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1

June, 2017

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 IN ALBANIA

STATISTICAL BRIEF

ALBANIAN LOCAL GOVERNMENT FINANCE AFTER TERRITORIAL ADMINISTRATIVE REFORM AND ON THE EVE OF THE IMPLEMENTATION OF THE LOCAL GOVERNMENT FINANCE LAW

ALBANIA

Prepared for the United States Agency for International Development, USAID Contract Number AID-182-C-12-00001 Prepared by: Tony Levitas

Senior Research Fellow Watson Institute for International Studies Brown University Elton Stafa PLGP Municipal Finance Expert

Tetra Tech ARD Contact: Adrienne Raphael Project Manager [email protected] PLGP Contact: Kevin McLaughlin, Chief of Party [email protected] Tetra Tech ARD Home Office Address: Tetra Tech ARD

159 Bank Street, Suite 300, Burlington, VT 05401 Tel: (802) 658-3890, Fax: (802) 658-4247 www.ardinc.com

mailto:[email protected]

mailto:[email protected]

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PLANNING AND LOCAL GOVERNANCE PROJECT IN ALBANIA STATISTICAL BRIEF

Albanian Local Government Finance after Territorial Administrative Reform and on the Eve of the Implementation of the Law on Local Government Finance

June, 2017

DISCLAIMER

The authors’ views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

STATISTICAL BRIEF ALBANIAN LOCAL GOVERNMENT FINANCE ON THE EVE OF TERRITORIAL CONSOLIDATION i

CONTENTS

ACRONYMS AND ABBREVIATIONS ........................................................................................................................ iii

EXECUTIVE SUMMARY ........................................................................................................................................... 1

1. INTRODUCTION .................................................................................................................................................. 5

2. TOTAL LOCAL GOVERNMENT REVENUE.............................................................................................................. 7

3. THE COMPOSITION OF LOCAL GOVERNMENT REVENUE .................................................................................... 9

4. LOCAL GOVERNMENT EXPENDITURE ............................................................................................................... 18

5. THE DISTRIBUTION OF LOCAL GOVERNMENT REVENUES AND EXPENDITURES ................................................ 22

6. THE LAW ON LOCAL GOVERNMENT FINANCE AND ITS IMPACT ON MUNICIPAL BUDGETS ............................... 29

7. NEXT STEPS ...................................................................................................................................................... 33

APPENDIX 1: COMPOSITION OF LOCAL GOVERNMENT REVENUES IN 2016 ................................................................ 39 APPENDIX 2: COMPOSITION OF LOCAL GOVERNMENT EXPENDITURES IN 2016 ......................................................... 41

LIST OF FIGURES

Figure 1: Local Government Revenue as a Share of GDP and Total Public Revenue in South-Eastern Europe (2015) ..................................................................................................................................................................... 7

Figure 2: Local Government Revenue as a share of GDP and Total Public Revenue 2002-2016 ................................ 8 Figure 3: The Composition of Local Government Revenues (BN ALL) ........................................................................ 9 Figure 4: Composition of Basic Local Government Revenues as % of Total 2002-2016 ........................................... 10 Figure 5: The Composition of Local Government Revenues in South-East Europe in 2015 ..................................... 11 Figure 6: Composition of Local Government Revenues in Albania in 2016 Compared to SEE Average in 2015 ...... 13 Figure 7: The Composition of Own-Revenue 2002-2016 (billion ALL) ...................................................................... 13 Figure 8: The Composition of Local Government Own-Revenue as a Percentage of Own-Revenue ....................... 14 Figures 9 & 10: The Property Tax as % of GDP and Local Government Own Revenues in SEE 2006 and 2015 ........... 15 Figures 11 & 12: Total Local Government Expenditure, in Billion ALL and as a Percentage of Total, 2011-2016 ....... 18 Figures 13 & 14: Local Government Expenditure from Freely Disposable Revenues, Billion ALL and as a Percentage

of Total 2011-2016..................................................................................................................................... 19 Figures 15 & 16: Composition of Local Government Investment Spending from Freely Disposable and Grant

Funding by Functional Classification, 2011-2016 (BN ALL) ........................................................................ 20 Figures 17 & 18: Composition of Local Government Spending by Functional Classification, 2011-2016 in Billions of

ALL and as a Share of Total. ....................................................................................................................... 21 Figure 19: Projected Increase in Transfers Resulting from the LGFL ........................................................................... 31 Figure 20: Projected Total Local Government Revenues Resulting from the LGFL ..................................................... 32

LIST OF TABLES

Table 1: Per Capita Revenues of Municipalities by Quartiles Organized by Per Capita Own-Revenue in 2016 .......... 23 Table 2: local government revenues per capita by quartiles based on population 2016 ............................................ 25 Table 3: The Composition of Per Capita Own-Revenues in 2016 by Quartiles based on Per Capita Own Revenues .. 27 Table 4: The Composition of Per Capita Local Government Expenditure by Quartiles based on Per Capita

Expenditure without Conditional Grants in 2016 ...................................................................................... 27

STATISTICAL BRIEF ALBANIAN LOCAL GOVERNMENT FINANCE ON THE EVE OF TERRITORIAL CONSOLIDATION iii

ACRONYMS AND ABBREVIATIONS

ALL Albanian Lekë

BN Billion

EU European Union

FY Fiscal Year

GDP Gross Domestic Product

GoA Government of Albania

IPA Instrument for Pre-Accession Assistance

IPT Immovable Property Tax

LGFL Law on Local Government Finance

LGU Local Government Unit

MoF Ministry of Finance

NALAS Network of Associations of Local Authorities of South-East Europe

PIT Personal Income Tax

PLGP Planning and Local Governance Project

PPP Public-Private Partnership

RDF Regional Development Fund

TAR Territorial and Administrative Reform

USAID United States Agency for International Development

USD U.S. Dollars

USG United States Government

1

EXECUTIVE SUMMARY

This brief presents an overview of the evolution and current status of local government finance in

Albania today. Its purpose is to give policy makers and stakeholders a picture of local government

finance in the aftermath of the Territorial and Administrative Reform (TAR) and on the eve of the

implementation of the new Law on Local Government Finance (LGFL). The report makes the

following main points:

• The 2015 TAR consolidating 373 local governments into 61 municipalities has been followed

by an improvement in the collection of local taxes, fees, and charges. There has also been a

decline in expenditure on public administration relative to the cost of the total amount of

services municipalities have to provide.

• As such, territorial consolidation seems to have produced some gains in the efficiency and

effectiveness of local governments. But definitive judgments are premature because the gains

are uneven across municipalities and because there are questions about whether some of them

are adequately servicing their newly incorporated rural areas. Going forward, operating costs

–and with them expenditures on public administration, are also likely to rise as municipalities

increase the quantity and improve the quality of local public services.

• The accounting and reporting of local government financial data by the Ministry of Finance

(MoF) has improved. MoF now reports municipal revenue without including social transfer

payments to poor households, payments made through their budgets but over which they have

no control. Expenditures can now also by examined by both economic and functional

classifications. Access to the revenue and expenditure data of municipalities should be made

available to the Municipal Associations, the new Consultative Council, as well as to

universities and think tanks.

• Following the 2015 passage of the Law on Local Self-Government, new responsibilities in

preschool education, fire protection, environment, forestry and irrigation were devolved to

municipalities. To pay for these new functions the national government added about 6 billion

lekë (ALL) into the transfer system. As a result, local government revenue as a share of total

public revenue increased from 9.8% to 11.8% between 2015 and 2016, and as a share of GDP

from 2.6% to 3.2%. Despite these gains, however, Albanian local governments still receive

substantially less public revenue than their counterparts in the region.

• The Albanian intergovernmental finance system remains very heavily dependent on

Conditional Grants for investment. Over the last decade, successive national governments have

chosen to use these grants to provide local governments with between 25% and 30% of their

total revenue. The dependency of municipalities on these grants for so much of their revenue

2 STATISTICAL BRIEF ALBANIAN LOCAL GOVERNMENT FINANCE ON THE AFTER TERRITORIAL ADMINISTRATIVE REFORM

AND BEFORE THE LOCAL GOVERNMENT FINANCE LAW

distorts local priorities, undermines good financial planning, and weakens the independence of

local officials vis-a-vis the national government.

• The consolidation of local governments in 2015 was accompanied by the introduction of a new

formula for allocation of the Unconditional Grant in 2016. But because the national

government decided not to increase the size of the Unconditional Grant, MoF imposed “hold

harmless” provisions on the application of the new formula. As a result, the least populous –

but often far from the poorest—municipalities have continued to receive a disproportionate

share of the grant. This has preserved the bias of the old formula against densely populated

urban areas despite territorial consolidation.

• The 2017 passage of the Law on Local Government Finance (LGFL) marks a major milestone

in the development of Albania’s intergovernmental finance system. The law will stabilize and

substantially increase municipal revenues by: i) anchoring the size of the Unconditional Grant

at no less than 1% of GDP; ii) giving municipalities a 2% share of the Personal Income Tax

(PIT) generated on their territories; and iii) expanding their share of the Vehicle Tax from 18%

to 25%.

• The Law also clearly identifies the Property Tax as the most important local tax, defines how

newly devolved functions should be financed until they can be considered true own-functions,

introduces new principles for local public financial management, and requires the development

of financial recovery plans for municipalities in financial distress.

• To consolidate the gains of the last few years, the LGFL will have to be properly implemented

and complemented by efforts to strengthen local government tax powers. This will require

close cooperation between the national government and local governments in the Consultative

Council established by new Law on Local Self-Government. Work in the following areas

should begin as soon as possible to ensure that the promise of the recent reforms is fully

realized.

o The “hold harmless” provisions imposed on the Unconditional Grant in 2016 and 2017

should be lifted and the specific weights and brackets needed allocate the Grant in 2018

should be agreed upon with the Consultative Council. To the greatest possible extent, these

weights and brackets should be defined so as to correct the anti-urban bias of the old

formula.

o To ensure that PIT-shares can be properly returned to their place of origin, MoF needs to

be able to identify PIT by the municipality in which taxpayers/employees reside. MoF and

the Road Directorate also need to develop procedures that guarantee that the Vehicle Tax

is attributed to place of residence of the vehicle owner.

o The 2015 Law on Local Self-Government devolved new functions to local governments in

the areas of pre-school education, fire protection, forestry and irrigation. The Law states

that these should be considered local government own-functions and thus financed from

freely disposable general revenues. At the same time, however, both the Local Self-

3

Government Law and the Local Government Finance Law allow these functions to be

financed by “Specific (conditional) Transfers” for a transitory period of up to three years.

This was done for two reasons: to give policy makers time to harmonize sectorial

legislation with the actual devolution of these responsibilities; and to ensure that all

municipalities actually have the infrastructure necessary to provide the concerned services.

Both tasks will require time and energy. The national government should be prepared to

provide investment support to those municipalities that currently lack the infrastructure to

provide the newly devolved functions. Work to develop plans for the full devolution of

each of these functions should be begun as soon as possible.

o To implement the new financial management rules contained in the LGFL, MoF needs to

develop a range of new formats, templates and procedures. These should be discussed with

the Consultative Council and carefully communicated to municipalities.

o The LGFL requires municipalities that have substantial payment arrears to develop and

implement financial recovery plans. It also requires MoF to monitor these plans and to take

remedial action if the plans fail to have their desired effects. Because senior MoF officials

report that 6 to 10 municipalities may already be close to insolvency, it is very important

that MoF and the Consultative Council elaborate the rules and procedures necessary to

negotiate this new and highly contentious terrain.

o In light of the LGFL’s identification of the Property Tax as the single most important

source of local tax revenue, the GoA is currently considering developing a national fiscal

cadaster to facilitate the registration, valuation and billing of the tax. This is a good idea

because it should reduce the cost of administering the tax and help standardize local

practices. A central registry of all properties and their users should also help with the fair

and equitable imposition of other local taxes, fees and charges. But the experiences of both

Kosovo and Republika Srpska suggest that even the creation of technologically

sophisticated central cadasters do not immediately produce dramatic improvements in the

yield of the tax if local officials are not committed to using the tax and have reasonable

enforcement powers. The experiences of other countries in the region also suggest that

Albanian policy makers should not expect the tax to generate revenue greater than 1% of

the GDP any time soon.

o Historically, the Albanian intergovernmental finance system has made excessive use of

Conditional Grants –through the Regional Development Fund– to provide local

governments with investment funds. Both ruling coalitions have used the investment grants

as much for political purposes as for developmental ones. Grants have also been given

disproportionately to small, but not necessarily poor municipalities (mainly for roads) as

opposed to larger, poorer municipalities with pressing network infrastructure needs.

