
ness tax, 100 per cent of CIT from the communal enterprises, 100 per cent of
the property tax and 25 per cent of an ecological levy. These were intended,
if effectively collected, to greatly increase the ATCs’ local revenues.
The ATC own revenues (revenues excluding national government transfers)
mostly consist of PIT and local taxes (including property tax) proceeds. As
these types of revenue account for more than 80 per cent of revenues, it
could be concluded that ATCs have quite low discretion over their own rev-
enues because the tax base and tax rates for PIT and local levies are defined
by the national legislation.
As is evident from Table 2, the local revenues did increase substantially in
the early years of the merging process. However, since 2019 (when a drastic
change in country’s political landscape occurred that is associated with a new-
ly-elected President Zelenskyii and forming a mono-coalition by his party in
the parliament) a decrease is observed due to slowdown of the economy and
re-shifting public revenues in favor of the central government. These data are
highly aggregated across all the local government units and tend to show a
slowing down of revenues in the later years.
Table 2. Total revenues of Ukrainian local governments including transfers,
2014-2020
2014 2015 2016 2017 2018 2019 2020
Total revenues incl.
transfers, bill. UAH
231,7 294,5 366,1 502,1 562,2 560,5 471,5
Increase, bill. UAH n.a. 62,8 71,6 136 60,1 -1,7 -89,0
Per cent increase n.a 27,1 24,3 37,1 12,0 -0,3 -15,9
Source: own calculations based on data of the Ministry of Finance of Ukraine.
Central European Public Administration Review, Vol. 20, No. 2/2022154
Glen Wright, Sergii Slukhai, Bohdan Yakymchuk
A significant drop in local total revenues experienced in 2020 must be attrib-
uted mostly to a cut of national government transfer payments towards local
governments due to change in priorities of public expenditure policy. Despite
that COVID-19 pandemic hit that year the Ukrainian economy, it had no sig-
nificant consequences for the local finance. The authors of a U-LEAD report
dedicated to this issue (Ventsel et al., 2021) came to the conclusion that COV-
ID-19 pandemic caused some losses for local budgets, however they were
overcompensated due to increase in minimal wage set by the government for
2020 (+15 per cent) and increase in average wage level (+10 per cent). As a
result, the average budget execution rate for aggregated total local revenues
in 2020 was 99.6 per cent with general budget fund revenue increase of 5.4
per cent in comparison to the level of 2019. This situation contrasts to that
observed in most countries of Europe. The regional and local governments
in Europe lost about 7.3 per cent of their revenues in comparison to the year
2019 (European Committee of the Regions, 2021). It could be assumed that
some responsibility for such a phenomenon are the specifics of vertical pub-
lic expenditure allocation in Ukraine, as well as a traditionally loose revenue
forecasting that gives many possibilities to hide the revenues in order not to
be subjected to revenue extraction by the national government.
Unlike other countries of the Western and Central European regions, Ukraine
practiced a voluntary approach to the amalgamation. The voluntary approach
had been attempted in several of the European countries, but in the end most
of the countries had to resort to a mandatory approach to reducing the num-
ber of local government units (Swianiewicz, 2002).
The process of amalgamating these units began in earnest in 2015-2016 fol-
lowing the adoption of the respective Cabinet of Ministers regulations. It was
driven by a bottom-up and voluntary method that allowed the local commu-
nities to determine how they wanted to merge. The process allowed for the
initiation of the process through the local officials, primarily the mayor or lo-
cal council, and the citizens.
The progress toward merging these units proceeded slowly over the years
beginning in 2015 with 159 newly-established ATCs and ended up with 1,469
ATCs by the end of 2020. The voluntary amalgamation reached a peak in 2019
and further progress to merging the units was very difficult to achieve after 5
years of the voluntary approach. There were several reasons for this, but the
most important appeared to be that there was substantial resistance from
the larger and wealthier local governments to merge with their surrounding
and less wealthy local governments (Udovychenko et al., 2017). These units
didn’t feel that they would benefit from increasing their population or territo-
rial size and the revenues they collect would be spread over the revenue-tight
communities merged with them. On the other side, in some regions the small
rural local communities which were highly dependent on donations and deci-
sions of district authorities were afraid to lose external sources of revenue
in course of amalgamation and that was aggravated by situation of the com-
pact dwelling areas of national minorities which were sensitive to maintaining
their cultural identity (Vartsaba and Mulesa, 2018).
