Decentralisation and Regionalisation in Bulgaria

Towards Balanced Regional Development

Report

OECD Multi-level Governance Studies

23 February 2021

3. Bulgaria’s multi-level governance system: A diagnosis

Abstract

Bulgaria’s efforts for decentralisation and place-based regional development since the early 1990s have not yet yielded the desired outcomes. Despite successive decentralisation strategies and implementation programmes, the country has maintained its centralised multi-level governance model. Regional policy is still top-down and does not foster an integrated approach across sectors. Municipal governance faces several challenges in the three key dimensions of decentralisation: political, administrative and fiscal. Effective regional governance is missing at both the district and planning region levels. Governors are not equipped with sufficient power and administrative and financial resources to carry out their functions and implement regional policy while planning regions are also particularly weak.

The difficult path towards decentralisation and place-based regional development policy

Bulgaria’s decentralisation process is a gradual process, spanning the past 30 years. Various steps have been taken, including restoring local democracy in the early 1990s, reforming the local public finance system, as well as taking a more institutional and comprehensive step since 2006 to deepen the decentralisation reforms. However, these efforts have not yielded their expected outcomes and Bulgaria remains a centralised state in many respects, thereby demonstrating that one of the most powerful impediments to decentralisation is the lack of political support.

Similarly, Bulgaria’s significant efforts towards place-based regional development policy have not always produced the expected results. Regional development policies remain centrally designed and implemented without taking into consideration specific territorial needs, addressing the region-specific factors that cause economic and social stagnation, or allowing all regions to achieve their full economic potential.

Bulgaria has undertaken a gradual process of decentralisation for 30 years but with mixed results

Bulgaria has undertaken a long path towards decentralisation since the early 1990s. This process has been gradual, with stops and starts, in an economic and political context that was not always conducive to such reforms. Three phases can be distinguished. The first phase from 1991-2001 when Bulgaria restored and consolidated local self-governance and established the legislative and regulatory framework for local governance. The second phase was from 2002-05. The country made significant advances in fiscal decentralisation in this period, aiming to address issues that emerged from the increasing responsibilities of local governments. The third phase was from 2006-15 when the government adopted a more comprehensive decentralisation strategy. Overall, since 1991, the decentralisation process in Bulgaria has taken place in fits and starts and was temporarily suspended between 2011 and 2013. On the eve of the new 2016-25 decentralisation strategy, the prior decentralisation process has not produced the expected results and Bulgaria remains a centralised country in many areas.

1991-2001: Restoration and consolidation of local democracy

In 1991, Bulgaria restored the foundations of its local democracy. In this year, Bulgaria adopted its current constitution, which establishes the municipal government as the only decentralised level of government, while district councils were abolished. In 1995, the first “real” local elections were held, in tandem with the Local Elections Act coming into effect (International Republican Institute, 1996[1]). The government consolidated the municipal governance system and continued the decentralisation process by adopting a package of laws that included: the Act on Administrative and Territorial Structure of the Republic of Bulgaria (1995), the Act on the Territorial Division of Stolichna Municipality (Sofia) and Major Cities (1995), the Referendum Act and Municipal Property Act (1996), the Local Taxes and Fees Act (1997), and the Municipal Budgets Act (1998), among others. This set of regulations and legislation provides the framework conditions for Bulgaria to build its local governance and democracy. In 1995, the National Assembly of Bulgaria also ratified the European Charter of Local Self-Government of the Council of Europe, which requires states to secure and protect the political, administrative and financial autonomy of territorial communities (MRDPW, 2016[2]).

The National Association of Municipalities in the Republic of Bulgaria (NAMRB) was established in 1996. While serious attention was paid to political and administrative decentralisation, particularly concerning the definition of competencies and responsibilities of local government in specific spheres of activity, revenue decentralisation has lagged. This has resulted in a gap between spending needs and authority over local revenues in many municipalities.

2002-2005: Progress towards fiscal decentralisation

A stronger decentralisation momentum emerged in 2002, with a firm focus on adjusting intergovernmental fiscal policies. Following the signature of a co‑operation agreement between the government and NAMRB on municipal fiscal autonomy, the government adopted a concept paper on fiscal decentralisation to be implemented over the period 2002-05. The objective was to more clearly delineate the responsibilities of municipalities and their sources of financing, creating sound and rules-based systems of intergovernmental transfers and strengthening the financial capacity of local authorities (Nenkova, 2014[3]).

This programme produced an in-depth transformation of the local financial system. The distribution of responsibilities between the central and municipal governments was clarified and two types of municipal spending responsibilities were distinguished: state-delegated responsibilities (mainly education, social protection and healthcare) and exclusive municipal responsibilities. State-delegated responsibilities are now funded by state transfers (including shared taxes) while other responsibilities are financed by own-source revenues.

Significant changes were also made to the structure of municipal revenue, particularly in the area of shared tax revenue. Before 2003, municipalities received around 50% of personal income tax (PIT) and 10% of corporate income tax (CIT) as well as a small share of excise duties. The 2003 reform abolished the municipal share of CIT and excise tax and instead allocated 100% of the proceeds of PIT to municipalities. PIT became the only shared tax revenue source for municipalities and thus a major source of financing. The Local Taxes and Fees Act was also amended to assign full legal rights to municipalities to set the base and size of local fees by application of the cost-recovery principle. Additionally, municipalities were granted the power to provide some tax exemptions to certain taxpayers for local, social and economic policies.

Finally, the Municipal Debt Act was adopted in 2005 to provide the first comprehensive legal framework for municipal borrowing; this represented an important guarantee against municipal default and a vital precondition for fostering the growth of a market in municipal credit (Stoilova, 2007[4]).

2006-2015: A more comprehensive reform on paper but with mixed outcomes

Boosted by the European Union (EU) accession process, Bulgarian decentralisation policy took a new step through the adoption of an ambitious “Strategy for Decentralisation for the period 2006-15” by the Council of Ministers (CoM). Compared to the previous strategy that mainly focused on fiscal decentralisation, the 2006‑15 strategy promoted a more comprehensive approach, reviewing not only municipalities but also the district and sub-municipal level administration. The strategy defined a series of measures aimed at achieving three strategic objectives, namely:

Objective 1: Enhance the transfer of powers and resources from the state bodies to the municipalities to strengthen local self-government.
Objective 2: Optimise the functional competencies of the district governors and the territorial units of the central executive bodies for co‑ordination of sectoral policies at the regional level.
Objective 3: Develop decentralisation within the municipality, i.e. between the “mother municipality” and its mayoralties and wards.

Three programmes were adopted for the duration of the decentralisation strategy, covering the period of 2006-09, 2010-13 and 2014-15 respectively. A Council for Decentralisation of State Governance was set up in 2006 to monitor the progress. The results highlight several main achievements, mostly in the area of fiscal decentralisation but also several unsatisfactory results.

On the positive side, the following points can be highlighted (MRDPW, 2016[2]):

Major tax reform in 2007: While the PIT as a shared tax was phased out, a constitutional change granted taxing power to the municipalities. This represented great progress towards fiscal autonomy. Municipalities can now determine local taxes as provided for and within the limits of the Local Taxes and Fees Act. The patent tax was transferred to the municipalities as an own-source tax. Municipalities were also given the power to directly collect taxes.
Municipalities also received full power over municipal fees.
Municipal revenues from concession contracts have increased, resulting from the transfer of 50% of the revenues from state concessions; a considerable number of properties owned by the state were also transferred to the municipalities.
The Fund for Local Authorities and Governments in Bulgaria (FLAG) was created to provide financial assistance to municipalities for the absorption of EU funds.
The legal framework for inter-municipal co‑operation and a public-private partnership was established.
The Strategy for Innovation and Good Governance at Local Level of the Council of Europe was implemented, paying special attention to the strengthening of local democracy.

On the more negative side, the overall outcomes of the 2006-15 decentralisation strategy were considered unsatisfactory. Only 39% of the decentralisation measures in the strategy have been completely implemented, with 22% not being implemented or started at all. Most of the measures of Objective 2 (districts) and Objective 3 (mayoralties) were not implemented. These include: resolving the co‑ordination issues among the territorial units of the central administration, as well as between these units and the district governors; expanding the discretion and administrative capacity of the district administrations to implement functions of supra-municipal importance; ensuring interdependence between the district development strategy and sectoral strategies, among others. Furthermore, there was no progress concerning the need to provide more powers to mayoralties and wards to reduce centralisation at the municipal level.

Despite this continuity over almost 30 years and permanent reaffirmation of the need to deepen decentralisation, many initiatives are yet to be implemented and many problems remain unsolved. Therefore, after almost three decades, the role of Bulgarian local governments in the economy is weak. Bulgaria belongs to the group of countries where a relatively low level of decentralisation is combined with a relatively low level of public spending, by international comparisons (Figure 3.1).

Why advancing decentralisation reforms is difficult in Bulgaria

The political economy of multi-level governance reforms is a key element to “make reforms happen”. Multi-level governance reforms are always particularly sensitive and difficult to conduct, as demonstrated by the number of failed reforms in many OECD countries (OECD, 2010[5]). Policymakers face a variety of challenges, including structural constraints (e.g. including countries’ specific features and political conjuncture), the problem of “reforming the reformer” and the difficulty of gaining citizen interest and public support (OECD, 2017[6]).

The last two challenges are particularly relevant for Bulgaria. “Reforming the reformer” has appeared to be one of the most powerful obstacles to decentralisation and regionalisation reform in Bulgaria. The difficulty is that since the public administration must indeed design and implement its own reform, it needs to impose measures that may be contested both at the central and local levels. Reshaping vertical interactions between central and subnational governments alongside changes to horizontal relations within the central administration itself, and within subnational governments, is particularly complex. They involve several layers of government, elected politicians and non-elected officials, as well as various other stakeholders with often-conflicting interests. There is often strong resistance to reform at all levels of government. In Bulgaria, it seems that there is resistance to reform at the central government level (several ministries, civil servants) and the municipal level. While municipalities support decentralisation reform, they seem to be more reluctant to the idea of further regionalisation.

Figure 3.1. The relative importance of subnational governments in the economy, EU-28, 2018

The second main obstacle is the lack of social demand. Citizens and non-governmental organisations (NGOs) do not seem to have a strong interest in decentralisation. This is also associated with the problem that most of the NGOs in Bulgaria are structured around sectoral issues or the problems of certain social groups, instead of being territorial or locally oriented.

