Financing Local Government Responsibilities in Social Protection and Healthcare in Albania

PLANNING AND LOCAL GOVERNANCE PROJECT IN ALBANIA Women, Peace & Security (WPS)

AUGUST 2020

PLANNING AND LOCAL

GOVERNANCE PROJECT IN ALBANIA Women, Peace & Security (WPS):

Financing Local Government Responsibilities in Social Protection and Healthcare in Albania

AUGUST 2020

PREPARED FOR THE UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT, USAID CONTRACT NUMBER AID-182-C-12-00001, ALBANIA PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP).

AUTHORED BY: SABINA YMERI, TONY LEVITAS, ELTON STAFA

COVER PHOTO: FREEPIK.COM

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DISCLAIMER This report is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this report are the sole responsibility of Tetra Tech and do not necessarily reflect the views of USAID or the United States Government.

TABLE OF CONTENTS

TABLE OF CONTENTS ...... 5

EXECUTIVE SUMMARY ...... 6

1. INTRODUCTION...... 10

2. ASSIGNMENT OF RESPONSIBILITIES ...... 11

2.1 Social protection ...... 11

2.2 Healthcare ...... 14

3. FINANCING MECHANISM ...... 16

3.1 Social Care Services ...... 16

3.2 The Social Fund: A competitive grant mechanism ...... 21

3.3 Primary Healthcare ...... 22

4. CONCLUSIONS AND RECOMMENDATIONS ...... 23

4.1 Financing Social Services Through the Unconditional Grant ...... 24

4.2 Financing Social Responsibilities Through An Integrated Specific Block Transfer ...... 24

4.3 The Social Fund ...... 25

4.4 Financing Municipal Functions in Primary Healthcare ...... 25

EXECUTIVE SUMMARY

Decentralisation is generally seen as an effective means to increase the quality and availability of services, to allocate resources to where the needs are, and to increase local participation in decision- making. These considerations have been at the heart of the decentralisation policy in Albania, where local governments are considered to be able to provide services in a more efficient way due to their proximity with the beneficiaries. However, there has been a lack of clearly designed decentralization strategy and the assignment of responsibilities has not always been followed by the assignment of financial means needed to meet those responsibilities.

In the case of social services, benefits of decentralisation are not always clear – cut. Income redistribution policies such as social welfare are often thought to be the domain of the central government. Local governments may not sustain heavy welfare programs on their own without risking attracting clients from other jurisdictions, which would in turn increase the costs of these programs. However, implementation of social welfare programs is often left to local governments, while the ultimate responsibility for financing these programmes rests with the central government. Cash benefit programmes are financed by the central government in almost all European countries; while the models for the delivery of social care services vary considerably from fully centralised to fully decentralised in different European countries.

There is no single best assignment of responsibilities, and different models work in different contexts. Considerations of welfare distribution and public benefit are also relevant in the primary education and healthcare sectors. In these sectors, spillovers are significant, therefore some components of the policies will always remain national responsibilities. When such services are local, the central government may help (or require) local governments provide services to a certain standard, for example, through grants conditional on the provision of the requisite levels of service.1

This policy note aims at reviewing the current systems for financing local government responsibilities in social protection and healthcare in Albania. It provides an overview of the legal, organizational and financial framework for local governments’ responsibilities in social protection and healthcare in Albania, including concrete recommendations for improving the systems which finance these responsibilities.

Social Care Services

The 2015 Law on Local Self-Government and the Law on Social Care Services assigned a set of social protection responsibilities to municipalities. Municipalities have a primary role in the establishment and management of social care services providing for vulnerable people2, including the responsibility to plan, finance and deliver at least a minimum set of services. The central government, through the Ministry of Health and Social Protection retains the prerogatives of policy design and overall oversight in the social protection domain, including social welfare services. Central government institutions are also in charge of the management of a set of “specialised” social services as well as monitoring and inspection authorities. Social care services are non-cash interventions supplied to individuals, families and communities to help reduce poverty, mitigate risks, improve inclusion and integration, and to help people live full and satisfying lives. The Albanian social care system provides public and non-public services for persons in need of residential and day care services. Public social services are provided mainly through residential and day care centres and financed by the state or local government budgets. Overall, in terms of

1 Bird, Ebel, Wallich, (1995) Fiscal Decentralization: From Command to market in Decentralization of the Socialist State World Bank 2 Law 139/2015 “On local self-government in Albania”, Article 24.

6 mandates, the legal framework appears to assign clear responsibilities to municipalities in planning, budgeting and managing social services. Nevertheless, the instruments for delivery remain vague and the national government has never defined how these mandatory services should be financed. The lack of experience in social care services leads to incomplete regulatory frameworks and standards in social service delivery; as well as services that are both few in number and varying in quality. As of 2019, at least 24 municipalities - do not provide any social care services, despite their legal obligation to do so. Meanwhile the 39 municipalities that do provide some service face challenges with regard to service outreach, human and financial resources, quality and sustainability.3 Currently, municipalities have a limited role in the management of social protection cash based programs (social assistance and disability). A reformed social assistance program entered into force since 20184, overhauled the roles and responsibilities of local governments, which now act purely as agents of the central government in performing a delegated function. Nevertheless, municipal social service staff carry out a set of crucial processes for the identification, monitoring and case management for households and individuals benefitting from these two centrally administered cash benefit programmes.

Overall, social protection spending in Albania amounts to 9,3% of GDP, significantly lower than the EU average of 28%5. The social protection budget programme, under the Ministry of Health and Social Protection, is the main state budget programme that supports social welfare policies outside of contributory programs. This budget programme covers the two main cash benefits programmes -- social assistance and disability benefits -- financed by the central government and delivered through municipalities as paying agents, as well as social care services.

The cash benefit programmes for poverty alleviation and disability, account for over 95% of the total budget programme for the last three years.6 The remainder 4 - 5% of total budget allocations supports all activities related to social care services, including day-to-day management of the Agency for the Protection of the Rights of Child and the State Social Service, as well as other administration expenditures. State budget financing for central and local social care services channelled through the social protection budget programme has fluctuated between 600 – 700 million lek in recent years.

In turn, local government discretionary financing for social care services has steadily increased in the recent years, from 400 million in 2015 to more than 700 million in 2018 and 1,2 billion in 2019. At an average annual growth of more 20%, financing from discretionary local budget funds is projected to become the largest source of financing for social care services in the medium term. Although local government financing for social care services is increasing at a rapid pace, it is, however, concentrated in a handful of relatively ‘wealthy’ municipalities. Multiple financing streams for social care services exist, but they have fuzzy lines of accountability, which mirror the different stages of policymaking in the delegation of social functions. Three different financing modalities are implemented within the Ministry in charge of Social Policy alone. These include direct transfers to social care centers; small grants to regional councils as well as the Social Fund. The concept of a Social Fund to support the local provision of social care services was agreed upon in 2005 but not implemented. In 2018, the Council of Ministers passed a decision to finally create the Social Fund7 and a fund of 150 million ALL was allocated within the Social Protection

3 Medium Term Review of National Strategy for Social Protection 2015 – 2020, Ministry of Health and Social Protection, 2019 4 In 2015 in the regions of Tirana, Elbasan and Durres, where it was piloted for three years prior to its formal adoption. 5 European System of Integrated Social Protection Statistics (ESSPROS). 6 The baby bonus programme, a new cash assistance programme for child benefits introduced in 2019 is administered fully by the central government. 7 Decision of Council of Ministers “for the Establishment and functioning of the Social Fund”, No. 111, date 23.02.2018

7 budget programme for the Social Fund in the 2019 budget.8 This was complemented by a ministerial instruction outlining a competitive procedure for allocating the fund to municipalities9. The Social Fund is expected to underpin financing for social care services at the local level, and to support the establishment of new services, in line with the approved social plans, ensuring their sustainability over time through a gradual shift in the mix of financing towards locally mobilised resources.