Central European Public Administration Review, Vol. 20, No. 2/2022 155
Simplification and Electronisation of Administrative Procedure in the Visegrad Group
Countries – A Sociological and Legal Approach
In addition to this resistance, the district governments still existed and, in some
instances, overlapped or duplicated the area of the merged communities. The
district administrations feared that they would be eliminated and not have the
fiscal resources even though they still had services to deliver. So, district of-
ficials were very opposed to the merging of units in their areas of jurisdiction.
The initial analysis examined the level of per capita own revenues of the ATCs
with the allocation of the personal income tax exclusively to the local units
and the increase as a per cent to the average of the total sample tracked over
the years from 2016 through 2020 in each of the population segments. These
data are presented in Table 3.
Table 3. Per capita own revenues (total revenues without transfers) by
population segments and years, per cent to average in four regions
ATCs by
population size
2016 2017 2018 2019 2020
>15,000 87,8 91,3 92,4 91,0 92,5
10-15,000 152,6 151,6 132,6 130,3 134,8
5-10,000 94,8 93,5 91,9 92,2 94,5
<5,000 94,8 98,3 99,8 91,5 93,2
Source: Authors’ calculation based on data published on the
Decentralization website (www.decentralization.gov.ua).
The data above indicate that the revenue variations across the ATCs is rather
dramatic. The 10-15,000 population units had substantially more revenue
over these years on a total revenue basis. The 5-10,000 and the larger than
15,000 units exhibited a relatively stable revenue base over these years. At
the same time the less than 5,000 population and the 10-15,000 showed a
decline in revenues over the same period. The most concerning situation is
with regard to the 10-15,000 population which indicates a dramatic decline in
revenues in 2018 and stays at a lower level for the last two years.
However, it also appeared that interregional differences concerning ATC fis-
cal endowment are quite substantial. The Figure 1 below provides a perspec-
tive of the differences over the years of the per capita revenue for each of the
regions and urban/rural designation.
The data tends to indicate that the divergence between urban and rural units
was the greatest in the Dnipro and Poltava regions, both in Eastern Ukraine.
The difference between urban and rural units is the least for the Ternopil and
Khmelnitsky regions (both Western Ukraine) and are at a much lower level
than for the Dnipro and Poltava (Eastern and Central Ukraine) regions. The
graph reveals that the ATC revenues, both in urban and rural locations did
grow over the years in all of these regions. The differences across the regions
with regard to total revenues correlate to the level of economy development
Central European Public Administration Review, Vol. 20, No. 2/2022156
Glen Wright, Sergii Slukhai, Bohdan Yakymchuk
in each region: the most developed are Dnipro and Poltava (Eastern and Cen-
tral Ukraine) which are more industrial and the less developed Khmelnitsky
and Ternopil, (Western Ukraine) which are more agricultural based regions.
Figure 1. Per capita revenues by regions in urban/rural ATCs by years, UAH
0
2000
4000
6000
8000
10000
12000
Av
er
ag
e
Ur
ba
n
Ru
ra
l
Av
er
ag
e
Ur
ba
n
Ru
ra
l
Av
er
ag
e
Ur
ba
n
Ru
ra
l
Av
er
ag
e
Ur
ba
n
Ru
ra
l
Ternopil Dnipro Poltava Khmelnitsky
2016
2017
2018
2019
2020
Source: Authors’ calculation based on data published on the Decentralization
website (www.decentralization.gov.ua).
The level of per capita revenues indicated that the worse-off ATCs must be
supported by the transfers from the central government. However, it must be
noted that amalgamation policy aimed to make the local units more fiscally vi-
able, so it was plausible to expect that transfer dependence would get lower
in amalgamated units in comparison to the pre-amalgamation period.
It has not been a surprise that our analysis (Figure 2) showed that the rural
ATCs appeared to have higher transfer dependence over the urban areas dur-
ing this period. The levels of donations generally grew over the years from
2018, but were nearly back at the same levels as at the beginning in 2016.
Overall, the levels were rather stable over these years. The upward trend is
observed from 2018 on both in the rural and urban areas of all the regions.
While the transfers show a rather stable (around 50 per cent to total reve-
nues) and slightly upward trend in the aggregate, the analysis on a regional
basis shows some significant differences.