Finally, it seems that the topic of decentralisation itself is not considered a priority but more of a secondary issue, far behind challenges related to the economic and financial situation. This opinion was particularly dominant after the 2008 global economic and financial crisis when subsequent budgetary consolidation measures relegated decentralisation reform to second place. Policymakers are hesitant to endorse decentralisation due to concerns about increasing macroeconomic instability. Decentralisation would imply transferring spending responsibilities, resources and decision-making to lower levels of governments and thus is perceived as a potential loss of control over macro-management. This reflects the absence of a genuine and deep understanding of the benefits of decentralisation among politicians and civil servants. Politicians tend to view decentralisation more as a problem than as a necessary and integral part of solutions to the country’s development and modernisation issues. In such a context, the decision-makers do not have a clear vision of what needs to be done. This confirms that, in Bulgaria, decentralisation reform is primarily impeded by political obstacles rather than technical ones. It has not labelled as a high priority on the political agenda while decentralisation cannot succeed without political and citizens’ support (MRDPW, 2016[2]).

Regional policy in Bulgaria is not sufficiently place-based or integrated

Many exogenous factors are contributing to poor outcomes of regional development policies, in particular, large and increasing inter- and intra-regional disparities (Chapter 2). Bulgaria entered the EU in 2007, just ahead of the global economic crisis, making it unable to fully reap the benefits of joining the EU market at the start. Throughout these years it was also a demanding task for Bulgaria to learn and adapt to the EU policy environment and, in particular, the implementation of complex EU cohesion instruments. Moreover, while the EU integration has been accompanied by a convergence of national economies for less developed EU countries, it has also generated an internal divergence process across and within regions (Totev, 2017[8]). In addition, territorial disparities are aggravated by a series of megatrends – globalisation, demographic and social changes, resource scarcity, climate change, urbanisation and digitalisation – which are particularly difficult to thwart and manage and have more pronounced impacts on already lagging regions and countries.

Nonetheless, one inherent factor is the lack of a place-based approach in Bulgaria’s regional development strategy and policies. Place-based policies refer to policies that can effectively address the diversity of economic, social, demographic, institutional and geographic conditions across regions. These policies target specific territories and provide the tools that traditional structural policies often lack to address region-specific factors that cause economic and social stagnation. They also promote an integrated approach across sectors ensuring that a wide range of sectoral policies, from transport and education to innovation and health, are co-ordinated with each other and meet the specific needs of different regions – from remote rural areas to the largest cities (OECD, 2019[9]). By its very nature, a place-based approach also mobilises local actors, based on the core assumption that local actors know best regarding what to do and when, in the places where they live (Barca, McCann and Rodríguez-Pose, 2012[10]).

In Bulgaria, a place-based approach has not yet materialised. The current approach to regional policy implementation fails to address the needs and unlock the potential of regions and municipalities, notably small cities and rural areas, to capitalise on cross-sector synergies. The new integrated approach for regional development has not yet yielded the expected results of regional growth and convergence.

In the 2014-20 period, Bulgaria has designed its regional policy framework with a focus on reducing regional disparities through the creation of a polycentric spatial development model with multiple urban centres, to allow for more sustainable and balanced growth across regions (MRDPW, 2019[11]). This integrated approach, called “broad regional policy”, developed as part of the National Concept for Spatial Development (NCSD) for the period 2013-25, aims at putting an end to the monocentric model of development which has led to growing disparities between Bulgarian regions, in particular the significant growth of Sofia (capital) district. It also focuses on boosting development in regions while reducing regional disparities (EoRPA, 2017[12]; NCRD, 2012[13]). The NCSD is directly connected with the Operational Programme “Region in Growth” (OPRG) for the period 2014‑20 and with the National Regional Development Strategy (NRDS) 2012-22, approved by the CoM in August 2018. The main goal of the NRSD is the achievement of “sustainable integrated regional development, based on the local potential, and cohesion of the regions in economic, social and territorial aspects” (Box 3.1). However, as underlined in Chapter 2, inter- and intra-regional disparities have increased, with Sofia (capital) district benefitting the most from current development policies.

Box 3.1. 2014-20 regional policy in Bulgaria aims for an integrated approach

Territorial development in Bulgaria is governed by the guidelines and proposals of three strategic national documents: the National Development Programme Bulgaria 2020, the National Regional Development Strategy (NRDS) 2012-22 and the National Concept for Spatial Development (NCSD) 2013-25. The three documents are complementary to each other in proposing territorial measures to address the objectives for smart, sustainable and inclusive growth following the “EUROPE 2020” strategy (EC, 2014[14]).

The National Concept for Spatial Development is directly connected with the 2014-20 OPRG, in line with the increasing emphasis of EU Cohesion Policy on urban and community development, and linked with the NRDS 2012-22. The NCSD uses a territorially based approach to identify priorities and measures to achieve the objective of balanced and sustainable territorial development. It promotes a polycentric spatial development model, with 39 cities as urban centres to drive balanced development (Figure 3.2). This is to address the current monocentric growth model where there are no counterweights to Sofia (capital) district in terms of population size, economic contribution, development of science, higher education, healthcare, art and culture (Kalfova, 2019[15]).

Figure 3.2. Bulgaria aims to develop a polycentric urban development model

Strategic planning for regional development remains mainly top-down and not integrated

Compared to a truly placed-based approach, regional policy design in Bulgaria remains mainly top-down and is thus unable to account for region-specific needs and strengths. National authorities play the dominant role as decision-makers in the strategic planning process, with subnational documents strictly subordinate to the national framework. Sectoral policies still dominantly influence the strategic planning for regional development, especially at the subnational level (e.g. regional development plans, municipal development plans, etc.). Due to this, Bulgarian regional policy is unintegrated and at arms-length from the regions and municipalities it is supposed to target. This renders regional policy in Bulgaria unintegrated and not place-based in practice. Lower-level units are expected to align their objectives and priorities to the strategic programmes at the national level. Strategic management is still mainly controlled by the Council of Ministers, with priorities and objectives trickling down to the lower units (EC, 2018[16]).

Strategic documents demonstrate a clear hierarchy from the EU level down to the municipal level (Figure 3.3). Strategic documents prepared by subnational governments mainly model and replicate the same procedures and formats as the national strategic documents. This approach also applies to the spatial development planning system. In theory, this may ensure the alignment of objectives and priorities across all levels; but in practice, this approach did not manage to ensure strategic coherence. Studies found that planning in Bulgaria was relatively slow, thus municipalities failed to receive the required documents on time and the quality of strategic documents was poor (Kalfova, 2019[15]). Furthermore, there is no evidence in the current document preparation procedures and ex post control actions that suggest that coherence between the National Regional Development Strategy and the regional development plans at the planning region level can be ensured (NAO, 2019[17]). This lack of coherence is demonstrated by a large volume of documents and poor co‑ordination during their preparation, which creates difficulties in achieving coherence for planned initiatives.

The missing linkage between regional development strategies and sectoral policies suggests that strategic planning in Bulgaria is not integrated. To begin with, sectoral planning in Bulgaria is prioritised over regional development. Various strategic documents state that regional development strategies at all levels should be developed following sectoral priorities. Considering sectoral targets when designing regional development strategies has its merits if conducted properly. However, in practice, regional development documents at the three territorial levels are found not to reflect the projections and investment intentions of sectoral strategies for the territory concerned (NAO, 2019[17]).

On the other hand, there is no mechanism for the territorial co‑ordination of sectoral strategies. This suggests the absence of integrated thinking and can significantly reduce the effectiveness of regional development strategies. Local policies are often limited to government-subsidised activities. Identifying issues of local importance usually follow the funding sources, not vice versa as it should be.

At the municipal and district levels, problems exist with policy development and implementation, particularly with regards to co‑ordination for policy execution. The findings in the 2011 draft Concept of District Government Reform show that very few strategic documents are linked to the continuation of policies at the municipal and district levels. Similarly, there is no mechanism for funding these policies at the district and municipal levels. Districts and municipalities are not engaged in activities aimed at implementing the national strategic documents, which limits the possibility of achieving them at the national level (Government of Bulgaria, 2014[18]).

Figure 3.3. The system of strategic documents for regional development

The current system of EU funds remains insufficiently place-based

The design and implementation of EU Cohesion Policy in Bulgaria in the current programming period appears to be a centralised process. Responsibility for preparing national and sector strategies, as well as the EU Partnership Agreement, rests with the CoM, its central co‑ordination unit and line ministries. Among the public authorities represented in the elaboration process of the partnership agreement, only 12% are from the local level (below the EU average of 17%) (EC, 2016[20]).

Inputs into Operational Programmes (OPs) priority setting and project selection from regional and district development councils, as well as the NAMRB, are also limited. The weak implementation of the partnership principle1 across different OPs is also one of the key issues.

There have been some recent efforts to improve the territorial approach. The 2014-20 programming period included the OPRG whose main objective is to tackle territorial imbalances in the country by identifying complementary effects for achieving regional and urban development policy objectives (EC, 2014[21]). The 39 largest urban centres of Bulgaria, identified as urban centres to support the polycentric spatial development model in the National Concept for Spatial Development 2013-25 (NCRD, 2012[13]), are the main target group of the OP. They also act as Intermediate Bodies (IBs) to participate in project selection for one Priority Axis “Sustainable and Integrated Urban Development”. In the same vein, six territorial offices – corresponding to the six planning regions – have been created within the Managing Authority (MA) for OPRG, to assist the MA for the OPRG implementation.

However, despite these efforts, there is still room for improvement to reinforce the territorial approach. For instance, the current six territorial offices are mainly in charge of inspection tasks and payment verification, rather than participating in priority setting and strategic planning. Meanwhile, it is also the first programme period in which the 39 municipalities will act as IBs to participate in project selection for Priority Axis 1 of OPRG – some municipalities might not have extensive experience or capacity in the area of strategic project selection. As for other Priority Axes, ministries tend to design the project in advance. One approach that is taken sees the ministry design the project, set its budget and then let the municipalities decide on the type of investment required. Nevertheless, it is not unheard of for a line ministry to identify several municipalities as “beneficiaries”, establish the projects to be implemented in each and then determine the project budgets. Once the technical documentation and specifications of the applications are confirmed by the originating line ministry, the selected municipalities then submit their European Regional Development Fund (ERDF) project applications to the MA. As a result, while ministerial priorities are likely being met, municipal priorities may not be.