Municipalities should be aware of the possible shrinking of the Regional Development

Fund over the next couple of years, as presented in the GoA’s Macroeconomic and Fiscal

Projections for 2018-2020. Nonetheless, the Fund is likely to remain an important source



of investment funding over the foreseeable future and efforts need to be made to ensure

that its allocation in not only fair and transparent, but clearly aligned with country’s most

important development needs, that should be specified by the Consultative Council.

o The LGFL, by stabilizing the foundations of the intergovernmental finance system, should

make municipalities more creditworthy. In light of this, the GoA should consider loosening

restrictions on local borrowing. Creditworthy municipalities should be allowed to make

effective use of their right to borrow while national government investment grants should

be directed predominantly towards poorer jurisdictions. The GoA should also continue its

efforts to reduce the borrowing of the national government because at present Albania’s

total public debt as a percentage of GDP (71%) significantly exceeds the limits set by the

European Union’s Maastricht Treaty (60%). As result, national government borrowing

continues to crowd out local debt financing.

5

1. INTRODUCTION

This brief presents an overview of the evolution of local government finance in Albania over the

past decade. It has two central purposes. The first is to examine changes in the financial position

of local governments since the 2014 passage of the Law on Territorial and Administrative

Division1. This law consolidated 373 local governments (67 municipalities, 306 communes) into

61 larger municipalities. The second is to highlight some of the changes and challenges that will

accompany the implementation of the 2017 Law on Local Government Finance (LGFL).

Together with the new Law on Local Self-Government of 2015, these laws constitute the legal

foundations of Albania’s efforts to radically overhaul its system of subnational governance as

defined in the “National Cross-Cutting Strategy on Decentralization and Local Government.”2

This strategy set three major objectives for the new system of public administration: to increase

the effectiveness and responsiveness of local governments by concentrating human and financial

resources in a smaller number of larger democratically-elected units; to improve the efficiency of

local public services by lowering administrative costs; and to help ensure the balanced and

sustainable growth of the country by providing subnational governments with the skills and

resources necessary to deliver improved public services to their citizens and businesses.

It is too early to assess the degree to which these goals will be met. But there is no question that

the legal order that has been put in place over the last few years represents a substantial

achievement in Albania’s continuing effort to both democratize its public sector and to improve

the quality of public services. At the same time, the new legal framework does not automatically

resolve all the problems inherited from the past, and the creation of a new, more dynamic

subnational order must be followed by further reforms if its promise is to be fully realized.

The first section of the Brief, tracks the evolution of local government finance in Albania over the

last 10 years, paying particular attention to the changes that have occurred since territorial

consolidation and the passage of the new Law on Local Self-Government3. Where possible and

appropriate it compares the revenue and expenditure of Albanian local governments with their

counterparts in the region. In the concluding sections, the Brief presents some simulations of the

1 Law 115/2014 on the “Territorial and Administrative Division of Local Government Units in the Republic of Albania” July, 2014

2 Council of Ministers, “National Crosscutting Strategy For Decentralization and Local Governance” July 2015, pp. 1-99

3 Tony Levitas “Statistical Brief: Albanian Local Government Finance on the Eve of Territorial Consolidation” PLGP/USAID

September 2014 pp. 1-38



major financial changes that can be expected to accompany the implementation of the LGFL as

well as some of the challenges that need to be addressed to consolidate the reforms.

The data used in the report comes from the Albanian Government Financial Information System

(the Treasury System) for the period 2011-2016 and is based on actual end-year figures. In the

report, we have excluded social welfare payments to poor families from the Ministry of Social

Welfare, payments that flow through local governments but over which they have no control.

These transfers are substantial, amounting to about 20 billion ALL a year.

Total local government revenue thus includes (1) revenues collected or raised by local government

themselves (Own-revenues); (2) freely disposable intergovernmental transfers (Unconditional

Grants and Shared Taxes); (3) Conditional Grants from line ministries and the Regional

Development Fund for local government own-functions, or functions which local governments

continue -de facto- to share with the national government (e.g. transport, education, water supply

and sewage)4. But it excludes revenues that flow through local government budgets for delegated

functions like the payment of social welfare transfers, and the operation of Civil Status Registry

Offices and National Business Centres.

Total local expenditure refers to expenditures financed from own revenues, freely disposable

transfers, and conditional grants from both line ministries and the Regional Development Fund.

But as on the revenue side, it excludes resources transferred for (or spent on) the delegated

functions described above. It is also important to note that most of the national investment funds

that go to local governments for education infrastructure and other important local public services

come from the Regional Development Fund. Nonetheless, they are accounted for in the Treasury

system as Conditional Grants from line ministries.

The revenue and expenditures of Qarks (regions) are excluded from the data and not considered in

the report because with municipal consolidation this level of government has become significantly

less important and now accounts for less than 5% of all subnational spending. The population

numbers used to calculate per capita revenues and expenditures are from the 2011 census.

4 We use the phrase de facto here because the new 2015 Law on Local Self Government eliminated the category of shared functions

from the catalog of possible intergovernmental arrangements. See the discussion of “Specific Transfers” on pages 11 and 12 below,

as well as in the concluding section of the Brief.

7

2. TOTAL LOCAL GOVERNMENT REVENUE

Figure 1 below, compares the total revenue of local governments in Albania as both shares of GDP

and total public revenue with the same indicators for local governments elsewhere in South-East

Europe in 2015. In countries marked with an asterisk, local governments pay for the full costs of

running primary and secondary schools including teachers’ wages. As a result, in these countries

the share of local government revenue as percentage of total public revenue is higher than the

average for the region. Indeed, in Kosovo and Romania, it is higher than the EU average despite

the fact that both countries have relatively small public sectors. This is largely because in Kosovo

and Romania, local governments also pay for the full costs of primary health care facilities,

including the wages of doctors and nurses.

Figure 1: Local Government Revenue as a Share of GDP and Total Public Revenue in South-Eastern Europe (2015)

*Countries in which local governments are responsible for primary education and in some cases primary health care. See NALAS,

Fiscal Decentralization Indicators in South-East Europe, 2016. Albanian data does not include Qarks; Romanian data includes

county level governments (judets).

As can be seen from the Figure, the overall size of Albania’s public sector is small (26%),

suggesting that the national government has difficulties in collecting taxes. Municipalities also

play a limited role in the country’s governance structure as can be seen from the fact that local

government revenue is equal to only 9.8% of total public revenue and 3.2% of GDP. Indeed, by

both measures Albania ranked last in the region, despite the fact that in a number of other countries

local governments are responsible for a similar set of public services. As such, it is fair to say that

2.6% 3.9% 4.7% 5.0% 5.9% 5.8% 6.1% 6.3% 6.7% 6.3% 6.6% 5.4%7.6%

10.1% 11.2%

26%

39%

43%

38%

42% 41% 42% 43% 44%

37% 38%

31%

25%

33%

45%

9.8% 10.2% 11%13.1% 14.0% 14.2% 14.5% 14.6% 15.3%

17% 17.2% 17.4%

30.3%30.7%

25%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Local Government Revenue as a % of GDP Consolidated Public Reveue, % of GDP

Local Government revenue as a % of Public Revenue



Albanian local governments both play a relatively limited role in delivering public services and

are underfunded when compared to their counterparts in South East Europe.

This however may be changing. Following the 2015 passage of a new Law on Local Self-

Government, municipalities were transferred responsibility for important functions in pre-school

education, fire protection, irrigation and forestry. As a result, in 2016 the national government

increased total local government funding by approximately 6 billion Albanian ALL5. This,

together with improvements in local government own-source revenue and increases in other

intergovernmental transfers led to an increase in municipal revenue as a share of total public

revenue from 9.8% to 11.8% between 2015 and 2016, and from 2.6% to 3.2% of GDP (compare

Figure 1 with Figure 2 below).

Figure 2: Local Government Revenue as a share of GDP and Total Public Revenue 2002-2016

Source: MoF’s Macroeconomic and Fiscal Indicators and the Treasury System. Authors’ calculations.

Thus, after a decade of downward fluctuation, municipal revenue as a share of both GDP and total

public revenue has recovered to their 2007-2008 levels. Moreover, this upward trend continued in

2017, when in anticipation of the passage of the LGFL, the Unconditional Grant was increased by

2.5 billion ALL. Most importantly, this trend should continue: On the one hand, and as we shall

discuss later, the LGFL should further increase and stabilize the Unconditional Grant by specifying

that the grant pool can be no-less than 1% of the GDP, and no less than the amount allocated in

the previous year. On the other hand, and for the first time it assigns municipalities 2% of the

Personal Income Tax (PIT) generated on their territories and expands their share of the revenues

from the Vehicle Tax from 18 to 25%. As a result, the finances of Albanian local governments

should improve in the coming years, and with it their role in the governance of the country.

5 This increase is shown in Figure 3 below as an increase in the Unconditional Grant. As discussed later, (pp. 10 & 15) this

increase will be recorded in the future as “Specific Transfers” and will function primarily as a sectoral block grant for preschool

education.

24.8% 24.1% 24.5% 25.1% 26.0% 26.0% 26.9% 26.1% 26.2% 25.4% 24.8% 24.2%26.3% 26.4% 27.0%

1.9% 2.3% 2.4% 2.3% 3.0% 3.2% 3.1% 2.9% 2.9% 2.6% 2.3% 2.5% 2.8% 2.6% 3.2%

7.8%9.3% 9.8% 9.1%

11.5% 12.4% 11.5% 11.1% 10.9% 10.1% 9.3% 10.4% 10.5% 9.8%11.8%

0%

5%

10%

15%

20%

25%

30%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Public Revenues as % of GDP LG Revenues as % of GDP LG Revenues as % of Public Revenues

9

3. THE COMPOSITION OF LOCAL GOVERNMENT

REVENUE

Figure 3 below, presents the basic composition of local government revenues between 2002 and

2016 in billions of ALL. As can be seen from the figure, there has been a fair amount of fluctuation

in both total revenues and their composition over the last ten years.

Figure 3: The Composition of Local Government Revenues (BN ALL)

Source: MoF’s Macroeconomic and Fiscal Indicators and the Treasury System. Authors’ calculations.

* MSWY stands for Ministry of Social Welfare and Youth.

Own-revenues increased steadily from 2002 to 2008 and have consistently constituted the single

largest source of local government income. In 2008, however, the absolute value of own-revenues

began to decline after the national government imposed restrictions on the ability of local

governments to tax business through the Small Business Tax (SBT)6. This policy was continued

even after a change of government in 2013, and in 2014 the SBT was transformed into a centrally

collected Simplified Profit Tax. Municipalities still receive 99% of this tax on an origin basis, but

it is now imposed on a substantially narrower base7.

Some local governments –led by the capital City of Tirana- responded to the restrictions imposed

on the SBT by using the liberal provisions of the Local Tax System Law to introduce Temporary

6 See Tony Levitas, Local Government Taxes, Fees and Charges in Albania: Current and Future Challenges (Report to the

Albanian Associations of Communes, Swedish Association of Local Authorities) September, 2010, pp. 1-31 7 1% is deducted by the national government as a fee for administering the tax.

39 10 10 12 14 16 14 14 14 13 13 15 14

188

6 6 710

1112 13 12 11 10 12

13 12

18

11

2 1

47

6 6 9 87

810 11

12

0

5

10

15

20

25

30

35

40

45

50

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Own Source Revenues Unconditional Grant Conditional Grants (w/o MSWY)



Taxes that they imposed disproportionately on the business community (e.g. the Temporary Tax

for Greenery, and more recently the Temporary Tax for Educational Infrastructure). In other cases,

local governments responded by introducing new local fees or by increasing the levels of the

existing fees. These changes buoyed the yield of own-revenues even as income from the SBT fell.

