FINANCIAL PROBLEMS OF LOCAL SELF-GOVERNING DURING THE ECONOMIC CRISIS

by NINO LOLADZE

Tbilisi GEORGIA 2010

Global Economic Crisis and Georgia

Global economic crisis brought a big financial stroke to many countries of the world. It is obvious that private sector first turned out to be in difficult situation. For the purpose of salvation the companies started reorganization and reduced their staff. Lots of people become unemployed and in countries increased unemployment and social problems. Many countries of the world designed anti-crisis plans and placed economy in special policy. National government first implemented the programs for the salvation of financial institutes. Georgia was also unable to avoid the global crisis. In addition, in 2008 Georgia turned out to be under double stroke. In August the Russian Federation implemented military aggression against Georgia. Russian aviation bombed peaceful towns and villages. Russian aggression destroyed infrastructure and affected economy. In autumn 2008 there was another problem the global crisis and all these caused to reduce the GDP, investments and taxes and also the increase of unemployment. Crisis especially has affected the local government and its development. It must be mentioned that Georgian regions have got serious economy potential according to the location, natural resources and labour forces. That is why before the Russian aggression and economical crisis foreign investors were interested in investing money, though the war and crisis impeded this process. It is true, all these affected the local budget but it can be mentioned that self-government did not suffer seriously. The same can be noted about the whole Georgia unlike countries. The development of self government was seriously slowed down by Russian war and world financial crisis started from the second part of 2008. Mentioned factors painfully influenced weak Georgian economic. We suppose, Georgian economic will be impacted by the results of the crisis at least for coming 2-3 years1.

Georgian State Budget, GDP and Unemployment During Crisis

Before pointing out the influence on the local budget, it is important to focus our attention on the countrys economy indication. Accordingly, it will be more obvious the situation in the country caused by the war and crisis. Before the war and crisis Georgias state budget increased every year. In 2007 it was 2.7 BLN $US and by the 2008 it was planned about 4 billion $US. But after the August war there was the correction of the budget and it amounted to 3.7 billion $US, in 2009 the countrys budget was 3 billion and in 2010 it has been planned 3 billion2. In January-June 2009 GDP reduced by 8.5% comparatively to the period of 2008. Before the August war and global financial crisis according to forecast real increase of GDP would be 10% by 2009, though real was only 4.3 billion $US3. After the war in the third quarter of 2008 the investing activity was considerably impeded. In 2008 in Georgia came 1.56 billion $US investment, but by 2009 759 million dollars4. In financial crisis conditions the reduced business activity is directly connected with employment. Thus, in crisis conditions the reduced activity caused the growth of unemployment. If in 2007 the level of unemployment came to 13.3 percent and unemployment was 261000 (two hundred and sixty-one thousand), in 2008 the level of unemployment came to 16.5 percent and the number of unemployment came to 315.8 thousand men. In totally in 2008 comparatively to 2007 the number of the employed is reduced by 102.4 thousand 5 men . The financial crisis reduced the most number of the employed from the bank and constructing sectors. In this sector were mainly employed people from regions and the sum got from the salary was returned to the regions.

Losaberidze, Davit. 2008. Policy Analysis. Page 3. Annual Report on Development of Local Democracy in Georgia, 2008. Edited by Open Society Georgia Foundation. Tbilisi. Georgia. 2 Ministry of Finance of Georgia; http://www.mof.ge/ 3 National Statistics office of Georgia; http://www.geostat.ge/ 4 Ministry of Economic Development of Georgia; http://www.economy.ge/ 5 National Statistics office of Georgia; http://www.geostat.ge/

Like many other countries Georgian Government designed anti-crisis plans, conducted the budget police of Tighten of the belts, lightened administration, disbursed more finance for the rehabilitation of infrastructure and by the tax indulgences made Georgia more attractive for international investors. The priorities of the countrys budget changed and most finances were addressed to social spheres. Like that increased giving out transfers to municipality. The policy conducted by the central authority towards the self-governing includes disadvantages. During the crisis the local budget had to take obligation which was not included in their competence.

