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World Bank Document Report No. 27885-ALB Albania Decentralization in Transition (in two volumes) Public Disclosure Authorized Volume 11: Analytical Report August 2004 Poverty Reduction and Economic Management Unit Europe and Central Asia Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Currency and Equivalent Units (Exchange Rate Effective as of February 9. 2004) Currency Units: ALL Albanian (ALL) US$1.00 = ALL 106.1 Fiscal Year January I to December 31 Weights and Measures Metric System ACRONYMS AND ABBREVIATIONS ADF Albanian Development Fund ALT Agricultural Land Tax CAS Country Assistance Strategy CoM Council of Ministers DSU Direct Spending Unit EAR European Agency for Reconstruction EU European Union EU European Union FY Fiscal Year GDP Gross Domestic Product GED Group of Experts for Decentralization HII Health Insurance Institute IMF International Monetary Fund ISU Indirect Spending Unit LSBT Local Small Business Tax MoF Ministry of Finance MoLGD Ministry of Local Government and Decentralization NCD National Committee for Decentralization NFDI National Forum for Decentralization Implementation NSSED National Strategy for Social and Economic Development PRSC Poverty Reduction Strategy Credit PEM Public Expenditure Management PIT Personal Income Tax PTT Property Transaction Tax QFA Quasi-Fiscal Activities SPT Simplified Profit Tax TRHA Tirana Region Health Authorities UNDP United Nations Development Program VAT value-added tax Vice President: Shigeo Katsu Countr-y Director: Orsalia Kalantzapolous Sector Director: Cheryl Gray Sector Manager: Helga Muller/Deborah Wetzel Task Tcam Leader: Joao C. Oliveira Acknowledgements This report is intended to contribute to the debate on the decentralization strategy in Albania, and to stimulate a broader discussion on its challenges as the process moves ahead. Issues, recommendations and a possible road map discussed in this report are presented as options currently open to the country, and as a technical contribution to the ongoing debate. This report incorporates inputs from the Authorities and the donor community, but it does not necessarily represent their official position or that of the World Bank. In addition to the strong encouragement received from the Albanian Authorities, this report benefited immensely from the collaboration and frank exchange of ideas with members of the government team, especially Zyher Beci, Fran Ibrahimi, Natasha Paco, Mimoza Dhembi, Luiza Jano, Ani Dasho, and Milva Ikonomi. Also, the work benefited from comments provided by members of the country team and other Bank staff, including, especially, Kathryn Funk, Mansour Farsad, Celestin Monga, Philip Goldman, Gary Reid, William Dillinger, Brian Levy, Olav Christensen, Juela Haxhiymeri, Carine Clert, Sue Berryman, Akiko Maeda, and Verdon Staines. Contributions were also provided by Artan Hoxha, Juliana Pigey, and Albana Dhimitri. This task was managed by Joao C. Oliveira (Team Leader, ECSPE) under the general guidance of Christian Poortman and Orsalia Kalantzopoulos (Country Directors), Pradeep Mitra and Cheryl Gray (Sector Directors), and Helga Muller and Bernard Funck (Sector Managers). Stefano Piperno (I.R.E.S-Istituto Ricerche Economico-Sociali, Piemonte, Italy) contributed substantially with analytical background material. Peer reviewers were Maureen Lewis (HDNVP) and Luiz de Mello (IMF and OECD). The report was edited by Emily Evershed and processed by Alison Panton and Anita Correa. 3 TABLE OF CONTENTS 1. REFORM OF PUBLIC ADMINISTRATIVE STRUCTURE ................................... 7 A. The Administrative Structure in the 1990s ............................ 8 B. The 2000 Reforms ............................................. 8 C. Challenges and Options for Reform Implementation ....................... 11 Changing Paradigms ........................................... 12 Strengthening Institutions ........................................ 14 Overcoming Fragmentation and Building Capacity ...................... 15 Defining a Role for the Regions ................................... 18 Committing with a new credible implementation agenda and work program .......... 22 Strengthening Coordination ...................................... 22 2. ASSIGNMENT OF RESPONSIBILITIES ............................ 25 A. De-concentration versus Decentralization in Albania ................... 25 State De-Concentrated Public Services .............................. 25 The 2000 Decentralization Reform: Assigning Responsibilities to Local Governments ................................................................................................................................... 26 B. Patterns of Local Government Expenditures ......................... 33 The Functional Structure of Local Expenditures ........................ 