Following Territorial Consolidation and the amalgamation of Albania’s 373 local governments

into 61 municipalities in 2015, the collection of own revenues improved significantly in 2016. This

suggests that territorial consolidation has been accompanied by an increase in the effectiveness of

local revenue collection.

The Unconditional Grant rose steadily between 2002 and 2009. But it then became downwardly

unstable. Moreover, between 2009 and 2015, the calculation of the grant became both less

transparent and less unconditional, as categorical transfers were added into the grant pool at the

margins through the annual budget law. The annual budget law defined the size of the grant and,

with the add-ons, amounts that had to be spent on certain earmarked functions. The grant’s

downward instability during this period, however, helped convince local government officials and

national policy makers that a floor had to be put on its size. The provisions in the LGFL that specify

that the grant cannot be less than 1% of the GDP, nor less than the previous year’s actual allocation,

reflect this conviction and represent a major landmark in improving both the adequacy and stability

of Albania’s intergovernmental finance system.

The role of Conditional Grants in the intergovernmental finance system has increased fairly

steadily since 2007. Indeed, by 2010, the amount of Conditional Grants in the system had more

than doubled and as can be seen from Figure 4 below, rose to 25% of total local income before

peaking in 2015 at 29%. This rise crowded-out efforts to increase the size of the Unconditional

Grant and occurred across the tenures of national governments run by opposing political parties.

This suggests that both parties found Conditional Grants to be useful tools to control infrastructure

development at the local level and exert political control over local governments.

Figure 4: Composition of Basic Local Government Revenues as % of Total 2002-2016

24%

57% 56% 55%47% 44% 47% 43% 41% 42% 43% 39% 39% 38% 37%

67%

37% 34% 38%37%

34%37% 38%

33% 34% 34% 36% 35% 33% 38%

9% 7% 10% 7%16% 22% 17% 18% 26% 24% 23% 25% 25% 29% 25%

0%

20%

40%

60%

80%

100%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Own Source Revenues Unconditional Grant Conditional Grants (w/o MSWY)

11

Figure 5 below compares the composition of local government revenues in Albania with those of

other South-East European countries in 2015. Countries are ranked from left to right based on the

share of local revenue in total public revenue. Not surprisingly, countries in which local

governments are responsible for significant social sector functions (e.g. primary education) are

clustered on the left hand side of the figure. Their own-revenues from local taxes and fees also

represent a lower share of their total revenue. Meanwhile, in countries in which local governments

perform few or no social sector functions, their own-revenues represent higher shares of their total

revenue. This is a function of the fact that it is very difficult to assign local governments own-

revenues robust enough to cover the costs of social sector functions. Blochlinger and King have

dubbed this phenomena the “decentralization paradox”, the paradox being that the more service

responsibilities that are assigned to local governments, the less local governments can be expected

to finance these functions themselves8.

Figure 5: The Composition of Local Government Revenues in South-East Europe in 2015

NALAS, Fiscal Decentralization Indicators in South-East Europe, 2012-2016 http://www.nalas.eu/News/FD_Rep_17

Albania’s position in the figure is noteworthy for four reasons. First, in 2015, and as we have

already seen, Albanian local governments received a lower share of total public revenue than any

of their counterparts in the region. Second, they had the highest share of income from Conditional

(investment) Grants. Indeed, the only countries remotely close to Albania are all new members of

the European Union -Bulgaria, Slovenia, and Romania- who receive large amounts of structural

support from the EU through Conditional Grants to local governments. Third, the Albanian

8 Blochliger and King, “Less than You Thought: the Fiscal Autonomy of Sub-Central Governments” OECD Economic Studies

No.43 pp. 156-185 http://www.oecd.org/eco/publicfinanceandfiscalpolicy/40507581.pdf. The only way to escape this paradox is

to give local governments not just PIT shares, but control over PIT rates. This is the foundation of both Nordic and Swiss Fiscal

Federalism in which the national government determines the base of PIT and collects it, but allows local governments set the

rates.

27%19%

12%21%

33%43%

35% 33%

70%

28%41% 42% 46%

35%

24%

0% 21%

46%6%

22%10%

18%

48%

41%50%

19%

5%

6%

33%

30%

6% 5%

20% 52%

12%

3%

14%8%

31%

35%

35% 45%

66%52% 38%

17%

7% 2% 1% 3% 3%13% 7% 6% 1%

22%4% 4%

25%

0%

20%

40%

60%

80%

100%

RO RKS MD HR MK BG SEE RS (BiH) MNE SLO RS TR FBiH(BiH)

AL

Own Revenues Shared Taxes General Grant

Sectoral Block Grants Investment Grants LG revenues, % of public rev.

http://www.oecd.org/eco/publicfinanceandfiscalpolicy/40507581.pdf



intergovernmental finance system makes comparatively modest use of shared taxes, and unlike

Romania, Moldova, Croatia, Republika Srpska, Montenegro, Slovenia, Serbia, Turkey and the

Federation of Bosnia Herzegovina, was not sharing Personal Income Tax with its local

governments. And finally, sectorial block grants are absent from the system because in 2015

Albania had yet to devolve any of the social sector functions that these grants are typically used to

fund.

PIT sharing has become an important pillar of local government finance throughout post-

communist Europe. One reason for this is that it provides a direct budgetary incentive for local

governments both to encourage job creation and to work with their national governments to

formalize the grey economy. Another, is because PIT per capita is a good objective measure of the

relative wealth of different jurisdictions and can thus be used to anchor transparent, fair, and easy

to administer equalization systems9.

Indeed, for all these reasons Albanian local government legislation had anticipated the introduction

of PIT sharing since the first Organic Law was passed in 200010. Nonetheless, it wasn’t until the

2017 passage of the LGFL that PIT sharing was introduced in practice. As result, in 2017, Albania

municipalities will begin to receive a modest 2% share of the PIT generated on their territories.

This will not be enough to provide municipalities with either a strong budgetary incentive to create

jobs or to work with the national government to formalize the grey economy; but it will increase

their overall revenues and help strengthen the equalization system within the Unconditional Grant

formula.11

In this context, it is also worth noting that the LGFL introduces a new category of Specific

Transfers to finance the functions devolved to local governments under the 2015 Law on Local

Self-Government. The most costly and important of these functions is the payment of the wages

of preschool teachers. As already indicated, in 2016 the national government added 6 billion ALL

into the intergovernmental finance system to finance the costs of these functions. But with the

passage of the LGFL, these functions will be financed by Specific Transfers that will function like

the sectorial block grants that other countries in the region use to finance social sector functions.

9 See USAID/PLGP White Paper on Fiscal Decentralization in Albania (http://www.plgp.al/index.php/en/resources/plgp-

publications/99-white-paper) and Tony Levitas, EURASIA State of Decentralization Background Paper, Seminar for Dialogue and

Capacity building of local and regional authorities in Eurasia in the development and local governance fields, SKL International

Tbilisi, Georgia May 2013 pp. 1-30.

10 Article 17 of Law 8652 on the Organization and Functioning of Local Governments, 31/07/2000

11 It is perhaps worth adding that neither the Law on Local Self Government nor the LGFL specifies that PIT must be shared on

an origin basis. The equalization provisions of the LGFL, however, can only be implemented if all shared taxes are shared on an

origin basis. Also, all taxes shared that have been shared with local governments in the past (e.g. the Vehicle Registration Tax

and the SBT) have been shared on an origin-basis.

http://www.plgp.al/index.php/en/resources/plgp-publications/99-white-paper

http://www.plgp.al/index.php/en/resources/plgp-publications/99-white-paper

13

Figure 6: Composition of Local Government Revenues in Albania in 2016 Compared to SEE Average in 2015

Data for SEE from NALAS cited above

Figure 6 above, compares the composition of local government revenues in Albania in 2015 and

2016 –including the new Specific Transfers– with the average composition of local government

revenues for the countries of South East Europe in 2015. As can be seen from the Figure, even

though the share of (conditional) investment grants remains inordinately high, the structure of

municipal finances in Albania has moved closer to the regional average, and will move further in

this direction with introduction of PIT sharing in 2017.

Figure 7 below, shows the composition of local government own-revenue between 2002 and 2016

in billion ALL. As can be seen from the figure, local government own-revenue increased

substantially in 2016, suggesting that the new consolidated municipalities are more effectively

collecting own revenues than their predecessors.

Figure 7: The Composition of Own-Revenue 2002-2016 (BN ALL)

Note: In the figure the Vehicle Tax is included as an own revenue. With the LGFL it will be classified as a shared tax and its sharing

rate will be increased from 18% to 25%.

0.8 0.7 1.12.5 2.8 3.2

1.5 1.6 1.6 2.0 1.8 3.1 3.3 4.01.3 1.3 1.3 1.7 1.72.0 2.1

3.3

0.82.6 2.3

2.6

3.3 3.8 4.22.9 2.2 1.9

2.2 2.2

2.3 2.3

3.0

1.6 1.5 1.8

2.22.5

2.83.2

2.7 3.2 1.6 1.8

2.4 1.4

2.8

0.4 0.5

0.50.6

0.60.7

1.3 1.3 1.4 1.5

1.11.1

1.0

3.0 4.13.6

2.42.2

3.02.6 2.4 2.6 2.3 2.1

1.7 2.1

0.6

1.2

0.50.5 2.2

1.41.7

1.82.2 2.8 2.0 2.2 2.1

2.2 1.9

3.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Property Tax Fees for Local Services Administrative Fees Infrastructure Impact Tax

Vehicle Taxes Small Business Tax Other



In 2008, as part of the effort to reduce the tax burden on businesses, the national government

halved the rates local governments could impose on the property of legal entities. As a result, the

yield of the tax plummeted. In 2014, these constraints were removed and the collection of the tax

returned to its 2008 levels. Indeed, studies of individual jurisdictions suggest that over 80% of the

yield of the tax is derived from businesses. Nonetheless, and as can be seen from Figure 8 below,

the tax now constitutes 22% of local government own-revenue and is the largest single source of

revenue that municipalities collect themselves. Meanwhile, the yield of the SBT has collapsed,

and in 2016 the tax generated only 3% of local government own-revenue.

Figure 8: The Composition of Local Government Own-Revenue as a Percentage of Own-Revenue

The collection of both Fees and Administrative charges have also increased significantly,

suggesting that local governments are doing a better job recovering the costs for the services they

provide. Between 2011 and 2015 the yield of the Infrastructure Impact Tax fell significantly in

both real terms and as a percentage of local own-revenue. In part, this is because the investment

boom of the mid-2000s slowed significantly with the global recession of 2009-10. And in part, it

is because the national government imposed a moratorium on new construction until local

governments completed their Territorial Development Plans. In 2016, revenue from this tax

increased but it is unclear how much this may be due to public works built by the national

government, and how much it is related to new private construction.

Figures 9 & 10 below, show the yield of the property tax as percentage of GDP and of total local

government revenue in all countries of South-East Europe in 2006 and 2015. As can be seen from

the figures, there has been a growth in the yield of the tax in most countries of the region.

Nonetheless, the property tax still yields revenue equal to less than 0.6% of GDP in all countries

of the region except for Montenegro, Romania and Serbia, with the greatest changes in the period

28%

8% 11%20% 21% 20%

10% 11% 11% 15% 14%21% 23% 22%

9% 9% 9%13% 13%

14% 15% 18%

29%

29% 23%

26%

27% 28% 27%21% 15% 13%

16% 17%

16%16% 17%18%

15%18%

18% 19% 18%22%

19% 23%12% 14%

16% 10%15%

5%5%

4% 4% 4% 5%9%

9% 11% 11%

7% 8%6%34%

40%

35%

20% 16% 20% 18%17%

19% 17% 16%11% 15% 3%43%

5% 5%

21%11% 12% 11% 15% 20% 14% 16% 16% 15% 13% 18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Property Tax Fees for Local Services Administrative Fees Infrastructure Impact Tax

Vehicle Taxes Small Business Tax Other

15

occurring in the latter two countries. Indeed, the collection of the property tax in Serbia and

Montenegro are now both in line with the average for the EU (c. 1.1% of GDP in 2014) -which in

turn is low by American or Canadian standards (2.5% - 3% of GDP).