Central European Public Administration Review, Vol. 20, No. 2/2022 157
Simplification and Electronisation of Administrative Procedure in the Visegrad Group
Countries – A Sociological and Legal Approach
Figure 2. Share of donation in the ATC budgets by years across the regions
0
5
10
15
20
25
30
35
Av
er
ag
e
Ur
ba
n
Ru
ra
l
Av
er
ag
e
Ur
ba
n
Ru
ra
l
Av
er
ag
e
Ur
ba
n
Ru
ra
l
Av
er
ag
e
Ur
ba
n
Ru
ra
l
Ternopil Dnipro Poltava Khmelnitsky
2016
2017
2018
2019
2020
Source: Authors’ calculation based on data published on the Decentralization
website (www.decentralization.gov.ua).
There is a great variation across the regions in terms of the transfers received.
The Ternopil region represents an interesting case in that both the rural and
urban amalgamated units had a much higher transfer share over the years
compared to the other regions. However, these transfer shares decline sub-
stantially after 2017. The Dnipro rural ATCs received much more transfers in
the later years compared to earlier years. In the Poltava region the rural and
urban ATCs had very low levels of transfers. Once again, Poltava and Dnipro
regions, both in the Eastern and Central Ukraine, had much lower levels of
transfers compared to the other regions because of having more generous
sources of budget revenues due to higher economic development.
Another finding is a trend in expenses on the local government bodies ob-
served since amalgamation started. Figure 3 below demonstrates that a share
of ATC expenditure on local government bodies in the sample units amount-
ed to 26 to 32 per cent on the average since amalgamation began. An up-
ward increase was observed both in urban and rural ATCs. Such a trend in
expenditure composition could indicate that new possibilities stemming from
extended local revenues are compromised to some extend by a bias of local
administrators to spend more local revenues on themselves, and are there-
fore missing in this way the opportunities to increase the level and quality of
local public service delivery.
Central European Public Administration Review, Vol. 20, No. 2/2022158
Glen Wright, Sergii Slukhai, Bohdan Yakymchuk
Figure 3. Expenditures for the local government bodies as per cent of general
fund revenues (own revenues plus general transfers)
25,9
29,1 30,2
31,9
5,3
9,6 9,8 11
63,9 64,1
69,9
62,2
18 20,4
21,1 22,1
27,8
31,2 32,4
34,2
0
10
20
30
40
50
60
70
80
2017 2018 2019 2020
Average
Min
Max
Urban
Rural
Source: Authors’ calculation based on data published on the Decentralization
website (www.decentralization.gov.ua).
The data reveal a higher level of these expenditures as opposed to spend-
ing on public services over these years. The upward trend in expenses would
indicate that these are taking more of the general fund budget relative to
the other general fund expenses, such as the delivery of public services. The
level of expenses on the local government bodies is much higher for the rural
areas as opposed to the urban areas. The values for this expenditure share
show that one of the goals of amalgamation – to keep administrative cost in
ATCs at the level of 20 per cent to general revenue fund at maximum – is far
from being achieved. Moreover, the growth trend here is obvious with the
average value reaching over 30 per cent in 2020. This situation is a particular
characteristic for the rural areas in the whole of Ukraine. This takes into con-
sideration that most ATCs from our sample are rural. The Ministry of Finance
of Ukraine latest data showed that in rural local governments the share of
expenditures on local government bodies soared up to almost 40 per cent in
2020 (Ministry of Finance of Ukraine, 2021).
A very important indicator of forming the viable local communities is their
investment activity as it supports local economy that in turn generates local
revenues. So, it was logical to assess in what way the amalgamation process
affected local public investments. Our major finding is the following one:
there is an opposite trend in general budget revenues and the ATC per capita
investment expenditures in nominal values and this tends to diminish from
year to year in all the regions. This follows from data presented in Figure 4.
Central European Public Administration Review, Vol. 20, No. 2/2022 159
Simplification and Electronisation of Administrative Procedure in the Visegrad Group
Countries – A Sociological and Legal Approach
Figure 4. Per capita capital expenditures by regions urban/rural by years, UAH
0
500
1000
1500
2000
2500
3000
3500
4000
Av
er
ag
e
Ur
ba
n
Ru
ra
l
Av
er
ag
e
Ur
ba
n
Ru
ra
l
Av
er
ag
e
Ur
ba
n
Ru
ra
l
Av
er
ag
e
Ur
ba
n
Ru
ra
l
Ternopil Dnipro Poltava Khmelnitsky
2017
2018
2019
2020
Source: Authors’ calculation based on data published on the Decentralization
website (www.decentralization.gov.ua).
