The State Audit Service published a report on the management of non-commercial (non-entrepreneurial) legal entities founded by municipalities.

The activities of legal entities, founded by self-governing entities, are of paramount importance in delivering high-quality municipal services to the population. In order to better exercise its authority, a municipality is eligible to found non-commercial non-entrepreneurial legal entities – NNLEs. Usually, self-government bodies establish these NNLEs in a specific sphere (for instance culture, healthcare, sport) to make sure that the population is able to use a better service. The main advantages of founding N(N)LEs is that they are focused on the delivery of a specific service and are less bureaucratic in nature. At the same time, they should be established exclusively with the view that their activities are carried out in ab effective, productive and efficient manner.

FactCheck highlighted a number of major issues from the report of the State Audit Service.

Establishment of Fields of Activities of Municipality N(N)LEs

According to the information requested from the self-governing entities based on an audit inspection, there were 723 functional N(N)LEs across 64 municipalities as of 31 December 2019 and their total expenditures in the same year amounted to GEL 714,861.4 which constituted 28% of total local budget payables.

According to the State Audit Service’s report, an inquiry into the activities of the legal entities shows that it is often a fact that several N(N)LEs of a similar profile function in one and the same municipality. This is particularly characteristic for the fields of culture, education, sport and infrastructure. These organisations which perform similar functions have their separate administrative personnel (director, deputy director, etc.). According to the State Audit Service’s report, a division of N(N)LEs without sufficient substantiation leads to the ineffective spending of financial resources.

According to the same report, municipalities do not have a consistent action plan on how they should achieve an objective in a specific field. Therefore, the establishment and the funding the N(N)LEs often happens without a prior sufficient analysis. As a result, there are plenty of cases when the idea of the establishment of N(N)LEs was unsuccessful and reorganisation or dissolution follows. In total, 169 legal entities were dissolved in 2014-2019 on the grounds of their failure to achieve a set goal. Therefore, the GEL 61,519.8 which was allocated for their funding has been assessed by auditors as inefficient spending.

The report also says that there were 67 N(N)LEs for 2019 which lacked the necessary equipment (computer hardware, office furniture, etc.) to carry out their duties. A total of GEL 45,062.9 was spent from local budgets in 2014-2019 to pay for such organisations which lacked a proper material base and, therefore, were unable to achieve their set goals.

Number of Employees and Amount of Salaries in Municipality N(N)LEs

According to the report of the State Audit Service, administrative personnel in municipality N(N)LEs increased by 25% and labour remuneration by 71% in 2014-2019.

According to the information received from the municipalities, there were 40,074 people employed in municipality N(N)Les as of 31 December 2014. This figure increased by 17,392 by the end of 2019 and reached 58,006. For comparison, as reported by the National Statistics Office of Georgia, the number of employees in the country increased by 40,900 from 2014 to 2019 whilst the growth in the number of employees in N(N)LEs in the same period was 18,500 which constituted 45% of the total employment growth. According to 2019’s data, there were 299,700 people employed in the state sector. Therefore, the number of employees working in municipality N(N)LEs constitutes 20.5% of the total state sector employees.

In regard to labour remuneration in the aforementioned period, GEL 239,049.6 was spent for labour remuneration for those employed in municipality N(N)Les in 2019. This figure was twice as low at GEL 119,844.1 in 2014.

FactCheck would like to add that if practice is any guide, the number of employees in municipality N(N)LEs particularly increases during the pre-election period which is stipulated by the fact that all governments (both former and incumbent) mostly use municipality N(N)LEs to give employment to their party activists. This is why there are more people employed in the N(N)LEs than actually needed and municipalities have no prior substantiation as to why each worker is needed.

As mentioned earlier, the State Audit Service’s report pays attention to the aforementioned problems. However, unfortunately the State Audit Service’s reports are more recommendatory in nature and municipalities do not or very seldom take steps to address documented shortcomings in their work.


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