Recently, there have been discussions about the abolition/merging of 7 self-governing cities and 7 self-governing communities that were separated and granted this status in 2014. On March 29, 2017, the Ministry of Regional Development and Infrastructure issued a statement confirming that the Georgian government had begun discussing the re-unification of these municipalities. The Ministry provided several arguments to justify this decision. We believe that the proposed change is harmful and none of the provided arguments manage to justify it. It is unfortunate that the government seems to have reversed its position on decentralization and no longer plans to fulfill its 2014 promise to expand decentralization even further by 2017.

Transparency International Georgia (TI Georgia) has already joined 122 other civil society organizations in a joint statement containing counterarguments to the Ministry’s March 29 statement.

The following are additional arguments prepared by TI Georgia based on our research and publicly available information.

1. Low access to municipal services and citizen engagement

Ministry position:

“The quality of and access to municipal services have not improved and, in some cases, have worsened, due to ineffective division of resources. Citizen trust towards the local government and their engagement in local governance have remained unchanged in the separated municipalities.”

TI Georgia’s assessment:

According to public opinion surveys, insufficient access to municipal services is a problem not only for the separated municipalities, but for the Georgian local government system as a whole. This is mainly due to municipalities having only limited authority by law, duplication of responsibilities of different levels of local government, and low levels of fiscal and economic decentralization.

In many cases, the property owned by municipalities and their revenue is insufficient for executing even their exclusive responsibilities. This problem will not be solved by the merging of municipalities, but rather through relevant legislative amendments and a more effective decentralization process.

As for citizen engagement, we managed to identify two major problems by studying the municipalities of Samegrelo - Zemo Svaneti region:

• Existing mechanisms of citizen engagement are ineffective and fail to solve problems identified by citizens.
• Citizens often do not have enough information about existing mechanisms and means of engagement.

Therefore, a low level of citizen engagement cannot be used as an argument for merging municipalities. The solution to this problem lies with the Georgian government and Parliament, who must develop simpler mechanisms of engagement that include all the major stages: problem identification, project development, budget and financial planning, implementation, and monitoring and evaluation.

2. Scarcity of financial resources

Ministry position:

“The separation of municipalities did not increase economic activity and did not increase the revenue of new municipalities. The fact that the separated city and community municipalities have budgets that are together greater than the joint budget before their separation is not due to increase in revenue, but rather increased transfer amounts from the state budget.”

TI Georgia’s assessment:

Most municipalities in Georgia do not have a self-sufficient budget and depend on transfers from the state budget. Municipalities do not have enough property and economic resources. The Georgian government has not taken any effective steps to ensure their financial independence.

According to the government Decree of March 1, 2013, on the General Principles of 2013-2014 Strategy for Decentralization and Development of the Local Government, state revenue from income tax would be proportionally shared with municipal budgets. The expectation was that the municipalities would retain the majority of revenue from income tax generated on their territory. However, this expectation was not fully met and municipalities retained income tax for only the following transactions:

• Income tax on the revenue made by natural person entrepreneurs
• Income tax of non-residents (on the revenue from selling of property)
• Income tax on the surplus from selling of material assets by a natural person
• Income tax from gifting of property to a natural person
• Income tax on property inherited by a natural person
• Income tax from leasing of property by a natural person

In 2017, Georgia’s state budget plans to collect GEL 2.57 billion from income tax, of which only GEL 160 million will be shared with municipalities. Municipal budgets also saw a substantial cut in the amount of transfers from the state budget over the past 2 years: from GEL 1,227 billion in 2015 to GEL 612 million in 2016 and GEL 666.58 million in 2017.

In the end, municipalities received more budget revenue from income tax, but less transfers from the state budget, which failed to increase their overall financial independence.

Also worth noting is the fact that even with the incomplete financial decentralization the new self-governing cities and communities generated significantly more revenue (without the equalization transfer) after their separation in 2015 and 2016 than the united municipalities before separation.

The process of property transfer to municipalities is also being hampered. According to Article 162 of the Local Government Code, the Ministry of Justice, Ministry of Regional Development and Infrastructure, Ministry of Economy and Ministry of Finance had until January 1, 2017 to elaborate a schedule and procedures of transferring agricultural land to municipalities and to submit it to the government for approval. However, the Ministries have yet to fulfill this obligation, which continues to hamper the decentralization process, including the transfer of political, administrative, fiscal and economic resources and property to the local government.

This suggests that the Georgian government does not have the political will to carry out real economic and fiscal decentralization, which would provide municipalities with enough financial and economic resources to exercise their authority.

3. Increase of administrative expenses

Ministry position:

The Ministry believes that the separation of municipalities has “at least doubled the administrative expenses… This increase in administrative expenses was also accompanied with a decrease in capital costs, which negatively affects municipalities as well as the country’s overall economic development.”

TI Georgia’s assessment:

The increase in administrative expenses is not directly related to the separation of municipalities. This trend is not exclusive to the municipalities created in 2014, and is observed elsewhere as well.

