Since the end of the last stage of the administrative and territorial division reform in 2020, the four years that followed have been the most difficult for both the newly formed municipalities and their residents. During this time, we have faced the challenges caused by COVID-19 and later by Russia’s full-scale invasion. Municipalities have had to look for new opportunities for cooperation and pooling resources with others in order to ensure the proper level of services, implementation of joint projects, etc.
“Among the formats of pooling municipal resources is launching joint utility companies, which have several clear key advantages,” said Victoriia Kopchak, Adviser on Decentralisation and Local Self-Government at the Regional Office of U-LEAD in the Kherson Oblast.
Read the adviser’s comment to learn about the advantages of this type of municipal cooperation:
- Founding municipalities can directly finance JMCs through financial support programmes. So where is the catch? Currently, if, say, a primary healthcare centre based in one municipality provides services to the population of another municipality, the latter can finance it only through an interbudgetary transfer to the municipality that is the founder of this joint municipal company.
- Founders can transfer property to a joint municipal company under the right of economic maintenance (or operational management in JMC). If the municipality is not the founder of the JMC, the municipal property can only be leased to such a company, which, as per the Law of Ukraine “On Lease of State and Municipal Property”, cannot be free of charge.
- JMC employees, such as project managers, can work on complex infrastructure projects important for founding municipalities. As of now, municipal projects attracting extra-budgetary resources are most often written by local self-government officials; however, this function is additional to their main duties and powers. If several founding municipalities set up a JMC, say, in the field of municipal development, the employees of this joint municipal company will handle writing projects, attracting investments and supporting the local business community based on a comprehensive approach, consistently monitoring available opportunities for attracting the funds. This, in turn, will enable removing extraneous functions from local self-government officials so that they can perform their official duties more efficiently.
At first glance, these advantages are obvious, as is the need for municipalities to collaborate and pool resources in certain sectors. However, the question arises: Why are there still so few joint municipal companies in Ukraine today?
Victoriia Kopchak explains that in order to analyse the reasons why joint municipal companies fail, it might be expedient to analyse the experience of the U-LEAD with Europe Programme in the implementation of support programmes focused on the creation of JMCs in health care, housing and utility services, municipal development and tourism in 2023–2024:
“During these years, 19 teams participated in the Programme. Each consisted of 2 to 6 partner municipalities, ready to create a joint municipal company in one of the given sectors. As of June 1 of this year, two teams have registered JMCs and successfully launched them (one in housing and utility services and another in municipal development); one team from four municipalities registered a JMC in municipal development but failed to allocate funds for it; two more teams are at the stage of making decisions about the creation of a tourism JMC. The rest of the teams abandoned the idea of a joint municipal company in the process of negotiations between potential founding municipalities,” said the adviser.
And this begs the question as to why, despite all the advantages, a JMC is such a difficult format and what are the reasons many municipalities fail at it. Here are some examples from Victoriia Kopchak:
- Failure of potential founders to agree on the key principles of the partnership. The funding share of each founding municipality, the appointment and dismissal of the director of the JMC, the staff list, the location and the name of the JMC are five aspects that — together or separately — become a stumbling block for the municipalities, which otherwise signal readiness to work on creation of the JMC. At the same time, until the municipalities reach agreements on these key issues in the form of a resolution, contract, memorandum or other written document, it makes no sense to proceed to the next stages, such as drafting the charter or bringing this matter before the municipalities’ councils.
- Too many founding municipalities. Based on the experience, 2–3 founding municipalities are optimal for creating a joint municipal company in any sector. The more founding municipalities there are, the more time and resources are taken up by conciliation procedures, which affects both the process of creation and functioning of the joint municipal company.
- Lack of actual offline meetings to agree on key positions. This reason logically follows from the first one but deserves to be considered separately. U-LEAD’s experience of implementing support programmes for the creation of joint municipal companies proves that where creating and launching a JMC were repeatedly discussed at joint meetings at the level of heads of municipalities and their deputies with the involvement of finance and legal departments, the JMCs were indeed successfully launched. However, for those municipalities that recognised the creation of a joint municipal company in a certain sector as a “neat idea”, but the senior officials of the partner municipalities never met or were limited to an occasional online meeting, the JMC failed to take off.
- Lack of extensive communication. The founding municipalities usually allocate 1 or 2 officials responsible for the relevant direction to handle the creation of the JMC and the preparation of the corresponding document. Often, if establishing the JMC is not the first priority for the municipality, the JMC-related efforts and communicating its stages are limited to these 1 or 2 officials. In some cases, when the working group has already drafted the constituent agreement and the charter and is ready to submit a proposal at the meeting, neither the public nor the members of the council are aware of the matter and why such a company is needed in general and end up seeing it as an unnecessary financial burden. Therefore, it is extremely important that at all stages, from the inception to bring this matter before the council meeting for consideration, the public and members of the council are informed about the advantages and opportunities that the joint KP will create for the founding municipalities.
- Misunderstanding that joint municipal companies are a long-term commitment. Unfortunately, this is a very common issue for development JMCs. The founding municipalities create a joint municipal company but, for one reason or another, fail to allocate funds for its launch, claiming the possibility of the funding at the expense of, say, donor programmes. Obviously, in order for an employee to start writing a project and attract extra-budgetary funds, they must first be employed and compensated for their work. Therefore, to be launched, a JMC must receive financial support of from the local budget. A joint municipal company in the field of development is a long-term commitment: having found international partners, gained experience in writing projects and provided services to local businesses, this company will obviously become at least self-sustaining, but for this to happen, the founders themselves must lay some groundwork. U-LEAD’s experience of implementing support programmes proves that registering a joint municipal company is not the same as effectively running it, and the failure of the founding municipalities to allocate funds leads to the existence of a registered JMC on paper only.
- Unfortunately, lack of qualified personnel is a rather common and the most difficult problem to solve for potential founding municipalities, especially small ones located at a considerable distance from big cities. There is no general advice here. Do consider recruiting young people, since employees of municipal companies, unlike local self-government officials, are not required to have a degree, as well as recruiting “new” residents of the municipality from among internally displaced persons.
“As you can see, the path to creating a joint municipal company for founding municipalities is quite difficult and fraught with difficulties, but it sure is an investment in the future, an excellent indicator of the sustainability and strategical planning capacity of municipalities, find compromises and pool resources to achieve important common results and improve the quality of life its residents,” said Victoriia Kopchak.