The Structure of the Local Self-Governing in Georgia

Self-governing is one of the major bases of democracy. It is significant to implement reforms of the local governing for the new democratic states. The major task of this reform should be the redistribution of the power and resources among the different levels of the authorities. It is important to balance common state and local interests. It is impossible to implement real local governing if there is not independence of territorial units and their administrative organs and do not have enough financial resources to realize their own competence and tasks. In Georgia these reforms started after gaining independence, but the process of the redistribution the authority and appropriate resources has been under way with resistance and prolonged way. It should be mentioned that the organic law of Georgia on Local self-government adopted by the Georgian Parliament on 16 December 2005 was s sudden change. According to the organic law, local self-governing unit has got representative and executive organs and owns competence and authorities established by the law and also own property and budget. In its part the organic law determined the new territorial bases of the implementation of the local government. Before that there was in Georgia two-levelled local government. The lower level was a village, community, borough, a city and the upper level was a district. The law came into action in the year 2006 in autumn after the elections of local government. The lower level was annulled and were created 64 municipalities and 5 self-governing city. One of the main reasons of this reform was that the self-government should have real financial, material and staff resources. The villages, boroughs and towns did not have resources they need for realization their own competence and due to the pour finance they were not able to implement self-governing really. At the level of municipality there occurred to unite these resources though on the other hand the demand of European Chart was broken for the principle of subsidiary and the population parted from the selfgoverning structure.

Local Self-Governing Economic Base

Economic activities of self-government are under the formation process yet in Georgia. Its development and implementation is mostly determined by self-government economic basics, generally divided in the following groups: Raising and controlling funds of local self-government; Local self-government activities regarding the property field; Supplementary activities of local self-government. According to the organic law it is established the economic bases of the self-governing unit (property, land, natural resources). It is determined the principles of the budget of self-governing unit and possible sources of revenues and expenses. It should be noted since gaining independence there has changed many times the system, methods and sources of financing the local unit. Financial Independence of Local Self-Governance Financial maintenance had been regulated by different laws. It is obvious that the laws had not been perfect and after some periods the country was obliged to change them. On May 24 2006 there was adopted the laws about the budget of self -governing unit, which came into action in the year 2007 on January 1. The new law managed to regulate the financial issues of local

governing unit. In the year 2010 this law was annulled and was designed Budget Codex, which regulated the state and local budget. Adequacy and conformity is the main principle if financial independence of self-governance and we may say main lack of Georgian legislation. The European Chart about Local Governing Finance It is an axiom that without having private property and financial sources, self-governance would be a sham and will exist only fictitiously. When we talk about the establishment of self-governance, the basic principles should be found in the financial independence. Even if self-governance units are elected with democratic way, have a good institutional structure and highly skilled staff, it is evident that without finances it would not be able to solve even local importance issues. That is way that European charter of Local Self-governance dedicates special article to the local finances. We may say that article of charter, including eight points in it, is the basis of financial independence. Without accomplishing the main principles of the mentioned article, the real self-governance would not exist6. The Georgian Parliament made the ratification of the European Chart of Local Self-Government in the year 2004 October 26. The 9-th article of the Chart deals with the finance of the local governing. Local authorities shall be entitled, within national economic policy, to adequate financial resources of their own, of which they may dispose freely within the framework of their powers(9.1)7. The requirement of the mentioned item is mainly carried out and the local governing organs have their own finance which they can spend in the frame of their authority. The revenues of the budget of self-governing unit consist of own and attracted revenues. The own revenues include the local taxes, local fees, equalizing transfer and other revenues belonging to the local governing units. The attracted revenues include special transfers and earmarked transfers and other revenues established by the Georgian legislation. The local self-governing units can spend their own revenues independently according to their opinion.

Self-Governing Units Budget Revenues

It should be noted that in the year 2007 the budget revenues of self-governing units amounted to 750 million US dollar. Out of it 57 percent was Tbilisi revenues and the rest self-governing revenues amounted to 43 percent. In the year 2008 according to the prediction it was planned to increase the revenues though the crisis and the war impeded this process partly. In spite of it the budget was high in the year 2008 and the revenues amounted to 830 million US dollar. Only Tbilisis revenues reduced considerably and it came to 41 percent in common revenues and the revenues of other self-governing unit 59 percent8. To compare with the year 2007 the revenues of selfgovernment increased by 10 percent is year 2008. Although it is the highest figure after the formation of self-government, the quality of financial independence of the local government have not increased. What is more, in the local budget the portion of the own revenues has considerably decreased. Thus, such a high indicator was dependent on the equalizing transfer, determination of which amount is a prerogative of the central government. Before January 1, the year 2007, income and profit taxes were fully transferred to local selfgovernment budgets. Since January 1, 2007 profit tax and since January 1, 2008 income tax are transferred to the state budget. This caused the serious reduction of local self government incomes. To compensate it occurred by means of different transfers.