Finally, similar to the 2007-13 programming period, the current absorption of EU funds in Bulgaria is still concentrated in big municipalities, including Stolitchna municipality (Sofia), instead of favouring the less developed regions and cities. For both programming periods (2007-13 and 2014-20), EU funds benefitting the Stolitchna municipality (Sofia) amounted to BGN 4.151 billion as of the end of June 2019. Stolitchna municipality (Sofia) has absorbed nearly 1/3 of the total amount of funds allocated under the OPs or about BGN 2 900 per person on average – a higher absorption rate than the country average of roughly BGN 1 500 per person (IME/Sofia Investment Agency, 2019[22]).

Despite the substantial efforts in absorbing cohesion policy funds and some promising results in terms of economic development (Box 3.2), there is still no evidence of Bulgaria achieving the main purpose of these funds, i.e. reducing regional disparities. This suggests that the approach used so far to determine EU financing based on sector priorities and to define urban and rural areas has led to unhealthy competition between municipalities and has deepened inter-regional, intra-regional and municipal disparities and imbalances. In practice, authorities may tend to select projects that are easier to implement, rather than projects that enhance convergence and regional development (Schoenberg, 2018[23]).

Box 3.2. 2014-20 EU funds and programmes for Bulgaria and regional development

For the current period of 2014-20, a total of EUR 11.7 billion (EUR 1 660 per inhabitant) is dedicated to implementing the European Structural and Investment Funds (ESIF) in Bulgaria, combining EUR 9.9 billion from EU financing and EUR 1.8 billion from national co-financing.

The EU financing comes from EU Cohesion Policy funds and amounts to EUR 8.7 billion over the period from 2014-20, which is equivalent to roughly Bulgaria’s 2.4% of gross domestic product (GDP). This envelope is channelled through the European Regional Development Fund (ERDF, 48%), Cohesion Fund (CF, 31%), and the European Social Fund (ESF, 21%). The allocation of Cohesion Policy funds from the EU to Bulgaria totals over EUR 1 billion per annum. EU Cohesion policy funding provides significant support for tackling structural challenges in Bulgaria, investing, among other things, in research, technological development and innovation, the competitiveness of enterprises, sustainable transport, education, employment and social inclusion.

The Cohesion Policy programmes for Bulgaria include 8 programmes, the largest allocation of funds being for the OP “transport and transport infrastructure”. Agricultural and fisheries funds, along with other EU programmes, also contribute to addressing investment needs. By the end of 2019, around 85% of the total amount was allocated to projects, while 41% was reported as having already been spent on the selected projects. These implementation levels are in line with the EU average (Figure 3.4).

The estimated effect of ESIF boosted GDP by 5.5% and helped create 200 000 new jobs by 2019. ESIF alone are responsible for almost 77% of GDP growth in the country. Almost 5 000 enterprises have already benefitted from the support. Additionally, up to 96% of ESIF expenditure has touched on 13 of the 17 of the United Nations Sustainable Development Goals (SDGs) (EC, 2020[24]).

The OP specifically targeting regional development is “Regions in Growth” (OPRG), amounting to over EUR 1.5 billion. Its objective is to tackle territorial imbalances in the country by identifying complimentary actions for achieving regional and urban development policy objectives.

Figure 3.4. Allocation and absorption of ESIF in Bulgaria, by Operation Programme, by 30/12/2019

Diagnosing decentralisation at the municipal level: The political, administrative and fiscal dimensions

The three dimensions of decentralisation – distribution of powers (political), responsibilities (administrative) and resources (fiscal) - are complementary and closely interconnected. Linkages should be carefully considered to maximise the chance of success of decentralisation. In practice, however, finding the right balance and sequencing between these three dimensions represents a major challenge for policymakers. Many countries implementing decentralisation reforms often find that there are one or two missing links and bad sequencing (OECD, 2017[6]; 2019[25]). Bulgaria is no exception. The following section tries to answer two main questions: what are the problems and challenges in these three dimensions of decentralisation; and how may these problems impede achieving the ultimate goal of balanced territorial development? Fiscal decentralisation appears to be the weakest dimension of the Bulgarian decentralisation process although significant progress remains to be achieved in the two other areas as well.

Improving local democracy through enhanced political decentralisation within municipalities

Political decentralisation involves the distribution of decision-making and enforcement powers according to the subsidiarity principle, between different tiers of government, with different objectives, and often to strengthen local democracy. Thus, how subnational administrators are selected (elected or not) is critical. Accountability, transparency and citizen engagement are also critical perspectives in this regard. In Bulgaria, political decentralisation has been carefully taken into consideration in providing democratic legitimacy and accountability to municipalities. However, some improvements are still needed to improve local democracy, especially concerning decentralisation within municipalities at the sub-municipal level and the citizens’ involvement at the local level.

Since the restoration of local democracy, municipalities and their mayors are strong political actors

Municipalities are today the only directly elected local self-governments that enjoy the independent political power protected by the constitution. Deliberative power is exercised by the municipal council, which determines the municipality’s policies while the executive power is exercised by the mayor (See Chapter 2 “The municipal level and its localities”). Mayors are supported by a municipal administration divided into specialised administration and general administration. The initial design of the local government system was “weak mayor-council” but the practice over the years has led to a gradual evolution towards “strong mayor-council”. Several reforms have reinforced the autonomy of the mayor vis-à-vis the council and thus reaffirmed the tendency towards strengthening the mayor’s powers and responsibilities to decide on local policy within the municipality (Minkova et al., 2006[26]; Petrov Simeon, 2020[27]).

Since their restoration, municipalities have been key and stable actors in providing public goods and services to the population. They have an irreplaceable role in any kind of territorial and multi-level governance reforms, strategies and policies, and ensure political representation at the local level. The last municipal election took place in October 2019 to elect a total of 36 233 candidates running for mayoral and municipal council seat. Voter turnout was 43% of among 6.2 million eligible voters. This turnout was 10 percentage points below the 2015 turnout of 53.6%. Declining voter participation rates are observed in many EU and OECD countries but, in the case of subnational elections, the level of decentralisation could also be an explanation of low voter turnout. The more power that is devolved and the more autonomous the subnational tier is, the more is at stake in elections at this tier. The high level of participation in Nordic countries confirms this assumption. Many authors have also argued that devolving power to subnational levels allows citizens to communicate more efficiently with their representatives and, therefore, makes the latter more accountable. This, in turn, should make subnational politics more meaningful and increase political participation (Gendzwill, 2019[28]). This declining level of turnout in Bulgaria could thus reflect a lack of confidence in decentralised institutions and their capacity to govern effectively. If the decline is persistent, it may present a red flag concerning participative democracy and governance. It signals that people are choosing not to use voting as a mechanism of engagement in civic life and implies that future elected governments may not accurately reflect the broadest possible segment of the population (OECD, 2017[29]).

Figure 3.5. Voter turnout in local elections in 21 European countries, 1990-2014

The centralised municipal level model requires improvements

Bulgaria belongs to the group of EU and OECD countries that have established an institutionalised level of localities at the sub-municipal level. Such localities can be effective actors in reinforcing local democracy, bringing citizens closer to policymaking and political life and providing proximity to public services. However, in Bulgaria, these community-based governments have long historical traditions and perform different functions. The Bulgarian sub-municipal model is highly centralised, which prevents it from providing the benefit that such a level could bring.

The network of sub-municipal entities comprises 3 187 mayoralties (kmetstva) in rural areas, 35 city wards (rayoni) in urban areas and a network of around 1 070 villages. Mayoralties are deconcentrated municipal units established by the decision of the municipal council, governed by elected mayors and comprising at least 350 inhabitants. Urban wards, located in the 3 municipalities with more than 300 000 inhabitants (Stolitchna municipality (Sofia), Plovdiv and Varna [24 urban wards in Stolitchna municipality (Sofia), 6 in Plovdiv and 5 in Varna]), also have elected mayors. Settlements below 350 inhabitants do not have an elected mayor but instead, the mayor of the municipality may appoint a mayor’s representative (a mayor delegate) for the term of office to exercise executive tasks.

Within Bulgaria, there is an “intra-municipal centralisation”, compromising to some extent the outcomes of political decentralisation. The existing election system does not guarantee the representation of sub‑municipal units in the municipal council (Bobcheva, 2008[30]). Mayoralties and wards are just deconcentrated administrative territorial units. The municipal council approves the total number, structure and functions of mayoralties. Tasks of mayors include the implementation of the municipal budget and legal acts in the locality, the organisation of public works and other undertakings, the management of municipal property and staff, environmental protection, land use, police, administrative functions such as civil registers and administrative services to the population, public order and safety (defence from disasters and accidents) and representation. They can also execute functions assigned by the mayor of the municipality.

Most of the decision-making power remains concentrated at the municipal level, leaving sub-municipal institutions with a very limited ability to bring policies and services closer to their citizens (Peteri, 2008[31]). Mayoralties in Bulgaria do not have a role in designing local planning or development policy either. The mayor of a ward or a mayoralty may participate in the meetings of the municipal council but only with an advisory vote. Governance and management efforts at the sub-municipal level are an ad hoc process that depends on the will of the mayor, his/her subjective judgment of local needs and the mayor’s ability to raise funds. Public services, a mayoralty’s functions and their financial resources are not clearly defined by law, thus the scope of public services performed may vary even within sub-municipal governments of the same municipality (Bobcheva, 2008[30]; MRDPW, 2016[2]; Ivanov et al., 2002[32]).

The mayoralties, inhabited by about 30% of Bulgarian residents, have very limited roles in the provision of public services. Their role is confined to representing the village in municipal meetings and to suggesting solutions to any problems or needs in their locality. In general, administrative services are still far from the service users, who need to travel to the municipal and district centre to access many services. As of the end of 2014, 169 administrative services have been provided by the municipalities and only between 3 to 5 types of services, mainly referring to civil status, are delivered by the mayoralties. The role of village mayors is limited to proposing certain projects but their proposals can be disregarded by the municipal administration (Bobcheva, 2008[30]). Frequent changes to the threshold population size required for the establishment of a mayoralty, as well as the inconsistent policy concerning the zoning of cities, have also had a negative impact on the decentralisation process at the municipal level (MRDPW, 2016[2]).

