Municipal capacity criteria in Ukraine’s reforms

Dr. Pavlo Ostapenko, Head of Ukrainian Researchers Society

Executive summary

In Ukraine, administrative-territorial reform moved into a new phase in 2020, the formation of municipalities by administrative means[1]. This stage followed voluntary formation of municipalities, when over 900 new, amalgamated municipalities were established. However, after the local elections on the basis of the new territories, voluntary amalgamation will again take place over 2021-2024, before the next local elections and new territorial units will possibly be formed by administrative means. This article analyzes the criteria and indicators of municipal capacity that were used in the previous stages of forming territorial units and suggests new assessment criteria. The approach used in developing the Methodology for the formation of capable municipalities,[2] and the criteria for assessing capacity is analysed, too. Based on data analysis of the draft 2021 budget,[3] financial indicators for functioning municipalities,[4] and data from the public service network portal,[5] and applying mathematical analysis, comparison, typification and evaluation, examples are provided of other criteria that might be used in assessing this capacity.


Assess municipal capacity

Let us consider two types of indicators that can be used to assess capacity of both acting and planned municipalities:

  1. Indicators to measure capacity of municipalities in accordance with the Methodology for the formation of capable municipalities developed by MinRegion and approved by the Cabinet of Ministers.
  2. Additional assessment indicators for financial and infrastructure capacity, which are recommended for use in measuring capacity.

Notably, additional assessment indicators determine the level of infrastructure development and financial resources of a given territorial unit, which should be taken into account in the process of establishing capable municipalities. However, such indicators are not stipulated by the Methodology, which only states that “Capable municipalities are established taking into account infrastructural development in the territorial units [and] the financial resources available in such territorial units.”[6] At the same time, no methods are provided to determine the level of infrastructural development or the available financial resources.

Thus, this article will analyse each type of indicator.


Indicators in the MinRegion Methodology

According to Point 10 of the Methodology, the territory of a capable municipality should cover the territories of all constituent municipalities and should be contiguous.

This suggests that the contiguousness and geographical integrity of the territories of municipalities need to be analysed first, since any municipality with fragmented territory such as enclaves and exclaves needs to change its configuration. According to preliminary estimates, 66 of the 1,469 approved municipalities have discontiguous territory.

The overall level of municipal capacity is determined by the index method in the Ministry’s Methodology. However, analysis of this methodological approach to assessing municipal capacity reveals a lot of problems, some of which will be considered next.

According to Point 7 of the Methodology, capacity assessment is based on criteria that characterize the main socio-economic indicators affecting the development of a given capable municipality.

Capacity assessment criteria are:

  • the number of permanent residents;
  • the number of pupils attending general secondary schools in the municipality;
  • the area covered by the municipality;
  • the taxability index of the local budget;
  • the share of local taxes and fees in local budget revenues.

A specific numerical value or index, which depends on the indicator value of each criterion, is determined for all five criteria for capacity assessment according to Annex 2 of the Methodology. For example, the population criterion index for a municipality with a population of 3,102 will be 0.3, and for one with a population of 7,352 it will be 1.


Table 1. Criteria for preliminary assessment of municipal capacity (MinRegion Methodology)

Criterion name
Criterion numerical value
# of permanent residents
< 3,000
> 7,000
# of pupils attending general secondary schools in the municipality
< 300
> 500
Area covered by the municipality
< 200 sq. km
200-400 sq. km
> 400 sq. km
Taxability index of local budget
< 0.3
> 0.9
Share of local taxes and fees in local budget revenues
< 0%
> 40%


The most significant shortcomings of this approach include:

  1. A specific index, the criterion numerical value, is applied to each indicator, although only three indices are applied. The value of the step of an index increase is not directly proportional, since the index first increases by 0.3 and then by 0.4. A disproportionate increase in the index is possible if the interval that correlates with the index changes commensurate with the index, but as we can see, the intervals of the indicator for each criterion are different and not equal.
  2. The intervals of indicators for each criterion should increase in arithmetic or geometric progression by equal steps, and this would be a correct application of the method of equal intervals. The intervals for each indicator of the criterion appear to have been determined by empirical means, but not mathematically, without any preliminary calculations.
  3. One of the proposed criteria is the taxability index, although the Methodology suggests applying an index to an index, which does not comply with standard research methods.
  4. Minimum, medium and maximum values of the indicators are determined by empirical means and do not correspond to similar indicators for each criterion that can be calculated using mathematical statistics methods.

After calculating the numerical value of an index, the Methodology describes how to determine the overall capacity of the municipality, based on the sum of numerical values of the capacity assessment criteria:

  • low capacity: 1.5 to 2.1
  • average capacity: 2.2 to 3.8
  • high capacity: 3.9 to 5

For example, the overall capacity of a municipality with an average capacity level 2.5 is obtained by the sum of the numerical values of population criterion or 0.3, the enrolment criterion or 0.3, the territorial area or 1.0, the taxability index, or 0.3, and the share of local taxes and fees in local budget revenues index or 0.6: 0.3+0.3+1.0+0.3+0.6=2.5.