Chkheidze, Paata. 2005. Aspects of Administrative and Legislative Decentralization. Proceedings of Fiscal Decentralization Forum Georgia, 2004. Tbilisi. 7 The European Chart of Local Self-Government, Strasbourg, 15 October 1985. 8 Ministry of Finance of Georgia; http://www.mof.ge/

At the result of it, the structure of local budget has changed totally. If in the year 2007 the own taxies revenues came to 50.2% of the local budget, it decreased by 15.1% in 2008. In the year 2008 the biggest portion 35.6% of attracted revenues among the revenues of self-governing budget comes on the revenues gotten from transfers. 35.1% from total revenues comes on attracted revenues, 15.1% - on tax revenues and 9.8% on the capital revenues. In the revenues of local budgets unimportant portion has the revenues received from grants and loan, which only amounts to 0.03% and 4.5% of the total revenues9. Although if comparing the year 2008 with 2007 the amount of various revenues had completely changed. In the year 2008 relatively with 2007 tax revenues reduced by 100%; In the year 2008 relatively with 2007 attracted revenues reduced by 114%; Capital revenues reduced by 133%; Totally tax, attracted and capital revenues reduced by 158% in the year 2008; Grants increased by 80000%; The loan quota increased by 100%. Although the budget of local government did not reduce, their portion towards united budget and GDP has been reduced10. Year 2004 2005 2006 2007 2008 2009 Local Budget in GDP % 6.8 7 6.8 8 7 6.7 Local Budget in United Budget % 26 24 18 20 18 17

It is worth to mention, that for state budget as well as local ones, 2009 was the problematic year comparing with the year 2008. The results of the crisis reflected on the budget only from 2009. The situation has been improved from the beginning of 2010, as incomes were comparably higher for state budget, as well as local ones. Property Taxes in Georgia In the European Chart of local government has been underlined that the organs of local government should be a right of adopting local taxes and fees. They should get the part of local revenues just out of it. Today, according to the acting law, one of the major sources of owns revenue of the local budget is the tax of the property and seven kinds of local fees. In connection with the tax of property due to the existing indulgences this tax is not able to fill the budget of municipalities. Economic crisis did not affect the revenues got from property taxes. On the contrary, it even increased. In the year 2007 the tax of property came to 67.3 MLN US dollars. Out of it the portion of Tbilisi was 49%. In 2008 the common revenues of the units of local governing amounted to 88.4 MLN US dollars. Out of it 51% came to Tbilisi. In 2009 the tax of property was 96 MLN US dollars and 41% came to Tbilisi. Although this sum is very little and it is only 9% in total quota of budget 11. Local Fees in Georgia One of the sources of filling the local budgets is local fees, though the enumerated figure of local fees established only by the law means nothing if self-governing unit does not pass the right administration of these
9

Ministry of Finance of Georgia; http://www.mof.ge/ National Statistics office of Georgia; http://www.geostat.ge/ 11 Ministry of Finance of Georgia; http://www.mof.ge/
10

local fees. Today only seven kinds of local fees work. Since January of the year 2007 lots of local fees have been annulled. Although there added others instead of them. Although there added other instead of them, but the new local fees dont act and the budget do not get revenues from them. In the Year 2007 from the local fees 27268.2 thousand US dollar went into the local budgets. Out of it 21230.5 thousand US dollar get comes to Tbilisi. In 2008 41773.3 thousand US dollar get and the portion of Tbilisi is 32319.4 thousand US dollar12. Although the size of the local budget has not reduced despite the crisis, but it occurred at the expense of transfers. More than 2/3 it of revenues of some municipalities is transfer. According to economic experts, that in its part increases the danger of pressure from the central authority.