What is additionally evident here is that the Dnipro and Poltava regions (East-
ern and Central Ukraine) have much higher levels of per capita capital expen-
ditures over the years and with substantial variations from year to year. The
greater convergence between the per capita capital expenditures between
rural and urban areas is most noticeable in the Ternopil and Khmelnitsky re-
gions (both Western Ukraine). The extent of the variations from year to year
of the capital expenditures does not demonstrate a particularly stable or up-
ward trend in the capital expenditures among these units. Generally, there
was a downward trend in the per capita capital expenditures over these years
with a significant decline in 2020.
Considering the key trends and relationships characterizing the process of
amalgamation of territorial communities in Ukraine, surprisingly strong cor-
relations between the following metrics were identified:
– High negative correlation (-.536) between the share of basic donation in
total revenues and own revenue per capita. This result shows a natural con-
nection that reflects the replenishment of transfers in regions with insuffi-
cient cash flow levels.
– Moderate negative correlation (-.322) between the share of expenditu-
res for the government bodies in general revenues and the population of
amalgamated territorial communities. Such a result arises as a scaling ef-
fect: the higher the population, the lower the share of administrative costs
Central European Public Administration Review, Vol. 20, No. 2/2022160
Glen Wright, Sergii Slukhai, Bohdan Yakymchuk
per capita. More significant consolidation of the ATC groups may lead to a
smaller percentage of these expenses to revenue generated by the com-
munity.
– A high positive correlation (.629) between capital expenditure and own re-
venues per capita. As a result of higher business activity in the region, in-
vestment in the area increases accordingly, demonstrating the most robust
pairwise relationship.
The hypothesis tests were performed to conclude a significant linear rela-
tionship for described pairs of metrics with p-values lower than the .05 sig-
nificance level. In addition, the performed correlation analysis confirms the
hypotheses stated earlier.
Machine learning methods were used to describe the functional impact of
individual components on the target performance metrics of the reform.
Among the methods tested for explaining the share of donations, CatBoost
Regression, the model of gradient boosting as an ensemble of decision trees
on a transformed sample of data free of multicollinearity and with combined
categorical variables, was singled out as the most accurate. In addition, the
bootstrapping method was used to expand the data sample (see Table 4).
Table 4. Comparison of accuracy of Machine Learning models to
explain basic donation in total revenues metric
Model MAE MSE RMSE R2
CatBoost Regressor 4.9094 49.7953 6.9067 0.7098
Extra Trees Regressor 4.7632 51.2661 6.9905 0.7094
Random Forest Regressor 5.2213 54.5084 7.2579 0.6866
Gradient Boosting Regressor 5.3972 56.6585 7.4068 0.6635
K Neighbors Regressor 5.4193 60.0295 7.6164 0.6553
Extreme Gradient Boosting 5.4377 61.5980 7.7341 0.6412
Linear Regression 6.4467 65.4230 8.0205 0.6267
Source: Authors’ calculation.
Since gradient boosting is a complex algorithm for interpreting the influence
of multiple independent variables on a target metric, we used the Shapley Ad-
ditive Explanations algorithm, a sensitivity analysis-based method for explain-
ing prediction models, to identify the character and strength of the influence
of our variables (Figure 5).
Central European Public Administration Review, Vol. 20, No. 2/2022 161
Simplification and Electronisation of Administrative Procedure in the Visegrad Group
Countries – A Sociological and Legal Approach
Figure 5. SHAP Values of factors explaining share of basic donation
in total revenues in CatBoost Regression Model
Source: Authors’ calculation.
As we can see from the sensitivity analysis, per capita own revenues have
the most decisive influence, while there is a robust negative relationship be-
tween this factor and the share of basic donation in total revenues. The area
of the ATC plays the second most important place in the model, while the re-
lationship also has a negative value. Another point that should be highlighted
from the sensitivity analysis of the factors is that a larger share of subsidies is
characteristic for ATCs of Ternopil region and those ATCs from other regions
which have majority of the rural population. The situation is the opposite for
Poltava and Dnipro regions.
Using a similar approach to illustrate the share of subsidies to the region we
built a model that explains the percentage of expenditures for government
bodies in the revenues. The model with the best characteristics was deter-
mined to be the Extra Trees Regressor model. This model has even a slightly
lower level of Mean Absolute Error (4.24 p.p.) of expenditures for govern-
ment bodies share and the coefficient of determination at the level of .739.
The results are presented in Figure 6.
Figure 6. SHAP Values of factors explaining share of basic donation
in total revenues in Extra Trees Regression Model
Source: Authors’ calculation.