Stakeholder engagement is not sufficiently developed at the municipal level

One of the most severe disadvantages resulting from the centralised governance model is the low level of stakeholder engagement, including civil society organisations (CSOs), citizens and businesses at the municipal level in Bulgaria. Civil society participation was not enshrined in the constitution. The important role of civil society, citizens and business organisations in ensuring successful place-based region policy reforms and good governance in general, cannot be emphasised enough. However, it does not appear to receive sufficient attention from national and subnational Bulgarian authorities.

CSOs are not recognised as an important partner of the public administration at the central and local levels in policy decision-making, planning and implementation (BTI, 2018[33]). One challenge at the local level for Bulgarian municipalities is the lack of territorially based or local CSOs that are united to safeguard their interests. The existing CSOs are primarily sectorally aligned and focus on the protection of interests of certain social groups but not of the local community as a whole.

Only in 1996 did the Public Consultation Act permit that referendums, citizens’ general assemblies and petitions can be organised for issues of local interest at the municipal and sub-municipal levels, but only if certain thresholds are met. There are other indirect forms of participation, regulated by the Law for Local Self-government and Local Administration, which include participation in open sessions of the municipal council, written proposals and opinions to the commissions of the municipal council, as well as various community associations (Stefanova, 2018[34]). The Administrative Reform Council at the CoM adopted Standards for Public Consultations, and published a Civic Participation Guide (Council of Ministers of the Republic of Bulgaria, 2019[35]). The high participation thresholds for initiating any form of direct participation at the local level and for making its results valid, together with the overly complicated and expensive bureaucratic procedure, discourage direct democracy in Bulgaria (Nikolova, 2011[36]). There were three local referendums in 2017. In one of them, turnout was sufficiently high to ensure that the result was binding on the municipal council (SGI, 2019[37]).

Engaging civil society, citizens and business communities in governance and policymaking is difficult across most municipalities in Bulgaria. It appears a vicious cycle that in many cases, municipalities lack the knowledge, mechanisms or staff to properly and strategically engage the civil society and citizens, while citizens and NGOs do not express a great interest in public consultations. Many do not believe that their engagement can have a tangible impact on the governance process. For example, the OPRG prescribes that, according to the partnership principle, municipal development plans shall be discussed and agreed with all interested bodies and organisations, including economic and social partners, individuals and representatives of legal entities. However, the level of participation in public consultations is low. Even though according to the mayors, all municipalities have organised a public discussion during the drafting process of the development plans, many of them do not have any written rules in place for conducting a public consultation (NAO, 2019[17]). As a result, public discussions are mainly attended by municipal employees. The observed practice does not create confidence that the actions carried out by the municipal administration are sufficient to attract a larger number of persons in public discussions.

While publishing public sector information in an open format increases government transparency and enables citizens to hold their representatives accountable, access to municipal information and quality of municipal information is insufficient. Despite most local administrations being computerised, electronic services are limited and municipal websites offer only basic information and application forms for a subset of administrative services (World Bank, 2015[38]).

In Bulgaria, the government introduced an online public consultation portal (www.strategy.bg), which was recognised as a good practice of digital democracy by the Parliamentary Assembly of the Organization for Security and Cooperation in Europe. It presents regulatory and strategic documents at both the national and local levels for public consultations. For the district and municipality level, over 500 documents have been uploaded for consultation between end of 2013 and beginning of 2021. These documents include draft ordinances and amendments related to local taxes and fees, municipal property management, sporting activities, etc., as well as municipal development plans and sectoral development plans at the local level. However, in practice, most of these documents do not receive any public comments (Council of Ministers, 2021[39]). The public consultation process is not yet systematically implemented and public consultation does not take place for many government initiatives (World Bank, 2015[38]).

In general, as in another six EU countries, the Bulgarian governance model of open data is exclusively top-down (EC, 2019[40]) and open government data initiatives at the municipal level are scarce, e.g. in Stolitchna municipality (Sofia). Although most Bulgarian municipalities actively publish information about their budgets, the information is too complex and its interpretation and understanding require specialised expertise. This in turn discourages citizen participation in such an important area as municipal finance (Government of Bulgaria, 2016[41]).

There is not enough work underway to stimulate the establishment of civic structures on a territorial basis, nor to integrate these structures into local policy formulation, adoption, implementation and monitoring processes. Some form of direct participation in local government on a territorial basis is observed only in the largest cities but, in general, the level of civic activity remains unsatisfactory (UPEE, 2020[42]).

The result is the low participation of citizens in the development, adoption and control over the implementation of municipal policies (MRDPW, 2016[2]). According to the Government Closeness Index, which measures people’s empowerment on various aspects of government decision-making at the local level, Bulgaria ranked 43^rd among 182 countries but 24^th among the EU-28 countries (Ivanyna and Shaw, 2014[43]).

Effective administrative decentralisation has been limited so far

Administrative decentralisation refers to the transfer of responsibilities and functions from the central government to subnational governments. The outcomes of administrative decentralisation depend on the way responsibilities are allocated. The way responsibilities are shared should be explicit, mutually understood and clear for all actors, and without strong imbalances across policy areas. It is equally important to have clarity about the different functions that are assigned within policy areas, be it financing, regulating, implementing or monitoring. The effectiveness of administrative decentralisation also largely depends on the capacity of subnational governments in taking up these competencies. It is thus crucial to identify administrative capacity gaps, constraints and obstacles that prevent local governments from fulfilling their tasks and functions.

In Bulgaria, effective administrative decentralisation has been limited so far, despite commitments included in the successive decentralisation strategies and programmes. Bulgaria remains a centralised country, with municipalities accounting for a relatively small share of public expenditure which is mostly delegated spending made on behalf of the central government. Delegated spending undermines municipal spending autonomy and reduces the efficiency in the provision of public goods at the local level. Municipal investment is relatively small and fragmented and is highly dependent on EU funds. Administrative decentralisation is further constrained by multiple limitations related to the administrative and strategic capacity of municipalities. Finally, Bulgarian municipalities do not exploit all the possibilities offered by the inter-municipal co‑operation framework, both in rural and urban areas.

Local expenditure is relatively low and constrained

According to the Local Self-government and Local Administration Act, municipalities are in charge of a wide range of responsibilities. However, the reality is a bit different. Most of the responsibilities are shared between the central government, the districts (state deconcentrated administration) and the municipalities (Table 3.1. ).

	Central government	Districts (deconcentrated administration)	Municipalities
1. General public services (administration)	Administrative services	Administrative services	Municipal administration; Civil registers; Issuance of building permissions, categorisation for tourism accommodations, permits for use of beaches; Management of municipal property (municipal airports, ports, etc.); Management of municipal companies; Cemeteries
2. Public order and safety	Police; Firefighting; Road traffic control	Firefighting; Public order; Disaster protection; Co‑ordination of road safety regulations	Shared: Municipal commissions for juvenile delinquency, prevention; Municipal programme for disaster risk reduction; Traffic signs
3. Economic affairs/transports	General policy on road infrastructure (Road Infrastructure Agency); Republican Transport Scheme; Railway transport: Civil aviation; Motor vehicle registration; Agriculture; IT; Tourism national policy; Energy	Road safety (district commissions); Public transport scheme; Implementation of state policy for the promotion of investment; Co‑ordination of information technology (IT) development; Tourism strategies and programmes	Municipal roads; Parking; Implementation of the policy for investment promotion upon the elaboration of the municipal development plan; Adoption of local programmes for tourism development, building and maintenance of tourism infrastructures Shared: Urban public transport; Upgrading of local infrastructure for electricity, heat and natural gas networks
4. Environment protection	Management of protected areas; National Waste Management Plan; Air pollution prevention	Implementation of the state policy on environmental protection; Conservation, sustainable use of soils	Environmental protection; Waste management; Sewerage systems; Development and implementation of programmes to decrease pollution levels; Local air quality maintenance
5. Housing and community amenities			Spatial planning; Water supply; Housing (together with housing associations); Urban heating; Urban rehabilitation and development plans
6. Health	Drug prevention and public health services; Medical products; Primary healthcare		Municipal hospitals (exclusive) and district hospitals (shared); Nursery schools (shared)
7. Culture & recreation	Protection and development of culture	Protection of cultural heritage	Shared: Theatres, libraries; Local media; Sport; Leisure implementation of the cultural heritage preservation policy
8. Education	Higher education; Special and disciplinary schools	Employment and vocational training	Pre-school education; Early, primary and secondary education (delegated); Construction and upkeep of buildings; Canteens and extracurricular activities
9. Social welfare	The state is not a direct provider of social services. Its role is to form the policy in this area and to assure financing from the state budget for a certain number of services.	Planning of social services at the regional level	Child protection; Centres for homeless children; Home-based assistance for the elderly; Social inclusion; Residential homes for senior citizens (delegated)

Source: Provided by the Ministry of Regional Development and Public Works in the OECD questionnaire prepared for this multi-level governance review.

As a result, the level of local government expenditure is low in Bulgaria, accounting for 7% of GDP and 20% of public expenditure in 2018. Both spending ratios are significantly lower than EU-28 averages (15% of GDP and 34% of total public spending). Moreover, despite successive decentralisation strategies and programmes in the past two decades, this share has not increased (Figure 3.6). From 2000 to 2018, the share of subnational government spending in total public spending has been stagnant, with ups (a small peak in 2015 likely stimulated by the new decentralisation strategy and injection of EU funds) and downs (consolidation measures following the economic crisis).

Figure 3.6. Subnational expenditure in Bulgaria, 2000-18, and its comparison with EU-28 countries in 2018

Figure 3.7. The share of subnational government spending in general government spending by the Classification of the Functions of Government (COFOG), 2017

Municipalities also have limited spending autonomy and are empowered to take independent decisions for only a small percentage of their expenditure. The reason is that municipal expenditure includes a large share of state-delegated expenditure. In fact, since the fiscal decentralisation programme in 2002/03, municipalities have two types of spending tasks: state-delegated mandates and exclusive municipal responsibilities. Delegated spending mandates are mainly in the areas of education, social protection and healthcare but also include culture, public transport and public order and safety (Table 3.1). The central government is formally responsible for providing those services. Municipalities are mainly “service delivery and paying agents”: budgets “arrive” at the local level with almost all provision decisions already taken by the respective ministries (NALAS, 2018[45]). Exclusive municipal responsibilities, financed from general transfers and own resources, mainly concern local public goods. Although municipalities have more autonomy in these areas, central regulations, norms and standards or budgetary rules may impose ceilings or compulsory expenditures.

