Corruption prevention mechanisms for state LEPLs and N(N)LPs remain weak, while expenditures continue to rise

It is a widespread practice in Georgia, when public institutions, at both central and local government levels, set up subordinate legal entities - Legal Entities of Public Law (LEPLs) and Non-Entrepreneurial (Non-Commercial) Legal Persons (N(N)LPs) - to perform those public functions, which these public institutions are charged with. A lot of questions have accumulated over the years regarding the effectiveness of these organizations, the need of their operation and their possible use for corruption purposes.  

Transparency International Georgia thoroughly discussed [1] this issue back in 2017: The organizations that essentially perform public functions and are largely financed from the budget do not properly fall under the legislation regulating public service and anti-corruption mechanisms, which ultimately poses a risk of abusing them for corruption purposes. 

The situation has not changed even after four years – more and more budget resources are being spent on LEPLs and N(N)LPs every year, their number, as well as number of their employees and expenditures is increasing, while transparency and monitoring mechanisms remain minimal. This gives rise to significant corruption risks, especially as no effective measures and legislative amendments are being implemented to ensure risk management.  

As a result, ministries and municipal bodies are creating sub-institutions, which perform public functions under much lower standards of transparency and accountability than it is required for parent institutions. And this practice is becoming more prevalent.  

The following key problems have been identified with regard to the state-founded LEPLs/N(N)LPs:

1. Number of LEPLs/N(N)LPs subordinated to government agencies is increasing from year to year, while the criteria for their establishment are obscure; frequently, a question arises why it is necessary to set up a specific organization to perform the functions, which are directly within the competence of a supervising ministry or mayor’s office. The issue is especially problematic with regard to N(N)LPs, because the obligation to select employees through a competition does not apply to them. 
2. Receiving information from public institutions is a problem. In response to our requests, we received full or, in some instances, partial public information regarding only 105 out of 150 LEPLs and N(N)LPs selected for the study. According to the received information, in 2020, up to 100 organizations spent GEL 372,267,815.23 on remuneration paid to 28,948 permanent and supernumerary employees. 
3. Number of LEPLs selected for the study, number of permanent and supernumerary employees, amount of remuneration and other administrative expenses have been increasing from year to year that creates corruption risks in the absence of control and prevention mechanisms:  

• 45 LEPLs were subordinated to 12 agencies in 2017; by the end of 2020, the number of LEPLs functioning under the same agencies increased to 54. Further, 33 N(N)LPs were subordinated to 15 agencies in 2017; by the end of 2020, number of N(N)LPs functioning under 17 agencies increased to 51. 
• In 2017, GEL 14,288,771.57 was spent on salaries paid to permanent employees working for LEPLs; by the end of 2020, this figure increased by 38.4% and amounted to GEL 19,777,021.63. 
• In 2017, there were 9,288 supernumerary employees working for 41 LEPLs; in 2020, their number increased by 45.5% and amounted to 13,517. In 2017, there were 784 supernumerary employees working for 23 N(N)LPs; by the end of 2020, their number increased by 46% amounting to 1,145. 
• In 2017, 42 LEPLs paid GEL 73,826,398.59 in salaries to supernumerary employees; in 2020, this expenditure increased by 108.1% to GEL 153,645,554.5. The situation is identical in respect of N(N)LPs: in 2017, 21 N(N)LPs paid GEL 3,630,496.88 to supernumerary employees in salaries; in 2020, this expenditure increased by 104.4% to GEL 7,419,935.65. 
• In 2017, 44 LEPLs spent GEL 8,509,301.25 on fuel; in 2020, their fuel expenses increased by 54.5% to GEL 13,149,717.75. N(N)LPs also consumed an increased amount of fuel: in 2017, 24 N(N)LPs spent GEL 1,023,775.54 on fuel; in 2020, fuel expenses of the same organizations increased by 47% to GEL 1,504,967.22. 