Other financing streams originate from the Ministry of Finance which delivers so-called Specific Transfers to six municipalities that manage social care facilities located in their jurisdictions (mostly social daycare centers). Municipalities also finance social services from discretionary resources of the local budgets. Smaller municipalities will continue to depend on state budget resources to finance social care services. Costs associated with management of social care services go beyond the financing of existing or new centres of social care services, but the often overlooked – and substantial - costs related to the management of services – including personnel costs associated with hiring social workers at the local level.10

Primary healthcare Between 2004 and 2005, local governments were assigned the responsibility for the management of the physical facilities and certain operational aspects in primary healthcare, as a shared function. Among other things, this entailed beginning a process for transferring the ownership of primary healthcare facilities to local governments. However, the government did not develop a clear and comprehensive strategy on primary healthcare as a shared function.

As a result, policies regarding the local government role in primary healthcare have changed from year to year, with the functions – and the funds to perform them – being decentralized and recentralized several times since 2005. The frequent changes in policy were the result of ongoing structural reforms in the entire health sector combined with a high degree of mistrust about the capacities of local governments. High policy unpredictability has proved to be detrimental to the performance of local governments and in 2009 all their responsibilities in the field were formally withdrawn.

The 2015, Local Self-Government law, however, stated that the “construction, rehabilitation and maintenance of primary healthcare facilities …” was a municipal function, maintaining exactly the same definition as in the previous law.11 Despite the declarations of the law, the majority of municipalities do not in fact maintain primary healthcare facilities. MoHSP retains full authority over the management of primary healthcare services, although some local governments do deliver small scale maintenance work for primary healthcare centers.12 Local government discretionary spending on primary healthcare has doubled between 2018 and 2019, while capital expenditure from own local resources has increased more than 5 times in this period. Central government transfers to local governments in the sector appear to have been discontinued since 2018. This has led to a decline in total local government spending in healthcare.

8 MTBP 2019 – 2021 projections estimated the Social Fund allocations to increase to 200 and 250 million ALL for 2020 and 2021 respectively. 9 DCM 150, dated 20.03.2019 10 Municipalities are mandated to hire one social worker per at least every 10,000 inhabitants, at least one child protection officer in each administrative unit; one or more social administrators to manage the social assistance and disability cash benefits; as well as child gender and domestic violence officers. These costs are typically not included in the social care budget programmes, but in the general public services budget programmes. 11 Law 139/2015, Article 23/13. Responsibilities of local authorities are also reiterated in the Law 10107/2009 “On Healthcare in the Republic of Albania”, which sets out local governments’ responsibilities to “administer” primary healthcare facilities as well as ensure healthcare services for their communities (Article 5). 12 Mid Term Review, National Crosscutting Strategy for Decentralisation and Local Governance, Ministry of Interior, 2018.

Conclusions and recommendations

Independent of which particular responsibilities are decentralized, it is crucial that those that are, be accompanied by revenue assignments that actually make it possible for local governments to fulfill the responsibilities they have been assigned. The lack of appropriate revenue assignments has undermined the real, functional decentralization of both social care services and primary healthcare in the last fifteen years.

The financing mechanism for social care services and primary healthcare needs to be streamlined and made more transparent, while ensuring some degree of fund adequacy as well as sustainability for municipalities. A careful analysis of possible options indicates that the best possible option going forward would be to introduce a block grant to municipalities to finance social care services as well as maintenance of primary healthcare facilities. The block grant would ideally be distributed based on a set of policy-neutral criteria, such as the size of population, vulnerable groups, as well as service accessibility and it should integrate all existing financing modalities into one. In the short term, the block grant should incorporate a set of transitional safeguards to avoid potential shocks to the budgets of individual municipalities. The block grant, should be anchored to the GDP, as in the case of the unconditional grant. This is critical to ensure predictability and stability of financing over time, and most importantly a gradual in

1. INTRODUCTION

Territorial administrative reform and the adoption of a new Law on Local Self-government in 2015 paved the way for the extension of the role of local government authorities in the social domain. In 2016, local governments were transferred new powers to regulate and administer preschools, and social protection in Albania, along with responsibilities to maintain primary health care facilities. This means that local governments are now solely responsible for preschool education. In the area of social protection, local governments have become exclusively responsible for the establishment and administration of social welfare services at the local level for people with disabilities, disadvantaged groups, children and women that have suffered violence, abuse and trafficking, mothers or parents with many children, and the elderly. Local governments are also responsible for building and administering social housing and social service centers. In the area of public health, local governments are now exclusively responsible for the maintenance of primary healthcare premises and facilities and some public health functions (mainly information and awareness campaigns). Early childhood education plays a key role in social inclusion, cohesion, and particularly the life chances of children coming from disadvantaged households. Additionally, the lack of access to public preschools is considered an important factor impeding women’s participation in the labor market. The lack of adequate social support or protection can have adverse effects on people’s lives and life perspectives and may be conducive to seclusion, marginalization and radicalization. By the same token equal access to decent local primary health care facilities contributes substantially to improving the quality of life of citizens and in reducing social imbalances and the risks of marginalization.

Increasingly, municipalities have the responsibility to integrate social inclusion policies in their overall development vision and plans, recognising that social inclusion is essential to enabling broader goals for economic growth and development and addressing multiple underlying factors for poverty and deprivation. One of the key challenges that local governments face with these important social sector functions is the lack of adequate funding and an inconsistent and non-transparent system for allocating available funds to municipalities, leading to insufficient and inadequate services to citizens.

This policy note aims at reviewing the current systems for financing local government responsibilities in social protection and health. It provides an overview of the legal, organizational and financial framework for local governments’ responsibilities in social protection and health , including concrete recommendations for improving the systems which finance these responsibilities. This note maps local government responsibilities in these sectors in order to help policymakers and practitioners have a better understanding of the major challenges associated with their current organization and financing. And it suggests ways to make the financing and governance of these responsibilities more consistent, transparent, equitable and predictable.