Figures 9 & 10: The Property Tax as % of GDP and Local Government Own Revenues in SEE 2006 and 2015

In Montenegro, much of the yield of the tax comes from coastal properties in general, and hotels

in particular. Here, municipalities have turned heavily to the tax as the national government has

rolled back their powers to impose taxes on new construction and on business registration.

The story in Serbia is more complicated. Until 2006, the national government administered the tax

but transferred 100% of its yield to local governments. But because the national government

derived no revenue from the tax, the registration of the base, its valuation and collection were

extremely poor. As a result, local governments inherited extremely poor administrative data on the

tax when it was handed over to them in 2007. The construction of local fiscal cadasters has been a

long and slow process. The national government has helped by developing tax registration and

billing soft-ware and donors have supported municipal efforts to improve the registration and

valuation of properties. As in Montenegro, the national government has also forced local

governments to use the tax by limiting their ability to tax the business community. And most

recently, it has put in place an incentive system that rewards local governments for increasing

collection. Taken together, these measures have managed to double the yield of the tax over the

last decade.

For their part, both Kosovo and Republika Srpska have tried to improve the yield of the tax by

creating centralized fiscal cadasters. With the support of the international community, the

government of Kosovo created a Property Tax Agency within the Ministry of Finance. This

Agency is responsible for maintaining a national fiscal cadaster of all properties. It also prepares

tax bills for all properties after local governments submit to it information on valuation and rates.

BG

HR

RKS

MK

MD

MNE

RO

RS

SLO

TRAL

FBiH (BiH)

RS (BiH)

BiH

SEE

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

0% 5% 10% 15% 20% 25%

% o

f G

DP

% of total local revenues

2015

RSHR

RKS

MK

MDMNE

RO

BG

SLO

TR AL

FBiH (BiH)

RS ([BiH)BiH SEE

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

0% 5% 10% 15% 20% 25%

% o

f G

DP

% of total local revenues

2006



By the mid-2000s, and with the help of significant donor funding, the Agency had registered most

buildings in the country. But local governments did a poor job of registering new properties and

by 2012 the cadaster had to be updated through another –largely donor funded– round of mass

registration. Local governments have also kept valuation and rates low, and have been lax with

respect to collection. As a result, the yield of the tax has not increased dramatically and collection

rates remain at about 50% after payments for outstanding debt are accounted for12.

Republika Srpska has also moved to a more centralized system. In 2012, the entity government

put in place a national cadaster system and recentralized the administration of the tax. As a result,

the entity government now values all properties, sends out tax bills, and collects the tax.

Municipalities however, are still responsible for setting tax rates and for ensuring the registry of

new properties. So far however, the new system has yet to yield substantial improvements.

These different strategies to improve the performance of the property tax should be carefully

examined by Albanian policy makers, particularly since the LGFL clearly designates the property

tax as the most important source of local tax revenue. Indeed, the development of the tax is

critically important for the development of responsive and accountable local governments in

Albania because it will be the single most important fiscal instrument linking citizens –as taxpayers

and consumers of local public services—to their democratically elected officials.

For this linkage to work however, the tax has to be fairly imposed on both commercial and

residential properties and uniformly enforced and collected, neither of which has proved easy

anywhere. In part this is because the infrastructure necessary to administer the tax is technically

complicated and costly to develop. But it is also because local government officials are reluctant

to tax their electorates and prefer to raise revenue through less transparent means.

Kosovo and Republika Srpska have tried to address the technical problems of administering the

tax by creating a centralized property registry that can calculate and issue all tax bills once

valuation and registration information has been in-putted locally. And in Republika Srpska,

collection has also been recentralized, meaning that all the tax execution powers of the national

government can in theory be brought to bear on reluctant tax payers.

Neither Kosovo nor Republika Srpska, however, have yet to see big returns on their investment

into the tax whose yield remains low. In large measure this is because the recentralization of tax

administration does not fix the second problem that the property tax almost inevitably encounters

in practice: The reluctance of democratically elected local officials to actually use the tax to raise

revenue from voters. Indeed, the experience of Kosovo and Republika Srpska –like those of many

other governments—demonstrate that even the most technically sophisticated administrative

systems will leak like sieves if local officials fail to register (new) properties, value them in

12 B. Disha, S. Kurtisi, T. Levitas, “Improving Municipal Own Source Revenue in Kosovo” (USAID/Democratic Effective

Municipalities Initiative, January 2012) pp. 1-25.

17

uniform ways, and enforce collection –assuming that they actually have some real enforcement

powers.

As such, Albanian policy-makers should be wary of technological solutions to the property tax

problem that do not address the reluctance of local officials to impose the tax as well as the

reluctance of citizens to pay. In this context, the short description provided above of Serbia’s (not

so short history) with the tax may be instructive. Here, the recent substantial gains in the yield of

the tax have come not through the recentralization of tax administration, but through a combination

of national support for the development of reasonably uniform local cadasters; national pressure

on all local governments to use the tax; and financial and other rewards for those local governments

that actually improve registration and collection.

In short, while it may make sense for Albania –as a relatively small country—to centralize certain

aspects of property tax registration and valuation –while maintaining the essentially local character

of the tax (rate setting, billing and collection) - policy makers should not forget that much of the

real challenge lies beyond the realm of purely technical solutions. Moreover, as important as the

development of a uniform and equitable property tax system is for Albanian local democracy,

national policy makers should recognize that even in the best instance the tax will yield insufficient

revenue for local governments to pay for significant social sector functions on their own.

At best, a well-executed property tax reform will increase –hopefully significantly— the ability of

local governments to meet their electorates demand for better local infrastructure and services.

This is critically important. But it is important more because of its power to change the relationship

between citizens and their local officials than it is as a way to relieve fiscal pressure on the national

government by raising the amount of money local governments can raise themselves. Or put

another way, while there is every reason in the world to implement a fair, equitable and effective

property tax system in Albania, the primary objective this effort should be to improve the nature

of local governance, and not to reduce the amount of central transfers.



4. LOCAL GOVERNMENT EXPENDITURE

This section provides a description of local government expenditures, their status and development

over the past six years, following the economic and functional classification, and divided by the

source of funding. This section shows also where local government investment spending is focused

and where the central governments’ transfers at the local level are focused.

Figures 10 and 11 below, show the composition of local government expenditures according to

their economic classification in both billion ALL and as a share of total expenditure for the years

2011-2016. As can be seen from the figures, local government personnel spending increased

sharply (c. 30% or 5 billion ALL) in 2016 after remaining stable for many years. This reflects the

fiscal weight of the functions devolved to local government by the new Law on Local Self-

Government, and in particular the costs of paying pre-school teachers.

It is also striking that since 2011, local governments have spent between 34% and 42% of their

total budgets on investment, and in 2016 investments amounted to just under 20 billion ALL (c.

156 million USD). The high share of investment spending in local government budgets is

impressive and suggests that local governments are making concerted efforts to improve the lives

of their citizens.

Figures 11 & 12: Total Local Government Expenditure, in BN ALL and as a Percentage of Total, 2011-2016

But here two things must be remembered. First, half of all investment spending has been financed

through the Conditional Grants (mostly from the Regional Development Fund), which we

discussed earlier. The allocation of these grants has been highly politicized and in many cases

10.4 10.1 10.8 11.0 11.0 16.2

9.8 11.0 10.4 11.1 12.1 12.6

13.6 10.8 13.0 15.5 16.5

19.9 33.7 32.0 34.3 37.5 39.6

48.8

-

10.0

20.0

30.0

40.0

50.0

2011 2012 2013 2014 2015 2016

Personnel Operational

Capital Investments Total

31% 32% 32% 29% 28% 33%

29% 34% 30% 30% 31% 26%

40% 34% 38% 41% 42% 41%

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015 2016

Personnel Operational Capital Investments

19

reflects more the priorities of the national government than it does those of local governments.13

Second, much of this investment is concentrated in a few jurisdictions, with between 25 and 30%

of it going to Tirana and Durres, the two largest cities in the country.

Figures 13 and 14 below, show the composition of freely disposable municipal expenditure

(without Conditional Grants) according to their economic classification in both billions of ALL

and as shares of total expenditures. Without conditional grants, investment spending drops from

about 40% of total spending (Figure 12) to about 25% (Figures 14). Moreover, almost half of

investment spending from freely disposable revenues comes from Tirana and Durres.

Figures 13 & 14: Local Government Expenditure from Freely Disposable Revenues, in BN ALL and as a Percentage of Total 2011-2016

The wages for preschool teachers in 2016 appear in both figures as freely disposable revenues because this is how

they are registered in the treasury system.

Figures 15 and 16 below show the composition of investment spending by functional classification

from both freely disposable revenue, and from Conditional Grants for the years 2011-2016. As can

be seen from the figures, more than 60% of all investment spending from both sources has gone

towards public transport, meaning essentially roads and the renovation of public squares. There is

no question that Albania needs to improve its road network and public squares. But it should also

be noted that spending on road improvement and public squares is also the easiest type of

investment spending to execute because it requires the least amount of complex planning and

because road investments can be suspended mid-stream without great cost, if money runs out. As

such it is likely that the high share of investment spending on roads and public squares is not just

a reflection of needs or preferences, but also a reflection of the difficulties of preparing investment

projects in other areas.

13 See for example UNDP “Assessment of design and performance, recommendations for improvements and support in reforming

the Regional Development Fund” December 2010, pp 1-34 and “ Albanian Association of Municipalities, “Position paper on the

Allocation of the RDF” March 11, 2014, pp 1-2

9.6 9.5 10.0 10.3 10.2 15.6

8.6 10.0 9.4 10.2 10.0

10.8 7.1 5.0 6.2 7.1 8.0

10.2 25.3 24.6 25.6 27.5 28.3

36.6

-

10.0

20.0

30.0

40.0

2011 2012 2013 2014 2015 2016

Freely Disposable Local Expenditures

Personnel Operational

Capital Investments Total

38.0% 38.8% 39.1% 37.5% 36.0% 42.6%

33.9% 40.7% 36.8% 36.8% 35.5% 29.6%

28.1% 20.5% 24.1% 25.6% 28.5% 27.7%

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015 2016

Own Local Expenditures

Personnel Operational Capital Investments



As can be seen from the figures, most investment in education has come from conditional grants,

while almost all investment in local administrative capacity has come from own-source revenue.

Investments in the improvement of local public services have been financed almost in equal part

by local and conditional funds.

Figures 15 & 16: Composition of Local Government Investment Spending from Freely Disposable and Grant Funding by Functional Classification, 2011-2016 (BN ALL)

Figures 17 and 18 below show the composition of total local government spending by functional

classification for the years 2011-2016 in billions of ALL and as a percentage of total spending. As

can be seen from Figure 17, between 2011 and 2015 spending on Administrative Services

amounted to about 11 billion ALL before declining to 10 billion ALL in 2016. Meanwhile,

spending on other functions increased sharply, so much so that spending on Administrative

Services declined from about 30% of total spending in the years prior to 2015, to 20% in 2016.

Although it is too early to make any conclusive judgements, this suggests that territorial

consolidation has increased the administrative efficiency of local governments in Albania, and

that the 61 new municipalities, on average, have managed to reduce administrative costs both in

absolute terms and relative to the other services they provide.

4.2 2.4

3.5 3.7 5.2 6.0

1.4

1.3

1.4 1.7

1.6

2.2 1.2

1.0

0.9 1.1

0.7

1.0

0.2

0.2

0.2 0.4

0.4

0.8

- 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

10.0 11.0

2011 2012 2013 2014 2015 2016

Freely Disposable Local Investments

Other Culture

Education Administrative Services

Local Public Services Public Transport Infrastructure

1.8 1.7 3.1

4.2 4.7 6.6

2.0 1.5

2.1 1.4

1.9

1.5

2.1 2.3

1.6

2.6 1.8

1.6

- 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

10.0 11.0

2011 2012 2013 2014 2015 2016

Conditional Local Investments

Other Culture

Education Administrative Services

Local Public Services Public Transport Infrastructure

21

Figures 17 & 18: Composition of Local Government Spending by Functional Classification, 2011-2016 in BN ALL and as a Share of Total

These conclusions, however should be regarded cautiously for two reasons. First, it is possible that

some of the reduction in spending on administrative services has come at the expense of the rural

areas that have been incorporated within municipalities. And second, it is quite possible that

administrative costs will increase in both absolute terms and as a share of total spending as local

governments improve the services they provide.