Estimation of local self-government property basis

It is one of the most important elements to own the property by the local self-government. Without this factor, it is almost impossible to use self-government authority and render the qualitative public service to the population. As for the property of local self-government, recently adopted laws could not manage to provide the real property decentralization. First of all, because the normative base was not flawless, on the other hand, another important factor was absence of relevant political will that blocked the development of democratic processes within the country. According to the organic law about local self-government, the main source for formation of the property basis is the transfer of state property in local self-government ownership. At the same time, they can purchase or create own property with the funds allocated from local budget. The transfer of state property can be carried out in following ways: 1. based on the law, when the property is handed over directly, and 2. based on request of the self-governing unit. On March 25, year 2005, according to the law about the property of self governing unit, as a result of actively started property decentralization process, the most of self-governments were transferred the basic part of the property in ownership, but the process is not finished yet and is still on its way. Problems in Delivery Property The process of transfer of state property did not turned out to be analyzed, planned and managed properly. Blockage of this process is caused by the different reasons: The property transfer process was not properly planned; Before it was started, the property (non-agricultural land, buildings and constructions, forests, etc.) had not been accounted and registered accordingly; The ministry of economic development and local self-government bodies do not have the full information about the property owned by the state; According to the procedures described by the law, initially, there should have been conducted the property inventory, to define its balance sheet value, to make the maps and drawings; All these procedures to be fulfilled need serious funding. As the property was transferred, the central government put the responsibility for passportization and registration of the property on local self governments; Because of limited income, self-governments appeared unable to meet this dement of the law, accordingly, the property was not registered in public registry as an ownership of local selfgovernment. It is rather vague the process of transfer of forest resources to local self-governments. The law gives an exclusive right to self-governing unit for management of the locally important forests. The issued regarding transfer of water resources still needs a solution. The unsolved problem causes important complications in work of self-government. According to the organic law about local selfgovernment, local water resources are owned by self-government, although there is no definition.

12

Ministry of Finance of Georgia; http://www.mof.ge/

Regional Differences
In Georgia some municipalities are riches and some are poorer due to its poor resources. In order not to by a big social-economic difference among municipalities it is important that the centre should take upon itself to solve this problem and the European Chart considers it in its part. According to the requirement of the chart: The protection of financially weaker local authorities calls for the institution of financial equalisation procedures or equivalent measures which are designed to correct the effects of the unequal distribution of potential sources of finance and of the financial burden they must support. Such procedures or measures shall not diminish the discretion local authorities may exercise within their own sphere of responsibility13. In Georgia the demand of the noted paragraph since the year 2007 is being fulfilled, as there is a formula of equalizing transfer proved on the base of the law. The equalizing transfer is given to the budget of self-governing unit as a financial aid for the purpose of implementation of the exclusive authorities. In Georgia, as well as in all other countries, all municipalities have not got the same economic bases and their budgets are also different. Equalizing Transfer according to the Regions The purpose of equalizing transfer is to finance various self-governing units is order to reduce the financial difference and equal the level of their development. The equalizing transfer is given to self-governments in order to finance the difference that exists between revenues and expenses. However according to the decision of the Georgian government only 70% of necessary transfer has been financed, because of which local governments are unable to implement financing of all kinds of necessities. The requirement of the Europe chart 9.6 - Local authorities shall be consulted, in an appropriate manner, on the way in which redistributed resources are to be allocated to them14. Georgia is not joined with this article of the chart and accordingly local governments do not participate in distribution of their finance. According to the chart, transfer should be allocated to equal week local government with others. However it happens so that a big quota of transfers comes to the capital and to big municipalities, as they have much expenses and week municipalities have got little budget and their expenses are reduced. Tbilisi - the capital, comparatively with other municipalities, has got the most budget revenues at one person. It has the best regulated infrastructure and the most part of the state budget is spent in the capital. There is a situation, when the capitals budget is twice as more as all the other budget of self-governing (with minus of Autonomous Republics). Actually, it can be noted that all economic activity and finance are concentrated in one city. The Graphic of the equalizing transfer about the difference According to the regions15

2007 30000 20000 10000 0 thousand

2008

2009

2010

13
14

The European Chart of Local Self-Government, Strasbourg, 15 October 1985. The same. 15 Ministry of Finance of Georgia; http://www.mof.ge/