4. There is no unified database/registry to provide information about the exact number of LEPLs and N(N)LPs subordinated to government agencies, number of their employees and expenditures. 
5. A number of anti-corruption regulations do not apply to the state-founded LEPLs and N(N)LPs, most of these organizations do not have effective internal mechanisms to prevent conflict of interests and corruption that further increases corruption risks and complicates the introduction of effective control and integrity mechanisms in these organizations. 
6. Although the majority of organizations claim to have a body responsible for identifying corruption-related violations, not a single violation has been identified in 96% of LEPLs and N(N)LPs (that provided public information) over the past four years. 
7. According to the law, the activities of LEPLs are deemed to be part of the public service. However, the decision to fully extend the purposes of the Law on Public Service to these organizations has been postponed four times. Due to this, a number of anti-corruption restrictions imposed on civil servants do not apply to the employees of these organizations, among them observing the norms of ethics and integrity, identifying and preventing conflict of interests, observing the rules related to accepting a gift, etc. 
8. The legislation regulating public service and anti-corruption mechanisms does not apply to the state-founded N(N)LPs, causing a high risk of corruption-related violations in these organizations. 

Methodology 

Legal entities subordinated to the central and local government bodies (up to 150 organizations functioning under the ministries and 12 municipalities) were selected within the framework of this study. Organizations working in the fields of culture, education, research, sports and religion have not been studied. The data provided in this study are fully based on the official data for 2017-2020 provided by the above-mentioned agencies. 

In response to our requests, we received full or partial public information about 105 out of 150 target legal entities (54 LEPLs and 51 N(N)LPs). Due to the provision of incomplete information or failure to provide it, the data given below may not provide a comprehensive assessment of the current situation, but nevertheless, they allow for the identification of general trends. 

Public information was not provided by the following agencies: Ministry of Justice, Ministry of Internal Affairs, Ministry of Defense, Ministry of Culture and Rustavi Municipality City Hall. Thus, the study does not contain information about LEPLs and N(N)LPs subordinated to these agencies. 

Expenditures of subordinated legal entities 

Number of organizations 

Number of LEPLs and N(N)LPs selected within the framework of the study and functioning under central and local government bodies continues to increase year by year. According to the provided information, in 2017, 45 LEPLs were subordinated to 12 agencies; in 2020, the number of LEPLs subordinated to the same agencies increased to 54. In 2017, 33 N(N)LPs were subordinated to 15 agencies; by the end of 2020, the number of N(N)LPs subordinated to 17 agencies increased to 51. It is worth noting that in case of former self-governing cities, increased number of LEPLs can be explained by the merger of municipalities in 2017.

Lack of criteria for the establishment of LEPLs and N(N)LPs has been one of the key reasons for the growing number of organizations – the non-governmental sector has long been focusing [1] on this problem. 

Furthermore, the trend of increase in the number of LEPLs will further continue, because according [2] to the amendments made to the Local Self-Government Code [3] and accompanying laws in 2020, all municipalities have the right to set up an LEPL until 2030 (previously, only the Tbilisi Municipality had the right to set up LEPLs). 

Number of permanent and supernumerary employees 

According to official data, the number of employees working for LEPLs and N(N)LPs subordinated to central and local government bodies has been increasing annually over the past four years.  

Number of supernumerary employees is increasing in both types of organizations, while the number of permanent employees - only in N(N)LPs. 

In 2017, there were 9,288 supernumerary employees working for 41 LEPLs; in 2020, the number of supernumerary employees working for the same organizations increased by 45.5% to 13,517. 

It is noteworthy that the number of permanent employees working for LEPLs has decreased since 2017. In 2017, there were 9,805 permanent employees working for 42 LEPLs, while by the end of 2020, the number of permanent employees working for the same organizations decreased to 8,952. 

Number of both permanent and supernumerary employees working for N(N)LPs has increased. In 2017, there were 784 supernumerary employees working for 23 N(N)LPs; by the end of 2020, their number increased by 46% to 1,145.  

With regard to permanent employees, in 2017, there were 1,848 permanent employees working for 27 N(N)LPs; in 2020, the number of employees working for the same organizations increased by 12.9% to 2,088. 

A growing number of N(N)LPs and employees working for these organizations is especially noteworthy as the principles of the Law on Public Service, including the obligation to select employees through a competition, do not apply to this type of organization. 