The importance of conditional investment grants for spending on public transport and public

squares can be seen in the rapid expansion of this category of expenditure in both charts. Indeed,

it masks the growth in absolute spending that has occurred over the last few years in other areas

like Local Public Services. Also noteworthy is the increase in education spending in both absolute

terms and as a share of total spending. In part, this increase comes from Conditional Grants for

education infrastructure. But the lion’s share of the increase in 2016 comes from the devolution of

preschool education to local governments. Finally, it should be noted that spending on Water

Supply and on Housing –both contained in the other category— remain low.

11 11 11 11 11 10

7 5 7 9 11 155 5

66

77

3 33

4 3

7

2 2 22 2

2

1 1 11 2

2

1 1 11 1

2

4 44

33

4

0

10

20

30

40

50

2011 2012 2013 2014 2015 2016Administrative Services Public Transport Infrastructure

Local Public Services Preschool and Primary Education

Sport, Culture, Religion Social Prodection

Secondary Education Other

33% 35% 32% 30% 28%20%

20% 16% 22% 24% 28%30%

14% 16% 16% 17% 17%15%

9% 10% 8% 11% 8% 15%6% 5% 5% 4% 4% 4%2% 3% 3% 3% 4% 4%3% 3% 3% 3% 3% 4%11% 11% 12% 9% 9% 7%

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015 2016

Other Secondary Education

Social Prodection Sport, Culture, Religion

Preschool and Primary Education Local Public Services

Public Transport Infrastructure Administrative Services



5. THE DISTRIBUTION OF LOCAL GOVERNMENT REVENUES

AND EXPENDITURES

The consolidation of local governments in 2015 was accompanied by the development of a new

formula for allocation of the Unconditional Grant in 2016. But this new formula was not fully

implemented in either 2016 or 2017 because MoF imposed “hold-harmless” provisions on the

allocation of the grant. These provisions required that no municipality receive less than 85% of

what they had received in previous years. They were considered necessary by MoF because

contrary to the Ministry’s expectations the GoA did not increase the size of the Unconditional

Grant in 2016 and without such an increase, the formula would have produced a politically

unacceptable number of jurisdictions that lost substantial amounts of funding.

As a result, the new formula —whose parameters are now defined but not fully specified in the

LGFL— is expected to go into effect in 2018. The increase in the Unconditional Grant that is

expected to come from anchoring it to 1% of the Gross Domestic Product should allow for enough

coverage and to ensure that there are no losers from the transition from one formula to another.

In the following, we repeat the same basic analysis of the equity of intergovernmental finance that

we conducted in 201214. As we shall see, the system continues to favor small but not necessarily

poor municipalities at the expense of more urban jurisdictions that appear to have weak tax bases.

Given the hold harmless provisions imposed on the formula this is not surprising since these

provisions essentially left the previous per capita allocation of the grant unchanged.

It should also be noted, that in the following, judgements about the relative wealth and poverty of

municipalities are being made on the basis of their per capita collection of revenues from local

taxes, fees, and charges. This is suggestive, but judgements about the relative wealth of

jurisdictions should not be made on the basis of collected revenues because these are heavily

dependent on the behavior of municipalities -on how willing local governments are to actually tax

their citizens. Instead, such judgements should be made on the basis of an objective measure of

the relative strength of local government tax bases.

Unfortunately, such “objective” measures are hard to come by. But in the future, the expansion of

tax sharing called for in the LGFL –and in particular, the analysis of the per capita yield of PIT by

location- should allow for a much more reliable assessment of the real wealth of municipalities,

14 Tony Levitas, Albanian Local Government Finance on the Eve of Territorial Consolidation, Planning and Governance Reform

Project (ARD-TetraTech/USAID) September 2014 pp. 1-40

23

and with it the equity of the intergovernmental finance system. Nonetheless, it is still useful to

look at the system using per capita collections as the metric of relative wealth.

Table 1 below, presents the per capita revenues of municipalities in quartiles organized by per

capita revenue from local taxes, fees, and charges. What this means is that we have ranked all

municipalities in order of their per capita own-revenues from “poorest” to “richest”. We have then

separated out the Capital City of Tirana as a special case and divided the remaining 60

municipalities into four groups –quartiles– each composed of 15 municipalities each. The first

quartile contains the 15 municipalities that collect the least own-source revenue, while the fourth

contains the 15 that collect the most. The third column in the top half of the table presents the

average population of the municipalities in each quartile. The last column shows the percentage of

total per capita revenues of each quartile in relation to those of the 4th quartile. And the columns

in between, the per capita yield of different types of municipal revenue.

Table 1: Per Capita Revenues of Municipalities by Quartiles Organized by Per Capita Own-Revenue in 2016

Pop. in Quartile

Average Pop.

Own Revenue

Shared Taxes

Uncond. Grant

Condit. Grants

Total Revenue

% of Total Revenue to

4th Quartile

1st 407,306 27,154 1,595 261 8,676 3,251 13,782 66%

2nd 459,703 30,647 3,027 270 7,282 4,806 15,385 74%

3rd 807,183 53,812 4,154 361 6,303 4,602 15,419 74%

4th 568,524 37,902 7,262 430 6,625 6,609 20,926 100%

Tirana 557,422 557,422 13,023 504 4,326 1,254 19,107 91%

All 2,800,138 45,904 5,993 374 6,481 4,180 17,028 81%

Pop. in Quartile

% of Pop.

% of Own

Revenue

% of Shared Taxes

% of Uncond.

Grant

% of Condit. Grants

% of Total

Revenue

Ratio of % of Pop. %

of Revenue

1st 407,306 15% 4% 10% 19% 11% 12% 0.81

2nd 459,703 16% 8% 12% 18% 19% 15% 0.90

3rd 807,183 29% 20% 28% 28% 32% 26% 0.91

4th 568,524 20% 25% 23% 21% 32% 25% 1.23

Tirana 557,422 20% 43% 27% 13% 6% 22% 1.12

All 2,800,138 100% 100% 100% 100% 100% 100% 1.00

In the bottom half of the table, these middle columns show the percentage of each type of revenue

going to a particular quartile. Thus, Tirana collects 43% of all own-revenue in the system but only

gets 13% of the Unconditional Grant despite serving 20% of the population. The last column shows

the ratio of the percentage of the population living in each quartile to the percentage of that

quartiles total revenues. For example, c. 20% of the population lives in the 4th quartile which

receives c. 25% the total revenue in the system. So the ratio of its share of the population to its

share of the total revenues in the system is 1.23 to 1.



As can be seen from the Table, municipalities in the 1st and 2nd quartiles receive larger

Unconditional Grants than all the others. This makes sense because it means that the allocation of

the Unconditional Grant is helping to equalize the (collected) revenues of “poorer” jurisdictions

with those of richer ones. But a number of other things about the Table are puzzling. So puzzling

in fact that they ultimately cast a shadow on this initial observation.

The first is that while the allocation of the Unconditional Grant seems to be flowing to poorer

jurisdictions, the same cannot be said of Conditional Grants. Municipalities in the 1st Quartile

receive less in Conditional Grants than the 2nd Quartile. Indeed, and as can be seen from the bottom

half of the table, 1st Quartile municipalities receive a lower share of the total pool of Conditional

Grants (11%) than their share of the population (15%). This is odd, because one might reasonably

expect that Conditional Grants would also flow disproportionately to poorer municipalities.

But this is clearly not the case. In fact, municipalities in the 4th quartile have the highest per capita

amount from Conditional Grants and receive 32% of all Conditional Grant money despite the fact

that serve only 20% of the population. Indeed, they receive more per capita funding from both the

Unconditional Grant and Conditional Grants than the 3rd quartile, despite the fact that they collect

substantially more in own revenues.

These indicators suggest that while the Unconditional Grant is having an equalizing effect on the

system, it is not very efficient because the poorer jurisdictions of the 3rd Quartile get less per capita

from the grant than their richer counterparts in the 4th. At the same time, the allocation of

Conditional Grants seems to be dis-equalizing because with the exception of Tirana, most of it is

going to jurisdictions with relatively high per capita own revenues. Indeed, it looks like Tirana is

bearing most of the costs of equalization because its shares of both Conditional and Unconditional

Grants are significantly lower than its share of the population. To some extent this is both necessary

and to be expected because Tirana’s own-revenues are off the charts. Nonetheless, when looked at

regionally, it is extremely unusual that the total per capita revenues of a capital city are less than

the average per capita revenues of richest 25% of other municipalities (see below).

What is driving these outcomes becomes a little clearer when we examine Table 2 below. In this

Table, the quartiles are determined not by per capita own-revenues, but by population. Thus, the

1st Quartile is composed of the 15 smallest municipalities, and the 4th the 15 largest. This radically

changes the composition of the quartiles when compared to Table 1, as can be seen from the

percentage of the total population living in each one.

What is striking about the Table is that the per capita own-revenues of the 1st, 2nd and 4th quartiles

are remarkable flat, and that the 3rd Quartile actually collects less per capita revenue than all the

others. What this means, is that there is no obvious relationship between the population of a

municipality and its collection of own revenues. Instead, there are clearly a fair number of small

jurisdictions that do well with the collection of own revenues, as well as a fair number of large

jurisdictions that do not. Moreover, there may be a group of medium sized (3rd quartile)

municipalities with populations of 20,000 to 40,000 people that have particularly weak tax bases.

25

The lack of a clear relationship between population and the apparent ability to raise own-revenue

is unusual because in most countries there is a strong correlation between low population, rurality,

and weak revenue raising ability.

TABLE 2: LOCAL GOVERNMENT REVENUES PER CAPITA BY QUARTILES BASED ON POPULATION 2016

Quartile

Pop. in Quartile

Average Pop.

Local Revenue

P/C

Shared Taxes P/C

Uncond. Grant P/C

Condit. Grants

P/C

Total Revenu

e PC

Ratio of Revenue PC to 4th quartile

1st 121,480 8,099 4,757 232 12,735 11,454 29,178 2.08

2nd 312,190 20,813 4,829 495 8,325 6,316 19,965 1.42

3rd 464,382 30,959 3,639 304 7,449 6,654 18,046 1.29

4th 1,344,664 89,644 4,274 329 6,046 3,385 14,034 1.00

Tirana 557,422 557,422 13,023 504 4,326 1,254 19,107 1.36

All 2,800,138 45,904 5,993 374 6,481 4,180 17,028 1.21

Quartile

Population in

Quartile

% of Pop.

% of Local

Revenue

% of Shared Taxes

% of Uncond.

Grant

% of Condit. Grants

% of Total

Revenue

Ratio of % of Pop. to

% of Revenue

1st 121,480 4% 3% 3% 9% 12% 7% 1.7

2nd 312,190 11% 9% 15% 14% 17% 13% 1.2

3rd 464,382 17% 10% 14% 19% 26% 18% 1.1

4th 1,344,664 48% 34% 42% 45% 39% 40% 0.8

Tirana 557,422 20% 43% 27% 13% 6% 22% 1.1

All 2,800,138 100% 100% 100% 100% 100% 100% 1.0

The three quartiles of the smallest municipalities get higher per capita revenues from both

Unconditional and Conditional Grants than the 4th quartile, despite the fact that per capita local

revenues of the 4th Quartile are lower than those of the first two. The low population quartiles also

get substantially larger shares of these grants than their shares in the total population, whereas the

opposite is true for both the 4th quartile and Tirana. Or put another way, the first three quartiles of

municipalities –in which 32% of the population live—receive 42% of the Unconditional Grant,

and 55% of Conditional Grants. Meanwhile, the 48% of the population that lives in the 4th quartile,

and the 20% of the population that lives in Tirana receive –respectively– 45% and 13% of the

Unconditional Grant, and 39% and 6% of Conditional Grants.

In short, the allocation of both Unconditional and Conditional Grants in Albania strongly favors

municipalities with small populations –whether they are poor or not– over larger ones. To one

degree or another, this is justifiable to the degree that municipalities with low populations are also

sparsely populated. This is because the unit costs of servicing low density jurisdictions are usually



significantly higher than those servicing of at least moderately densely populated ones, though it

is also extremely difficult to measure exactly by how much15.