In Georgia the dynamics of allocating the transfer during the years 2007-2010 was like that. In the year 2007 from central budget as transfer 43 MLN dollar was allocated for local governments. Out of it equalizing transfer was 30%, 67.5% was giving to special transfer and 2.5% for earmarked transfer; In the year 2008 the quota of transfer increased by 700% comparatively with the year 2007 and amounted to 335 MLN Dollar. Out of it 66% was giving to equalizing transfer and 3% to earmarked transfer and 31% - to special transfer; In the year 2009 the size of equalizing transfer reduced by 14%, though the size of special transfer increased by 77%, but the size earmarked transfer increased by 35%; In the year 2010 in the state budget there has been considered 490 million dollar for local selfgovernment and comparing with the year 2009 it is the growth by 34%; In the year 2010 equalizing transfer will be given more than 89% and the quota of the special transfer will increase by 8.2% and the quota of earmarked transfer will reduce by 29% comparatively with 2009. The considerable growth of the equalizing transfer is caused by the changes of accounting method. It should by mentioned, that the most part of equalizing transfer 71% comes to self-governing cities. It is worth to mention, in 2008, budget revenues and equalizing transfer per inhabitant for local selfgovernments were characterized by fluctuations. The average of budget revenues of local self governments calculated per inhabitant amounted to 214.3 GEL, but equalizing transfer per inhabitant amounted to 50.2 GEL16.

900.0 768.8 800.0 700.0 600.0 500.0 358.4 400.0 348.5 232.3 300.0 137.4 128.4 155.9 200.0 118.4 114.7 98.8 97.0 83.7 49.9 34.2 25.6 21.5 21.3 100.0 20.2 17.4 15.6 13.2 11.8 0.0

US $

revenues per capita

equalizing transfer per capita

Mtskheta municipality has the maximum amount of budget incomes per inhabitant. It is caused by the fact that in August, 2008, after Russian-Georgian war, there were allocated funds from the state budget to build living facilities for refugees. These funds were register within the budget of Mtskheta municipality. Delegated Authority - The Earmarked Transfer The least portion in transfer comes to earmarked transfer. According to the law earmarked transfer is transferred to finance delegated authority of the local self-governing. Delegation of authorities to the self-governing unit by the state governance bodies shall be allowed on the basis of legal acts of Georgia, and the agreement accompanied by the transfer of commensurate material and financial resources. According to the law in 2009 for the local self-government had been determined the following delegation of authorities:
16

National Statistics office of Georgia; http://www.geostat.ge/

 Public Health care; Compulsory military service; Military reserve; Minimal social help. However, some of the municipalities did not get the necessary sum of financed the delegation authorities from central budget and allocated the finance from their own revenues. For example: the municipality of Kharagauli allocated approximately 5000 Us dollar from its revenues to finance which should be used to settle the important problems considered as priority by the population. Problems about Special Transfer It should be noted one more fact, the chart considers, that 9.7 article As far as possible, grants to local authorities shall not be earmarked for the financing of specific projects. The provision of grants shall not remove the basic freedom of local authorities to exercise policy discretion within their own jurisdiction17. It can be said, that this requirement of the chart is not fulfilled up to end and in most cases selfgovernment have to finance such expenses that are not in their competence. According to the law, special transfer should be used for financing unforeseen expenses such as natural disasters. In the year 2008 in organic law was written that special transfer should be used to finance other important expenses. Thats why the purpose of this transfer factually became comprehensive. In the year 2010 special transfer is considered two local governments: On Tbilisi and Batumi (capital of the Autonomous Republic of Adjara). The Graphic of the special transfer about the difference According to the regions18

2007 16000 14000 12000 10000 8000 6000 4000 2000 0

2008

2009

Crisis and Social Problems

In order global economic crisis should not have serious effect on social-economic situation of the local government, the Georgian government managed to avoid it just by subsidy. It is important that the central government have taken upon itself to finance such kind of necessity, as the projects of infrastructure. To build and repair roads is an exclusive competence of the local authorities but in regions these projects are nearly financed totally from the central budget. What is main, while building these roads local inhabitants were employed and this made possible to avoid social problems.
17
18

