PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA June 2018 This publication was produced for review by the United States Agency for International Development. It was prepared by Tetra Tech ARD. PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 1 ACKNOWLEDGEMENTS Prepared for the United States Agency for International Development, USAID Contract Number AID-182-C-12-00001, Albania Planning and Local Governance Project (PLGP) This draft-policy brief was prepared by: Tony Levitas and Elton Stafa We would like to thank Fran Brahimi of the Ministry of Finance and Economy and Florian Nurçe of the Ministry of Education and Sport for critical support in the preparation of this policy brief. Tetra Tech ARD Home Office Address: Tetra Tech ARD 159 Bank Street, Suite 300 Burlington, Vermont 05401 USA Telephone: (802) 658-3890 Fax: (802) 658-4247 www.ardinc.com Tetra Tech ARD Contact: Adrienne Raphael, Senior Technical Advisor/Manager [email protected] PLGP Contact: Kevin McLaughlin, PLGP Chief of Party [email protected] DISCLAIMER The opinions and proposals contained in the publication do not necessarily reflect the views of either Ministry or those of the United States Agency for International Development or the United States Government. PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 2 Contents Executive Summary ................................................................................................................................. 4 1. Purpose of this Brief ............................................................................................................................ 6 2. The Origins of the Current Situation .................................................................................................... 7 3. The Fundamental Problems ................................................................................................................. 8 Social Welfare Centers .................................................................................................................... 9 Recommendations for Social Welfare Centers ............................................................................. 10 Dormitories ................................................................................................................................... 10 Recommendations for Dormitories .............................................................................................. 12 Fire Protection, Agriculture and Irrigation, Forestry .................................................................... 12 Recommendations for Fire Protection, Agriculture and Irrigation, Forestry ................................ 13 4. Local Governments, Preschool Education, and Per Pupil Funding .................................................... 14 Overview Preschool Education in Albania .................................................................................... 14 The Specific Challenges of Developing a Per-Pupil Formula for Preschool Education in Albania Today ................................................................................................................................ 18 Recommendations for Preschools Education ............................................................................... 24 PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 3 Executive Summary The 2015 Law on Local Self-Government (LSGL) substantially increased the role of democratically-elected local governments in Albania by assigning to them a number of new own-functions. The most important of them is the responsibility for financing and managing preschools. Others include fire protection, irrigation and drainage, providing counselling services to farmers, and managing and maintaining forests, pastures, and rural roads. As “own functions” municipalities should have sufficient legal authority over these services to deliver them in ways that are aligned with the preferences and priorities of their electorates. They must also be able to finance them from their general revenues and not from conditional grants from the national government. When the LSGL was passed, however, it contained a provision that allowed these new own functions to be financed by conditional grants –Specific Transfers—for three years. This transitional period was put in place to give the national government time to both harmonize sectoral legislation and to introduce changes in the intergovernmental finance system that would allow municipalities to pay for these new responsibilities from their general revenues. This transition period expires at the end of this year, and in 2019, it is expected that municipalities will not only exercise greater managerial control over these functions, but that they will start financing from their general revenues –meaning out of some combination of the unconditional transfers that they receive from the national government and the revenues they derive from local fees, charges and taxes. Figuring out how local governments should get these general revenues is however a big challenge for at least three reasons. First, the national government is currently spending more than 8.5 billion Albanian Lekë (ALL) to finance these functions through Specific Transfers. This is equal to more than 20% of total local government revenues, and more than 50% of today’s Unconditional Transfer. As a result, municipalities will need to see a very substantial increase in their freely disposable revenues if they are to finance the existing costs of these functions –functions which to greater or less degree have been underfunded for years. Second, while there is room for Albanian municipalities to improve the collection of their own tax revenues, there is little chance that such improvements could significantly offset the costs of these new functions in the foreseeable future. As a result, and in the immediate future, the only viable way to provide local governments with the necessary funds to finance these functions, will be to substantially increase the size of the Unconditional Grant. Third, and most importantly, it will be necessary to increase the size of the Unconditional Grant by more than the 8.5 billion ALL that the national government is currently spending on these functions through Specific Transfers. The most fundamental reason for this is that the ways these functions are currently being provided and financed by the national government does not reflect any objective measure of the need for these services across the country as a whole. The clearest illustration of this is with fire protection because in many areas of the country the national government simply did not build or staff fire stations. But similar PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 4 problems exist with all of the concerned functions. For example, while all local governments currently have preschools some have many more than others in relationship to the number of preschool children they have to educate. What this means is that if the same amount of money that is currently being spent on these functions (through Specific Transfers) is allocated to local governments on the basis of more objective measures of need --such as a municipality’s population, or the number of preschool children it serves-- then municipalities which currently have relatively more of these institutions than others, will receive less funding through the Unconditional Transfer than they did through conditional grants Indeed, in some cases so much less funding that they may not be able to provide the service at all, or will have to radically reorganize how they deliver it. As a result, moving from a system in which the national government provides conditional grants to individual local governments on the basis of the existing costs of the institutions located on their territories, to one in which the national government allocates Unconditional Transfers to all local governments based on objective measures of their relative needs requires increasing the size of the Unconditional Transfer by more than current level of conditional grants. In the following chapters, we discuss the dilemmas of moving from conditional grants to unconditional transfers for each of the new functions that have been assigned to local governments by the LGFL. But we pay particular attention, to preschool education because it is by far the costliest responsibility that the Government of Albania (GoA) has assigned to municipalities, and arguably the most important for the country’s future. Here, we argue that while it would probably have been best to consider preschool education as a shared-function, it is possible to integrate a fair and equitable (weighted) per pupil formula into the Unconditional Transfer. But doing so will also require a) adding new funds into the system b) phasing in the introduction of the formula and c) providing municipalities with legal authority and technical support to reorganize their preschool networks –not least because demographic decline and internal migration will force at least some municipalities to close facilities and redeploy