According to the results of 2023, communities did not use almost 6 billion UAH of reconstruction funds, in 2024 – already 8 billion UAH. These funds were returned to the Ministry of Finance. According to the rules, every penny provided must be spent within one budget year, which is a very tight deadline for reconstruction projects. What’s worse, this is not the only obstacle on the path of communities to recovery.
According to the International Organization for Migration, as of March this year, about 3.8 million internally displaced persons (IDPs) were registered in Ukraine. IDPs live in dormitories, recreation centers, school gyms, temporary housing – modular towns built with donor donations, or rent housing on their own.
The situation is worsened by the unregulated private housing rental market. The virtually absent protection of tenants from sudden eviction leads to speculation, impoverishment, and insecurity of IDPs. Without effective efforts in the field of housing policy, migration processes and regional disparities will grow, undermining solidarity within the country.
Ukraine needs quick, effective and transparent solutions to provide housing for internally displaced persons, workers in critical sectors and other vulnerable categories. Despite the critical needs, there is weak public interest in providing housing for IDPs. Almost all housing programs are implemented with the support and money of the EU and other international donors.
Centralized model as an obstacle
A serious problem is the centralized model of international aid circulation, which excludes flexibility, speed and localization of solutions critical for solving the housing problem of IDPs. International experience proves the effectiveness of direct financing of communities.
The current budget model in Ukraine is too centralized, and this hampers the effectiveness of international financial assistance at the community level. According to the Budget Code of Ukraine, international grants, concessional loans from foreign governments, international financial organizations (IFOs), donors (WB, IFC, KfW, EIB, etc.); funds from international agreements are credited to the Special Fund of the State Budget.
The advantage is government control over the centralized allocation of resources, transparency of accounting and reporting to donors and parliament, which improves fiscal stability. At the same time, centralization slows down the implementation of projects on the ground, slows down tenders and procedures.
The path of aid from donors to recipients
At the first stage, international donors transfer aid in the form of targeted grants, concessional loans or through trust funds. The intentions of donors are obvious – the funds are intended for communities to provide housing for IDPs.
At the second stage, after the formalization of the agreement with the donor, the aid is included in the Special Fund of the State Budget. According to the Budget Code, not a single penny can be spent outside the budget program or without amendments to the Law on the State Budget. Donor funds formally become state property and cannot be transferred directly to communities.
A crowd of state intermediaries appears between donors and recipients:
The Ministry of Finance, which approves the allocation of funds as intergovernmental assistance and distributes funds in the form of budget appropriations, and then controls their use through the reporting of the State Treasury.
The main administrators of budget funds, depending on the direction: the Ministry of Regional Development, the Ministry of Social Policy, the Ministry of Reintegration, the Ministry of Community and Territorial Development, etc. prepare Passports of budget programs, which are agreed with the Ministry of Finance and according to which they plan to distribute funds. The Ministry of Economy, together with the NBU, agree on financial programs. The preparation of program passports, approval by the Ministry of Finance, and the list of financing can take months.
The State Treasury Service receives funds for treasury services, according to which the disposal of funds is strictly regulated in estimates, financing schedules, etc. Financial reports must comply with the Budget Code, and not only with the requirements of the donor. If the funds are not used by the end of the year, the balances are returned to the budget. The State Audit Service checks the spending of budget funds.
Regional (district) state administrations are involved in the approval or distribution of programs as intermediate administrators or controllers. Local governments, if they become lower-level administrators, must submit projects, undergo a competitive selection and sign an agreement with the Chief Administrator, because they themselves cannot directly receive assistance from the donor. Due to the rigid budget bureaucracy, even with the assistance and approval of donors, it is impossible to quickly change priorities or receive direct urgent assistance at the community level.
The inclusion of international aid in the state budget formally gives it “legitimacy”, but in fact excessive bureaucracy creates a multi-level filter of state intermediaries who do not manage their own funds. Excessive concentration of decisions opens up space for informal influence on tender procedures for selecting contractors for construction work. Funds often do not reach the target communities or are spent inefficiently.
Decentralized alternative
Successful implementation of housing programs requires a decentralized management model based on the direct participation of territorial communities as the main beneficiaries. Program implementation should be carried out exclusively at the level of territorial communities, adhering to the principles of transparency, competition, and accountability.
The involvement of central executive authorities should be limited to regulatory support, intergovernmental agreements, or coordination of international technical assistance, without direct interference in project decisions and financial flows.
An alternative should be the decentralized use of resources through direct financing of projects at the level of territorial communities, with donor programs being taken outside the state budget by creating local target funds or trust structures.
The need to implement housing projects at the local level is due to the direct mandate of territorial communities under the Law of Ukraine “On Local Self-Government in Ukraine”, according to which the provision of housing to socially vulnerable categories of the population, in particular IDPs, is the responsibility of local self-government bodies. The community has a full understanding of local needs, available land resources, technical capacity and partners.
International partners support the principle of funding follows beneficiary, when resources should flow as close as possible to those who really need them. Implementation of projects at the community level allows for raising funds directly through local development funds, private sector partnership mechanisms, and municipal bonds. Direct financing of projects increases the efficiency of resource use and reduces administrative losses.
Advantages of decentralization
Launching decentralized housing construction programs for IDPs allows for maintaining efficiency and involving local investors in the process:
Flexibility in project implementation and rapid adaptation to local conditions. Local authorities will be able to respond to specific needs of regions in a timely manner and make operational decisions.
Minimization of bureaucracy. Without centralized management, bureaucratic obstacles can be avoided, which allows reducing the time for decision-making and project implementation.
Greater attractiveness for investors. Decentralized projects can be more attractive to private investors, as they can assess specific investment opportunities in individual regions or cities.
Possibility of implementing different financing models. Investors can work with local authorities, creating more personalized conditions for each project. International donors can see greater transparency in the use of funds on the ground.
Reduction of corruption risks. Decentralized management reduces the concentration of power in the hands of a single body, which can help reduce corruption risks through localization of processes and more transparent control.
Necessary legislative changes
Amendments to the Budget Code should allow direct transfer of international aid to community budgets that meet the criteria of transparency and management capacity.
Communities should be allowed to open special escrow accounts in state banks for international aid outside the treasury account. Under the escrow account agreement with donors as depositors, banks will be able to ensure proper control over the targeted use of funds.
International experience of financing through trust funds that directly administer programs through extra-budgetary implementation channels should also be introduced. Communities should be given the right to directly conclude grant agreements with donors.