In 2017, municipalities spent over half of their budget (53%) on state-delegated responsibilities (Figure 3.8). The latest data (2014) show that 58% of municipalities spent even more (between 50%-70%), with 5 municipalities spending over 70%. Education represents one-third of municipal total spending, almost double the EU-28 average (19%). While it is common that subnational governments in southeast Europe allocate a bulk of their budget to education, Bulgaria is the only case in which local governments need to cover the full costs from pre-education to secondary education,2 including the maintenance of schools and teacher salaries (NALAS, 2018[45]). Local governments do not have real decision-making powers regarding municipal school directors and teachers’ employment and compensation. Municipal councils can make proposals to establish, transform and close municipal schools but the Minister of Education has the final say (MRDPW, 2016[2]). Municipal decision-making is restricted to the construction and maintenance of the municipal school buildings since they are public municipal property.

Health and social protection spending accounted for 9% and 10% of the municipal budget respectively, in 2017. In these two areas, spending is also strongly constrained by guidelines and requirements from line ministries. The quality, quantity and access to these services are mainly under the purview of the state based on legally introduced criteria and standards (Ladner, Keuffer and Baldersheim, 2015[46]). Local governments’ influence on health and social services is minimal.

Figure 3.8. Subnational government expenditure by functional area (COFOG) in EU-28, 2017

In addition, it has become a common practice that line ministries and state agencies increasingly delegate additional tasks to municipalities in a sporadic manner, even if these tasks are beyond their scope of responsibility. When such obligation is stipulated by law, it leaves an “open door” for line ministries to create secondary legislation to add obligations to municipalities, given that district administrations in Bulgaria do not have adequate capacity to carry out these functions. Many of these delegated activities – typically administrative duties – are highly resource-intensive and not all municipalities have the capacity to implement these tasks. In some cases, the scope of these activities may be inappropriate and “atypical” to local governments, such as: controlling copyright compliance by shops, restaurants and hotels (2018 Copyright Act); implementing the 2019 national programme on wild animals through adopting local programmes (including monitoring stray dogs); ensuring the quality of timber woods (measuring the humidity level); allocating buried lands; and establishing and financing municipal police units among others.

The main objective of the 2002-03 fiscal decentralisation reform was well intended. Distinguishing between delegated and exclusive responsibilities would provide clarification and transparency on local budget planning. Its implementation, however, was problematic. Instead of first defining the tasks which should be purely local, purely national or having a significant spill-over beyond the local level, the reform drew the line between delegated and exclusive functions according to the source of funding (Nenkova, 2014[3]). As a result, central authorities increasingly delegate functions to municipalities as long as they provide corresponding transfers, even if it is outside the scope of municipal responsibility. This increases the mismatch between municipal tasks and their capacity to perform them, leaving municipalities with the difficult task of ensuring the quality of these services. This is also detrimental to municipal fiscal stability and sustainability, especially in the context of underfunded delegated mandates.

Municipal investment is relatively small, fragmented and highly dependent on EU funds

In 2018, municipalities contributed around 43% of total public investment, equivalent to roughly 1.3% of GDP. Both ratios are lower than the EU average of 53% and 1.5% respectively (Figure 3.9). If measured by the amount per capita, subnational government investment in Bulgaria is extremely low (EUR 102 per inhabitant vs. EUR 465 in EU-28), making Bulgaria the third-worst performer in EU-28 – only higher than Cyprus and Malta.

Currently, most subnational investment (55%) is for housing and community amenities (housing, potable water, public lighting, etc.) which is significantly higher than in the EU-28 average (9%). Fifteen percent goes to education, mainly for building and maintenance of school infrastructure. Only 10% of local public investment is dedicated to economic affairs and transport, which is less than one-third of the EU average (32%). This may be one factor contributing to the low quality of municipal roads and it may signal local governments’ limited development capacity in key areas that can promote local economic growth. This lack of transport and economic affairs investment is particularly challenging/detrimental for rural municipalities, which face the dual obstacles of poor transport accessibility and large distances from places of employment and services.

Figure 3.9. Subnational government investment in EU-28, 2018

Municipalities do not have sufficient self-financing capacity to cover their investment needs because of the burden of state-delegated expenditure. A study conducted in 2017, revealed that only 12% of municipal budget revenues were available for local government investment3 (Kalcheva and Nenkova, 2019[47]). The investment capacity of municipalities depends a lot on the central government and the availability of EU funds. Therefore, municipal investment is volatile, fluctuating according to EU funding cycles. Despite some large fluctuations, overall, local government investment in Bulgaria has substantially increased since 2000, in large part due to EU membership. In 2000, local government investment amounted to 17% of public investment and 0.7% of GDP, compared to 44% and 1.4% respectively in 2019.

Figure 3.10. Changes in local government investment in Bulgaria from 2000 to 2019

Local government as a share of public investment and GDP

In Bulgaria, central government capital grants are all earmarked. This system encourages municipalities to operate in silos, without co‑ordination across sectors (e.g. education, transport, housing, health, etc.) or across levels of government. This is one of the major obstacles to effective public investment, not only in Bulgaria but in other countries as well.

EU funds under Cohesion Policy are a major financial source for local investment in Bulgaria. It is estimated that Bulgarian municipalities receive over 60% of all the EU financial support to Bulgaria and almost all municipal investment come from this source (NALAS, 2018[45]). EU funds are often the only source of funding for public investment in small municipalities. However, the use of EU funds appears to be highly concentrated in big cities, where large infrastructure is located. As of June 2019, 10 municipalities, accounting for 36% of the country’s population and mostly in the southern part of the country, had absorbed 41% of total funds received by municipalities (Figure 3.11). By contrast, 123 municipalities – almost half – have spent less than BGN 1 million on average and 72 small municipalities with less than 6 000 inhabitants collectively accounted for 4% of EU funds absorbed by municipalities.

The pattern of polarisation in funding absorption is confirmed by measuring EU funds per capita across municipalities. By June 2019, on average, each inhabitant benefitted BGN 212 from EU funds received by local governments (NAMRB, 2020[49]). Around 70% of municipalities were below BGN 250 per capita and 33%, including many small municipalities, were below BGN 100 per capita. The majority of municipalities received a small share of EU funds relative to the population that they serve, although some small municipalities receive a high amount of EU funds (Figure 3.12). Major reasons for that could be the limited administrative capacity of the small municipalities that does not allow them to compete effectively for European funding, the small size of the projects, the difficulty of co-financing EU funded projects (about 40% of local governments have difficulty in meeting their co-financing requirements) and the challenges of financing non-eligible costs for EU funding (e.g. land acquisitions). EU fund management authorities may tend to select more secure projects or those that are easier to implement, rather than projects that enhance convergence and regional development. This may consequently favour big municipalities that have better financial and administrative conditions (Schoenberg, 2018[23]). This unbalanced use of EU support further entrenches diverging growth and development trends among the municipalities, which contradicts the main objectives of EU Cohesion Policy for economic, social and territorial convergence (IME, 2019[50]).

Figure 3.11. The distribution of EU funds across municipality is highly polarised

The share of EU funds spent in each municipality, by June 2019

Figure 3.12. EU funds per capita in municipalities, by June 2019

Multiple constraints on municipal administrative and strategic capacity hinder effective decentralisation

The effectiveness of administrative decentralisation also depends on the administrative capacity of subnational governments. Administrative capacity refers to the ability of a subnational government to deliver on its mission/mandate in an efficient, fair, accountable, incorruptible and responsive manner. In many countries, a lack of sufficient administrative capacity is probably one of the biggest challenges in the field of decentralisation (OECD, 2019[25]). In Bulgaria, significant administrative capacity gaps prevent municipalities from properly fulfilling their tasks and functions. According to the National Audit Office (NAO) (2019[51]), the causes for the common problems of municipalities in performing their functions are high turnover of staff, insufficient training of staff, improper division of responsibilities among municipal structural units and an insufficiently developed e-government framework. The following section does not cover all areas of administrative capacity but focuses on some bottlenecks which represent key challenges for further decentralisation: the lack of sufficient and adequate human resources, weak strategic capacity, the difficulty in delivering high-quality services and the lack of transparency and integrity to mitigate corruption (OECD, 2019[25]).

There is a lack of staff and expertise in municipalities, especially in smaller ones

Despite the decentralisation process underway and concurrent capacity-building efforts, municipalities still struggle to effectively perform their duties due to a lack of human resource capacities and expertise, especially compared to the national government.

Bulgarian municipalities have the same public sector employment arrangements as the central government (notably the Civil Service Act and Labor Code) but they do not have the same employment conditions. Municipal staff are additionally regulated by the Local Administration Act.

The municipal council has full discretion on municipal administration structure as well as the number and salaries of employees, within centrally-determined legal requirements and restrictions. There are two types of public employees: civil servants and other public employees. Municipal administration is divided into specialised administration and general administration. The general administration is composed of different units such as legal, administrative services, finance and accounting, human resources, etc. Specialised administration comprises all units that support the mayor in exercising his/her powers (e.g. municipal property management, spatial planning, social services, education, EU programmes management, culture, local taxes and fees, etc.). The functions of specialised administration differ substantially across municipalities, depending on their size. Municipalities can also have other functions outside the secretariat, such as legal advisors and information officers.

Bulgaria’s 265 municipalities have approximately 24 600 employees (34 000 including sub-municipal administration), which is 93 employees per municipality on average. Municipal staff account for 23% of total public employees (see Figure 3.24), with great variation across municipalities. Stolitchna municipality (Sofia) has the highest number of public employees (1 161), followed by Plovdiv (483) and Burgas (446) (Figure 3.13, left panel). Around one-third of municipalities have less than 50 public employees. Many municipalities do not have enough staff to fulfil their assigned tasks. While small municipalities tend to have a smaller territorial and population scope of administrative work, this does not necessarily mean they have a smaller workload. Additionally, there is low administrative efficiency in small municipalities, as shown on the right side of Figure 3.13. In municipalities with more than 150 000 inhabitants, 1 employee serves around 683 citizens on average, while this ratio is around 95 in small municipalities with less than 6 000 inhabitants. Potentially, small municipalities are not able to streamline municipal work and optimise efficiency because of a lack of qualified employees and poor work organisation, among other factors.