What is wrong with this approach to assessing the overall capacity level is that the intervals between types of capacity are not equal: the interval for a low-capacity municipality is 0.6 (2.1-1.5), the interval for municipalities with average capacity is 1.6 (3.8-2.2), nearly three times higher, and the interval for high-capacity municipalities is 1.1 (5-3.9)—lower than the middle interval, but almost twice as high the first interval. The different intervals in the Ministry’s Methodology for assessing overall capacity level does not reflect the real number of municipalities in each group.

If municipal capacity is calculated according to the Ministry’s Methodology, the number of high-capacity municipalities is 610 or 42.4%, the number of municipalities with average capacity is 817 56.8%, and only 11 municipalities are low-capacity, 0.8%. There are obvious errors in this methodology, and they distort the outcomes of assessment with higher numbers of high and average capacity municipalities. This, in turn, affected the number of municipalities approved by the Cabinet in June 2020.

In and of itself, the Ministry’s Methodology is not incorrect, as the defined indicators adequately characterize the level of municipal capacity, but errors in the calculation methodology make it impossible to determine the real number of municipalities with low, average and high capacity.


Additional assessment indicators

With this in mind, additional assessment indicators can be used that derive from data analysis that can be obtained from the state statistics agencies, ministries, oblast administrations, and municipalities, as well as using field or questionnaire methods.

These additional assessment indicators can be divided into two groups: indicators that show the level of infrastructure development and indicators that characterize the financial resources of municipalities.

Financial resources indicators include:

  • Budget Revenue Index is the coefficient that determines per capita local budget revenues compared to average in the country as a whole. The minimum value of this index cannot be less than 0.3. If the index value is 0.3 or less, the municipality will be considered unable to fulfil its own and delegated functions. According to preliminary calculations, the number of municipalities like this in 2021 could be around 60 or 4.1%.
  • Share of budget revenues spent on local government. Observations show that, the higher the share, the more money is spent on salaries of local government officials, rather than on developing the municipality’s territory and infrastructure. If the share is 20% or higher, decentralization of budget funds in municipalities has not been achieved. According to preliminary calculations, the number of municipalities that will have a share of personnel costs over 20% could be around 352 or 24.5% in 2021.
  • Ratio of basic subsidy to total budget revenues. A new indicator that reflects dependence of the local budget on the basic subsidy from the central government. If the basic subsidy for the local budget is more than 50%, such a municipality cannot perform its own functions independently, without state support. However, when calculating this indicator, it is necessary to consider the distance from municipalities, especially villages and hamlets, to the nearest district centre or city. The establishment of heavily subsidized village and hamlet municipalities with their own local governments not far from existing administrative and economic centres is absolutely irrational and inefficient. According to preliminary calculations, there will be about 91 municipalities or 6.3% that will have a basic subsidy higher than half of their budget, while, for another 232 municipalities or 16.1%, the basic subsidy will amount to 20-50% of their total local budget in 2021.

In general, all indicators of financial resources are divided into two basic groups: incentives and disincentives. Incentives are indicators whose increase improves the overall assessment of a municipality’s capacity, while disincentives, on the contrary, make the assessment worse.

To sum up, three indicators of financial resources and their critical limits show that planned or acting municipalities are not able to fulfil their own and delegated powers.


Critical limits
Indicator group
Budget revenue index
0.3 and less
Share of spending local government in local budget revenues
20% or more
Ratio of basic subsidy to total budget revenues
50% or more


Note that the data for local budget revenues in 2019 were used to calculate financial indicators, which include revenues to both general and special funds. Local budget revenues also included the share of personal income tax (60%) paid on the territory of an administrative-territorial unit that was not part of an amalgamated municipality as of 01.01.2020, since this type of tax was channelled to the general fund of county budgets in 2020.


Infrastructure development indicators should include:

  • general secondary schools of I-III degree;
  • preschool facilities;
  • administrative service centres (TsNAP);
  • fire stations;
  • outpatient clinics;
  • secondary healthcare facilities.

The absence of any of the six types of institutions in a municipality should be considered holistically: the more social infrastructure that is not available in a municipality, the less it will be able to provide basic services, such as preschool, secondary education, healthcare, security, and administrative services.