2. ASSIGNMENT OF RESPONSIBILITIES

2.1 Social protection Social protection policies in Albania are constructed around three distinct pillars. These include social insurance pension for the elderly and other types of pensions, cash benefit programs for the poor and disabled, as well as non-cash social care services for vulnerable people. The main programs are social insurance, as well as two large cash benefit program supporting poverty alleviation and people with disabilities, respectively. Social insurance is managed entirely by the Social Insurance Fund. But responsibilities are divided between the national government and local governments with respect to both other cash benefits and the delivery of social services. Social care services have limited coverage in the country and were very limited until the late 90s. Since the early 2000s, the national strategic framework on social protection has recognized that local governments are best equipped to provide social services to citizens because they are closer to them, better understand their needs, and are better able to tailor services to those needs. The Law on Local Self-government13 of 2015 sets out the functions and authorities of local governments. In the area of social services, municipalities are responsible for establishing and managing of local social services and building and administering social care centres and social housing. The law also requires municipalities to establish a “social fund for financing social services”, in cooperation with the Ministry in charge of social affairs. Notably, as of 2015, local governments have no role in administering cash benefit programs for social protection and poverty alleviation, which were previously delivered as a shared function.14 The 2015 law on local self-government does not explicitly define “own” or “exclusive” functions of municipalities. Nevertheless, the spirit of the law suggests that the municipalities shall exercise their functions as “own” functions, fully and independently, in line with the European Charter of Local Autonomy.15 In contrast, the law defines “delegated” functions, which are central government authorities delivered by the local government. Until 2015, local governments exercised their responsibilities for social services as an own function; while their role in administering cash benefits for poverty alleviation was considered a shared function. Local governments had a defined responsibility to determine eligibility for the allocation of social assistance cash benefits based on objective criteria established by the law. But the program was owned by the national government and fully financed by the state budget. The system had many faults, including a rigid framework for the evaluation of eligibility as well as inaccurate targeting of the poor. In contrast, local government responsibilities in the delivery of social care services have gradually increased. Social care services are non-cash interventions supplied to individuals, families and communities to help reduce poverty, mitigate risks, improve inclusion and integration, and to help people live full and satisfying lives. At the individual level social care services in Albania are designed to serve adults and children with disabilities, the old and infirm, people with chronic illness, children without parental care or in conflict with the law and people at risk of physical or sexual abuse. Social services are also provided to reduce labor market impediments to vulnerable people.

13 Law 139/2015 “On Local Self-Government”, Article 24 14 Article 11.c, Law 8652/2000, repealed. However, Law 57/2019 “On social assistance in the Republic of Albania” defines a set of responsibilities of the local government for the management of the social assistance programme, which entail, as a minimum, significant administrative costs for municipalities. 15 Ibid, Article 22. In addition, the law sets forth the definition of function as the “scope of activity for which the local self- government is responsible and has the legal authority to exercise freely, fully or partially …”

The Albanian social care system provides public and non-public services for persons in need of residential and day care services. Public social services are provided mainly through residential and day care centres and financed by the state or local government budgets. Social care services were first decentralized in 2005. Around nineteen, mainly residential facilities such as children homes, elderly homes, and centers for people with disabilities were transferred to municipalities. Municipalities were made the owners of these facilities and made responsible for their physical maintenance and improvement. Many of them were already in a deteriorated state and had high operating costs. At the time (2005), it was agreed that at least for a transitional period, these institutions would be financed through conditional grants from the state budget. Fifteen years later, however, they are still being financed directly by the Ministry in charge of Social Affairs, undermining the development by municipalities of any real sense of responsibility for them. Since 2002, successive governments have initiated a number of efforts to reform the provision of social services but the process has been patchy and a viable formula for the funding of social care services has yet to be articulated. Social care services account for a small percentage (less than 5%) of the total expenditure on social protection, where the majority of annual expenditure (95%) is accounted by social assistance (Ndihma Ekonomike) and the disability benefit (PAK)16. In 2015, the Law on Local Self-Government assigned a set of social protection responsibilities to municipalities. They have a primary role in the establishment and management of social care services for vulnerable people17. But they do not have any role in the management of social protection cash- based programs (social assistance and disability). A reformed social assistance program entered into force since 201818, overhauling the roles and responsibilities of local governments, which now act purely as agents of the central government in performing a delegated function. Municipalities act on behalf of the central government to receive applications and pay out benefits. They no longer have oversight of the social assistance programme, or discretion in decision-making over eligibility (run through a computerised system based on a proxy-means tested scoring formula); nor the size of benefits once eligibility is established.19 Local governments, however, have a series of administrative responsibilities to manage the process of applications as well as follow-up with applicants and/or beneficiaries through spot checks. Social administrators at municipal level are expected to carry out assessments of the households in need and refer them to other services at the local or national levels. In addition to the centrally managed social assistance programme, each municipality is entitled to allocate social assistance benefits to households or individuals that have not been accepted in the national scheme, up to an amount not exceeding 6% of the funds allocated for this purpose by the national budget.20 Similarly, local government responsibilities in the management of disability benefits are also those of a paying agent on behalf of the central government and have not changed over the course of the years. Local government responsibilities in the social policy area are further specified in the Law on Social Care Services21. This law defines the types of social care services that can be provided; eligibility criteria for beneficiaries; as well as roles and responsibilities of institutions in charge, including municipalities. The law stipulates the distribution of authorities between institutions at central level, which retain responsibilities for the management of a set of “specialised” social services as well as

16 Data from 2017, indicate that local governments spent about 0,9% from their local government budgets’ discretionary sources in social care services. In addition, NGOs provide a range of services, which are often funded by development partners. In this case as well there is no evaluation available of expenditures at the national level. 17 Law 139/2015 “On local self-government in Albania”, Article 24. 18 In 2015 in the regions of Tirana, Elbasan and Durres, where it was piloted for three years prior to its formal adoption. 19 The criteria for eligibility, as well as size of benefits are determined through a Council of Ministers Decision. 20 The block grant finances the additional 6% to support people who have not been deemed eligible from the central scoring eligibility system. Municipalities may freely top-up state budget funds for cash benefits from their own budgets. 21 Law 121/2016, “On Social Care Services in the Republic of Albania”

monitoring and inspection authorities; and municipalities which have the responsibility to plan, finance and deliver a at least a minimum set of services. The central government, through the Ministry of Health and Social Protection retains the prerogatives of policy design and overall oversight in the social protection domain, including social welfare services. The State Social Service (SSS), a central executive agency, is in charge of monitoring standards and serves as an appeal institution for social care services. At the same time, SSS is in charge of delivering some social care services for the nation as a whole, typically highly specialised and/or sensitive services. The Labour Inspectorate is in charge of inspection of social care service standards. Local governments are expected to follow some key steps for reforming social care services. This includes adopting local social plans, establishing a minimum basket of local services, and the operation of community - based services and other important elements, which are mentioned for the first time in the legal framework for the sector. The 2017 Law on the Rights of Children further clarifies the institutional responsibilities and processes for the protection of children. Secondary legislation is currently being drafted supporting implementation of both laws. While the Social Service Law has been widely considered as an important step towards a meaningful reform, many problems persist, particularly those concerning to the financing and sustainability of services. The Law on Social Care Services state that social care services can be funded from the following sources: • The state budget (delegated funds) • Funding from local budgets • Other revenues/sources earmarked for this purpose • Service fees from beneficiaries The local government and social care service law requires municipalities to establish a “Social Fund” composed of all the above-mentioned sources of financing, as well as funding from non-public contributors (i.e. non-governmental organisations, development programmes or private donors). In the current legal framework, the concept of a local Social Fund essentially earmarks funding for social care services. The concept of a national Social Fund to support local care services was introduced in 2005, but never implemented. In 2018, and for the first time, the Council of Ministers passed a decision to establish a national Social Fund22, and the first – competitive - call for proposals to the fund was opened in mid-2019, managed by the Ministry of Health and Social Protection (MoHSP). Overall, in terms of mandates, the legal framework appears to assign clear responsibilities to municipalities in planning, budgeting and managing social services. Nevertheless, the instruments for delivery remain vague. The concept of a minimum, mandatory set of services at the local level was actively embraced – and endorsed – by the central government. But at the same time the national government never defined how these mandatory services should be financed. The lack of experience in social care services leads to incomplete regulatory frameworks and standards in social service delivery; as well as services that are both few in number and varying in quality. Services provided through the non-public sector – mainly financed by international NGOs and charities have attempted to fill the gaps in public service provision as well as introduced models of service delivery away from the traditional residential model of public services delivered by the central government until the early 2000s. However, NGOs are highly dependent on donor funding and as donor funding shrinks, the sustainability of service provision is undermined. As of 2019, at least 24 municipalities did not provide any social care services, while others faced challenges with regard to service outreach, human and financial resources allocation, quality and sustainability.23