Many municipalities have difficulty attracting and retaining personnel, especially staff with the necessary knowledge, skills and qualifications. While the municipal vacancy rate is 6% on average, it is above 15% in 20 municipalities, with the highest being 57%. Low salaries and limited career opportunities prevent municipalities, especially small municipalities in remote areas, in attracting and retaining skilled employees. This is a pressing challenge. Municipalities must respond to increasingly diverse expectations from citizens, notably in terms of quality of services, and perform increasingly technical tasks, requiring a high level of expertise (e.g. public procurement, lawyers, chief architects, chief engineers, local developers). The systemic shortage of specialists is an increasingly common problem. For example, the same group of employees in the local revenue unit may perform the functions of a cashier, inspector and public contractor (NAMRB, 2018[52]). Municipalities are also often forced to use services contracts to execute the work. In fact, only 22% of municipal staff are civil servants and there is a high turnover of staff in municipalities, which reduces institutional stability and continuity of municipal administration. Many municipalities are forced to outsource some of their tasks. An audit carried out during 2012-16 revealed that 11 out of 12 audited municipalities outsourced the preparation of municipal development plans and 2 outsourced the monitoring report.

Figure 3.13. Local government employment in Bulgaria

The other obstacle for enhancing local administration capacity is the lack of comprehensive, consistent and practical training that targets the needs of local administration. However, in recent years, many training programmes have been conducted involving a large number of municipal staff. There is a paradox in having a considerably high relative share of municipal employees participating in training sessions while still having such a large capacity gap. A large part of the training is provided by the Institute of Public Administration, the NAMRB, NGOs and other institutions. Moreover, this training is largely inconsistent in nature and focuses on a narrow range of subject areas, namely the absorption of EU funds and legislation in a few restricted areas (MRDPW, 2016[2]). While it is legitimate to focus on EU funds, given that implementing EU projects is an important responsibility, the training is often technocratic and fragmented, targeting ad hoc topics of EU fund management instead of following a consistent structure or framework. In many cases, local staff do not understand the underlying objectives of EU funds being an instrument and driver for local development. In other cases, staff reported that many training courses organised by the Institute of Public Administration are mainly top-down and do not reflect their specific needs. There is a lack of significant focus on the practical aspects of the work – often employees only acquire theoretical knowledge which cannot be used effectively in their daily activities. This disorganised training programme/scheme has resulted in several identified cases of municipal officials not being aware of their responsibilities as officials, leading to communication problems with the business community. Finally, there are large disparities in access to training across the country, and between large-, medium- and small-sized municipalities (MRDPW, 2016[2]).

Municipalities have a limited strategic capacity

Strategic capacity refers to the ability to set strategic goals for social, political and economic outcomes. In Bulgaria, under the long tradition of centralisation, most local authorities play more of an administrative role than a strategic one. Currently, according to the IISDA website, municipalities are mandated through normative acts to carry out over 150 administrative services covering 14 areas,4 in addition to the services stipulated in the Local Government Act.

While local governments in Bulgaria are involved in a wide range of policy sectors, their capacity to regulate, design and plan activities remains limited. They mainly perform implementation functions, including operating and control, rather than strategic ones. For example, as already mentioned, they play a limited role in the elaboration of municipal development plans. The latter follow pre-made templates prepared by the central government. Therefore, municipal development plans, instead of serving as broad vision and long-term planning instruments for municipal development priorities, are often formal, top-down documents that do not adequately address local issues and respond to local needs.

Studies reveal that many municipal development plans are of poor quality. They often lack clear objectives and identification of the desired future state of the municipality, and when they exist, they are not sufficiently integrated to define a comprehensive and cross-sectoral local development strategy. Apart from the problem of objectives setting, 2007-13 municipal development plans have also been identified as having incorrect prioritisation and a lack of analysis (i.e. excessive emphasis on current state description) (Krumov, 2013[53]).

Municipal development plans may not take into consideration long-term national priorities. Municipalities have substantial difficulties in ensuring the coherence between local, regional and national strategies. Municipal strategic documents are often disconnected from national sector strategies, while issues at each level may be interrelated, for example, between waste and water management, which are two high municipal priorities, and biodiversity protection and climate change, which are perceived as “non-local”.

Another issue is the fact that the identification of challenges and priorities tends to follow the funding sources, not vice versa as it should be. This is a common problem in many small municipalities with very limited funding sources. Local policies are often narrowed to government-subsidised activities instead of based on actual needs of local importance.

This absence of strategic capacity at the municipal level is particularly problematic in the context of EU cohesion policy and the need for a more localised approach (Box 3.3).

Box 3.3. The weak strategic role for municipalities in the use of EU funds for local development

In the 2014-20 programming period, the strategic role of municipalities in the implementation of EU funds remains limited. Municipalities, especially the small- and medium-sized ones, have a narrow role in partnership agreement design, OP programming, priority setting and other strategic planning processes. When municipalities do not play an active role in the design of national and regional development strategies or the OPs, they tend to have less buy-in or may not even understand the underlying rationale and concepts.

In the current programming period, 39 municipalities act as Intermediate Bodies (IBs) for the Priority Axis 1 of the OP “Regions in Growth”. This is the first time where municipalities act as IBs to participate in project selection. As for other Priority Axes where ministries are the “beneficiaries”, they tend to design the project in advance. One approach taken is that the ministry designs the project sets its budget and then lets the municipalities decide on the type of investment. Nevertheless, it is not unheard of for a line ministry to identify several municipalities as beneficiaries, establish the projects to be implemented in each and determine the project budgets. Once the technical documentation and specifications of the applications are confirmed by the originating line ministry, the selected municipalities then submit their ERDF project applications to the MA. As a result, while ministerial priorities are likely being met, municipal priorities may not be.

The other problem associated with the participation of municipalities in the OPRG is that the roles of IB and beneficiary are combined in the same institutional body for the 39 municipalities. Although officially there is a clear delimitation of functions and responsibilities, in reality, there are cases where municipalities just grant projects to themselves. From the institutional perspective, this provides very little incentive for local governments to use EU funds for local development strategically. This may entail the risks that local government mainly use EU funds in the areas of traditional public service provision, leaving fewer resources and attention for improving the business environment, attracting private investment or for sustainable local development.

Source: OECD (2019[54]), “Strengthening governance of EU funds under Cohesion Policy: Diagnosis and roadmap for the Managing Authority of OP Regions in Growth in Bulgaria”, Unpublished, OECD, Paris.

Municipalities have difficulty delivering high-quality local services

Municipalities have difficulty delivering high-quality local services, both for delegated and exclusive functions. The scope and quality of exclusive local public services depend a lot on municipal own revenues, which may be very limited, especially in small municipalities. Great disparities also exist in the provision of delegated services, due to the centralised planning system, scarcity of funds and insufficient incentives and know-how to enhance the public service quality in some municipalities. Finally, other bottlenecks include the absence of an appropriate reference model, lack of guidance and technical assistance for services rendered at the municipal level, as well as the absence of monitoring and evaluation systems to track performance (Box 3.4).

Box 3.4. Municipalities have difficulties using performance and quality management tools

Local administrations have difficulties using objective and robust indicators, targets and cost-benefit analyses to measure the relationship between inputs, processes, outcomes and the impact of their administration (Government of Bulgaria, 2014[18]). Municipalities lack a standardised approach to performance monitoring. Less than 60 municipalities reported having improved existing or introduced new organisational mechanisms to support result-oriented policy development and implementation. Only 37 municipalities reported having performed impact assessments on the regulations, acts and ordinances adopted, with most of them being big municipalities. Only around half of the Bulgarian municipalities indicated that they have introduced rules and concrete methodologies for monitoring, control and ex post evaluation of policy implementation (Houbenova-Delisivkova, 2017[55]).

Other management tools and mechanisms have been developed, such as the functional analysis which examines the improvement of organisation, work processes and co‑ordination within the structure, the municipal Good Governance Assessment Methodology, and ISO certified systems, which have been adopted in some municipalities. However, in practice, these tools are not widespread and are under-exploited. In some cases, they even reinforce established bureaucratic practices.

Source: Government of Bulgaria (2014[18]), Working for The People: Public Administration Development Strategy 2014-2020, http://www.strategy.bg/FileHandler.ashx?fileId=4647; Houbenova-Delisivkova, T. (2017[55]), “Financing regional development and competitiveness: Problems and challenges at macro and micro level in Bulgaria”, http://www.revecon.ro/articles/2017-1/2017-1-5.pdf.

Social service provision is a particular challenge area for many municipalities. Social services in Bulgaria are characterised as low quality, with limited accessibility and a lack of an integrated approach. The situation is worse in small municipalities with scarce human and financial resources. An evaluation conducted in 2017 identified the insufficient provision of most types of social services across the territory. In smaller and rural municipalities, there is a serious shortage of services for children and adults, particularly for home-based care, day-care, and mobile and integrated services (EC, 2019[56]). Insufficient funding is one of several underlying factors. From 2015-19, the share of delegated expenditure for social services out of total delegated expenditure decreased from 9.2% to 8.1% (IME, 2018[57]). In addition, many social services dedicated to vulnerable populations are provided mostly based on the availability of resources instead of the needs. The assessment of individual needs is insufficient, at both the national and local levels.

To try to solve these issues, a new Social Service Act was adopted in March 2019 and entered into force in July 2020, although it is currently still in the implementation phase. The overall aims are to improve access to social services and enhance efficiency while addressing longstanding problems of underfinancing and uneven distribution of funds across territories (Box 3.5). Despite having the best of intentions, the act still has the potential to create an even more challenging situation for municipalities in providing social services. For example, from the funding perspective, the act obliges municipalities to provide free assistance to children and people without income, while user fees apply to everybody else, except for some services made universally available, e.g. support for the development of parental skills (OECD, 2021[58]). This responsibility needs to be allocated in tandem with increased delegated funding for social service provision; it will otherwise create additional fiscal burdens for municipalities. From the perspective of administrative capacity, the implementation can be very demanding, both for local governments but also for the national government. For one, municipal services in the poorest municipalities will be required to meet the same quality standards that apply in the wealthiest municipalities and if these standards are not met the funding will be phased out. This places additional pressure on administrative capacity in municipalities who are already struggling in this area. In addition, the new act advocates the principle of integrated social service provision and introduces a more detailed approach to quality control. For example, the act defines the content of different types of social services and municipalities are required to organise the complex provision of different services for the users. In addition, the National Map of Services is intended to be updated annually with information on the available services and needs of target groups throughout the country. While these changes are intended to tailor the social services to the real needs of the population, the implementation requires significantly more capable social workers and public administrators (EC, 2019[59]).

