ALI article for the “Decentralisation” portal.
The full-scale invasion of Russia caused crisis phenomena in the state: the departure of young people, population aging, ruined and damaged infrastructure, an acute shortage of labour and financial resources, the impossibility of attracting sufficient private investment, etc. To compensate for these negative phenomena, a high-quality social policy of the state is important, considering the increase in the number of vulnerable categories of society.
During 2022–2023, there is a regression of the position of Ukraine in the Global Social Progress Index, which characterizes the level of social development of countries. Thus, in 2021, Ukraine ranked 48th from 168 , in 2022 – 52nd from 169 , and in 2023 – 59th from 170 .
Considering the problems in the sphere of social services and the challenges that constantly appear in connection with the war, the social services system needs modernization: involving non-government players, changing the funding model, creating equal conditions for government and non-government providers, and, in general, creating a market for social services. However, problems in funding procedures currently prevent the creation of a competitive social service market, which we will consider in this article.
Who provides and funds social services?
In communities, social services are provided mainly by providers from the government and municipal sectors. About 80% of social service providers belong to the government and municipal sectors (according to the Register of Providers and Recipients of Social Services). These can be territorial centres of social services, centres for social service provision, centres for comprehensive rehabilitation for children with disabilities, etc. These institutions are primarily budgetary, non-profit, and established by administrators of budget funds (according to the Unified Register of Administrators and Recipients of Budget Funds). The share of non-government providers in the social services market is no more than 20%. Such data indicate low competition among service providers in territorial communities, which actually depends on their timeliness, availability, efficiency, and quality. And since municipal providers are maintained or receive financial support from local budgets, this puts them in a privileged position among other service providers and excludes them from market mechanisms. The introduction of financial mechanisms to attract non-government providers, in particular, through social ordering, public-private partnerships, social project competitions, social programmes, etc., can be the push for the development of the social service market.
The legislation establishes various sources of funding for social services. These are the funds of the state and local budgets and the funds of designated funds, enterprises, institutions, and organisations. Also, recipients of services can be responsible for funding, and funds from charitable assistance (donations), grants, etc. can be attracted. However, funding of social services in communities is mainly performed at the expense of local budgets because, in the course of decentralisation, powers and resources for the implementation of social policy, including the provision of social services, were transferred from the state to the local level, in fact, to territorial communities. This, of course, made it possible to bring social services as close as possible to their direct consumers and ensure subsidiarity of the social service system. Still, there are not always enough resources to satisfy all the needs of community residents.
The main problems of funding the social sphere
The funding of the social sphere has problems in two dimensions:
- Institutional. Municipal service providers’ lack of autonomy limits their expenditure planning and decision-making regarding the provision of certain social services.
- Regulatory. There are inconsistencies and contradictions in the legislation; somewhere, there are no necessary norms. This makes developing a market for social services impossible and prevents equal conditions for all providers.
The institutional dimension of problems
One of the sources of funding services is payment for services by recipients. In fact, these are additional revenues of budget institutions, which are included in the special budget fund and are directed exclusively to the organisation of key activities of the institution, organisation, and provision of social services. It follows that the principle “the money follows the recipient of social services” is nullified since local budgets do not fund the provision of social services to citizens but the maintenance of institutions that provide such services.
A common problem is the lack of assessment of social service needs, which makes it impossible to plan high-quality expenditures in the social sphere. According to the Ministry of Finance, following the results of 2023, local budget expenditures for implementing the social policy increased by almost 60% compared to 2021. In 2022, budget performance for social expenditures comprised 83.17% of the revised annual plan; almost UAH 5.9 billion was not used. Following the results of 2023, the performance of the budget for expenditures on social protection and social security makes up 90.97% of the revised annual plan; that is, almost UAH 4.45 billion of local budget funds planned for the social sphere were not used. This may indicate the failure to receive the planned amount of budget revenues, the low quality of budget planning in the social sphere, and, in some cases, the adoption of untimely management decisions, which is also related to the lack of assessment of the population’s needs for social services.
Regulatory dimension of problems
There are several reasons why it is impossible to direct funding specifically to social services and not to the maintenance of institutions. The value of social service is determined based on the rate, which is under the state standards of social service. That is the planned economically justified costs and the planned scope of social service provision, considering its content, shall be calculated. In May 2024, the amended CMU Resolution 486 entered into force, which set out the procedure for regulating rates for social services, which not only failed to resolve the problems with state standards for social services but, in some cases, exacerbated them. First, not all social services have state standards; some were approved even before 2019, that is, before the adoption of the new Law “On Social Services.” Second, state standards must be brought in line with the norms of the updated Procedure.
This way, it is impossible to establish a rate and calculate the value of a social service in the absence of state standards and, therefore, to form planned budget expenditures for the social sphere.
The legislation offers various opportunities for attracting non-government providers, but it also has some drawbacks from the point of view of the funding and tendering systems. Hence, according to social ordering procedures, non-government providers contract with the community to provide services. However, due to the limited funds of local budgets, implementation of the contract entered into may be inhibited by delays in payments from the budget. According to the approved mechanism for procurement of social services, the expected deadline for receiving compensation for social services provided may be more than two months unless otherwise specified in the contract. This leads to non-government service providers having to cover costs, including for payment of salaries and provision of social services at their own expense, without receiving any advance payments. Here, it is worth considering that if an organisation or foundation is small in the scale of economic activity, it does not always have unallocated funds to cover the costs. Moreover, there is a risk of artificially underestimating the value of social services since the amount of budget funds required for compensation is determined, taking into account the financial capabilities of the local budget.
These complex financial and procurement procedures have negative consequences for the development of the social service market. It is easier for non-government providers to attract funds for operating activities through grants, charitable assistance, and other permitted sources. Clear solutions are needed to solve these problems. Otherwise, new ones will gradually be added to the already accumulated problems, which can lead to more acute consequences.
What to start with to change the situation?
To institutionally strengthen the work of state service providers, it is necessary to ensure the autonomy of their activities. This is necessary so that they can independently plan and use funds to ensure the provision of the necessary social services, make decisions about their provision, and maintain the institution’s activities. A possible solution for this may be to reorganise their legal and financial status by turning them into municipal non-profit enterprises.
The regulatory part of the social sphere needs to be developed and improved to ensure equal conditions for government and non-government providers. First, it concerns the state standards of social services, which shall be uniform for all types of social service providers. For non-government providers, the procurement mechanism for social services needs to be simplified and adapted to real conditions, i.e., the procedure for compensating funds for social services provided shall stipulate timely payment and coverage of costs to non-government providers.