22 Decision of Council of Ministers “for the Establishment and functioning of the Social Fund”, No. 111, date 23.02.2018 23 Medium Term Review of National Strategy for Social Protection 2015 – 2020, Ministry of Health and Social Protection, 2019

2.2 Healthcare The healthcare system in Albania is mainly public, and provides the majority of services available for prevention, diagnosis, treatment and rehabilitation. Diagnostic and curative healthcare services are organised in three levels: primary healthcare (Ambulatory Centres in 61 municipalities); secondary healthcare (specialised polyclinics and regional hospitals) and tertiary healthcare (university and specialised hospitals). Public healthcare and health promotion services are delivered through the primary healthcare system, under the supervision and guidance of the Public Health Institute. The Ministry of Health and Social Protection is the lead authority in policy development, regulation and the coordination of stakeholders in the health sector. A number of institutions subordinated to MoHSP also provide health-related services at the national and regional levels. The Institute of Public Health (IPH) is the highest technical authority in public health issues and is responsible for study and monitoring of risk factors; surveillance of communicable disease as well as immunization programs. IPH also carries out health promotion activities and training in public healthcare issues. IPH coordinates the public healthcare system in cooperation with 12 Regional Departments of Public Health and 24 Regional Departments of Health. In the district of Tirana, a pilot initiative for the reorganization of the primary healthcare system has led to the establishment of the Regional Health Authority, as a public institution with some level of autonomy responsible for the management and delivery of primary healthcare services as well as other specialized ambulatory or hospital services. The Fund for Compulsory Healthcare Insurance is the key financial institution in the healthcare system. The Fund finances all healthcare services in primary and hospital healthcare system. It is financed through compulsory health insurance (payroll taxes) as well as through general taxation (69% of total financing in 2018). The financing of the primary healthcare system accounts for approximately 24% of the Fund’s expenditure. 24 Health strategies are governed by the National Heath Strategy (2016 – 2020). This strategy emphasizes the importance of improving the public financing for all layers of healthcare system by introducing a single payer system that creates competition in the provision of health care services. The single payer finances the integrated network of public healthcare providers at primary, secondary and tertiary levels, by supporting the autonomy in the administration of providers and increasing the presence of local authorities in the governance of healthcare networks. Health inequalities, including demographic, socio-economic, and gender considerations have been identified as key areas to address. The strategy also emphasizes the synergy between the development of health and the inclusive and economic growth and development. In this regard the improvement of access to health care services for vulnerable groups such as girls and women, Roma, the elderly, people with disabilities reinforces the need to improve quality and outreach of health services in partnership with municipalities and other and local partners. The network of primary healthcare centers is composed of more than 400 health centers across the country, in the 61 municipalities. On average healthcare centers provide services to 8,000 – 20,000 patients, depending on whether they are located in urban or rural areas25. Primary healthcare centers, deployed at each administrative unit (former commune) level, provide the basic package of services as defined by the Ministry of Health and Social Protection26, including emergency services; health services for children, health services for women of reproductive age, health services for adults, health services for the elderly; mental health services as health promotion and education.

24 Annual Report of the Fund for Compulsory Healthcare Insurance 2018, available at https://www.fsdksh.com.al/images/2019/Botime_09092019/Raport_Vjetor_2018_09092019/RaportiVjetor2018Shqip151 12019Rz.pdf . 25 Primary healthcare in Albania: rapid Assessment, World Health Organisation, 2018. 26 Basic package of services in primary healthcare, Ministry of Health at http://shendetesia.gov.al/wp- content/uploads/2018/02/Paketa_e_rishikuar_e_miratuar.pdf

Between 2004 and 2005, local governments were assigned the responsibility for the management of the physical facilities and certain operational aspects in primary healthcare, as a shared function. Among other, this entailed the beginning of the process for the transfer of ownership over primary healthcare facilities to the local government level. However, the government did not develop a clear and comprehensive strategy on the primary healthcare as a shared function. Similarly, there was no clear definition in the law of the respective responsibilities of the two levels of government in the area of primary healthcare. Local government functions for the maintenance and operation of primary health care facilities had elements of delegated tasks, without any room to exercise discretion in carrying out their functions. Local governments paid, but did not manage expenditures that were transferred and controlled by ministry staff in the form of earmarked grants. As a result, accountability for the condition of these facilities fell between the two parties, with neither accepting responsibility.27 Central government policies regarding the local government role in primary healthcare have changed from year to year, with the functions – and the funds to perform them - being decentralized and recentralized several times since 2005. The frequent changes in policy were the result of ongoing structural reforms in the entire health sector combined with a high degree of mistrust about the capacities of local governments. The high policy unpredictability proved to be detrimental to the performance of local governments and in 2009 all their responsibilities in the field were formally withdrawn. The 2015, Local Self-Government law, however, stated that the “construction, rehabilitation and maintenance of primary healthcare facilities …” was a municipal function, maintaining exactly the same definition as in the previous law.28 Despite the declarations of the law, municipalities do not in fact maintain primary healthcare facilities. MoHSP retains full authority over the management of primary healthcare services, although some local governments do deliver small scale maintenance work for primary healthcare centers.29 The national health strategy recognizes the territorial and administrative reform as an opportunity to strengthen accountability in healthcare services and to devolve functions to the municipal level. But the actual transfer of powers to municipalities is only foreseen in the medium term. A few municipalities, however, have already started to invest in the healthcare system by setting up integrated centers to provide social as well as primary healthcare services and to complement the existing primary healthcare service. The process of transfer of ownership of primary healthcare centers to municipalities is administratively burdensome and bears significant costs for the municipalities. Nonetheless, some municipalities have made good progress in this process, including through assistance of international partners.30 Infrastructure in the healthcare system needs significant improvement, despite considerable investment in the recent years. The Ministry of Health and Social Protection is carrying out a programme for the reconstruction of 300 healthcare centers across the country until 2021; alongside continued improvements in hospital infrastructure and programmes for the placement of medical doctors outside the major cities.

27 Conway F, Ymeri S., “Status report on Decentralisation in Albania, The Urban Institute, 2007 28 Law 139/2015, Article 23/13. Responsibilities of local authorities are also reiterated in the Law 10107/2009 “On Healthcare in the Republic of Albania”, which sets out local governments’ responsibilities to “administer” primary healthcare facilities as well as ensure healthcare services for their communities (Article 5). 29 Mid Term Review, National Crosscutting Strategy for Decentralisation and Local Governance, Ministry of Interior, 2018. 30 See, for instance, “Maintenance of PHC Infrastructure: Introducing a more inclusive approach of key stakeholders”, HAP project, 2020, available at http://www.hap.org.al/wp-content/uploads/2020/04/Policy-Brief-Mirembajtja-e- QSh_ve_print.pdf