Box 3.5. The 2019 Social Services Act

The parliament adopted a new Social Services Act in 2019, which aims to improve access to social services and enhance efficiency while addressing longstanding problems of underfinancing and uneven distribution of funds across territories.

The act introduces some significant changes to the parameters of the social service provision system, especially:

A new Social Services Agency (operational as of 2020) will licence social service providers, develop common quality standards for providers, ensure that consumer rights are respected, carry out ex post control, monitor the quality of social services at the municipal level provided by both municipalities and other service providers and assess their efficiency.
A definition of common standards and regulations for the suppliers.
A National Map of Social Services, to be prepared jointly with the municipalities, that aims at addressing the uneven territorial distribution and insufficient coverage and quality of services. It will provide information on available services and the needs of target groups throughout the country. The map will determine the local needs – number and types of services and a maximum number of users – as well as some additional issues regulated by law.

While it is an important step forward, more attention will now be needed to plan the scale of services and their prices. At the national level, the administration of the Social Services Agency will need to be trained and able to apply and implement the objectives of the law.

Source: EC (2019[59]), New Social Services Act finally Adopted in Bulgaria - ESPN Flash Report 2019/37, European Social Policy Network, European Commission; OECD (2021[58]), 2020 Economic Assessment of Bulgaria, OECD Publishing, Paris; IME (2018[57]), “The new law on social services: forward, sideways or there again? [Новият закон за социалните услуги: напред, встрани или пак там?]”, https://ime.bg/bg/articles/noviyat-zakon-za-socialnite-uslugi-napred-vstrani-ili-pak-tam/; EC (2019[56]), Country Report Bulgaria 2019 Including an In-Depth Review on the Prevention and Correction of Macroeconomic Imbalances, https://ec.europa.eu/info/sites/info/files/file_import/2019-european-semester-country-report-bulgaria_en.pdf.

The provision of social housing, a responsibility of municipalities, is also inadequate both in terms of quality and quantity. This is mainly due to a lack of funding and insufficient technical capacity at the municipal level to plan for, or implement, social housing programmes and estimate the housing demand. Therefore, a third of municipalities have no social housing at all. Overall, there is a large deficit in social housing. Municipal social housing stock, accounting for just 2.4% of the inhabited housing stock in 2015 according to the Draft National Housing Strategy, is poorly maintained and inefficiently managed (Gabova, 2020[60]; OECD, 2021[58]). Furthermore, while social housing should be targeted to the most needed households, this is not the case as municipalities are free to establish their own eligibility criteria for social housing which therefore vary from one municipality to another (World Bank, 2017[61]).

Since 1992, the public healthcare sector has been partially decentralised. Municipalities own local hospitals, outpatient clinics and other healthcare facilities. They also participate in the ownership of district multi-profile hospitals (joint ventures). However, the overall system remains highly centralised. Municipal healthcare offices organise healthcare within municipal boundaries under the responsibility of the Regional Health Inspectorates, which are the deconcentrated structures of the Ministry of Health in the 28 districts. Bulgarian municipalities play an insignificant role in health policy development (WHO, 2018[62]). Healthcare services facilities and professionals vary substantially in terms of quality and accessibility among the districts (National Health Strategy 2014-20). Overall, the effectiveness of the healthcare system in Bulgaria remains low in comparison to other EU member states. Currently, there are plans for healthcare reforms, including long-term care services, which are becoming even more crucial given the COVID-19 outbreak (EC, 2020[24]).

In the education sector, the centralised approach has failed to curb the deterioration of education quality and an increase in school dropouts. In this sector, a uniform standard cost formula has been adopted for all municipalities to allocate funds accordingly. However, the same standards do not translate into standardised quality. Schools use budget funds to "purchase" very different products and services. Fundamentally, the current funding system does not provide incentives to improve the quality of education. To a certain extent, the system encourages schools to focus on retaining students at all costs as funding is tied to the number of students and not to the quality of education provided. Another example is that the number of teachers in schools or their level of professional qualification cannot be included in the formula defined by individual municipalities. While this is justified as preventing the risk of recruiting more teachers than needed, or of there being vicious competition to attract teachers among schools, it in effect weakens the incentives to invest in teachers. Schools in small municipalities that receive limited funds feel even more reluctant and have greater difficultly investing in teachers (Nikolov, 2017[63]).

Administrative services to businesses are another area where quality is low and not conducive to an enabling environment for business. Many services are shared between national authorities and municipalities for the same process. For example, there are 18 procedures for dealing with construction permits in Bulgaria. The municipality is responsible for 7 and each procedure takes several weeks. Overall, it takes 97 days to deal with the 18 procedures.

To maximise the efficiency of service delivery or pooling of external financial resources, municipalities can establish local enterprises. By 2016, there were 581 fully or majority-owned municipal enterprises, compared to 350 state-owned enterprises at the central level. They provide utility services (electricity, gas), transport and other community services, e.g. waste management, water supply, cultural centres, etc. Municipalities can also establish municipal hospitals, homes for medical and social care, and primary healthcare facilities upon approval of the Ministry of Health. These local enterprises represent around 43 000 employees and a total value of over USD 600 million (around BGN 1 billion). Over half of them concentrate on the health and social sector (22 000 employees) (OECD, 2019[64]). However, regulating the management of municipal enterprises can be very challenging. There is neither a legal requirement nor a widespread practice of municipal enterprise boards of directors carrying out self-evaluations to appraise their performance and efficiency at either the national or the municipal level. As a result, misconduct, non-compliance and varying practices are often identified.

Deficiencies, irregularities and low transparency in municipal budget management and procurement

Corruption is considered as one of the most worrying governance issues in Bulgaria, together with the low performance in rule of law (World Bank, 2020[65]). In 2017, the Local Integrity System Index developed by Transparency International Bulgaria showed that the 27 municipalities-district centres had an average score of 3.29 (on a scale from 1 to 5), ranging from 2.91 to 3.74 (Transparency International Bulgaria, 2017[66]). The EU Cooperation and Verification Mechanism (CVM) specifically includes a recommendation concerning the need to fight against corruption at the local level. In 2016, the Institute for Market Economics (IME), a Bulgarian think tank, reviewed the audit reports released by the Bulgarian National Audit Office. The results revealed that close to 70% of Bulgarian municipality expenses can be classified as “failures” (IME, 2016[67]). The main issues are primarily related to budget management, public procurement and arranging municipal property. They include outright waste of public resources, non-economic use of funds, unexplained debt, bad property management or violations of public work procurement procedures. Sometimes inefficient administrative performance is due to a lack of capacity and funds, insufficient stimuli and/or bad planning. In other cases, the data in the reports point to the suspicion for the existence of corruption and the pursuit of personal gain.

This high level of inefficiency and administrative failure cost the Bulgarian government BGN 3.5 billion in the 2011-14 period – more than two-thirds of all municipal expenses during that time (Altas Network, 2016[68]; IME, 2016[67]). The information in the audit reports also raises doubts about corruption, noting that 21 reports (about a quarter of all audit reports) have been sent to the Prosecutor’s Office because of the presence of incriminating information (IME, 2016[67]).

Procurement is one of the most challenging issues. An average of around BGN 5 billion is spent annually through public procurement in Bulgaria (partnership agreements), while the infringements found in municipal public procurement procedures amounted to over BGN 200 million. The amount of allegedly corrupt procurement represented 36% of the total public funds spent by municipalities in 2015. In total, 214 violations were found in the 614 cases checked. Half of the deficiencies and irregularities were found in the preparation stage, not so much in the process of completion and finalisation (IME, 2016[67]).

Overall, the major issue is the lack of transparency, encountered at all stages of planning, spending, reporting and control of municipal budgets. The average active transparency rating for all 265 municipalities is 39% of maximum transparency. For the budgetary process specifically, the average municipal result is 41%.

Inter-municipal co‑operation is underdeveloped in rural or urban areas

Inter-municipal co‑operation can be a valuable development strategy for many different types of municipalities. It can be particularly beneficial for rural, urban and metropolitan areas in facilitating the provision of joint municipal services and ensuring investment at the right scale instead of fragmented investment projects. Inter-municipal co‑operation is now a widespread practice in OECD member countries and is firmly rooted in European and OECD municipal management practices. In Bulgaria however, as in many European countries in transition (EBRD, 2019[69]), inter-municipal co‑operation is underdeveloped. The Bulgarian practice shows that even though, on a purely rational level, the benefits of the inter-municipality co‑operation might be evident, this does not always lead to a fast and smooth implementation of the practice (Kalfova, 2017[70]).

Bulgaria has a history of regional-based associations of municipalities dating back to the early 1990s, many of which, however, were phased out after the establishment of the NAMRB. Today, around 10 regional associations of municipalities are still active. These associations are “transregional”, based on common economic or natural features. They primarily focus on information exchanges, mutual assistance, economic promotion (local economy, tourism, etc.) rather than delivering public services or realising joint investment projects (Box 3.6).

Moreover, Bulgaria has a legal framework that supports inter-municipal co‑operation through Article 137 of the 1991 Constitution and regulation under the Local Government and Local Administration Act (LGLAA). Chapter 8 of the LGLAA (Articles 59-61) provides the legal foundation for co‑operation among municipalities on a voluntary principle for the resolution of tasks of common interest (as well as between the municipalities and districts). In 2006 and 2017, amendments to the LGLAA set out a more precise regulatory framework. Municipalities can adopt co‑operation agreements to realise three forms of co‑operation: co‑operation on a specific project or activity; creation of a non-profit association of municipalities; and creation of a business or non-profit legal entity. The co‑operation agreement must also define the participation share of each party in terms of financial means, property and/or any other forms of participation, as well as the rules for the creation of inter-municipal councils and/or commissions and their responsibilities. The general principles of implementing inter-municipal co‑operation in Bulgaria include voluntary participation, mutual interest, active choice, flexibility and dynamism, transparency and responsibility.