Nonetheless, Albania’s intergovernmental transfer system is very unusual with respect to how

strongly it seems to favor low population jurisdictions. For example, in Serbia the four largest

cities had per capita revenues seven times those of the 1st quartile of local governments in 2002.

Moreover, even after very significant improvements were made in the equalization system in 2006,

the gap between the richest and poorest quartiles of local governments remained well over 3 to 1,

a gap which widened again at the end of the decade16. Similarly, in 2010, Skopje –the capital of

Macedonia, had per capita revenues close to three times the average of all other jurisdictions,

while the per capita revenues of local governments in the 4th quartile were five times higher than

those of the 1st17. Finally, in Georgia, the capital city of Tbilisi receives close to 50% of all the

revenues in the intergovernmental finance system –including 50% of the “Equalization Grant”-

despite the fact that only 30% of the population lives in the capital.18

The point here, however, is not that Albania should try to emulate what is going on elsewhere. Far

from it. Indeed, in many ways Albania should be complimented for its commitment to equalization.

At the same time, the strong preferences for small jurisdictions –independent of their apparent

revenue raising ability- that can be seen in the allocation of both the Unconditional Grant and

Conditional Grants should be reviewed.

Table 3 below, shows the composition of own-revenues across quartiles ranked according to total

per capita own-revenues19. As would expected, per capita revenues of all types –with the exception

of fees from the use of public space in the 2nd Quartile—increase steadily from the 1st Quartile

15 On both the general tendency of low density jurisdictions to have high unit service costs, and the difficulties of

measuring these differences see J. Kim and J. Lotz (eds), Measuring Local Government Needs, The Korea Institute

of Public Finance and the Danish Ministry of Social Welfare, Copenhagen 2008. We use the phrase “moderately

densely populated” because it is often argued that there is a “U-shaped” distribution of unit costs across

municipalities with different densities, with costs highest in both the least and most densely populated jurisdictions

(See “Introduction,” in Kim and Lotz. Pp 1-12).

16 See Tony Levitas, Reforming Serbia’s Intergovernmental Finance System, Serbia Local Government, in Journal of

Public Administration (Volume 28, Spring 2005) pp. 149-178 and Levitas, The Effects of the Suspension of the Law

on Local Government Finance on the Revenue and Expenditure Behavior of Local Governments in Serbia: 2007-

2009, Serbian Quarterly Economic Monitor, Winter 2010) p. 1-28

17 See Tony Levitas, Local Government Finances in Macedonia Today: Possible Reforms for Tomorrow, IDG

Working Paper, Urban Institute, May 2010, pp 1-39

18 Towards Improving the Efficiency and Equity of Georgia’s Intergovernmental Finance System, USAID/TetraT?ech,

July 2016, pp 1-45. In Georgia, the strong preference for Tbilisi is combined with a strong preference for tiny

settlements in mountainous areas. Taken together this is starving the mid-sized cities and towns in which most of the

population lives, giving Georgia the worst of both worlds.

19 The Table is slightly different from Table 1 because in Table 1 shared Vehicle Tax was included in the pool of

revenues used to create the quartiles.

27

through the 4th and Tirana. Indeed the per capita own revenues of the 4th quartile are more than

four times more than the first. The average population of municipalities in the 3rd and 4th quartiles

are also higher than those in the 1st and 2nd. But again the correlation between population size and

revenue raising ability is far from perfect, because the larger jurisdictions of the 3rd quartile

(average population 54,000) collect significantly less own revenue than their smaller counter parts

in the 4th (average population 38,000). So again, some small jurisdictions are probably getting more

than their fair share of grants, and some larger (and hard-pressed) municipalities are getting less.

Table 3: The Composition of Per Capita Own-Revenues in 2016 by Quartiles based on Per Capita Own Revenues

Pop Property

Taxes

Other Local Taxes

Fees for Local

Services

Fees for the use of

public space

Admin. Charges

Total Own Revenue

1st 396,272 326 417 296 34 418 1,491

2nd 470,737 799 804 656 158 530 2,948

3rd 807,183 1,134 1,199 767 96 906 4,102

4th 568,524 1,778 2,662 1,078 237 1,400 7,157

Tirana 557,422 2,737 5,338 2,861 539 1,511 12,987

All 2,800,138 1,413 2,143 1,162 215 995 5,927

Table 4 below, presents the per capita expenditures of local governments without Conditional

Grants broken down by economic classification and organized in quartiles based on total per capita

expenditures without Conditional Grants. As can be seen from the Table, 55% of the population

lives in the first two quartiles with lowest per capita expenditures from freely disposable revenues

while only 7% of the population lives in the 4th quartile, where such expenditures are close to the

levels achieved by Tirana. The high investment spending of this quartile of small municipalities is

a result of the fact that these municipalities both collect higher than average amounts of own-

revenues while also receiving generous Unconditional Grants. The low investment spending of the

first two quartiles expresses the fact that many fairly large municipalities collect lower than

average amounts of own-revenue while also receiving modest Unconditional Grant awards.

Table 4: The Composition of Per Capita Local Government Expenditure by Quartiles based on Per Capita Expenditure without Conditional Grants in 2016

Pop. % of Pop.

Wages Goods

and Services

Other Operating

Expenditure Investment

Total Expenditure

Investment as % of Total

1st 812,777 29% 4,242 2,264 557 1,826 8,891 21%

2nd 741,150 26% 5,304 3,023 823 2,345 11,495 20%

3rd 492,524 18% 6,296 3,556 1,023 2,925 13,801 21%

4th 196,265 7% 8,920 4,397 1,072 5,367 19,755 27%

Tirana 557,422 20% 6,054 5,908 1,570 7,962 21,494 37%

All 2,800,138 100% 5,573 3,567 947 3,626 13,714 26%



Looking ahead, in 2018 the hold harmless provisions currently governing the allocation of the

Unconditional Grant will be loosened or removed. At the same time, the other coefficients

governing the allocation of the formula –most importantly the coefficients for population and

relative wealth (based on the per capita yield of shared taxes) have to be set. In running the

simulations to determine these coefficients MoF should bear in mind the analysis above and adjust

the formula in ways that make the allocation of the funds more efficient and to the greatest possible

degree shift resources to larger municipalities with particularly weak tax bases. Similarly, the

objectives, rules, and the reporting of Conditional Grants –particularly those governing the

allocation of the Regional Development Fund—should be examined to determine whether funds

are being allocated in a way that serves the greatest good of the greatest number. We return to

these issues in the concluding section of the report.

29

6. THE LAW ON LOCAL GOVERNMENT FINANCE

AND ITS IMPACT ON MUNICIPAL BUDGETS

The passage of the Local Government Finance Law (LGFL) marks a milestone in Albania’s efforts

to create an adequate, equitable, and transparent intergovernmental finance system. The major

achievements of the law can be summarized as follows:

Anchoring the Unconditional Grant: The Law requires that the size of the Unconditional Grant

that local governments receive to support their expenditure responsibilities be set (anchored) at no

less than 1% of the GDP and no less than the previous year. As a result, and for the first time,

municipalities’ single largest revenue source will be predictable from year-to-year and will grow

with the economy. This should allow municipalities to reasonably forecast their budgets over a

multi-year time horizon and substantially improve their ability to plan and execute capital

improvements. It will also stabilize the intergovernmental finance system in ways that should

allow the Ministry of Finance to begin to ease the current restrictions on municipal borrowing.

New Principles for Allocating the Unconditional Grant: The consolidation of 373 local

governments into 61 larger municipalities required the definition of new principles for allocating

the Unconditional Grant. These new principles were necessary because the old ones were based

largely on the legal distinction between municipalities and communes, a distinction that territorial

consolidation made immaterial. But they were also designed to improve the transparency and

equity of the grant by:

• Shifting the foundation for the allocation from population as recorded in the Civil Registry,

towards population as registered in the 2011 census;

• Replacing the proxies for additional expenditure needs (mountainous/non-mountainous; a

non-transparent categorization of local governments in “fiscal distress”) with a single

proxy based on population density;

• Clearly grounding the revenue equalization component of the formula on shared taxes so

as not to discourage own-revenue collection.

In 2016 and 2017, these new principles were not fully used to allocate the Unconditional Grant

because without substantially increasing the size of the grant they would have led to significant

reductions in the grant awards of a number of municipalities that were treated preferentially under

the old formula. As a result, MoF imposed “hold harmless” provisions on the allocation of the

grant so the full effects of the new principles have not been realized.

With the passage of the LGFL not only have these principles been specified in the Law, but the

size of the Unconditional Grant pool has been increased by its anchoring to 1% of the GDP. As a



result, it will be possible to remove the hold harmless clauses that have been governing the

allocation of the grant since 2016. But before the new system can go into full effect, policy makers

will have to specify the population density and equalization coefficients that will be used for the

2018 allocations. These coefficients should be set in such a way as to increase the efficiency of the

grant by pushing money towards municipalities with weaker tax bases (as measured by the per

capita yield of shared taxes) while not penalizing those who increase their collection of own

revenues. It should also direct more funding to municipalities that have high population densities

but low revenue raising capacity –again as measured by the per capita yield of shared taxes.

Increased Role of Tax Sharing in the Intergovernmental Finance System: The Law increases

the role of tax sharing in the intergovernmental finance system by assigning to municipal budgets

2% of the yield of the Personal Income Tax (PIT) generated in their jurisdictions and expanding

the share of the Motor Vehicle Tax they receive from 18 to 25%. These new tax shares will increase

local revenues while also strengthening the equalization system by deepening the pool of funds

that can be equalized against without disincentivizing own-revenue collection. The potential future

increase of the PIT share would also create direct budgetary incentives for mayors to promote job

creation and align national and local interests with respect to formalizing the gray economy.

The Identification of the Property Tax as the Most Important Local Tax: The Law makes the

Property Tax the single most important local government own revenue. The Law regulates

municipalities’ ability to use Temporary Taxes to create ad hoc levies that in practice get

disproportionately imposed on businesses by requiring Temporary Taxes to be imposed as

surcharges on the Property Tax. It also specifies that fees for public services should be tied directly

to the full cost of providing those serves and to the greatest possible degree apportioned across

beneficiaries in accordance with their consumption the concerned services. These provisions

should increase the willingness of municipalities to invest in the modernization of property

taxation while also helping to align fees with service provision. Eventually, they should also help

shift the tax burden from firms to households. Hopefully, they will also strengthen the linkage

between local taxation and political accountability, while improving the business enabling

environment.

New Financial Management Principles: The Law introduces new principles for local financial

management. Among these are new standards for budget planning, execution, reporting, external

auditing, and provisions for identifying and resolving local fiscal distress. Taken together, these

new requirements should improve the sustainability and transparency of budget formation and

execution, reduce the arbitrary imposition of fees and taxes, help resolve situations in which

municipalities have accumulated unsustainable liabilities, prevent such situations from emerging

in the future, and reduce local fiscal mismanagement and malfeasance.

31

Devolution of New Functions to Municipalities: The new Law on Local Self-Government

eliminated the category of shared functions and devolved responsibilities in the areas of fire

protection, pre-school education, irrigation, and forestry to municipalities as own-functions. But

according to the LGFL these functions will be funded in part through Specific Transfers (and not

the Unconditional Grant) in order to ensure that municipalities who have the institutions necessary

to provide the services continue to receive adequate funding for them. This is an awkward

arrangement, but it should also increase the role of municipal governments in the provision of

basic public services. Figure 19 below shows the projected increase in transfers – without

Conditional Grants – that should result from the implementation of the LGFL over the next few

years. The projections are based on the assumption that funding for Specific Transfers, shared

taxes and the Unconditional Grant grow in line with the Government’s Macroeconomic and Fiscal

Framework20.

Figure 19: Projected Increase in Transfers Resulting from the LGFL

Figure 20 below presents a projection of total local government revenue over the next few years,

by integrating the Government’s projections for the Regional Development Fund (under the

Ministry of Urban Development) for 2018-2020, and by projecting a 10% annual increase in the

in the collection of own revenues. Taken together, these changes should generate a 13% increase

in total local government revenues by 2020 if the national government abides by its forecasts,

including those concerning Conditional Grants. This will mark a substantial improvement in the

financial position of local governments.