For example, according to a study published by Transparency International Georgia in July 2016, following the 2014 local government elections, the number of people employed in non-entrepreneurial (non-commercial) legal entities (NNLE) under Georgian municipalities (excluding Tbilisi) increased by more than 8 thousand, and the monthly payroll increased by more than GEL 4 million GEL. More specifically:

• The number of municipal NNLEs (excluding Tbilisi) increased by 84 (from 695 to 779).
• The number of persons employed in municipal NNLEs increased by 8,232 (from 36,540 to 44,772).
• Monthly payroll of municipal NNLEs increased by GEL 4,245,152 (from GEL 11,126,350 to GEL 15,371,502), which amounted to an annual payroll increase of GEL 50,941,831.

Administrative expenses of municipal NNLEs have continued to increase. For example, monthly payroll in Samegrelo-Zemo Svaneti region increased by GEL 95,314 in 2017 (February) compared to 2015, which amounted to an annual increase of GEL 1,143,768.

The number of NNLEs and their staff members increased not only in the newly separated municipalities, but in others as well. For example:

• Tsageri Municipality – Number of NNLEs increased by 13 after the 2014 elections.
• Municipalities in the Autonomous Republic of Adjara – Number of NNLE employees increased by 408 (from 4,007 to 4,415) as of June 2015, monthly payroll increased by GEL 198,817 and annual payroll by GEL 2.4 million.
• Municipalities in the Kvemo Kartli region – As of February 2016, number of NNLEs increased by 5 (from 74 to 75), number of their employees increased by 883 (from 4,107 to 4,990), monthly payroll increased by GEL 571,961, and annual payroll by GEL 6,863,534.
• No new municipalities were created in Adjara or in Kvemo Kartli.

According to Georgia’s Local Government Code, “remuneration expenses of public servants employed in the central offices of Municipal Administrations (City Hall) and Municipal (City) Councils must not exceed 25% of municipal budget expenditures”. In our opinion, this limit must be extended to include public officials in Municipal Administrations and Municipal Councils as well as employees of municipal legal entities. Currently, municipalities spend 30-35% of their budgets on remuneration expenses for public servants, public officials and employees of municipal legal entities.

Budget funds spend by municipalities on their subordinate legal entities are classified as subsidies, which on average constitute 35-40% of the revenue generated by municipalities. The majority of subsidy funds are used as remuneration of employees in municipal legal entities, which, we believe, is part of the local bureaucracy. Therefore, the Local Government Code must set subsidy limits as percentage of budget expenditure. This will reduce administrative expenses and municipalities will no longer be able to set up NNLEs or Ltds without actual need. As a result, for the purpose of providing public services (e.g. landscaping, drainage, sporting events, etc.), municipalities will have to procure the services of private companies through a competitive market.

Misuse of bonuses and salary supplements is also a significant problem. Bonuses and supplements are often awarded without any substantiation based on a single legal act. Flawed legislation in this area has led to a systemic problem. Despite numerous statements from the government, a number of municipalities have yet to adopt procedures for issuing bonuses and supplements. Ultimately, this misuse acts as another financial burden for the already scarce municipal budget.

All of the above suggests that the doubling of administrative expenses was caused not by the separation of municipalities, but by flawed legislation and ineffective policy on the local government level. If the government wants to reduce administrative expenses, it must, first of all, reduce the number of municipal legal entities, place limits on the number of their employees, better regulate procedures of issuing bonuses and salary supplements, and limit vehicle use and fuel expenses of public officials.

4. Separation of cities and rural communities

Ministry position:

The Ministry believes that “separation of cities and rural communities is a problem. These kinds of municipalities are present in Latvia and Albania, both of which criticize this model and plan to change it. European practice involves merging of municipalities (e.g. Estonia and others)... In addition, the fact that other municipalities do not differ from the newly separated municipalities by their main characteristics (population and size) places them in an unequal position, which is inconsistent with the law.

TI Georgia’s assessment:

Copying the experience of other countries without considering the local context is an unsound approach to solving the problem. Both international and local experience needs to be combined in order to develop a sound decentralization policy, which, we believe, should be aimed at increasing the number of municipalities.

It is TI Georgia’s position that:

• Merging of municipalities distances the state from its citizens;
• Merging of municipalities makes municipal and utility service delivery more difficult;
• Separation of municipalities creates new centers for economic development that can serve as the basis for the country’s long term economic development;
• Smaller municipalities bring local government and citizens closer, which increases citizen participation and accountability of the local public officials;
• Smaller municipalities have an easier time identifying responding to problems.

We believe that the government's plan to reduce the number of self-governing cities will undoubtedly damage the country’s democratization process. This decision raises even more doubts in the context of the upcoming local government elections.

Instead of distancing citizens from their local government, as will be the case if the Georgian government chooses to go along with its plan, the local government reform must ensure more citizen participation in the decision-making process.

The Georgian government has been struggling to deal with the residents of cities to be affected by the reform who have been requesting the government to retain their self-governing status. The government must disclose a more specific plan on the steps it plans to take before the elections and it must make its decisions based on consultations with the local population and civil society.