Analysis of infrastructure development in 1,438 existing municipalities showed that not all of them have a complete list of these institutions on their territory:

  1. general secondary schools of I-III degree: all municipalities have at least one, but 72 or 5% have only one;
  2. preschools: 6 municipalities have none and 30 or 2.1% have only one;
  3. administrative service centres (TsNAP): 765 municipalities or 53.2% have not yet established their own centre;
  4. fire stations: 398 municipalities or 27.7% do not have their own fire station;
  5. outpatient clinics: 23 municipalities or 1.6% do not have an outpatient clinic;
  6. secondary healthcare facilities: 733 municipalities or 51%)have no specialized healthcare facilities on their territories.

The overall analysis of infrastructure development indicators for existing municipalities showed that 4 of these 6 institutions are not available in 10 municipalities or 0.7%, and 3 of the 6 most essential social infrastructure institutions are not available in 305 municipalities, 21.2%.

In short, the Cabinet of Ministers only partly recognized the financial and infrastructure development indicators of planned municipalities when it was considering and approving municipality centres and territories.

Monitoring the total number of critical limits of financial and infrastructure development indicators could become an effective criterion for municipal capacity assessment. Municipalities that have three or more critical limits among these indicators should be divided into two types: municipalities that should be amalgamated with neighbouring, more capable ones and municipalities that require significant state funding in order to develop.

The first type should include municipalities with three or more critical limits of infrastructure development and financial indicators, whose centre is located no more than 20 kilometres by public roads from cities of oblast significance or county seats. Due to their lack or low level of infrastructure development and insufficient financial resources, they will not be able to provide adequate public services, in particular in education, culture, healthcare, social services, housing and utility services, based on the actual human and financial resources, and the infrastructure level of a basic administrative-territorial unit of that kind. Such municipalities are normally located next to more capable ones.

The second type should include municipalities with three or more critical limits of infrastructure development and financial indicators, but whose centre is further than 20 kilometres by public roads from cities of oblast significance or county seats. Such municipalities should receive the most support from the state, as they are formed in accordance with the Methodology, located at a considerable distance from the nearest economic and social centres, and their financial indicators and infrastructure development are the lowest in the oblast.



The analysis of the MinRegion Methodology and additional indicators of municipal capacity discussed in this article suggests that the procedure for municipal capacity assessment should include six stages:

  1. Analysing the contiguity and geographical integrity of the territory of planned municipalities. Where there are gaps and deviations from geographical integrity, the municipality should be considered not capable;
  2. Doing a preliminary assessment of municipal capacity in line with the MinRegion Methodology;
  3. Calculating the number of critical limits for three indicators of the municipality’s financial resources;
  4. Calculating the number of critical limits for six indicators of the municipality’s infrastructure development;
  5. Identifying municipalities that have three or more critical limits of financial and infrastructure development indicators, whose centre is located no more than 20 kilometres by public roads from cities of oblast significance or county seats. Such municipalities should be considered not capable.
  6. Submitting a list of the incapable municipalities in each oblast with proposals for their amalgamation with adjacent municipalities.

Using this kind of procedure for municipal capacity assessment will provide a clear picture of which municipalities need to be amalgamated in future, and which ones will need support from the state, investors and international donors.

Translator: Lidia Alexandra Wolanskyj

All terms in this article are meant to be used neutrally for men and women

Pavlo Ostapenko has participated at the International Expert Exchange, "Empowering Municipalities. Building resilient and sustainable local self-government", organized by U-LEAD with Europe Programme in December 2019. His speech delivered during one of the workshops is to a great extent depicted in this article. Despite its late publication, the article is still of significant relevance for the current discussion on decentralization reforms’ next steps in Ukraine.

In the name of the U-LEAD with Europe Programme, we would like to express our great appreciation and thanks for the input of Mr. Ostapenko. The article will be included in future online publication Compendium of Articles.

Compendium of Articles is a collection of papers prepared by policymakers, Ukrainian and international experts, and academia after International Expert Exchange 2019 and 2020, organized by U-LEAD with Europe Programme. The articles raise questions in the fields of decentralization reform and regional and local development, relevant for both the Ukrainian and the international audience. The Compendium will be published online in Ukrainian and English languages on the U-LEAD online recourses. Please, follow us on Facebook to stay informed about the project.

If you have any comments or questions about the Compendium of articles or this article in particular, please contact Yaryna Stepanyuk


This publication has been produced with the assistance of the European Union and its member states Germany, Poland, Sweden, Denmark, Estonia and Slovenia. The contents of this publication are the sole responsibility of its authors and can in no way be taken to reflect the views of the U-LEAD with Europe Programme, the government of Ukraine, the European Union and its member states Germany, Poland, Sweden, Denmark, Estonia and Slovenia.

[1] Note that the article was written in early 2020 when the process of amalgamation of municipalities in Ukraine was not completed yet.

[2] Methodology for the formation of capable municipalities.

[3] Draft State Budget for 2021



[6] Point 3 of the Methodology.


expertnotes Pavlo Ostapenko spromozhnist otsinka efektyvnosti hromad amalgamation of hromadas


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