White Paper on Fiscal Decentralization

Fiscal Decentralization Issues in Albania

This White Paper on Fiscal Decentralization in Albania is prepared under the auspices of the USAID funded Planning and Local Governance Program (PLGP) to support the effort to further fiscal decentralization in Albania. It is written to accomplish two main objectives:

  1. Provide a comprehensive overview of the current situation and possible actions that should be considered by policy makers to implement further decentralization.
  2. Provide a means to stimulate central and local level dialogue and consensus building on what further actions... can be implemented to support the continuation of the fiscal decentralization effort in Albania.

This White Paper examines the main areas of fiscal decentralization with assessment of the current situation supporting decentralization and a more detailed examination of the main areas to include (1) legal framework, (2) administrative territorial structures and expenditure assignments, (3) revenues and intergovernmental transfers, and (4) local borrowing. These issues are addressed in the main sections of this White Paper and are summarized in this executive summary.

In reviewing the progress that Albania has achieved over the past decade there are a considerable number of improvements in the local government system that has provided a foundation for further improvements. However, a realistic assessment should also indicate that little progress toward a more decentralized system has occurred over the past several years and several challenges to achieve a more decentralized system have not been met.
An assessment of progress on fiscal decentralization can be summarized with a strengths, weaknesses, opportunities and threats (SWOT) analysis that is more fully detailed in the main section of this report and briefly highlighted here.


The main strengths supporting progress toward fiscal decentralization are the (1) enactment of the basic legal frameworks that describe and define the authorities and functions of the local government units, (2) expenditure assignments are relatively clear with the exception of some shared functions, (3) own source revenues have been defined, (4) the unconditional grants have attempted to promote equalization across the local government units, and (5) local government budgeting capacity and citizen involvement has generally increased.


However, even with this progress over the past decade a number of weaknesses still exist that need to be overcome in the next several years. These weaknesses can be grouped into three main areas: (1) National Policy Development Framework, (2) Legal and Regulatory Framework, and (3) Local Government Authorities and Capacities. The main weakness in the National Policy Development Framework is the failure to formally adopt a National Decentralization Strategy, although much effort was put into this over the past several years. This is primarily due to the lack of a national level organizational policy and coordination mechanism that is actively working to develop this National Decentralization Strategy document. Another weakness contributing to this is the fragmentation of the local government associations, which prevents the development of a coherent policy for the local government units. These factors have inhibited the promotion of a policy dialogue and consensus building effort that would produce a national level decentralization policy document.

While there has been substantial progress in the overall legal framework with several different laws enacted; the main weakness is a comprehensive Law on Local Finance that would provide a more logical and consistent legal framework. The existing laws have some major deficiencies and inconsistencies that have been the source of conflicts at the local government level. In some instances, such as with the small business tax and the local borrowing; national level regulations have impacted these fiscal instruments from being effectively utilized by the local governments. Within the local government level the continuation of a number of small local government units that are unable to provide services is an ongoing problem. Additional weaknesses creating some confusion with the local government structures are (1) the role of the regions, (2) shared functions are not clearly defined, (3) lack of capacity for collecting some revenue sources, particularly the property tax and small business tax, and (4) unpredictability of the transfers to the local government units.


Identifying weaknesses always produces some opportunities for improvements. The primary opportunities for improving the fiscal decentralization situation are (1) improving the dialogue between the national and local government stakeholders, (2) enacting a Law on Local Government Finances that was drafted several years ago, (3) revising the intergovernmental transfers to provide more objective, transparent, stable and simple allocation criteria, and (4) enhance the revenue raising capacity of the local government units for own source revenues.


The main threats to overcoming the weaknesses and grasping the opportunities for improvements remains (1) the continuation of divisions with the local government associations, (2) lack of national level effort to promote policy dialogue through organizational structures, (3) no improvement in the legal framework on local finances to clarify areas of expenditures, revenues and transfers, and (4) no adjustments in the administrative territorial structures that would improve service delivery in a more rational and economic manner.


PLGP Support

The USAID funded PLGP program components are directed toward improving the fiscal decentralization situation in Albania. The PLGP will be providing support in the areas of fiscal decentralization policy development beginning with this White Paper on Fiscal Decentralization and supporting the development of a national and local level dialogue on the issues identified in this paper through a conference on fiscal decentralization and subsequent roundtables to discuss these issues in more detail in the coming months. The program mandate provides for supporting the enactment of a Law on Local Government Finances and improving the intergovernmental transfer system. Other components of the PLGP will address the improvement of service delivery at the municipal and commune level through working with 15 local government partners.


Click here to read the download the full version of the White Paper on Fiscal Decentralization. (PDF 1.95 MB)


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