3. FINANCING MECHANISM

Decentralisation is seen as an effective means to increase the quality and availability of services, to allocate resources to where the needs are, and to increase local participation in decision-making. Proponents of decentralisation31 argue that decentralisation has a positive impact on efficiency, by enabling different jurisdictions to choose the mix of services that most reflect the preferences of the local populations. This is best achieved through the principle of subsidiarity, which allocates responsibilities for the provision of services to the lowest level of government that can deliver the services effectively and efficiently. These considerations have been at the heart of the decentralisation policy in Albania, where local governments are considered to be able to provide services in a more efficient way due to their proximity with the beneficiaries. However, there has been a lack of clearly designed decentralization strategy and the assignment of responsibilities has not always been followed by the assignment of financial means needed to meet those responsibilities. Furthermore, in the case of social services, benefits of decentralisation are not always clear – cut. Income redistribution policies such as social welfare are often thought to be the domain of the central government. Local governments may not sustain heavy welfare programs on their own without risking attracting clients from other jurisdictions, which would in turn increase the costs of these programs. However, implementation of social welfare programs is often left to local governments, while the ultimate responsibility for financing these programmes rests with the central government. Cash benefit programmes are financed by the central government in almost all European countries; while the models for the delivery of social care services vary considerably from fully centralised to fully decentralised in different European countries. There is no single best assignment of responsibilities, and different models work in different contexts. Considerations of welfare distribution and public benefit are also relevant in the primary education and healthcare sectors. In these sectors, spillovers are significant, therefore some components of the policies will always remain national responsibilities. When such services are local, the central government may help (or require) local governments provide services to a certain standard, for example, through grants conditional on the provision of the requisite levels of service.32

3.1 Social Care Services Social protection spending in Albania amounts to 9,3% of GDP, significantly lower than the EU average of 28%33. Spending is dominated by social insurance outlays (contributory program), which account for over 80% of total spending between 2015 and 2019. The other two main programmes in social protection are the social assistance and the disability benefits, which account on average for 13% of total public social spending during the same period. The remainder of spending in the social policy area is dedicated to active and passive employment programmes, currently managed by the Ministry of Finance and Economy (about 1% of the total budget) as well as social care services, emergencies and the management of the social protection strategy. (Error! Reference source not found.).

31 Oates, W.E. (2005) Toward a second-generation theory of fiscal federailism. International Tax and Public Finance, Vol 12, p349-373 32 Bird, Ebel, Wallich, (1995) Fiscal Decentralization: From Command to market in Decentralization of the Socialist State World Bank 33 European System of Integrated Social Protection Statistics (ESSPROS).

Table 1 Social Protection Spending in Albania 2015 - 2021

Budget programme Year million ALL 2015 2016 2017 2018 2019 2020* 2021* Social care services (local discretionary 493 528 684 842 1 135 1 135 1 135 spending) Social Protection Budget Programme 21 442 21 283 21 614 21 445 23 542 23 987 24 926 Of which: cash assistance programmes 17 662 20 026 20 714 20 671 21 100 21 000 21 300 Of which: baby bonus at birth 1 870 2 000 2 500 Of which: Social care services and other 3 780 1 257 900 988 988 987 1 126 management costs in SP34 Social Inclusion 93 68 88 13 Employment Services 1 623 1 807 1 486 1 228 1 535 1 951 2 151 Of which: unemployment benefits (passive) 615 691 346 336 540 600 600 Emergencies 1 419 1 266 1 109 1 542 1 503 434,25 1 020 Subtotal social sector spending (non- 24 977 24 884 24 893 25 057 27 715 27 507 29 232 contributory) Social Insurance Fund (pensions) 107 309 114 276 119 081 125 364 130 927 137 468 142 965 Total social protection spending 132 286 139 160 143 974 150 421 158 642 164 975 172 197 GDP 1 434 307 1 475 251 1 552 886 1 647 625 1 705 246 1 793 466 1 905 129 Total General Government Budget 433 697 440 241 461 410 476 147 519 577 549 374 554 858 Social protection (without social insurance) In % of GDP 1,7% 1,70% 1,60% 1,50% 1,50% 1,40% 1,50% In % of GG budget 5,8% 5,70% 5,40% 5,30% 5,10% 4,90% 5,10% Social protection cash programmes In % of GG budget 4,1% 7,7% 7,7% 7,6% 7,5% 7,4% 7,3% In % of social spending (non contr.) 70,7% 80,5% 83,2% 82,5% 82,9% 83,6% 81,4% In % of social care budget programme 82,4% 94,1% 95,8% 96,4% 97,6% 95,9% 95,5% (central) Local government (discretionary) social spending In % of social spending (non contr??) 2,0% 2,1% 2,7% 3,4% 4,1% 4,1% 3,9% In % of social care budget programme (central) 2,3% 2,5% 3,2% 3,9% 4,8% 4,7% 4,6% 108,8 198,5 115,0 100,8 In % of non-cash central social spending 13,1% 42,0% 76,1% % % % % Source: Ministry of Finance Treasury data. For 2020 – 2021: Budget 2020 tables. * Figures for 2020 – 2021 are estimates. For local budget discretionary spending, a spending level equal to 2019 has been assumed for 2020 and 2021.

The social protection budget programme, under the Ministry of Health and Social Protection35, is the main programme that supports social welfare policies and provides to local governments. The two

34 State budget expenditure on non-contributory social protection programmes are channelled through the “Social Protection” budget programme in the Ministry in charge of social affairs. This programme includes direct cash assistance programs, such as poverty, disability and baby bonus benefits; administration expenditures for the State Social Service, expenditure for social care centers; as well as other administration costs, including in years 2015 - 2016, investment in the management information system for the administration of the cash benefit programmes. 35 Previously the Ministry of Welfare and Youth.

main cash benefits programmes are channelled through this budget programme and are delivered through the local government, which acts on behalf of the central government. The social budget programme is dominated by the cash benefit programmes for poverty alleviation and disability, accounting for over 95% of the total budget programme during the last three years.36 The remainder 4 - 5% of total budget allocations supports all activities related to social care services, including day-to-day management of the Agency for the Protection of the Rights of Child and the State Social Service, as well as other administration expenditure, including investment in the new Management Information System for the administration of the cash benefit programmes. State budget financing for central and local social care services channelled through the social protection budget programme has fluctuated around 600 – 700 million lek in recent years. Multiple financing streams for social care services exist, following fuzzy lines of accountability, which mirror the different stages of policymaking in the delegation of social functions. Three different financing modalities are implemented within the Ministry in charge of social policy alone. Other financing streams originate from the Ministry of Finance, alongside annual transfers to local governments; as well as financing from discretionary resources of the local budgets. (

Table 2).

Table 2 Financing modalities for social care services

Institution in Ministry in Ministry in charge of Ministry in Ministry in Ministry of Local charge charge of social policy/ charge of charge of Finance and government social policy/ State Social Service social policy social policy Economy discretionary State Social budgets Service Recipient 12 national 17 de jure decentralised At least 6 Local 6 local Local social social care social care service regional councils government governments services services, mainly institutions since 2006 delivering with social care for day-care residential; not specialised social plans in place social service Matching funds all are care services in from 2019 centres, for de-jure specialised cooperation typically locally decentralised; services with NGOs established de-facto central through NGO social care collaborations services and transferred Sporadic small to municipalities contributions to NGOs Modality SSS allocates SSS allocated funding Unclear – funds Social Fund Specific Depending on funding based based on predetermined are transferred transfer/ loosely structure at LG on appropriations, in the to the regional earmarked level: either predetermined same fashion as for council in the transfer topping budget appropriations national social care form of a up the state allocation to centres. Funding is fully transfers for budget general reporting conditional and detailed households and purpose budget to the line item level. individuals. transfer to local institutions or Covers staff salaries and governments centralised maintenance only. management at headquarters Approximate 2018: 242 2018: 438 million ALL 2018: 59 million 2018: N/A 2018: 89 million 2018: 842 budget million ALL ALL ALL million ALL 2018/2019 2019: 443,8 million ALL 2019: 150 2019: 266,5 2019: 72 million million ALL 2019: 88,7 2019: 1,13 million ALL ALL appropriated in million ALL billion ALL 2019. Unclear how much was allocated (roughly 6,7 million for 6 municipalities)

36 The baby bonus programme, a new cash assistance programme for child benefits introduced in 2019 is administered fully by the central government.