In the Extra Trees Regression model the population factor has a higher in-
fluence, demonstrating a certain positive scale effect of consolidation into a
Central European Public Administration Review, Vol. 20, No. 2/2022162
Glen Wright, Sergii Slukhai, Bohdan Yakymchuk
single ATC. The relationship between the variables is negative, as predicted
in the correlation analysis. The second most important factor – own revenue
per capita, also shows a negative impact. The regional location and a share of
the urban population have impact similar to the previous model, however we
should emphasize a stronger and more pronounced negative effect for the
Khmelnytsky region.
The Random Forest Regressor model was determined to be the most accu-
rate model for the estimating factor for per capita capital expenditures, but
the error rate for this variable is sufficiently high at 34 per cent Mean Abso-
lute Percentage Error (Figure 7).
Figure 7. SHAP Values of factors explaining per capita capital
expenditures in Random Forrest Regression Model
Source: Authors’ calculation.
The highest positive impact on per capita capital expenditures has the amount
of per capita own revenues, while other variables that have a strong effect
can be defined as the binary metric of the Ternopil region and the metrics of
ATC population and area.
5 Discussion
This research has examined the impact of a voluntary approach to amalgama-
tion and accompanying policies of local government finance over a five-year
period from 2016-2020. The intent was to see if there was a level of correla-
tion or trend relationship across these years in terms of the population size
to the fiscal resources and spending patterns. The assumption being that the
greater the population the greater the level of fiscal resources and that these
would rise as population levels of the amalgamated units increased. It was
also assumed that after amalgamation ATCs would improve their expenditure
composition and spend more money on investments.
While most studies of the impact of amalgamation have focused on the lev-
els of expenditures, this research focused on the revenue sources related to
own source revenues and transfers, capital expenditures and administrative
expenses.
Central European Public Administration Review, Vol. 20, No. 2/2022 163
Simplification and Electronisation of Administrative Procedure in the Visegrad Group
Countries – A Sociological and Legal Approach
The research indicates that population size as a predictor of increased fiscal
resources is not proven by the experience in Ukraine. The amalgamation ap-
proach of Ukraine of relying on voluntary amalgamation, use of inter-munic-
ipal cooperation and enhanced fiscal resources should have provided a high
probability that larger units would demonstrate increased fiscal resources.
Some studies carried out at the initial stage of decentralization put forward
such result as an argument to amalgamate into larger ATCs (Kaziuk, 2016).
This correlation was not proven by the data analyzed in this research. This
would suggest that concerns about fiscal viability of newly formed territorial
units expressed by some students (Vozniak and Zherebylo, 2020) is sustained
as our analysis shows. However, we do not suggest that population size is an
inappropriate indicator for clustering the ATCs as some students claim (Liutyi
and Spasiv, 2019). The problem with the absence of correlation among popu-
lation and own revenues (as well as capital expenditures) could be rooted in in-
stitutional peculiarities of Ukrainian local governments system, especially with
low elasticity of own local revenues with regard to the government size. And
this is maybe a very significant weakness of Ukrainian decentralization reform
because the world-wide experience of many countries demonstrated a high
importance of fiscal incentives for local revenue collection (Jin et al. , 2005).
Our research did indicate a significant level of differences between the fis-
cal capacity of urban and rural amalgamated units as might be expected. The
rural areas had lower levels of fiscal resources, while urban areas, particular-
ly those that include the large cities, had greater levels of fiscal resources.
Whether this will remain true following the mandatory amalgamation imple-
mented in 2020 will need to be further researched.
We suggest that an increase in ATCs own revenue observed through the time
in our sample could be associated with some fiscal risks coming from a high
(over 50 per cent) dependence on PIT. As some Ukrainian researchers em-
phasized, the PIT proceeds in smaller ATCs fall mostly on those who works
for local budgetary institutions (school teachers, local council staff, etc.) and
high reliance on PIT is in most cases associated with lower per capita own rev-
enues (Hrynchyshyn, 2019). This is an additional argument for changing ATC
revenue composition in favor of truly own source revenues.
However, it is clear that despite growing own source revenues, the amalga-
mation in its present form did not make ATCs more fiscally independent. The
dependence on equalization transfers did not change greatly over time, but
with some slight growth trend. This observation supports a claim by Lunina
that local governments in Ukraine still have no fiscal instruments to adjust
their own revenues to own expenditures (Lunina, 2014). The initial situation
where around 80 per cent of ATCs received the equalization transfers (Bara-
nivskyi, 2017) did not actually change. However, as our correlation analysis
suggested, the growth in own revenues must lead to decrease in transfer de-
pendence. The problems is that governmental policy should be more directed
at increasing local fiscal autonomy.