36 The Economic Composition of Local Expenditures ...................... 38 Local Spending Disparities Across Districts ........................... 38 Local Expenditures Across Municipalities and Communes ................. 44 C. Main Issues and Challenges .................................... 45 D. Options and Recommendations .................................. 48 On the Assignment of Responsibilities .............................. 48 On the Efficiency of Local Public Service Delivery ...................... 53 On Local CapacityOn LocalCapacityBuilding...................................5 Building .. 54 On Per Capita Expenditure Disparities Across Local Self-Governing Units ..... 54 On Central Coordination 55.....................I...............55 3. REVENUE ASSIGNMENT AND REVENUE AUTONOMY .............. 57 A. The Revenue Assignment ....................................... 59 The 2002 Fiscal Reform ......................................... 60 B - Patterns of Local Revenues ...................................... 67 Disparities in Local Per Capita Own Revenues ......................... 70 Own Local Revenues Across Municipalities and Communes ............... 70 C. Main Issues ................................................. 71 D. Options and Recommendations ................................... 74 4. MATCHING RESOURCES WITH RESPONSIBILITIES ................. 83 A. Fiscal Imbalances and Transfers .................................. 83 The Economic Rationale for Intergovernmental Transfers ................. 85 Evolution of the Albanian Intergovernmental Transfer System .............. 87 B. The System of Conditional Grants ................................. 88 C. The System of General Purpose Grants ............................. 91 Distribution Formula for the Unconditional Transfers .................... 92 Allocation of the Municipality/Commune Component .................... 93 Allocation of the Regional Component .............................. 95 4 Allocation of the Compensation Funds (A) ................................... 95 D. Main Issues and Options ....................................... 97 Size of the Unconditional Transfers Pool ................................... 97 Distribution of the Unconditional Transfers ................................... 98 Allocation of Conditional Grants ................................... 99 5. THE WAY FORWARD ........................................ 103 A. The Backdrop .................................... ....... 103 B. The Accountability Framework .................................. 103 C. Policy Consistency .......................................... 104 D. Policy Sequencing .......................................... 104 E. A Road Map for Reform ....................................... 106 STATISTICAL APPENDIX ....................................... 109 5 I I I I Ii i I iI i i i i 1. REFORM OF PUBLIC ADMINISTRATIVE STRUCTURE 1.1 Although an independent country since 1912, Albania started building its democratic institutions only from the early-1990s, after almost half a century of dictatorship and centralized government. Following this, local governments were formally re-created, with some regulations passed on their competences and authorities.' However, these regulations were not implemented, and local government in Albania possessed insignificant administrative and fiscal autonomy until the mid-1990s. Since the late 1990s a more consistent decentralization approach has been designed and an implementation strategy explicitly adopted; the latter is envisaged to gradually replace the inherited centralist state with a more participatory decentralized governance system. 1.2 The 1998 Constitution of Albania establishes that local governments are founded on the principle of decentralization, and that the relationship between the state, the regions, and the local govemments is grounded on autonomy, legality, and cooperation. 3 Since the late-1990s, Albania has taken major strides in setting up a basic legal and institutional framework for the implementation of an accountable decentralized fiscal and administrative structure.4 The Govemment has formulated and the Parliament ratified a decentralization strategy 5 that is broadly consistent with the European Charter of Local Self Governments and the National Constitution 6 l For example, references to local government budgets started with Laws # 7616 and 7776 of 1992 on Budgets. and Law # 7572/92 on Organization and Functioning of Local Governments (the latter abrogated by Law # 8652/2000, the current Organic Law on Local Self-Governments). For an analysis of the early 1990s first decisions on fiscal decentralization, see Fiscal Decentralization and Intergovernmental Finances in thze Reputblic of Albania, by D.
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