Remuneration  

Remuneration paid to permanent employees

The amount of remuneration paid to permanent employees significantly increased in N(N)LPs – in 2017, 26 N(N)LPs spent GEL 14,288,771.57 on remuneration; in 2020, the amount spent by the same organizations increased by 38.4% to GEL 19,777,021.63. It is noteworthy that during the same period, the number of permanent employees working for these organizations increased by 12.9%. 

With regard to LEPLs, the amount of remuneration paid to permanent employees increased only by 6.18% - in 2017, 43 LEPLs spent GEL 158,644,202.83 on remuneration and in 2020, the amount increased to GEL 168,457,294.38. However, it is noteworthy that the number of permanent employees working for these organizations decreased during the same period (approximately by 8.7%). 

Remuneration paid to supernumerary employees 

The amount of remuneration paid to supernumerary employees of LEPLs and N(N)LPs increased significantly in 2017-2020. In 2017, 42 LEPLs spent GEL 73,826,398.59 on remuneration paid to supernumerary employees; in 2020, remuneration expenses of the same organizations increased by 108.1% to GEL 153,645,554.5. The doubling of remuneration expenses is partly due to the increase in the number of employees. However, the number of employees increased by about 45.5%, while remuneration expenses – by 108.1%. This means that salaries paid to all supernumerary employees of LEPLs increased in 2017-2020. 

The situation is similar with regard to N(N)LPs: in 2017, 21 N(N)LPs spent GEL 3,630,496.88 on remuneration paid to supernumerary employees; in 2020, remuneration expenses of the same organizations increased by 104.4% to GEL 7,419,935.65. In this case too, the number of supernumerary employees increased by about 46%, which only partially explains the increase in remuneration and suggests that all supernumerary employees of N(N)LPs had their salaries increase in 2017-2020.   

Fuel expenses 

In 2017, 44 LEPLs spent GEL 8,509,301.25 on fuel; in 2020, fuel expenses incurred by the same organizations increased by 54.5% to GEL 13,149,717.75. It is interesting that fuel expenses increased dramatically by 90.6% in 2017-2018, from GEL 8.5 million to GEL 16.2 million, and started declining after 2018. 

Fuel expenses of N(N)LPs have also increased. In 2017, 24 N(N)LPs spent GEL 1,023,775.54 on fuel; in 2020, fuel expenses incurred by the same organizations increased by 47% to GEL 1,504,967.22.

Travel expenses 

Based on public information received from the selected agencies, it can be said that there was a trend of increase in the amount of travel expenses incurred by LEPLs until 2020. In 2020, travel expenses of LEPLs decreased significantly due to the COVID-19 restrictions – if in 2019, 43 LEPLs spent GEL 9,239,374.35 on travel, in 2020, travel costs incurred by 43 LEPLs decreased to GEL 4,692,772.87. 

Despite the pandemic, travel expenses of N(N)LPs selected within the framework of the study increased, as a whole. It, however, happened due to one specific organization (N(N)LP – Rural Development Agency) – in 2020, when Georgia confirmed its first case of COVID-19, travel expenses of this organization increased by 127.2% (in 2019 – GEL 155,607.31, in 2020 – GEL 353,584.6). Excluding the expenses of the Rural Development Agency, travel expenses of N(N)LPs decreased from GEL 260,750.47 in 2017 to GEL 142,170.50 in 2020. 

Weak control mechanisms for state-founded LEPLs and N(N)LPs

The fact that the amount of financial resources allocated to the state-founded LEPLs and N(N)LPs is increasing from year to year actually means a simultaneous increase in the risks of corruption and other violations. These risks should be balanced by strong control and accountability mechanisms. The study, however, has revealed that such anti-corruption mechanisms are either weak or do not exist in most organizations. 

On the one hand, the majority of studied organizations (47 out of 54 LEPLs and 43 out of 51 N(N)LPs) noted that they have a body responsible for identifying and reacting to corruption-related violations (an internal structural unit or an internal audit service operating under a superior public agency).  

On the other hand, the number of identified violations is minimal. According to the provided official data, in 2017-2020, no corruption-related violations were identified in more than 96% of the studied LEPLs and N(N)LPs, or the question related to their statistical data remained unanswered. 