20 Decision of the Council of Ministers No. 47, dated 25.01.2017, “On the approval of the Macroeconomic and

Fiscal Framework for the period 2018-2020

14.0 12.9 11.2 11.6 11.6 12.2 13.3 12.5 13.0 13 13.8 14.5 16.0

2.53.3

3.8 3.5 1

11

6

7

77

7

19.0

22.2

24.8 26.2

27.4

0

5

10

15

20

25

30

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (P) 2019 (P) 2020 (P)

bili

on

ALL

Unconditional Grant without LGFL Single year support in 2017 Unconditional Grant PIT share Vehicle Tax Specific Transfers



Figure 20: Projected Total Local Government Revenues Resulting from the LGFL

9.1 9.0 11.5 10.415.6 17.1 18.9 20.7 22.8

10.3 12.113.4 12.3

13.215.5

17.118.3

19.5

4.2 4.23.3 3.8

2.22.2

3.53.6

3.6

7.08.3

9.6 10.811.7

9.5 3.53.0

3.06.0 6.7 7.07.0

7.02.02.0

2.0

0

10

20

30

40

50

60

2012 2013 2014 2015 2016 2017 2018* 2019* 2020*Own Source Revenue Unconditional GrantShared Taxes Conditional Grants (+RDF)Specific Transfers for New Functions Conditional Transfers from Line Ministries

33

7. NEXT STEPS

Territorial Consolidation and the passage of both the new Law on Local Self-Government and the

Law on Local Self-Government Finance mark major milestones in Albania’s effort to create local

governments capable of effectively responding to the needs and preferences of their citizens. But

to fulfill their promises, these laws will have to be implemented smoothly and coherently. At the

same time, the GoA will have to decide on a national strategy to improve the use and effectiveness

of the property tax, and take steps to ensure the allocation of Conditional Grants is based less on

considerations of party politics and more on the objective needs of municipalities, however

defined. In the following, we outline some of the major challenges that remain to be faced.

Preparing, Negotiating and Allocating the Unconditional Grant: As we already indicated, in

2015, MoF developed a new formula to allocate the Unconditional Grant to the 61 consolidated

municipalities. The new formula’s main principles were later incorporated into the LGFL. But as

already discussed, in 2016 and 2017, MoF implemented the new formula using hold harmless

clauses.

This should not be repeated in 2018 particularly because it will be the last time in the foreseeable

future that the grant pool will expand significantly enough (2.5 to 3.5 billion ALL) to dampen the

effects of the reallocation of funds required by the new principles. Equally importantly, it needs to

be stressed that while these principles are stated clearly in the law, it is up to MoF and Parliament

– after consulting with the Consultative Council - to determine some of the coefficients and

brackets that will influence the final allocation of the grant, in particular the population density

component of the formula and its equalization provisions.

It is therefore important that work be initiated on the final structure of the formula as soon as

possible. In conducting this work both MoF and the representatives of local governments should

be guided by an understanding of the problems with the current allocation of the formula and the

objectives they want to achieve. In particular efforts should be made to redirect funds away from

small jurisdictions with robust tax bases and towards some of the larger municipalities that have

weak tax bases.

Ensuring that new tax shares are distributed on a True Origin Basis: The LGFL requires that

municipalities receive 2% of the PIT and 25% of the vehicle registration tax generated in their

jurisdictions. To date, however, MoF has never had to be concerned with the origin of PIT, only

that firms paid it on behalf of their employees. Allocating PIT on origin basis will thus require

going into the PIT database and extracting information about the place of residency of employees.

This is technically possible, but MoF needs to begin work in this area quickly if the tax is to be

allocated on an origin basis in 2018.



Similarly, while the 18% share of the Vehicle Registration Tax has been allocated to local

governments on an origin basis in the past, the registration of the tax by the Road Directorate has

not been transparent. As a result, there has been uncertainty about whether local governments are

getting their “fair share” and constant tension between municipalities, MoF, and the Road

Directorate over the attribution of the tax to particular jurisdictions. To avoid these tensions in the

future, clear and transparent procedures for attributing the Vehicle Tax by origin should be

developed and implemented by MoF and the Road Directorate and discussed with local

governments.

Preparing new Financial Reporting and Budgeting Standards, and for Monitoring and

Resolving “Fiscal Distress”: The LGFL requires municipalities to improve their public finance

management practices in accordance with new guidelines, procedures and formats developed by

MoF (and the Central Audit Chamber). These include guidelines for projecting own-revenues;

formats for reporting all tax payers, tax liabilities and tax abatements; formats for reporting the

level of local fees and charges by type of fee payer; templates for both line ministries and

municipalities to report the allocation and use of Conditional Investment Grants; principles and

procedures for budget formulation, execution and reporting; and principles and procedures for the

external auditing of municipalities by accounting firms, principles and procedures that differ

substantially from the auditing of private sector entities. The development of these guidelines and

formats should be done in collaboration with the Consultative Council in order to ensure that their

implementation does in fact improve the finance and management practices of municipalities.

Further, the implementation of all these guidelines and bylaws from local government units is

critically dependent on the improvement of the human capacities at both the local and national

level.

Articles 56-59 of the Law also establish procedures for identifying local governments that are

having serious problems meeting their financial obligations and are at risk of becoming, or already

are, financially insolvent. These procedures require MoF to monitor municipalities’ unpaid

payment arrears, something that will require the Ministry to develop new detecting and reporting

formats. They also require municipalities whose arrears exceed certain thresholds to develop

financial work out plans, and for MoF to ensure that these plans are successfully implemented.

This is entirely new and contentious terrain. Moreover, according to senior MoF officials a number

of municipalities already exceed the first and second thresholds (arrears greater than 25% of their

annual expenditures) and five or six of them may already be in the third phase of “fiscal distress”

(arrears greater than 80% of their annual expenditures). If the provisions of the LGFL are to be

implemented, these municipalities, in cooperation with the MoF will have to develop and

implement recovery plans. Such plans are always problematic because they temporarily constrain

the financial independence of democratically-elected local governments. To ensure that they

generate as little conflict as possible they will have be both carefully prepared and clearly

35

explained to all stakeholders. To ensure that this is possible, work on these problems should begin

as fast as possible both within MoF and with the Consultative Council. Further, the system cannot

be entirely based on self-declaration and MoF should take steps to periodically monitor whether

local governments are really budgeting financial commitments in line with revenues.

Harmonizing Sectorial Legislation with the Devolution of New Functions to Municipalities

and the Rules Governing Specific Transfers: The new Law on Local Self-Government devolved

to municipalities significant new responsibilities in the areas preschool education, fire protection,

irrigation and forestry as own-functions. As own-functions, local governments should be free to

manage these functions as they see fit. They should also pay for them out of their general revenues.

But while this is the goal, it will take some time for this to become a reality.

There are two reasons for this. The first is prosaic: while the Law devolved these responsibilities

to municipalities as own functions, they continue to be regulated by sectorial laws and regulations

set by line ministries. Some regulation of these sectors will remain necessary to ensure that local

governments provide services in accordance with some set of minimum standards. Nonetheless

the existing legislation will have to be overhauled in order to give local governments some

reasonable amount of managerial autonomy. Finding the right balance between local autonomy

and centrally set but achievable service standards is a non-trivial task. At a minimum, it will require

intensive discussions between the line ministries responsible for regulating these sectors and the

municipalities who will now be delivering the concerned services.

The second reason is more complex and will complicate the task of determining reasonable

regulatory standards for the newly devolved functions. The origin of the problem lies in the fact

that the geographical distribution of the assets and employees that have been providing these

services on behalf of the national government is extremely uneven. For example, there are only 49

fire stations in the country, and not 61, meaning that while fire protection has been devolved to all

municipalities as an own function, not all municipalities have the assets and employees necessary

to provide the service. Similarly, the percentage of preschool-age children who have access to

preschools differs dramatically from one municipality to another because the national government

was never able to build and staff preschools everywhere they are necessary.

As a result, there is an inherent tension between devolving these functions to all municipalities as

own responsibilities, and the reality that only some of them have the infrastructure and staff to

actually provide the service now. Worse, this tension expresses itself in an extremely painful

financial dilemma: if all local governments are expected to provide newly devolved services

according to some reasonable minimum standards, then all local governments should be receiving

the resources necessary to do so. But giving all local governments these resources is incredibly

costly precisely because the services have never been adequately funded in the past -or at least not

everywhere in the country.



If, however, the national government simply allocates what it has spent on these functions in the

past to all local governments based on some reasonable metric like the number of citizens or pre-

school age children that these local governments must serve, then nobody is happy: local

governments that already have the assets and employees to provide the services get less money

than they got before and often have to close facilities. Meanwhile jurisdictions that don’t have the

infrastructure or employees, get some new money but typically not enough to actually provide the

service.

Unfortunately, there is no easy way out of this problem, a problem which in fact haunts

decentralization efforts in many countries across the globe. In Albania, the LGFL created the

category of Specific Transfers to give all parties to the problem additional time to work through it.

These Transfers allow the national government to provide those municipalities that already have

the infrastructure and employees to actually provide the concerned services with the same amount

of money that the national government spent on them in the past.

This is clearly unfair to other jurisdictions that should also receive funding for these new own

functions. But it prevents the reduction of services in places where they already exist. More

importantly for our purposes, the law limits the use of Specific Transfers for three years. As a

result, the national government has three years to develop and implement plans to overcome the

problems caused by devolving to (newly created) local governments public services that

historically have been provided (and funded) very unevenly across the country.

In some sectors these plans are already emerging. For example, the national government has

committed itself to building fire stations and purchasing fire trucks in at least some of the

municipalities that don’t have them. This is a good start, but the issue will require not only building

new infrastructure in many municipalities, but figuring out how local governments everywhere

should finance the operating costs of the services going forward. Meeting these challenges will

require a combination of sectorial, financial and legal expertise as well as the active and continuous

engagement of the Consultative Council and Albania’s Municipal Associations.

Strengthening Local Government Tax Powers: To improve the responsiveness, accountability

and efficiency of local governments it is critically important to strengthen the linkage between

municipalities and their electorates through local taxation. This will require the development of a

coherent political, legal and technological framework for the registration, valuation, billing,

collection and enforcement of the property tax, as well as rules that ensure that other local fees,

charges and taxes are fairly and uniformly imposed on different categories of tax payers.

With the encouragement of the IMF, the national government has recently begun considering the

development of a centralized fiscal cadaster designed to facilitate the registration and valuation of

37

all real property in the country. This may be a good idea, but the experiences of Kosovo and

Republika Srpska suggest that technologically sophisticated and centralized systems of property

registration and billing, do not in themselves ensure radical increases in the yield of the tax.

Meanwhile, the experiences of Serbia and Montenegro suggest that significant improvement in the

collection of the tax can be achieved without centralized cadaster systems if the national

government is prepared to consistently support municipalities in developing their capacity to

administer the tax, apply pressure on them to use the tax, and reward those who do.

It is beyond our purposes here to suggest the particular path that Albania should take to improve

the regulatory regime governing the property tax. But at least three points should be made here.

First, the construction of this regulatory regime needs to be developed with the active engagement

of local governments if they are going to actually use the tax. Second, both the national government

and municipalities must make it clear to taxpayers how and why they are being taxed, if voluntary

compliance is to improve. Or put another way, policy makers at both the national and local levels

must understand that while technical improvements in tax administration and collection are

extremely important, at the end of the day successful local taxation requires as much a change in

tax culture, as it does in tax administration. And finally, the experiences of other countries suggest

that while real gains in own-revenue mobilization can be achieved with the property tax reform,

these gains take years to mature and generally do not produce financial gains of sufficient

magnitude to allow for the reduction of national government transfers.

Reforming the Regional Development Fund: As we have indicated, the share of conditional

grants in the Albanian intergovernmental finance system has been inordinately high over the last

10 years and all ruling political coalitions have used the Fund as much for political purposes as for

developmental ones.

Over the coming years, the size of the Regional Development Fund will probably shrink as

indicated in the Governments’ Macroeconomic and Fiscal Projections for 2018-2020. Local

governments should consider this eventuality, and focus more of their energies on raising the

revenues they need to maintain high investment rates. At the same time however, the Regional

Development Fund will remain an important part of Albania’s intergovernmental finance system

and steps should be taken to ensure that its allocation is not only depoliticized, but focused on the

country’s most pressing needs.