The European Chart of Local Self-Government, Strasbourg, 15 October 1985. Ministry of Finance of Georgia; http://www.mof.ge/

thousand

Helping Villige Cheap Credit Programs To overcome the problems caused by the war and crisis two Georgian government started to implement two important programs: The program of helping villige and a cheap credit program. In the frame of a program of helping village all the municipalitys villages were given certain finance and this finance was used by the local inhabitants themselves. In the frame of helping a villige, all municipalities villages have been given finances and they have been used by the local population. In same villages there has been made water supply, were built nursery schools, libraries. In this work the local population have been employed. We think that such stimulus was important for avoiding the crisis, though it is better that local governments should be given more finance resources in order to be able to finance all kinds of needs. The governmental program Cheap credit contains two sub -programs - Export Promotion and Regional tourism, agricultural and handicraft development. Within the framework of this program, in 2008 and in 2009 were financed 134 projects and total value of projects amounted more than 40 million US Dollars. The budget of this program was distributed by all regions of Georgia. The amount of direct and indirect beneficiaries of cheap credit program exceeds 32 thousands persons 19. The program of the local business has considered allocating cheap credit for local business. The local businessmen were given credits with a low interest rate. They created enterprises and employed the local population in it. Primarily, credits were given to businessmen who have their business in those municipalities that were damaged because of the Russian aggression. Russian military forces did a serious harm to Georgian strong municipalities. In order not to be lagged behind these municipalities, many activities have been financed from the central budget. Budget Priority of Social Sphere Crisis has affected the social situation: the number of unemployed has increased, there started migration inside and outside the country. That is why to avoid these problems are largely dependent on the right policy of self-governance. During the crisis the priority of the local budget should be changed and mainly directed towards the social sphere. As it has been mentioned, Georgian municipalities have not got strong financial resources that are why crisis has not affected it largely. However social situation has changed. Just because of it, Georgian local authorities looked at the budget policy and directed the finances towards the social projects. That is confirmed by the statistics of the years 2007-2009. According to the law funding of social field is not an own competence of self-government. It is a competence of central government. It is reflected in the law on self-government, that its competence is mobilizing the municipal resources in the spheres of health and social care on the territory of self-governing unit, working out, implementing and informing the population about the appropriate events, such as the creation of safety environment for peoples health, the establishment of the wholesome manner of life and the identification of risk factors concerning the health. Although, since the economic crisis appeared, self-governments announced social programs as a priority. In general, it is very important to carry out an analysis of self-government expenditure policy. This shows how effective is the self-government, and if it spends the income correctly in accordance with the law and set targets. In the year 2007, the self-governments expenditures amounted to 756724.1 US Dollars20. The expenditures were as follows:

19 20

Ministry of Economic Development of Georgia; http://www.economy.ge/ Ministry of Finance of Georgia; http://www.mof.ge/

Finance representative Self-defence and executive 0.2% authorities 11.0% Social care 3.5% Education 6.4% Rest, culture 6.6% Health care 1.3%

Public order 3.8% economic activity 17.4% Protect environment 4.2%

Accomodation economy 45.5%

In the year 2008 the total quota of the budget taxes of self-governing units came to more than 906 MLN dollars. Quite a considerable sum was spent on financing non-own competence (Police departments, the office of Parliament major deputy, Health care, general education and etc.). Number of rights and authorities are not distinguished between the central and local governments 21. In 2008, the small exclusive competences of self-governments were decreased even more and the fields like water supply achieve management, central heating, rests utilization were taken away. When worldwide, exactly the local self-governments are authorized to regulate the above-mentioned fields.
Finance representativ e and executive authorities Social care 12.7% 4.4% Education 9.9% Rest, culture 7.5% Health care 2.2% Accomodatio n economy 35.9%

Self-defence 0.3%

Public order 2.0% economic activity 20.3% Protect environment 4.9%

In the year 2008 the quota of non-own expenses is not so little. In 2007 the portion of non-reasonable expenses came to 6.4% of total expenses. In 2008 9.1% and in 2009 it takes 8.6% in the planned taxes 22. Non-finance of exclusive authorities by the local government makes social conditions more difficult in the regions. Because of decreasing income, the budget of local self-government is limited. Thats why it is not acceptable, to use the most part of finances on funding of apparatus of self-government and other nationwide programs (like healthcare, education). Local self-governments do not fund the projects oriented on real development. In most local self-government areas, the infrastructure is not arranged and limited amounts are spent on social events. That causes the increase in migration from village type settlements to urban ones and
21