Central European Public Administration Review, Vol. 20, No. 2/2022164
Glen Wright, Sergii Slukhai, Bohdan Yakymchuk
Our study of expenditure patterns related to ATC revenue development re-
vealed some problems with spending efficiency. This fact is not a unique one,
as some studies documented no influence of amalgamation on local govern-
ment spending efficiency (Afonso and Venancio, 2020). It could also be re-
lated to the complex interaction between elected politicians and bureaucrats
at the local level (Peters, 2020). Our findings concerning growing share of
expenses on local government bodies may indicate some institutional issues
in local governance that are still present in the Ukrainian subnational public
sector. These results are similar to those reported by Blesse and Baskaran
(2014) in their examination of differences between voluntary and mandatory
merged units in the German federal state of Brandenburg which found that in
mandatory merged units there was a greater and more immediate reductions
in administrative expenditures, while in the voluntary merged units there
was much less reduction in these expenditures. Another study found that in
course of amalgamation there is no economy of scale observed as concerns
expenditures for local government bodies (Matejova et al., 2017). So, we can
suggest that Ukrainian voluntarily amalgamation resulted in less efficient re-
source usage that could be explained to some extend by decreasing account-
ability backed by insufficient budget transparency and slow development of
own revenue sources. The fact of low local budget transparency in ATCs is
documented in a study by Slukhai et al. (2019). Low accountability relates to
low citizen participation in local government budget decisions, as recent stud-
ies of some countries showed (Ebinger et al., 2019). However, the correlation
analysis demonstrated that in general, growing own revenues may lead to
decreasing share of this part of expenditures with regard to revenues.
Our analysis of local public capital expenditures in the four regions revealed
their downsizing. This observation is consistent with trends observed in some
other regions of Ukraine (Melnyk et al., 2019). However, our correlation analy-
sis showed that per capita capital expenditures might increase with growing
local revenues.
We also revealed great interregional variation and year-by-year fluctuations
of per capita capital expenditures. This maybe caused to a great extent by
the inconsistent governmental policy concerning supporting ATCs invest-
ments. As the audit by the Accounting Chamber of Ukraine on spending of
state subvention for forming the ATC physical infrastructure showed, there
have been no explicit principles of subvention accumulation and allocation
formulated which have led to its mostly inefficient usage (Rakhunkova Palata
Ukrainy, 2019). As this infrastructure subvention is a significant part of ATC
capital budget, it would be no surprise that they have no consistent invest-
ment policy with resulting observed fluctuations. The empirical studies also
showed insufficient influence of local investments on local economic devel-
opment (Klyuchnik et al., 2020) that could be related to the issues with the
state local investment support.
Central European Public Administration Review, Vol. 20, No. 2/2022 165
Simplification and Electronisation of Administrative Procedure in the Visegrad Group
Countries – A Sociological and Legal Approach
6 Conclusions
Based on the analysis in this paper it was revealed some substantial differ-
ences on a regional basis from the decentralization reform. The ATCs in the
Eastern and Central Ukraine (regions of Dnipro and Poltava) had more own
source fiscal resources and had much less transfer dependence. The opposite
was true for the Western Ukraine (regions of Ternopil and Khmelnitsky) with
lower levels of own fiscal resources available and higher levels of dependence
on transfers. This may indicate significant differences in the economic situa-
tion in the regions as well as the capacity of these units to collect revenues
and manage fiscal resources.
There may be other explanations for why our basic hypothesis was not fully
proven in this decentralization reform. The data may not reflect the differ-
ent economic situations of the merged units, the different capacities of the
local government to collect revenue, and that the policy decisions related to
enhanced revenue sources were not sufficient to have a noticeable impact on
the fiscal situations.
It is clear that some changes in the current approach to decentralization (amal-
gamation) should be introduced. First of all there is the need for a broader
range of truly local own source revenues. The local governments have to en-
joy much higher autonomy in local taxation and that this must extend also to
property taxation. In order to enhance local public investments, the amount
of investment subsidy also must be increased and its incentive component
significantly improved.
It is clear that these improvements could be introduced only after the victory
of Ukraine in a war unleashed by Russia on February 24, 2022. Despite the
mass destruction of the economy and severe issues with public institutions
functioning caused by the aggression, the Ukrainian after-reform local gov-
ernment sector has proven its institutional sustainability.