For example, the Fund should clearly be used to equalize the resource and facility endowments

that are currently inhibiting all local governments from providing forestry, irrigation, fire

protection and pre-school services as own-functions in accordance with the 2015 Law on Local

Self Governance. This could be done by clearly stating that equalizing these endowments is a

priority of the fund, and that much of the fund will be used to build and equip fire stations and



preschools in those municipalities that don’t have them, or have too few of them relative to their

service (e.g. preschool age) populations.

Similarly, thought should be given to using the fund more to support critical efforts in the areas of

water supply, sewage treatment and solid waste disposal, as opposed to roads. Moreover, in

thinking through these issues, efforts should be made to ensure that the funds produce the greatest

good for the greatest number. This probably means directing funds to more densely populated

urban areas for network infrastructure at the cost of funding rural roads, and shifting the bias in

the existing allocation of the grants from small jurisdictions –regardless of the relative wealth—to

larger ones that have low revenue raising capacities as measured by the per capita yield of shared

taxes in their jurisdictions.

Improving local government access to debt financing: The LGFL, by stabilizing the foundations

of the intergovernmental finance system, should make municipalities more creditworthy. In light

of this, the GoA should consider loosening restrictions on local borrowing. Creditworthy

municipalities should be allowed to make effective use of their right to borrow while national

government conditional investment grants should be directed predominantly towards

municipalities with low revenue raising ability as measured by their per capita revenues from

shared taxes.

The careful liberalization of access to credit is also important because the inability of financially

sound local governments (e.g. Tirana) to finance major capital improvements through debt seems

to be encouraging them to enter into extremely non-transparent arrangements with private

developers to build public infrastructure. These non-transparent arrangements (read: badly

constructed PPPs) should be constrained, and where possible replaced with bank loans based on

simple, transparent and prudent debt regulations, most of which are already specified in the Law

on Local Government Borrowing of 200821.

At the same time, the GoA should also continue its efforts to reduce the borrowing of the national

government because at present Albania’s total public debt as a percentage of GDP (71%)

significantly exceeds the limits set by the European Union’s Maastricht Treaty (60%). As a result,

national government debt continues to crowd out local government borrowing.

21 Articles 17 and 18 of Law Nr. 9869, 04.02.2008, “On Local Government Borrowing.”

39

APPENDIX 1: COMPOSITION OF LOCAL GOVERNMENT BASIC REVENUES, IN ORDER OF THEIR PER CAPITA OWN REVENUES

Row Labels Pop. By Census

Local Revenues Per

Capita

Shared Taxes Per

Capita

Uncond. Grants Per

Capita

Condit, Grants

Per Capita

total revenue

per capita

Has 16790 716 288 11,252 10,440 22,696 Dibër 61619 1,065 190 8,156 1,183 10,594 Pustec 3290 1,174 118 10,196 333 11,821 Kurbin 46291 1,306 357 6,253 2,825 10,741 Bulqizë 31210 1,382 814 10,242 5,829 18,266 Këlcyrë 6113 1,553 151 12,866 12,398 26,968 Memaliaj 10657 1,590 150 11,831 4,066 17,637 Gramsh 24231 1,709 131 11,027 2,711 15,579 Klos 16618 1,712 141 8,705 2,703 13,261 Mat 27600 1,800 213 9,389 4,316 15,718 Peqin 26136 1,845 187 6,538 2,006 10,576 Kukës 47985 1,918 267 8,918 567 11,669 Prrenjas 24906 1,934 150 6,893 827 9,805 Maliq 41757 1,967 161 6,872 3,189 12,189 Mirditë 22103 2,178 243 12,050 8,131 22,602 Tepelenë 8949 2,353 294 13,669 16,060 32,375 Pukë 11069 2,361 177 14,080 8,980 25,599 Devoll 26716 2,406 222 7,818 1,301 11,748 Librazhd 31892 2,418 129 8,916 9,610 21,073 Fushë_Arrëz 7405 2,631 120 15,222 1,925 19,898 Divjakë 34254 2,712 212 6,473 16,962 26,358 Ura_Vajgurore 27295 2,794 316 4,698 5,546 13,353 Kuçovë 31262 3,052 242 6,617 1,181 11,092 Selenicë 16396 3,072 155 9,849 7,092 20,168 Pogradec 61530 3,086 185 6,708 1,159 11,138 Libohovë 3667 3,087 318 13,406 7,261 24,071 Rrogozhinë 22148 3,164 156 5,889 5,635 14,845 Kolonjë 11070 3,190 206 14,423 11,733 29,552 Vau I Dejës 30438 3,220 532 6,506 7,621 17,878 Shkodër 135612 3,421 356 5,863 1,035 10,675 Cërrik 27445 3,611 208 5,868 5,817 15,503 Fier 120655 3,638 549 5,643 5,961 15,791 Përmet 10614 3,841 266 12,779 13,836 30,723 Poliçan 10953 3,844 242 11,041 5,616 20,742 Elbasan 141714 3,849 258 5,911 5,334 15,352 Belsh 19503 4,012 160 6,352 9,564 20,089 Lushnjë 83659 4,026 311 5,751 3,895 13,983 Malësi e Madhe 30823 4,180 251 8,749 2,055 15,235 Tropojë 20517 4,196 189 10,670 4,636 19,691 Lezhë 65633 4,281 468 5,982 1,509 12,241 Berat 60031 4,296 344 7,255 7,095 18,990 Krujë 59814 4,493 258 5,054 4,846 14,651 Patos 22959 4,791 2,325 6,579 4,588 18,283 Kamëz 104190 4,794 34 4,611 535 9,974 Gjirokastër 28673 4,854 454 10,323 7,831 23,462 Finiq 10529 4,879 339 11,804 690 17,712 Vlorë 104827 4,942 368 6,217 1,667 13,193



Konispol 8245 5,216 124 7,039 22,474 34,853 Delvinë 7598 6,103 347 11,870 9,636 27,956 Shijak 27861 6,111 283 5,185 2,993 14,571 Durrës 175110 6,739 448 4,896 3,205 15,288 Kavajë 40094 6,926 277 6,659 10,885 24,746 Skrapar 12403 7,209 624 15,067 14,177 37,077 Korçë 75994 7,221 333 7,667 9,237 24,459 Mallakaster 27062 7,245 307 7,655 12,783 27,989 Roskovec 21742 8,245 1,907 5,147 5,690 20,989 Tiranë 557422 13,023 504 4,326 1,254 19,107 Sarandë 20227 13,223 637 8,953 17,778 40,591 Vorë 25511 13,727 68 4,844 5,719 24,358 Dropulli 3503 13,810 631 20,115 15,728 50,284 Himarë 7818 20,763 184 14,008 41,963 76,919

national average 2,800,138 5,993 374 6,481 4,180 17,028

41

APPENDIX 2: COMPOSITION OF EXPENDITURES PER CAPITA (WITHOUT CONDITIONAL GRANTS) IN 2016

Pop. Wage

s

Goods and

Services

Other Operating Expenditur

e

Investment

Total Expenditur

e

Investment as % of

Total

Kurbin 46,291 4,081 2,662 330 652 7,726 8%

Prrenjas 24,906 4,397 2,103 470 886 7,856 11%

Kamëz 104,190 3,164 1,209 316 3,355 8,045 42%

Peqin 26,136 3,767 1,521 431 2,328 8,049 29%

Shkodër 135,612 3,558 3,301 753 516 8,128 6%

Krujë 59,814 3,886 1,922 614 1,993 8,417 24%

Vau I Dejës 30,438 3,785 1,317 425 3,277 8,805 37%

Belsh 19,503 4,210 1,766 353 2,627 8,956 29%

Ura_Vajgurore 27,295 3,985 1,547 385 3,068 8,985 34%

Librazhd 31,892 5,592 1,873 463 1,394 9,323 15%

Divjakë 34,254 4,075 2,459 716 2,471 9,722 25%

Pogradec 61,530 5,137 2,555 809 1,254 9,756 13%

Cërrik 27,445 4,561 2,720 685 1,878 9,846 19%

Maliq 41,757 4,642 1,710 327 3,217 9,897 33%

Elbasan 141,714 5,275 2,624 644 1,450 9,995 15%

Lushnjë 83,659 4,913 2,996 568 1,542 10,020 15%

Klos 16,618 4,907 2,203 610 2,318 10,039 23%

Kuçovë 31,262 5,876 2,137 354 2,089 10,457 20%

Devoll 26,716 4,658 2,768 778 2,314 10,520 22%

Kukës 47,985 6,439 2,685 830 1,115 11,071 10%

Dibër 61,619 5,557 1,584 546 3,863 11,551 33%

Mat 27,600 6,445 2,425 732 2,000 11,603 17%

Lezhë 65,633 6,657 2,470 867 1,672 11,666 14%

Vlorë 104,827 4,478 4,907 1,466 914 11,766 8%

Rrogozhinë 22,148 4,371 4,197 202 3,111 11,882 26%

Bulqizë 31,210 5,421 2,808 396 3,268 11,894 27%

Konispol 8,245 5,488 3,754 589 2,301 12,133 19%

Memaliaj 10,657 6,508 2,918 1,221 1,511 12,160 12%

Shijak 27,861 3,800 4,183 1,185 3,032 12,202 25%

Durrës 175,110 5,186 2,760 849 3,428 12,224 28%

Pustec 3,290 7,555 2,121 467 2,260 12,404 18%

Mal. e Madhe 30,823 4,551 1,694 466 5,991 12,704 47%

Fier 120,655 5,547 3,423 1,455 2,406 12,832 19%

Has 16,790 6,142 2,685 525 3,561 12,915 28%

Berat 60,031 6,138 3,137 760 2,965 13,000 23%

Gramsh 24,231 6,735 3,351 923 2,202 13,211 17%

Mallakaster 27,062 6,751 3,159 846 2,537 13,294 19%

Patos 22,959 6,863 2,429 840 3,250 13,383 24%

Selenicë 16,396 5,591 2,972 1,167 4,095 13,826 30%

Finiq 10,529 6,853 4,519 1,162 2,087 14,623 14%

Korçë 75,994 6,396 5,348 1,234 1,872 14,851 13%



Përmet 10,614 10,373 3,396 845 734 15,349 5%

Poliçan 10,953 8,314 3,404 379 3,527 15,624 23%

Mirditë 22,103 8,303 3,293 404 3,755 15,756 24%

Kavajë 40,094 6,411 4,356 1,155 4,060 15,983 25%

Pukë 11,069 10,288 2,610 1,211 1,924 16,034 12%

Këlcyrë 6,113 7,115 2,123 863 7,055 17,157 41%

Gjirokastër 28,673 10,437 3,282 1,337 2,361 17,419 14%

Vorë 25,511 5,222 3,776 554 7,998 17,552 46%

Tropojë 20,517 6,771 3,147 583 7,135 17,636 40%

Delvinë 7,598 9,412 5,076 709 3,037 18,235 17%

Roskovec 21,742 5,219 2,779 568 9,740 18,307 53%

Kolonjë 11,070 10,875 4,243 1,508 1,930 18,557 10%

Fushë_Arrëz 7,405 10,334 3,762 1,502 3,300 18,900 17%

Libohovë 3,667 8,553 3,798 1,096 6,171 19,619 31%

Sarandë 20,227 10,219 8,810 1,729 2,260 23,020 10%

Tepelenë 8,949 10,727 3,224 1,253 8,672 23,876 36%

Skrapar 12,403 13,712 4,342 979 6,582 25,616 26%

Himarë 7,818 11,460 9,390 975 5,207 27,033 19%

Dropulli 3,503 13,190 12,542 3,341 6,222 35,296 18%

Tiranë 557,422 6,054 5,908 1,570 7,962 21,494 37%

Grand Total 2,800,13

8 5,573 3,567 947 3,626 13,714 26%

43

U.S. Agency for International Development Planning and Local Governance Project in Albania

Dervish Hima St. 3 Towers near Qemal Stafa Stadium

Tower No. 1, Apt. 91, Tenth Floor Tirana, Albania

Tel: + 355-04-450-4150 Fax: + 355-04-450-4149

www.usaid.gov

albania - plgp.al · plgp contact: kevin mclaughlin, chief of party [email protected]...

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