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Ukraine is replacing fragmented project selection with strategic investment planning, digital monitoring and EU-style financial safeguards. Yet the reform contains a difficult contradiction: the municipalities with the greatest needs may not be those best equipped to meet the new rules.

Ukraine is building a new bridge between wartime reconstruction, municipal investment planning and the principles of EU Cohesion Policy.

For European policymakers, Ukraine’s regional development reform may appear to be a technical matter: a new government resolution, a new scoring system and another digital platform for public investment.

It is more consequential than that.

The rules adopted by the Ukrainian government on 8 July 2026 reshape the State Fund for Regional Development — commonly known by its Ukrainian acronym, DFRR — from a mechanism financing individual local projects into an instrument supporting medium-term public investment plans developed by regions and municipalities.

This is a deliberate move towards the logic of EU Cohesion Policy: multiannual programming, territorial strategies, co-financing, project maturity, measurable results and stronger protection against misuse of public and European funds.

But the reform will be judged by more than its formal resemblance to European rules.

Its real test is whether it can reduce territorial inequality — or whether it will create a new divide between municipalities capable of navigating complex investment procedures and those whose institutions, budgets and human resources have been weakened by war.

A reform Brussels should take seriously

Ukraine’s regional policy is entering a new institutional phase.

Under Government Resolution No. 883 of 8 July 2026, the DFRR will no longer operate primarily as a competition between disconnected construction proposals. Funding will be channelled through medium-term priority public investment plans aligned with national, regional and municipal development strategies.

For 2026, the fund has been allocated UAH 2 billion. That is modest compared with the scale of Ukraine’s reconstruction needs, but the institutional significance of the mechanism is greater than its present financial volume.

The reform establishes infrastructure that Ukraine will eventually need to manage considerably larger national, donor and EU resources.

The Ministry for Development of Communities and Territories has explicitly linked the transformation of the DFRR to the principles of EU Cohesion Policy and the future use of EU structural and investment instruments. The ministry describes the new approach as a transition towards programming, partnership, territorial orientation and results-based investment management. It has also connected the reform to Ukraine’s public investment management system and the DREAM digital ecosystem.

According to the ministry, the fund is intended to move from financing isolated projects to supporting strategic investment plans prepared by regions and communities.

This direction is rational. It is also overdue.

For years, regional investment in Ukraine was vulnerable to fragmented planning, short political cycles, uneven project quality and the temptation to treat public infrastructure as a catalogue of individual construction sites rather than a coherent development policy.

The new model attempts to replace the question “Which object should receive money?” with a more demanding one: “Which territorial strategy, investment portfolio and measurable result should the state support?” That is genuine progress.

What is changing

The new mechanism contains two different 30/70 formulas, and the distinction matters.

First, 30% of DFRR resources will support investment plans implementing priorities of the State Regional Development Strategy. The remaining 70% will support plans linked to regional and municipal development strategies.

This gives local and regional strategies a stronger financial function. A strategy can no longer remain a ceremonial document approved by a council and forgotten in an archive. It becomes a gateway to investment.

Second, the territorial allocation of funding will be calculated according to population and fiscal capacity: 70% will be distributed with regard to regional population, while 30% will reflect the tax capacity of local budgets.

Every supported plan must also receive at least 10% co-financing from a local budget.

Municipalities may submit prioritised lists containing no more than ten public investment projects. These projects must already belong to the respective regional or municipal investment portfolio and comply with the priorities announced by the ministry.

The system introduces further safeguards familiar to European institutions:

Verification of beneficiaries, contractors and subcontractors against restrictive measures.

Eligibility rules for entities, persons and materials.

Safeguards against double financing.

Public visibility of EU-related funding.

Document-retention obligations and monthly reporting.

Integration with Ukraine’s unified public investment management system and the requirements of the Ukraine Facility.

This is the language of financial discipline that Brussels understands. Yet financial discipline is only one part of territorial cohesion.

The hidden contradiction: need versus capacity

The new rules attempt to help weaker and war-affected territories.

The socio-economic adjustment mechanism gives the highest weight — 30% — to the number of damaged and destroyed assets relative to population. Negative revenue dynamics receive a weight of 20%, while low tax capacity and low capital expenditure per resident are also taken into account.

In principle, this should direct attention towards communities carrying the heaviest burden of war and fiscal decline.

But another part of the model may work in the opposite direction.

At project level, the prioritisation system strongly favours speed, co-financing and readiness.

There is no separate project-level weight for the number of people benefiting from the investment, the reduction of territorial inequality, long-term operating costs, climate resilience, accessibility, social return or the project’s contribution to economic transformation.

Some of these considerations may be incorporated during planning and expert appraisal. But they are not visible as independent weighted indicators in the final project-ranking formula.

That creates a structural risk.

