STUDY November, 2024 EVALUATION OF THE TERRITORIAL AND ADMINISTRATIVE REFORM (TAR) OF LOCAL GOVERNMENT IN ALBANIA

EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA 1

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EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA 1. Consolidation of Municipalities The reform reduced the number of municipalities from 373 to 61 aiming to create larger administrative units that could better manage resources, deliver services effectively, plan effectively and respond to the needs of citizens. Decentralization By empowering local governments, the reform sought to decentralize decisionmaking processes, allowing municipalities to respond more effectively to local needs and priorities. Enhanced Service Delivery The reform aimed the reorganization in order to enhance the quality of public services, by ensuring that municipalities had the necessary capacity and resources. Economic Development The reform intended to stimulate local economic development through better planning and coordination, creating a more conducive environment for investment and job creation. EU Integration To align Albania’s administrative structures with EU standards, particularly as part of the country's efforts to meet the criteria for EU Integration. 5

EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA Resistance to Change Many local officials and citizens were initially resistant to the new structure, fearing loss of identity and local representation. Capacity Building The newly formed municipalities required significant investment in capacity building and training to ensure they could fulfill their new responsibilities effectively. Resource Allocation Ensuring equitable distribution of financial resources among municipalities posed a challenge, as disparities in economic development persisted across regions. Increased Efficiency: The consolidation of municipalities has led to more efficient administration, reducing bureaucracy and streamlining service delivery. Enhanced Local Governance: Local councils have gained more authority, allowing for greater responsiveness to community needs and improved civic engagement. Investment Attraction: The establishment of larger municipalities has attracted more significant investments, as they are better positioned to plan and implement development projects. • 6

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EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA Scope: Assess the financial impact of TAR, based on the level of revenues, expenses and public investment of LGUs. Objective 1: Assess the level of revenues and expenses. Objective 2: Assess public invetsmnets of LGUs. 8

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EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA Fiscal Decentralization The reform increased the financial autonomy of municipalities by introducing changes in local revenue-sharing mechanisms and local tax systems. Municipal Mergers The reform enabled more effcient administration and better use of resources by consolidating smaller local units into larger municipalities. Decentralization of Functions The reform devolved greater decision-making power and responsibility to local governments, including the management of public services 11

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EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA ➢ Increased Budgetary Powers The newly formed municipalities have greater control over local budgets and the allocation of resources, including the ability to increase or adjust local taxes and fees. This autonomy allowed for more tailored local policies and a more direct relationship between local revenue generation and local service provision. Revenue Generation L arger municipalities generally have more diverse economic bases, which can contribute to increased local revenues. ➢ Citizen Engagement The larger municipalities provided more opportunities for citizen engagement in budgetary decisionmaking, improving the connection between local governments and their populations. This allowed for more informed decision-making, where citizens could better track the impact of public spending on local services. ➢ 20

EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA Improved Budget Management and Planning Better Financial Oversight The reform enabled municipalities to adopt more sophisticated budgeting processes, with improved oversight and accountability mechanisms. This reduces the risk of wasteful spending and misallocation of resources. Strategic Planning With a larger fiscal base and more resources, municipalities can invest in longer-term strategic planning and project implementation. This enables more efficient use of funds, as resources can be allocated in line with long-term development goals, rather than short-term, piecemeal projects. Improved Fiscal Management With the consolidation of local government units, municipalities could more effectively manage their finances. ➢ Increased Fiscal Responsibility The reform gave municipalities more responsibility for own-source revenue generation while also provided them with more tools for managing their finances. This shift required careful coordination between central and local governments in order to ensure that municipalities had the financial resources they needed to meet their responsibilities without relying too heavily on central transfers. Collaborative Fiscal Planning The reform encouraged greater collaboration between the central government and local municipalities in terms of fiscal planning. Regular consultations were required to ensure that fiscal policies aligned with local needs, that regional disparities were addressed, and that municipalities had adequate support to carry out their tasks 21

EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA ➢ Equalization Mechanisms To address regional disparities, the reform included mechanisms aimed at redistributing financial resources in order to ensure that poorer, rural areas did not suffer from reduced funding. ➢ 22

EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA Capacity Constraints • Many of the newly formed municipalities lacked the institutional capacity, expertise, and technical resources to manage the increased budgetary responsibilities. The staff at the local level were not prepared to manage larger budgets, which led to inefficiencies in budgeting, planning, and financial management. Infrastructure and Service Delivery Costs • Larger municipalities were expected to take on greater responsibilities for infrastructure, social services, and public administration. While economies of scale could theoretically lead to cost savings, the immediate impact was often an increase in expenditures as municipalities struggled to provide services across larger areas. This raised concerns about financial sustainability, as the new local authorities had to balance the increased cost of services with the available budget ➢ Tax Base Expansion: • The larger municipalities, particularly those in urban areas, as a result of a broader tax base, were able to increase revenue through local taxes and fees. This helped them to cover the increased costs of local services post-reform. Increased Service Delivery Costs • The increased size of municipalities often led to higher administrative costs, according to which larger areas meant more infrastructure maintenance, social services, and public works projects. These increased responsibilities came with higher spending needs, especially for municipalities that previously lacked the resources or infrastructure to manage such tasks effectively. Better Investment Attraction • Larger, more financially stable municipalities are more attractive to investors. This can enhance the municipality's revenue potential by increasing economic activity and job creation. The ability to manage larger-scale investments and development projects also contributes to better public spending outcomes. ➢ 23

EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA Education and Health Investments I n rural areas, where local governments often struggle to fund education and healthcare, the reform allowed for larger municipalities to pool resources and allocate funding more efficiently Public Health and Social Protection T he reallocation of resources allowed for more targeted investments in social welfare programs, ensuring that vulnerable groups in rural and underserved areas could receive more attention and support. Larger municipalities were able to implement more coordinated strategies for poverty alleviation, unemployment, and other social issues ➢ • • 24

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EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA Larger Tax Base • By merging small communes and municipalities into larger administrative units, the reform expanded the tax base of local governments. Larger municipalities could more effectively tap into revenue sources such as property taxes, business taxes and local fees. Local Economic Growth • In many cases, the larger municipalities included urban centers with more developed economies, offering better opportunities for local revenue generation through taxes on commercial activity, services, and property. These enabled municipalities to enhance their fiscal capacity and fund local development projects without over-reliance on central government transfers ➢ Strengthened Tax Administration • With more financial resources and better-trained personnel, municipalities could enhance their ability to assess collect, and manage taxes, which contributed to greater fiscal autonomy. Revenue Diversification • Larger municipalities, with more diverse economic activities, could expand their sources of revenue. This diversification of revenue sources was crucial for enhancing the fiscal capacity of local governments and ensuring that they had the financial means to support their growing populations and service demands 26

EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA ➢ Limited Administrative Capacity Many of the newly consolidated municipalities lacked the administrative capacity to manage the larger budgets and more complex service delivery tasks that came with the reform. Smaller municipalities, in particular, faced a skills gap when integrating their financial systems, managing larger workforces and implementing complex infrastructure projects, which led to inefficiencies, waste, and potential misallocation of resources. Weak Institutional Coordination Larger municipalities had to integrate various administrative units, which sometimes resulted in coordination challenges and communication breakdowns between local departments. These governance issues hindered effective budget planning and oversight, making it difficult for municipalities to stay on top of spending, investments and the execution of development projects. 27

EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA 4. ➢ Initial Costs of Consolidation The transition from a highly fragmented system to a consolidated one required upfront investment, such as costs associated with merging administrative systems, integrating different sets of local laws, and harmonizing local budgets. Public spending increased during the transition phase as municipalities had to invest in new administrative systems, public outreach, and legal reforms. Increased Investment in Public Services Newly consolidated municipalities needed to ramp up services to meet the demands of a larger population. This required increased public expenditure in the short run to develop infrastructure, enhance public service delivery, and ensure that newly merged areas had adequate access to essential services like water, healthcare, and education. ➢ • 28