In any case, the national government should look for reshaping its decentrali-
zation policy in some very important constituents. Then the recent amalga-
mation efforts might bring an expected outcome – getting a fiscally viable
and sustainable local government system. This may require a more detailed
examination of the own source revenues and the use of additional incentives
to spur greater revenue collections. It should also address the potential ineq-
uities in the transfers and the use of performance-based grants to increase
the willingness of local government units to voluntary merge. Additional at-
tention needs to be directed toward supporting more intensive inter-munic-
ipal cooperation in those instances where voluntary amalgamation is not a
politically viable approach.
Since the Government of Ukraine mandated a compulsory amalgamation of
all local government units in 2020, effectively ending the voluntary approach,
our study may provide a basis for future research in terms of analyzing the
differences in comparable units that were once merged voluntarily to those
Central European Public Administration Review, Vol. 20, No. 2/2022166
Glen Wright, Sergii Slukhai, Bohdan Yakymchuk
that were mandated. There has been little research in this particular aspect of
decentralization and the debate over whether voluntary or mandatory amal-
gamation will produce better results needs to be addressed. This study may
also provide a basis for assessing the deficiencies of utilizing the voluntary
approach and lead to identification of amalgamation policies that provide
greater incentives for local governments units to merge on a voluntary basis.
Central European Public Administration Review, Vol. 20, No. 2/2022 167
Simplification and Electronisation of Administrative Procedure in the Visegrad Group
Countries – A Sociological and Legal Approach
References
Afonso, A. and Venancio, A. (2020). Local Territorial Reform and Regional
Spending Efficiency. Local Government Studies, 46(6), pp. 888–910.
Baranivskyi, M. O. (2017). Finansova detsentralizatsiia v Ukraini: osoblyvosti
stanovlennia. Ukrainskyi heohrafichnyi zhurnal, 4(100), pp. 30–38.
Blazhivska, M. and Petrovskyi, P. (2020). Formation of Territorial Community
as a Subject of Local Development. Central European Public Administration
Review, 18(2), pp. 165–182.
Blesse, S. and Baskaran, T. (2014). Do Municipal Mergers Reduce Costs? Evidence
from a German Federal State. CEGE Discussion Papers, 176[rev.]. University
of Göttingen, Center for European, Governance and Economic Development
Research, Göttingen
Ebinger, F., Kuhlmann, S. and Bogumil, J. (2019). Territorial Reforms in Europe:
Effects on Administrative Performance and Democratic Participation. Local
Government Studies, 45(1), pp. 1–23.
European Committee of Regions (2021). Local and Regional Finances in the
Aftermath of COVID-19. Brussels: European Union.
Hamaniuk, O. and Palchuk, M. (2020). Size Matters: Incomes of Smaller Hromadas
(Communities) Increase More Than of Large Ones. Vox Ukraine, 26 March.
At , accessed 1 May 2021.
Hrynchyshyn, I. M. (2019). Finansova spromozhnist terytorialnykh hromad
u konteksti otsiniuvannia rezultativ administratyvno-finansovoi
detsentralizatsii. Sotsialno-ekonomichni problemy suchasnoho periodu
Ukrainy, 5(139), pp. 26–32.
Ivanova, O. Yu. and Ivanov, Yu. B. (2020). Detsentralizatsiia vlady: vyklyky dlia
novoobranykh orhaniv mistsevoho samovriaduvannia. Finansy Ukrainy, 9, pp.
24–28.
Jin, H., Qian, Y. and Weingast, B.R. (2005). Regional Decentralization and Fiscal
Incentives: Federalism, Chinese Style. Journal of Public Economics, 89(9-10),
pp. 1719–1742.
Kaziuk, Ya. (2017). 20 lideriv OTH ta shcho ye vyznachalnym kryteriiem
dlia staloho rozvytku hromad. At , accessed May 22 2021.
Klyuchnik, А.V. et al. (2020). The Impact of Amalgamated Territorial Communities
Infrastructure on the Formation of Their Competitive Advantages.
International Journal of Management, 11(5), pp. 1045–1057.
Liutyi, I. and Spasiv, N. (2019). Otsinka finansovoi spromozhnosti ob’iednanykh
terytorialnykh hromad. Finansy Ukrainy, 7, pp. 92–112.
Lunina, I. (2014). Biudzhetna detsentralizatsiia: tsili na napriamy reform.