A municipality with experienced staff, current planning documents, completed technical designs, procurement capacity and sufficient fiscal space can achieve a strong score. A poorer municipality may have a more urgent problem — unsafe drinking water, an inadequate shelter, a damaged hospital or an unstable heating network — but still lose because it cannot prepare documentation or mobilise co-financing quickly enough.

The new system may therefore reward readiness more reliably than necessity.

Medium-term planning, one-year implementation

There is another unresolved tension.

The reform is built around medium-term public investment plans. Yet one of the conditions for funding is that the selected project must be completed within the current budget period. The ability to finish within that year alone carries a weight of 25% in project prioritisation.

This may be sensible for avoiding unfinished construction and years of frozen public assets. Ukraine has ample experience of projects that consumed money without producing functioning infrastructure.

But the rule can also distort priorities.

Many investments central to regional recovery — water systems, wastewater treatment plants, district heating modernisation, hospitals, transport interchanges and large civil-protection facilities — cannot always be responsibly designed, procured and completed within a single budget year.

A mechanism presented as medium-term programming may consequently favour smaller, faster and administratively convenient interventions over complex projects with greater structural value.

European Cohesion Policy works through multiannual programming precisely because territorial transformation rarely fits inside one annual budget. Ukraine will eventually have to decide whether the one-year completion rule is a temporary safeguard or a permanent feature of its regional investment model.

The front-line dilemma

The regulation excludes settlements officially classified as territories of active hostilities or temporary occupation where no end date has been established. Allocations attributed to Crimea, Sevastopol, Donetsk and Luhansk regions are to be redistributed among other regions.

From a fiduciary perspective, the logic is understandable. The state cannot finance conventional capital projects where implementation, supervision and preservation of assets are impossible.

From a cohesion perspective, however, this leaves a difficult question unanswered: how will Ukraine prevent the territories most affected by the war from falling even further behind before full reconstruction becomes possible?

The answer cannot be to fund standard construction projects in locations where they cannot be delivered. But neither can the answer be simply to remove these territories from the development map.

Front-line and temporarily occupied territories require a parallel pipeline: preparatory planning, technical documentation, damage assessment, institutional support and ready-to-activate recovery portfolios. Otherwise, the gap between territories able to invest today and those waiting for security conditions will become embedded in Ukraine’s future geography.

Kryvyi Rih: where the reform meets reality

Kryvyi Rih provides a useful case for European readers.

It is a large industrial city whose national importance is far greater than a conventional population-based formula can capture. It combines heavy infrastructure, industrial transformation, environmental pressures, war-related security needs and responsibility for surrounding communities.

Its development agenda cannot be reduced to a single project.

Water security, civil protection, healthcare, transport, energy resilience and industrial modernisation form an interconnected territorial system. Investment in one area affects the functioning of the others.

Kryvyi Rih itself has significant administrative and technical capacity. Smaller municipalities across the wider Kryvyi Rih area may not. They face many of the same infrastructure and security pressures but have fewer specialists able to produce strategies, feasibility studies, investment portfolios and procurement documentation.

This is precisely where the new model will be tested.

If strategic planning becomes a mechanism for connecting the city and neighbouring municipalities around shared infrastructure and economic priorities, the reform could produce genuine territorial development. If every municipality is left to compete separately according to its existing capacity, the system may reinforce fragmentation.

This distinction is essential.

Project discipline should not be weakened. Poorly prepared investments waste public money and undermine trust. But territorial cohesion requires more than selecting the best applications.

It requires helping disadvantaged territories become capable of preparing credible applications in the first place.

What the European Union should watch

For EU institutions and European partners, the success of the reform should not be measured only by the number of projects entered into DREAM or the percentage of funds disbursed on time.

At least five broader indicators deserve attention.

The regulation establishes a stronger administrative framework, but it does not by itself guarantee this wider partnership model.

Parliament’s responsibility does not end with the budget

The Verkhovna Rada has a role beyond authorising expenditure.

Parliamentary oversight should examine whether the new DFRR reduces disparities, strengthens local self-government and prepares Ukraine for EU regional-policy instruments.

These questions will become even more important as Ukraine advances through the EU accession process, particularly in the field of regional policy and the coordination of structural instruments.

A European direction — but not yet a cohesion guarantee

Ukraine is clearly moving in the European direction.

The new DFRR model links money to strategies, introduces medium-term investment planning, strengthens digital monitoring and incorporates safeguards required for the Ukraine Facility. It replaces a fragmented project culture with a more disciplined system of public investment management.

That should be recognised as an important reform.

But Europeanisation cannot be measured only by the complexity of procedures or the similarity of administrative terminology. EU Cohesion Policy is ultimately judged by whether less developed territories are able to close the gap.

Ukraine’s new system will succeed only if it combines competition with capacity-building, fiscal discipline with territorial solidarity, and project readiness with the scale of public need.

Otherwise, the country may create a sophisticated European-style selection mechanism that consistently identifies the communities already best prepared to win.