In addition, during the reporting period, a great part of the selected organizations took no measures towards developing anti-corruption mechanisms. A significant part of these organizations left this question unanswered. 

One other control mechanism is the elaboration of an annual action plan by organizations, monitoring of its implementation by a supervisory body and production of statistics on fulfillment of recommendations developed on the basis of these annual reports. A large number of selected organizations noted that an action plan is elaborated and approved on a yearly basis and monitoring of its implementation has a permanent nature. However, the majority of organizations left the question related to producing statistics on fulfillment of recommendations unanswered. 

Given the general picture, it can be stated that the organizations that have been studied do not have effective internal mechanisms for preventing conflict of interests and corruption, which is particularly problematic considering the fact that they essentially implement public functions.

Problems related to legislation 

A number of anti-corruption regulations do not apply to the state-founded LEPLs and N(N)LPs that further increases corruption risks and complicates the introduction of effective control and integrity mechanisms in these organizations.

The main law regulating corruption-related violations in public service is the Law on Conflict of Interests and Corruption in Public Institutions, which introduces a number of obligations and restrictions* for officials and civil servants. 

* For example, submitting asset declarations, observing the rules of ethics and integrity, identifying and preventing conflict of interests, suspending any activities incompatible with an official position, observing the rules of accepting a gift, etc.  

These restrictions and obligations are introduced to ensure that an individual does not abuse power for personal purposes. 

The state-founded N(N)LPs are not considered to be part of public service and the restrictions and obligations imposed on civil servants do not apply to any employees (heads, permanent and non-staff employees) of these organizations, although these organizations are involved in public service and have been set up to perform public functions. As a partial exception, the heads of N(N)LPs are obliged to submit asset declarations; but in this case too, other restrictions imposed on civil servants do not apply to them.  Correspondingly, if any organization involved in public activities is exempt from these restrictions, it will automatically promote the creation of a favorable environment for corruption. This is how the current situation looks like in all state-founded N(N)LPs and a large part of LEPLs.   

In addition, the state-founded N(N)LPs are not obliged to select employees through a competition that reduces transparency and impartiality of the process and creates a favorable environment for corruption. 

The situation is different but still problematic with regard to LEPLs. The Law on Public Service directly considers the work for a Legal Entity of Public Law to be part of public service. However, the decision to fully extend the purposes of the Law on Public Service to these organizations has been postponed four times since 2017. 

Due to this, a number of restrictions imposed on civil servants do not apply to the employees of a large part of the state-founded LEPLs. The heads and deputy heads of LEPLs are the only exception as the Law on Conflict of Interests and Corruption in Public Institutions fully applies to them. 

It is also worth noting that restrictions and obligations imposed on other civil servants do not apply to supernumerary employees working in public service (labor contract-based employees) that is particularly problematic with regard to the state-founded LEPLs and N(N)LPs, because it is specifically the significant increase in the number of supernumerary employees which raises questions about the used of these organizations for corruption or political purposes. 

Correspondingly, in order to reduce corruption risks in the state-founded LEPLs and N(N)LPs, it is necessary to apply restrictions and obligations imposed on other civil servants to the employees of legal entities that are performing public functions and are financed from the budget. Leaving such organizations outside the regulatory framework is clearly problematic, especially against the background of a trend of increase in the number of such organizations, budget financing and number of their employees. 

Recommendations 

• Central and local government bodies should refrain from setting up unnecessary LEPLs and N(N)LPs, as well as increasing the number of employees (especially supernumerary employees) and expenditures of these organizations in an unjustified manner. 
• The criteria for creating LEPLs and N(N)LPs should be clearly stipulated by law, in compliance with the good governance standards. 
• Ministries and municipalities should make more efforts to identify corruption-related violations in the subordinated legal entities.   
• Effective internal mechanisms for preventing conflict of interests and corruption should be introduced in the state-founded legal entities. 
• The Law on Public Service should fully apply to the state-founded LEPLs. 
• In order to efficiently prevent a conflict of interests, nepotism and corruption in the state-founded N(N)LPs, the principles regulating public service and anti-corruption mechanisms should be applied to them. 
• A relevant agency should create a unified database/registry to provide an update on LEPLs and N(N)LPs subordinated to central and local government agencies.