The Ministry of Health and Social Protection provides funding to 29 social care institutions in the country, of which 12 are national social care institutions and 17 social care services that were de jure decentralised in 2006 but which de facto remain centrally managed. The Ministry itself finances specialised social care services delivered at the regional level by the regional councils of Tirana, Gjirokaster, Vlora, Berat and Elbasan. The financing modalities for these services are based on ad-hoc Memoranda of Understanding entered into with the specific regions over the years. Meanwhile, since 2015 the Ministry of Finance and Economy allocates financing for 6 relatively new social care service centres established locally; in the framework of the specific transfers37 accompanying the (formula – based) general purpose transfer to the municipalities. (Table 1) It is unclear why a specific policy choice was made to fund six of the 61 municipalities through specific transfers for local social services; while a status-quo was maintained in the financing arrangements for seventeen local services in 13 municipalities that continue to be funded with conditional grants through the State Social Service. Local government financing for social care services has steadily increased in the recent years, from 400 million in 2015 to more than 700 million in 2018 and 1,2 billion in 2019. At an average annual growth of more 20%, financing from discretionary local budget funds is projected to become the largest source of financing for social care services in the medium term. Although local government financing for social care services is increasing at a rapid pace, it is, however, concentrated in a handful of relatively ‘wealthy’ municipalities. There are marked disparities in the distribution of discretionary spending across municipalities. In 2019, more than 40% of all discretionary spending on social care services came out of the municipalities of Tirana and Durres; with Tirana spending twice as much as Durres; and another 38% of discretionary spending came out of the municipalities of Elbasan, Shkoder, Berat, Korçe and Kavaja. (

37 The specific transfers are loosely earmarked transfers (i.e. conditional block grants) allocated to local government for newly transferred functions, for the first time in 2015. The concept of “specific transfer” was later defined in Law 68/2017 “On local government finance”. Specific transfers are earmarked by sectors, but local governments have some degree of discretion in how they choose to spend them within the given sector and can carry any unspent funds forward to following financial years.

Table 3).

Table 3 Expenditure on social care services in 2019, by source of financing and municipalities

Municipality Discretion Specific Social State Total Populatio Total Discreti ary transfers Fund budget funds n* spendin onary spending transfer transfers g per spendin on social for social capita g per care care capita services in services 201938 Tirane 314 209 - 1 394 32 707 348 311 638 716 545 492 Durres 162 918 - - 28 380 191 298 219 604 871 742 Elbasan 55 716 21 108 1 743 - 78 567 163 000 482 342 Shkoder 51 016 19 564 92 329 162 909 157 532 1 034 324 Berat 38 094 23 731 - 23 961 85 785 71 983 1 192 529 Kavaje 43 799 - - 31 064 74 863 53 145 1 409 824 Korce 38 997 - - 53 298 92 294 92 269 1 000 423 Lezhe 36 446 - 1 103 11 192 48 741 79 648 612 458 Bulqize 30 836 - - - 30 836 33974 908 908 Vlore 26 689 1 985 37 447 66 122 133 941 494 199 Kucove 19 218 2 622 - - 21 840 38 614 566 498 Diber 20 244 - - - 20 244 66322 305 305 Kruje 19 674 - - - 19 674 66641 295 295 Librazhd 18 496 - - - 18 496 35 444 522 522 Vau I dejes 0 14 52139 - - 14 521 36 767 395 0 Mat 13 107 - - - 13 107 30 551 429 429 Kamez 13 078 - - 7 920 20 998 113 657 185 115 Lushnje 15 700 - 274 - 15 974 97 656 164 161 Shijak 12 456 - - - 12 456 33518 372 372 Ura Vajgurore 11 652 - - - 11 652 49 887 234 234 Gjirokaster 10 799 - - 33 670 44 470 35 680 1 246 303 Malesi e madhe 8 815 - - - 8 815 38 249 230 230 Mirdite 8 261 - - - 8 261 26 410 313 313 Peqin 7 125 - - - 7 125 30 169 236 236 Devoll 7 010 - - - 7 010 31275 224 224 Kolonje 6 540 - - - 6 540 13413 488 488 Skrapar 6 380 - - - 6 380 13 880 460 460 Cerrik 6 000 - - - 6 000 33503 179 179 Kurbin 5 694 - - - 5 694 54 853 104 104 Sarande 5 486 - - 35 740 41 226 32 963 1 251 166 Polican 5 441 - - 22 615 28 055 12 817 2 189 424 Fier - - - 1 743 1 743 145 823 12 - Roskovec - - 175 - 175 25 035 7 - 15 municipalities 33 541 2 498 - - 33 541 339 647 99 91 Other 13 LGUs - - - - - 264 646 - - Total 1 046 271 88 713 6 674 412 065 1 553 724 3 311 231 469 343 Source: Ministry of Finance, Treasury. Figures are in 000 ALL. Population data is based on the weighted average between census and administrative data used for the unconditional formula.

38 Discretionary spending refers to funds originating from the general-purpose transfers and specific transfer or own revenues of municipalities. Some municipalities include expenditures on creches and kindergartens under the social service budget programmes, so discretionary spending on social services may be inflated in some cases. 39 The specific transfer for the municipality of Vau I Dejes in 2019 was 19,19 million Lek. It appears to have spent only 14,5 million lek transferring the remainder to the following financial year.

Smaller municipalities will continue to depend on state budget resources to finance social care services. This does not only include existing centres of social care services, but the often overlooked – and substantial - costs related to the management of services – including personnel costs associated with hiring social workers at the local level40.

3.2 The Social Fund: A competitive grant mechanism The concept of a Social Fund to support the local provision of social care services was agreed upon in 2005 but not implemented. In 2018, the Council of Ministers passed a decision to finally create the Social Fund41 and a fund of 150 million ALL was allocated within the Social Protection budget for the Social Fund in the 2019 budget.42 This was complemented by a ministerial instruction outlining a competitive procedure for allocating the fund to municipalities43. The first call for proposals from LGUs was opened in April 2019 and 9 municipal proposals were selected for funding in 2019. However, only a very small disbursement of 7 million ALL was made in 2019 and this to only six LGUs. The Social Fund is expected to underpin financing for social care services at the local level, and support establishing of new services, in line with the approved social plans, ensuring their sustainability over time through a gradual shift in the mix of financing towards locally mobilised resources. Financing from the state budget may support up to 90% of the costs for the first year of the service provision; up to 60% of costs during the second year; and 30% of the costs thereafter44. It is worth noting that funding allocated for the Social Fund for the first year of its operation is quite modest. The criteria for the allocation of the Social Fund are primarily based on the criterion of the highest need45 followed by the availability of funds within the SF; percentage of matching funds from sources other than the state budget, as well as the financial sustainability of the service delivery model. The judgment criteria for each of the above are unclear and do not ensure predictability of financing for local governments. Furthermore, SF appropriations under the general Social Protection budget programme is only notional. This means that SF funds are fungible and may easily be reallocated for other purposes in this budget programme – indeed, the national government has not made a clear legal commitment towards financing social care services at the local level. The envisaged mechanism for state budget support, at decreasing levels of financing for new services over three years is intended to equalise funding across the majority of local government over the longer term, without creating an unsustainable burden on the state budget. Nevertheless, bigger and wealthier local governments are better equipped to absorb funding from a competitive mechanism. On the other hand, where the Social Fund will finance new services in relatively poorer local governments, the arbitrary and uniform financing cap may undermine longer-term sustainability of services and/or create future liabilities for the state budget.