Ekonomika Ukrainy, 11, pp. 61–75.
Matějová, L. et al. (2017). Economies of Scale on the Municipal Level: Fact or
Fiction in the Czech Republic? NISPAcee Journal of Public Administration and
Policy, 10(1), pp. 39–59.
Melnyk, M., Leshchuk, I. and Yaremchuk, R. (2019). Efektyvnist administratyvno-
finansovoi detsentralizatsii v rehioni: investytsiinyi vymir. Finansy Ukrainy, 3,
pp. 103–117.
Ministry of Finance of Ukraine (2021). Budget of Ukraine 2020. Kyiv: Ministry of
Finance of Ukraine.
Central European Public Administration Review, Vol. 20, No. 2/2022168
Glen Wright, Sergii Slukhai, Bohdan Yakymchuk
Newmaier, S., Sybiriansky, Y. and Ventsel, V. (2019). Assessment of the Public
Finance Management System of Amalgamated Hromadas. Kyiv: U-LEAD.
Patytska, Kh. (2019). Finansovo-ekonomichnyi potentsial terytorialnykh hromad:
mekhanizmy funktsionuvannia ta aktyvizatsii. Lviv: Instytut rehionalnykh
doslidzhen imeni M. I. Dolishnoho NAN Ukrainy.
Rakhunkova Palata Ukrainy (2019). Yak vykorystovuiutsia koshty derzhbiudzhetu
na rehionalnyi rozvytok. At ,
accessed 27 July 2021.
Romanova, V. and Umland, A. (2019). Ukrainian Local Governance Priorto
Euromaidan: The Pre-History of Ukraine’s Decentralization Reform. Kennan
Cable, 44.
Slukhai, S. et al. (2019). The Principle of Transparency: Does It Work within the
Ukrainian Decentralization Reform. Central European Public Administration
Review, 2, pp. 141–165.
Solodkyy, S. et al. (2020). The Link between Decentralization and EU Integration.
Kyiv: New Europe Center (Ukraine) and Centre for East European and
International Studies (ZOIS, Germany).
Spasiv, N. Ya. (2019). Otsinka strukturnykh dysbalansiv dokhodiv biudzhetiv
ob’iednanykh terytorialnykh hromad. Svit finansiv, 2, s. 73–84.
Swianiewicz, P. (ed.) (2002). Consolidation or Fragmentation: The Size of Local
Governments in Central and Eastern Europe. Budapest: OSI/LGI.
Tavares, A. (2018). Municipal Amalgamations and Their Effects: A Literature
Review. Miscellanes Geographica, 22(1), pp. 1–11.
Udovychenko, V. et al. (2017). Decentralization Reform in Ukraine: Assessment
of the Chosen Transformational Model. European Spatial Research and
Policy, 24(1), pp. 23–40.
Vartsaba, V. and Mulesa, E. (2018). Otsinka finansovoi spromozhnosti providnykh
ob’iednanykh terytorialnykh hromad Zakarpatskoi oblasti. Internauka. Seriia:
Ekonomika, 5(13), pp. 81–86.
Ventsel, V., Pylypiv, V. and Slobodian, R. (2021). How the COVID-19 Pandemic
Impacted Local Budgets in Ukraine. Kyiv: ULEAD.
Vozniak, H. and Zherebylo, I. (2020). Formuvannia finansovo spromozhnykh
terytorialnykh hromad: ryzyky detsentralizatsii. Finansy Ukrainy, 1, pp. 73–82.
Wright, G. (1995). Policy Options for Local Government Decision-Making
Capacity. A paper presented at International Conference on Problems of
Modern City Management. Kyiv, 28-29 September 1995.
Wright, G. and Slukhai, S. (2021). Decentralization Policy in Ukraine: How
Voluntary Amalgamation, Inter-Municipal Cooperation and Fiscal Incentives
Impacted the Local Government System. NISPAcee Journal of Public
Administration and Policy, 14(1), pp. 311–344.
Zakhidna, O.R., Huzovata, I.R. and Ishchenko, V.A. (2020). Otsinka finansovoi
spromozhnosti providnykh ob’iednanykh terytorialnykh hromad Lvivskoi
oblasti. Ekonomichnyi visnyk. Seriia: finansy, oblik, opodatkuvannia, 6, pp.
54–66.
Zubenko, V., Kornienko, A. and Holynskyy, V. (2020). Results of Assessment
of Public Financial Management Systems in Amalgamated Hromadas. At
, accessed 12 June 2021.