Narnamia, Davit , and Losaberidze, Davit. 2009. Expenditure Policy of Local Self-Governments in Georgia. Caucasian Institute for Economic and Social Reserch. Tbilisi. Georgia. Also available online at http://www.ciesr.org/uploads/publications/gtz_research_ciesr_geo.pdf 22 Ministry of Finance of Georgia; http://www.mof.ge/

from urban type settlements to the capital city. As a result, the 1/3 of the country population is concentrated in the capital city23. In the year 2009, the self-governments expenditures amounted to 594757.8 thousand US Dollars24.
Finance representative and executive authorities 13.9% Social care 6.7% Education 9.3% Rest, culture 7.7% Health care 3.2% Accomodation economy 29.7%

Self-defence 0.4%

Public order 2.8% economic activity 16.1%

Protect environment 10.2%

Society participation level in the activities of local self-government and decision-making process in pretty low. The problem is the factor, that the society do not have imagined clearly and is not quite aware about the role and functions of the self-government and the point that the people is the source of authority and power, and they must be involved actively in resolution of issues of local importance. In Georgia, this right is used while voting. Nowadays, society involvement and participation in resolution of locally important issues is minimal. In 2007-2008, while planning local budget expenditures, there were ignored the priorities of the population. It was low participation of the society in the budget planning process, although since 2009 the municipalities have been trying to involve local population in budget planning process and make them set their priorities themselves. It is conducted based on sociological survey, though it happens frequently, when the population requests to fund the project beyond the exclusive competencies of local self-governments.

Reforms
After economic crisis Georgian Government more activity started to develop regions and to give them more authorities. From the year 2009 the government started to pass the reforms in this course and all kinds of changes have gone into the organic law and the competences of the local self-governance have increased. These changes will be enacted in the year 2010 after the local elections. In addition in 2009 created the Ministry of Regional Development and Infrastructure, competences of which represent: Works out proposals on municipal development, administrative-territorial arrangement and regional governance system reforms; Leads activities to stimulate innovations activities; Supports establishment of research and development institutions in the field of innovations; Draws up recommendations for decrease of existing disproportion in the levels of the socio-economic development among the regions; Prepares proposals on support to entrepreneurship activities, stimulation of investments, regulation of employment issues, creation of new job places and improvement of the social infrastructure; Prepares recommendations on the calculation methodology for the equalization transfer.

23

Losaberidze, Davit. 2008. Policy Analysis. Page 4. Annual Report on Development of Local Democracy in Georgia, 2008. Edited by Open Society Georgia Foundation. Tbilisi. Georgia. 24 Ministry of Finance of Georgia; http://www.mof.ge/

It was reduced extra free capital within Georgia, the big privatization process was ended and as a result previously received funds expired. Thus, it became doubtful to finish old programs, not speaking about launching new ones. Even if the central government expresses the desire, the implementation of the reforms, such as enforcement of local democracy, appears to be hard, because of the need of serious funding. At the same time, inefficiency of present local self-government system becomes more apparent. The demands for changes come more frequently not only from the representatives of civil society and international organizations, but the officials of serf-government too. It is needed to start real decentralization and to be the reform fully implemented 25.

Recommendation
To proceed the real expenditure policy, it is necessary to solve the following issues: To provide the real fiscal decentralization, giving the chance to local self-governments to spend more funds independently; The central government should transfer particular sources of income to local selfgovernments; The income tax should be placed to local self-government budgets instead of the state budget; The local self-governments should be granted a real independence while planning expenditures part. The central government interference should be excluded from all those processes; The local budget should be transform on the program principles of financing, that means that on the activities financed from budget the target program should be previously elaborated and approved with budget. This will ensure the purposive and transparent expenditure of concrete local budget; Establish principles of state transfer policy; It is vital to increase the population involvement level in budget expenditure planning process, to let the local self-government to fund those issues, which are the most important for the local population; Establish local budgetary public control system; Delegate authorities should be fully ensured financially with earmarked transfers by Central Government; Once the nice property basis is set up, it will support the financial development and improvement of investment environment; Upon the distinguishing the central and local government property, it is necessary to grant wider authorities and real independence to local self-governing units. It will give to selfgoverning units to use and control the mentioned property more efficiently in their best interests. They would be able to use the income from this property within their competence, influencing self-government economic growth.

25

Losaberidze, Davit. 2008. Policy Analysis. Page 3. Annual Report on Development of Local Democracy in Georgia, 2008. Edited by Open Society Georgia Foundation. Tbilisi. Georgia.

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