REPORT ON THE ASSESSMENT OF THE ACTORS AND DONORS ACTIVE IN THE EASTERN PARTNERSHIP COUNTRIES IN THE FIELD OF LOCAL GOVERNMENT May 2017 1 TABLE OF CONTENTS Introduction ……………………………………………………………………………………………………………………………….. 3 Background ………………………………………………………………………………………………………………………………... 3 Common trends and main findings …………………………………………………………………………………………….. 4 Key features of the local government systems in the EaP countries …………………………………………... 9 Instruments of local authorities to promote local economic development ………………………………. 15 Major donors active in the field ……………………………………………………………………………………………….. 23 Annex 1. Country reports on each of the six EaP countries ………………………………………………………. 32 Armenia – Country Report ……………………………………………………………………………………………………….. 32 Azerbaijan – Country Report ……………………………………………………………………………………………………. 54 Belarus - Country Report …………………………………………………………………………………………………………. 67 Georgia – Country Report ………………………………………………………………………………………………………. 104 Moldova – Country Report …………………………………………………………………………………………………….. 140 Ukraine – Country Report ………………………………………………………………………………………………………. 164 2 Introduction This report was drafted during the Inception Phase of the Mayors for Economic Growth (M4EG) Initiative launched by the European Union in October 2016. The report was revised in April-May 2017 based on comments received. The M4EG Initiative targets local authorities throughout the Eastern Partnership Countries of Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine (EaP). The focus of the Initiative is on sustainable local economic development (LED) and its overall objective is to support local authorities to become active facilitators for economic growth and job creation by developing their capacities and technical skills while working in partnership with their business sectors and civil society. The aim of this report is to provide an overview of the core issues which affect the performance of municipalities in the EaP countries and influence the local economic development. A specific part of the report is devoted to the International Donor Organizations active in the field of local government support in these countries with the aim to avoid overlapping activities during the implementation of the M4EG Initiative. The document is based on the six Country Reports prepared by the M4EG Country Experts and annexed to this report. Moreover, a number of related documents drafted by the International Organizations were carefully examined. Several of their findings were used in the preparation of the report. In this respect, it is worth mentioning two documents: - Study on Roles and responsibilities of mayors and local councilors in the Eastern Partnership Countries prepared in April 2016 within the Council of Europe/European Union Eastern Partnership Programmatic Co-operation Framework 2015 – 2017; - Update on Public Administration and Local Governments Reforms in Eastern Partnership Countries prepared in January 2017 by the Subgroup on Local Government and Public Administration reform of the Eastern Partnership Civil Society Forum. The European Charter of Local Self Government, hereafter “the Charter”, represents the core source and the benchmark for the improvement of local government systems in Europe and in turn also for the assessment of several aspects mentioned in this report. Background Over the past decade, the governments of the majority of the EaP countries, under the influence of various circumstances, have made a number of efforts for decentralization and modernization of their public administration systems including local government systems. In a number of countries, local authorities (LAs) received additional powers and opportunities to influence the situation in their municipalities. The European Union pays great attention and gives serious support to these processes in the EaP countries. The European Neighborhood Policy (ENP) has been in place since 2004, aimed at supporting and fostering stability, security, prosperity and inclusive economic development in the countries closest to European Union borders. 3 In particular, it is with the purpose of overcoming a number of obstacles in order to unlock the development potential of LAs that the European Commission reaffirms the importance of LA in partner countries in achieving development objectives. The Terms of Reference of the M4EG Initiative provides an overview of the EU key messages regarding the role of local authorities in the region. In this respect, it would be important to mention the following issues. The Communication of the European Commission of July 2014 "The urban dimension of EU policies – key features of an EU Urban Agenda" underlines the essential role that LAs can play in delivering on policy objectives set at other levels of governance. Moreover, the importance of LAs has been confirmed in the conclusions of the Riga EaP Summit in 2015. In the official declaration, the Heads of State and Government encouraged Local and Regional Authorities (L&RAs) to play a key part in the relevant EaP policies. The final declaration at the EaP Summit also suggested that L&RAs should be provided with targeted support. The EaP Municipal Development Flagship and the European Neighbourhood Instrument (ENI) Multiannual Indicative Programme (MIP) 2014-2017 Regional East put forward the objective of "deepening sustainable economic development and fostering sector cooperation" including through “the creation of a climate conducive to trade, investment and regional/multi-country integration, fostering entrepreneurship, innovation and creativity, with a particular focus on promoting sustainable business models and green growth, promotion of access to finance, support to public- private cooperation. This is to be done both at national and sub-national level. The Multiannual Programme aims also at strengthening LAs, communities and civil society and business organisations to help develop joint solutions to common social and economic development challenges in the EaP municipalities and to improve good governance at local level. On economic modernisation and entrepreneurship, the Joint Communication states that “The EU will support partners to modernise their economies for smart and sustainable growth by engaging in economic dialogue, policy advice and the mobilisation of financial assistance. It will promote a better business environment and reforms that allow greater investment, and more and better jobs.” Common trends and main findings There are different local self-government systems functioning in the region and the level of decentralization also varies a lot in the EaP countries. But at the same time, these countries often face very similar challenges and have a lot of common trends, which up to now were in a large part inherited from the Soviet past. The main obstacles which prevent LAs from becoming active facilitators for economic growth and job creation in the region are also, in many ways, similar in these countries. The main of these are the following ones: 1. Weak financial basis. 2. Overlapping and unclear powers and responsibilities between levels of government. 4 3. Excessive control from the upper levels of government. 4. Institutional deficiencies and lack of capacity at municipal level. 5. Limited citizen participation in local affairs and the politicization of local life. Below a brief description of each of these issues is presented. It should be taken into account that all these issues are interrelated. Weak financial basis The findings of the six country reports clearly show that the main barrier to the full exercise of the responsibilities of local authorities and thus, to become active facilitators for economic growth and job creation in their municipalities, is local finance. The LAs competences/responsibilities and financial resources for their implementation are not inter-linked and allocations are un-predictable. Central government transfers are still the main source of revenue for local government. The freedom to use local finances are strongly limited in all Eastern Partnership countries, as central government interferes in local government spending decisions through several mechanisms. Real local taxation, with the right of local self-government to determine rates on the base of local needs and priorities, does not exist. Partial exception is Moldova, where local councils are free to establish the rates for local taxes and fees, but are not allowed to introduce new taxes except the ones listed by the fiscal code. The missing link between the scope of responsibilities and the amount of available finances leads to the fact that the unit costs of provided services are unknown. There are no mechanisms to collect this necessary information and to link it with fiscal decentralization processes. Another problem is unclear criteria of earmarked allocations (“subventions”) from the state budget. In the majority of the countries the allocation of central grants to the local level is mostly based on subjective decision-making and in several countries is politically influenced. This is also the case in allocations from national funds (environmental, road, etc.). Usually, the allocation of finances from these funds has “relationship” or political background, as often decisions are adopted by taking into account the “administrative resources” or political affiliation of mayors, without consulting other relevant criteria. As a result, the allocation of targeted funding becomes an additional instrument of the central government to influence