40 Municipalities are mandated to hire one social worker per at least every 10,000 inhabitants, at least one child protection officer in each administrative unit; one or more social administrators to manage the social assistance and disability cash benefits; as well as child gender and domestic violence officers. These costs are typically not included in the social care budget programmes, but in the general public services budget programmes. 41 Decision of Council of Ministers “for the Establishment and functioning of the Social Fund”, No. 111, date 23.02.2018 42 MTBP 2019 – 2021 projections estimated the Social Fund allocations to increase to 200 and 250 million ALL for 2020 and 2021 respectively. 43 DCM 150, dated 20.03.2019 44 DCM 150, dated 20.03.2019, “On the methodology for the calculation of funds for financing social care services”. Services which have contractual agreement with the responsible ministry/MoHSP, such as the National Centres for social care services, centres offering specialised services at regional level, and Counselling Lines for Children and Victims of Domestic Violence are not subject to the above financing limitations. 45 This is broken down into 9 criteria of different weights, such population size (10%); unemployment rate (15%); number of economic aid recipients (15%); number of people with disabilities (20%); number of requests for social housing (10%); number of existing social services 10%); number of clients from existing social services (10%); number of organisations providing social services (5%); as well as delivery of new services in line with the basket of services (5%). It is unclear whether these criteria are going to be used for positive or negative discrimination.

3.3 Primary Healthcare The role of Albanian local governments in primary healthcare is very modest. Although municipalities have not been formally assigned responsibilities in the area of primary healthcare, some have continued to commit modest amounts of funding to the sector, for small investments, repair work and other administrative services. Local government discretionary spending on primary healthcare has doubled between 2018 and 2019, while capital expenditure from own resources has increased more than 5 times in this period. Central government transfers to local governments in the sector appear to have been discontinued since 2018; which had led to a decline in total local government spending in healthcare.

Table 4. Expenditure assignment in primary healthcare 2011 2015 2016 2017 2018 2019 Local discretionary spending 13 151 12 827 7 712 15 171 12 876 26 250 of which capital expenditure 4 307 6 044 228 5 330 2 520 12 960 Capital exp. in % of total 33% 47% 3% 35% 20% 49% Local earmarked spending (central budget transfer) 72 279 31 965 47 290 37 155 0 0 of which capital expenditure 72 279 31 965 47 290 37 155 0 0

Capital exp. in % of total 100% 100% 100% 100%

Ministry of Health 8 351 711 9 291 005 8 459 735 6 922 087 8 721 581 7 814 460 of which capital expenditure 482 483 367 786 371 221 63 308 1 005 588 721 500 Capital exp. in % of total 6% 4% 4% 1% 12% 9% of which transfers to Health Fund 7 812 000 8 859 000 8 020 000 6 781 600 7 638 000 7 010 836

Health Fund 14 057 848 17 250 235 19 434 649 22 666 274 19 215 000 25 075 199 of which maintenance 117 140 143 855 187 701 197 346 no data 141 418 Operation& maintenance expenditure in % of total 0,8% 0,8% 1,0% 0,9% no data 0,6% Total 14 682 988 17 727 033 19 929 386 22 859 087 20 311 458 25 905 073 LG expenditure assignment (in %) 0,58% 0,25% 0,28% 0,23% 0,06% 0,10%

Source: Ministry of Finance, Treasury data. For 2018, Health Insurance Fund spending is from Annual Report 2018. Data in 000 ALL.

The primary healthcare sector is financed through the Compulsory Health Insurance Fund, a special fund which is partially financed the state budget (MoH) and partially through health insurance contributions. The Fund transfers funding to all primary healthcare centers in the country to cover personnel costs, the cost of basic health package services provided therein as well as very limited maintenance funds (less than 1% of the total). Although Primary Healthcare Centers (PHC) budgets are described as capitated, the Compulsory Health Care Insurance Fund funds the PHC centres based on historical expenditures.46 Capital investments are in turn, still under the domain of the Ministry of Health. Investment in the primary healthcare sector appears to have increased significantly in the last two years, in line with the government’s objectives for the full refurbishment of 300 primary healthcare centers. However, maintenance costs dedicated to the sector do not seem to have increased (Table 4).

46 WHO, 2018, Primary Healthcare in Albania: Rapid Assessment.

4. CONCLUSIONS AND RECOMMENDATIONS

There is no single best way to divide responsibilities for any particular public service between national and local governments. Albania, like many other Western Balkan and European countries has decided to decentralize the bulk of responsibilities for social care services to local governments. In primary healthcare, Albanian local governments retain very limited responsibilities. This is unlike many other European countries where local governments have varying degrees of authority over the management of primary and secondary healthcare facilities. Independent of which particular responsibilities are decentralized, it is crucial that those that are, be accompanied by revenue assignments that actually make it possible for local governments to fulfill the responsibilities they have been assigned. The lack of appropriate revenue assignments has undermined the real, functional decentralization of both social care services and primary healthcare in the last fifteen years. The local government expenditure share in social care services has significantly increased in recent years. However, the share of expenditure does not, in itself, indicate the degree of decentralization. In many cases municipalities act as payment agents on behalf of the central government, and have little discretion or decision-making authority over the way the funds are spent in their fields of responsibility. This is the case of municipal spending in the two social protection cash benefit programmes in Albania for poverty alleviation and disability benefits. Municipalities have a central role in the management of social care services, which is a municipal own function. An integrated transfer system needs to provide municipalities with sufficient policy discretion and financing flexibility. The financing mix for social care services is, at present, quite complicated and does not ensure transparency nor predictability for municipalities. In theory, this is a sector that should be continued to be supported by state budget funds. Municipalities may be able to provide services more efficiently, but the central government retains the responsibility to finance the function going forward. Moreover, it is often the case that the need for social welfare programs is higher in poorer communities, which have comparatively less resources than bigger and wealthier communities. The system of intergovernmental grants in the sector should be streamlined and simplified. Going forward, the government should consider putting in place a more equitable and transparent system of intergovernmental transfers. Earmarked state budget transfers tend to indicate stronger responsibility of the central government and lower local autonomy over how to provide services. Several social services across the country, which are in theory owned by municipalities continue to be fully governed by the central government. Conditional grants for these social centers are transferred directly from the State Social Service, fully bypassing the municipality and thereby undermining any municipal authority in their management. On the other hand, unconditional or specific transfers enable more significant decentralisation, when local authorities receive freedom and flexibility in re-directing funds across programmes but limits the authority of central government over the quality and quantity of services provided at the local level. Specific transfers are block grants earmarked to the social sector. Specific transfers are not fully unconditional, however local government have discretion on how to spend them within the given sector and may carry any unspent funds forward to the following financial years, if needed. This is a marked difference with conditional grants financed through the State Social Service, which finance social centers directly on a line item basis. Only six municipalities receive specific transfers for social services, while conditional grants are used to finance seventeen social centers in thirteen municipalities. Some of the policy options to be considered by policymakers going forward include:

4.1 Financing Social Services Through the Unconditional Grant Currently social care services are expected to be financed from general purpose financing of local governments, which include locally raised revenues (tax and non-tax revenues); as well as the unconditional transfer from the state budget. The dependency ratio of local government is rather high on state budget financing, almost throughout the territory with the exception of more developed areas. The unconditional transfer is allocated based on a capitation formula corrected with certain factors such as population density and number of pupils/students in primary and secondary education. It does not include any social dimension, such as population age groups (i.e. younger or older population could be a warning signal for more service needs)47; poverty levels or similar factors. If the criteria for the allocation of the unconditional transfer are revisited, the MoHSP could consider lobbying in favor of introducing the social dimension. This change will most likely be supported by parallel sectors such as education and eventually health. However, the introduction of too many criteria in the general-purpose grant formula may be perceived to make it too complicated and less transparent. Furthermore, the current formula-based grant has a strong (horizontal) equalization purpose – if a social dimension is introduced in the formula, policy choices will need to be made with regard to which criteria should be employed that are policy – neutral (i.e. would not distort municipal behavior for the sole purpose of increasing allocations) and representative of the vast array of social issues. The introduction of the social dimension in the state budget transfer would support local governments that have higher percentages of population in need. In turn, this would not necessarily mean that needs will be covered exhaustively. Costing of services in the minimum basket of services to be provided at the local government level will serve as a reference point to calculate if there are indeed unfunded mandates at the local level that the central government should compensate. Overall, full incorporation of social transfers into the general grant may ensure some degree of stability of funding. However, it may be quite complicated to apply in practice as it may compromise the predictability and transparency of the formula based general purpose transfer to municipalities.

4.2 Financing Social Responsibilities Through An Integrated Specific Block Transfer Social services may be incorporated into the unconditional grant in the form of a revisited block grant (i.e. specific transfer) for social care services. In the short term, it is imperative that the different transfers for all social care centers that are legally administered by municipalities be unified into one single block grant. In line with the strategic vision for the development of social care services, the social service grant system should move away from the strict control currently incorporated into the conditional grants managed by the State Social Service This would entail a specific transfer to accompany the general-purpose unconditional transfer to municipalities. In the short term, it should be considered that the block grant a) the current “specific” transfers to the 6 municipalities receiving them; as well as b) the conditional grants that are transferred to decentralized social care institutions from the State Social Service/Ministry of Health and Social Protection. In practical terms, this would mean that the funding for these social care centers would be taken out of the budget of the line ministry and transferred directly to municipalities from the Treasury. The regulatory framework grants the line ministry and SSS sufficient monitoring and inspection authorities to ensure that the service is continued to be provided within the statutory standards. This interim solution will ensure that there are no shocks to the budget of the municipalities and respective social services, while granting municipalities more leeway to manage their social care services in an integrated – and more efficient – way.

47 A proxy for the number of school-aged children has been introduced in the formula since 20xx.

Nevertheless, the current transfers to municipal social care services cover a limited number of local authorities and services thereof; and do not provide adequate tools for municipalities to establish a clear and sustainable financing strategy in the social sector. Hence, in the medium term, it is advisable that the block grant be gradually increased in order to finance services in more (or all) municipalities. Currently, MoHSP has designated the Social Fund as the primary vehicle to finance social care services at municipal level. This policy choice is valid; however, the Social Fund, as a competitive grant pool would be most effective in financing the establishment of new, and/or innovative services at local level. The gradual increase of an annual block grant for all municipalities, softly earmarked to social care, would ensure more sustainability as well as increased municipal accountability in service delivery. The block grant should move away from financing based on historical costs. The pool of the block grant for the social sector may be allocated through a specific dedicated formula, or based on other criteria such as the size of the municipality; the size of the population, and specific vulnerable groups; as well as relative access to existing services. When a formula-based block grant is introduced, transitional safeguards may be put in place to avoid any financial shocks for existing services.

4.3 The Social Fund The Social Fund could work as a competitive fund that accepts applications from local and regional authorities as well as non-public service providers. However, it is important to note that in its current form, the social fund provides a stream of earmarked funding that does not strengthen managerial autonomy of local governments. It could be a positive transitional instrument to help set up new services and/or new models of service provisions; but it should be gradually merged into a more stable and predictable form of financing for local governments, such as the annual non-earmarked transfers (see above). Going forward, it will be important for the Social Fund to establish clear application and eligibility criteria (types of projects to be funded, clear focus on innovation; eligibility open for both public and non-public authorities; need to demonstrate compliance with social development plans); establish a minimum and maximum project size to avoid very small interventions that could be covered through general purpose financing and at the same time to finance several projects each year; establish a minimum share of own contribution of the applicant into the project to ensure sustainability; as well as establish incentives for joint proposals of more than one local units in the same project (local and regional authorities – i.e. higher maximum project size). Alongside the social sector block grant, the Social Fund could be channeled to primarily establish services in municipalities where these are currently lacking. The current arrangements for the Social Fund indicate that any municipalities receiving funding thereof, are entitled to a financing amounting to 30% of the services costs from the third year of operation and on. This amount of financing should be transferred to the block grant.

4.4 Financing Municipal Functions in Primary Healthcare

In the primary healthcare area, the division of responsibilities and intergovernmental relations between the two levels of governments are relatively more straightforward than in the social sector. The basic function of local governments in primary healthcare – maintenance and building of physical facilities – is identical to their responsibility in the area of primary and secondary education. In this case, the assignment of the responsibility to the local level appears to have been done with considerations of economies of scale – and of scope – at the local level. Furthermore, the costs of service provision are not likely to be dramatically different in different localities, and the catchment area of the services are well defined within the given territories. It is unclear to what extent the general reform in healthcare management, with the introduction of the single payer system has deliberately taken into account that part of the responsibilities in primary healthcare are shared with municipalities. So far, no specific policy on financing for maintenance in primary healthcare appears to have been articulated, and how this would differ from maintenance in secondary or tertiary healthcare.

Municipalities need to secure funding for the function that is stable and predictable over time. Their responsibility in the health sector is not highly technical, nor does it require special technical skills to perform. Funding for the local primary healthcare function will need to be integrated into one of the existing financial instruments, as follows: - Allocation of funding for primary healthcare facility maintenance through the annual unconditional transfer. In this case, an analysis of the funding needs for maintenance of primary healthcare centers needs to be carried out and the total pool of funding would be added into the unconditional grant pool. The analysis should be based on cost estimates and funding needs, rather than historical cost. Given that the distribution of healthcare centers is somewhat proportional to the size of population, no major adjustments (if any) should be needed for the formula of the unconditional transfer. The drawback of this option is that the pool of the unconditional transfer is legally anchored to the GDP. Financing new (i.e. not previously included) functions through this instrument may ultimately reduce the total amount of money available to municipalities through the general-purpose grant in the medium to longer term, albeit the legal framework clearly establishes that any new functions should be financed in addition to the current levels of financing.

- Alternatively, financing for the healthcare sector may be integrated into the block grant for the social sector (see section 2 above). From a pragmatic point of view, this is a clear-cut solution that does not compromise existing general-purpose funding; while at the same time may provide a more transparent picture of the funding available for the healthcare sector. From an effectiveness and efficiency point of view, a block grant integrating social and healthcare functions may allow municipalities to think strategically and establish comprehensive healthcare and social services, which would cater even more efficiently to the most vulnerable categories of the population. Given the many interlinkages between primary healthcare and social policy; the criteria for the distribution of the social sector block grant as explained above are bound to be mostly feasible for both primary healthcare and social service grants.

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