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EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA Increased Service Demands: These newly merged municipalities had to meet the growing demands of larger populations, which put significant pressure on their budgets. According to Harjunen, Saarimaa& Tukiainen, 2021 the increase in size makes it more difficult to adapt local services to meet citizens' preferences as a result of the increased heterogeneity of local government. Underestimation of Costs: The consolidation process brought together multiple small administrative units, each with its own fiscal practices and service standards. Aligning these various systems into a single, cohesive budget was challenging, and many local governments found it difficult to accurately estimate the operating costs associated with their new responsibilities. This often led to budget shortfalls or underfunded services. Inflationary Pressures: The reform also resulted in higher demand for public goods and services, which could put upward pressure on costs. Municipalities faced the risk of inflation affecting construction costs, wages, and other expenses tied to local service provision. As a result, local governments could encounter budget overruns, which might require them to either cut services or borrow more funds to cover the difference. 30

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EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA 5. ➢ Larger Administrative Units with Greater Resources Larger municipalities, with more diversified tax bases and greater financial capacity, are better positioned and equipped to plan and implement development projects. More Professionalized Governance: Larger municipalities could employ more qualified staff, adopt better project management practices and improve their ability to design and manage development programs. Enhanced Strategic Planning With larger populations and more complex administrative structures, municipalities were able to adopt more comprehensive development plans. These plans could focus on longterm growth, integrating both economic and social aspects such as infrastructure, education, healthcare and social welfare, which in turn fostered more holistic and sustainable development ➢ 34

EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA Improved Investment Climate Larger municipalities have a broader range of economic activities, including industrial, commercial and service sectors, which provide a more diversified base for investment. With more developed financial management and governance systems, these municipalities were better able to create an attractive investment climate, offering investors improved administrative services, clearer regulations, and better infrastructure. 35

EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA 6. ➢ Regional Infrastructure Development: The creation of larger municipalities meant that infrastructure investments could be planned and implemented on a regional scale, addressing the needs of more people and covering broader geographic areas. Investment in road networks, transport infrastructure, public utilities and waste management could now be scaled up to meet the needs of larger populations, leading to improvements in local connectivity, access to services and overall regional development. Strategic Regional Planning: The larger administrative units allowed local governments to think more strategically about long-term regional development plans, incorporating a more comprehensive view of the region's economic activities and development potential. ➢ 36

EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA Increased Access to Central Government Funds • Larger municipalities and greater administrative capacity provided more access to central government funding for public investment, by enabling to finance capital-intensive projects. Public Investment in Key Sectors • Larger municipalities focused on areas that would have the most immediate impact on development, such as education, healthcare, infrastructure and social welfare. As municipalities were able to allocate larger budgets to these sectors, more significant investments were made in the construction and upgrading of schools, hospitals and social housing. This shift in investment priorities allowed for improvements in the quality of services available to residents 37

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EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA ➢ EU and International Funding • The EU accession process has provided Albania with access to significant funding for local development. After the reform, larger municipalities became more competitive in securing EU funds. As these municipalities had improved governance and administrative structures, they were better equipped to apply and manage complex projects and access international funding for regional development. This enhanced access to EU funds boosted investment in local infrastructure, environmental projects, and other development initiatives ➢ Foreign Direct Investment(FDI) • The larger municipalities, especially urban centers and those with economic potential, were better positioned to attract foreign direct investment(FDI). The consolidation allowed these municipalities to offer a more attractive investment environment by improving business infrastructure, local governance and financial services 39

EVALUATION OF THE EFFICIENCY OF TERRITORIAL STRUCTURE OF LOCAL GOVERNMENT IN ALBANIA Urban-Centric Investment Growth • Larger cities(urban centers), saw an increase in implementing different projects focused on infrastructure, tourism, etc. The consolidation allowed for more streamlined urban planning and infrastructure investments, making these areas more attractive to both domestic and foreign investors Disparities in Rural Investment • Despite efforts to promote balanced regional development, rural areas still faced challenges in attracting investment. While larger municipalities were intended to reduce regional disparities, many rural regions with lower economic activity continued to lag behind in terms of both public and private investment. The reform helped centralize resources in larger municipalities, but smaller rural areas with lower population densities still struggled to secure the same level of attention and investment as urban areas ➢ • 40

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