Box 3.6. Regional associations of municipalities in Bulgaria

Regional associations of municipalities were formed on geographical principles to assist each other in solving common regional issues, such as rendering assistance in a broad range of consultancy services among each other. Examples include the Association of Rhodope Municipalities founded in 1992 with 17 municipalities, the Association of Black Sea Municipalities founded in the same year with 18 municipalities and the Association of Danube River Municipalities founded in 1993 by the mayors of 10 municipalities. These associations were developed bottom-up through the initiatives of individual mayors rather than as the result of a government policy.

A common feature of these associations was to represent and defend the interests of the participating municipalities vis-à-vis the state and other authorities. However, this role was transferred to the NAMRB, created in late 1996, and regional associations steadily decreased in importance thereafter. Many of them dissolved shortly after because of difficulties in readjusting the nature of their activities towards developing investment projects or joint service provision (MRDPW, 2016[2]).

Today, there are around ten active regional associations in Bulgaria. They include the Association for the Development of Mountain Municipalities of the Republic of Bulgaria, the Regional Association of Municipalities “Maritsa”, the Association of the Black Sea Municipalities, the Association of Rhodope Municipalities and the Association of Danube River Municipalities (ADRM “Danube”) among others.

For example, today, ADRM “Danube” brings together 35 municipalities with a combined population of over 800 000 inhabitants along the Danube River in the central part of the Danube region and is registered under the Law for Non-Profit of 16 May 1993. The main objective of ADRM Danube is to promote the social and economic development of the Danube region. It seeks to do this by working to establish a common concept and strategy of regional development, furthering the joint implementation of socio-economic policies, enhancing co‑operation with all the stakeholders in the sub-region and developing a common regional identity. Furthermore, it works to achieve the objectives of the EU Strategy for the Danube Region. The association achieves its strategic objectives through the facilitation of the work of local administrations, businesses, universities and research institutions, and NGOs in the priority areas of transport, ecological and energy infrastructure, social and economic development, science and technology, education, and security (http://www.adodunav.org/).

Source: MRDPW (2016[2]), Decentralisation Strategy 2016-2025 of Bulgaria, Ministry of Regional Development and Public Works; Assocaition of Danube River Municipalities “Danube” (2021[71]) Assocaition of Danube River Municipalities “Danube” – About us, http://www.adodunav.org/bg/page/misiia.

Despite this legal framework, inter-municipal co‑operation is not widely accepted and practised in Bulgaria. There are few examples of effective inter-municipal co‑operation initiatives, except where it is legally mandated, as is the case for the provision of water, sewerage, and waste management (Box 3.7). That said, the success or failure of inter-municipal co‑operation for joint investment is largely contingent on the intervention of the central government. While the district administrations are supposed to foster local development and encourage municipalities to unite to work together on large-scale projects, their extremely limited administrative capacity and political power prevents them from executing this function. There are also some examples of inter-municipal co‑operation resulting from EU policies, e.g. to promote rural-urban partnerships and common strategies for local development via the LEADER5 approach to Community-Led Local Development (CLLD) but the Bulgarian experience was not very successful (Angelov, 2019[72]). Furthermore, these forms of co‑operation (Local Action Groups) are complex and not always sustainable.

Box 3.7. Inter-municipal associations in Bulgaria

Waste management

In early 2000, despite the existence of an EU funding opportunity and the poor situation in numerous municipalities in terms of waste management, a majority of the Bulgarian local authorities rejected participation in regional waste management associations. Thus, the central government made it mandatory in 2010 through legislative amendments, as a way to fulfil the commitments made to the EU for the National Waste Management Programme. A municipality that rejects participation causing delays or thwarting the creation or functioning of a regional association shall cover the damages and missed benefits of the remaining municipalities in the region.

Water and sanitation

The Waters Act that came into force in 2000 imposed the creation of Water and Sanitation (W&S) associations – one for each district. The participation of municipalities, however, is not obligatory. The main incentive for them to participate is EU funding, as only W&S associations are eligible for funding in the 2014-20 programme period. To date, 29 regional W&S companies have been established. However, there are still reluctant municipalities. For example, in 2010, 15 municipalities refused to join the created W&S associations due to financial considerations. In fact, the price of the W&S services for municipalities in the mountainous area is far below the average, since they can use an entirely gravity-driven water supply thanks to the mountain geography.

Source: Kalfova, E. (2017[70]), “Inter-municipality cooperation in Bulgaria - Between the necessity and impact of EU policies”, 25th NISPAcee Annual Conference.

The critical problem is that the use of inter-municipal co‑operation for scaling-up investments and joint service delivery is much more difficult and limited in practice. Co‑operation for collective local investments is not rooted in Bulgaria’s local governance and administrative culture. Local governments are not always motivated to participate since the inter-municipal co‑operation arrangements may or may not address their local needs and interests.

The existing financing mechanisms for public investment do not facilitate collaboration across municipalities and hence may impede the creation of a co‑operative culture. Funding is largely determined by line ministries without an integrated approach, which leads to a high level of competition among municipalities for resources, notably EU funds. There are no incentives or requirements to encourage inter-municipal co‑operation. For example, while over half of the OPRG 2014-20 budget is dedicated to integrated urban development, the majority of these projects are designed to meet the priorities of a single municipality and do not require partnerships or administrative co‑operation (OECD, 2019[54]). Distrust may also exist between municipalities and the central authorities. On the one hand, line ministries tend to favour big municipalities in the distribution of EU funding; while on the other hand, some municipalities may associate inter-municipal co‑operation with the risk of “losing” their municipal companies or weakening their power over their own jurisdiction, especially when the central government directly participates in the co‑operation arrangements (Kalfova, 2017[70]).

The 2016-19 Decentralisation Strategy Programme aimed to develop a uniform model for inter-municipal co‑operation for the provision of services of general interest and BGN 50 000 was allocated for drafting proposals for changes to the regulatory base, but the implementation and outcomes of this initiative remain unclear.

The lack of inter-municipal co‑operation in metropolitan areas

Issues of public investment efficiency, jurisdiction fragmentation and inter-municipal disparities are often multiplied in metropolitan areas. Bulgaria has defined 17 functional urban areas (FUA), including 18 cities having great importance for the country’s economic and regional development. At the end of 2018, these 17 FUAs accounted for 59.3% of the Bulgarian population (compared to 57.4% in 2010-12). More than three-quarters of the FUA’s population live in the city centre (NSI, 2019[73]). There are 7 FUAs above 150 000 inhabitants (Burgas, Pleven, Plovdiv, Ruse, Sofia, Stara Zagora and Varna), representing around 36.6% of the country’s population. Applying the EU-OECD definition of a metropolitan area, Bulgaria has four metropolitan areas (Burgas, Plovdiv, Sofiaand Varna), Sofia being classified as a “large metropolitan area”.6

Metropolitan areas are increasingly facing new challenges of working across physical, sectoral and organisational boundaries. This requires addressing the governance of metropolitan areas, in particular by enhancing co‑operation and co‑ordination of public policies to provide public infrastructures and services on a metropolitan-wide basis and by reducing intra-metropolitan disparities. In Bulgaria, there is no governance structure for these metropolitan areas, meaning there is no decision-making body that governs or co‑ordinates municipalities within the urban area.

For example, integrated planning covering the entire Sofia metropolitan area does not yet exist. A Master Plan for Sofia Metropolitan Municipality was adopted by the parliament in 2007 but it is rather indicative and advisory (Schmitt, 2013[74]), primarily focusing on the Stolitchna municipality (Sofia)instead of the entire metropolitan area. The only co‑operation structure is the Regional Association of Municipalities Centre (RAMC), a non-statutory body created in 2010 by the mayors of 11 municipalities (Stolitchna municipality (Sofia) plus 10 other municipalities) covering the FUA of Sofia (which includes Pernik). The association is responsible for strategic planning and technical infrastructure, in particular, to use Trans-European Transport Networks (TEN-Ts) to strengthen its transport corridors with neighbouring countries and regions, connecting axes in southeast Europe. It aims to set up a common strategy for polycentric development on the territory of the associated municipalities (Eurocities, 2013[75]). However, this municipal co‑ordination effort has yet to produce a more integrated governance body for the metropolitan region. The Sofia metropolitan area remains characterised by high internal disparities, which will need to be addressed at a metropolitan scale (Box 3.8).

Box 3.8. Disparities within Sofia metropolitan area

Twelve municipalities are identified as urban centres, sprawling across the Sofia (capital) district, Pernik and Sofia district. Figure 3.14 illustrates the disparities among municipalities within the metropolitan area, with Sofia (capital) district strikingly outperforming the others in various dimensions. The population is highly concentrated in Pernik and Stolitchna municipality (Sofia) – the two municipalities also see a high amount of own-source revenues. In terms of public spending and investment per capita, there are significant imbalances across the municipalities within the administrative district. The divide between Pernik district and Sofia (capital) district is particularly stark, with the two urban centres in Pernik district having the lowest level of investment per capita of less than BGN 40, whereas this ratio is 4 times higher in Sofia (capital) district. It demonstrates that the spill-over effect into the territories and communities outside the Pernik and Sofia administrative boundaries is very limited.

Figure 3.14. Disparities within the Sofia metropolitan area

Fiscal decentralisation is the weakest dimension of decentralisation in Bulgaria

Financial provisions are provided by the constitution (amended in 2007 to grant taxing powers to municipalities), the Local Self-Government Act and the Local Administration Act, the Local Taxes and Fees Act (enacted in 1999 and amended in 2018) and the 2014 Law on Public Finance. Since 2002, a series of reforms have been implemented to provide municipalities with more fiscal autonomy but despite these efforts, the fiscal framework remains characterised by a low level of fiscal autonomy and unsustainable fiscal conditions for many municipalities, especially small and rural ones. Municipalities depend mainly on EU funds and central government transfers, the latter of which are earmarked and often insufficient to cover spending needs. Municipalities have a limited own-source revenue-generating capacity, especially regarding tax revenues and, therefore, there are large vertical fiscal gaps. In addition, access by municipalities to borrowing is restricted, while fiscal discipline rules have been strengthened. These unsustainable fiscal and financial conditions entail additional risks in the advent of external shocks. The COVID-19 crisis may exert short-, medium- and long-term pressure on subnational public finance, similar to the 2008 global crisis (OECD, 2020[76]).

Municipalities are financially dependent on the central government

Grants and subsidies make up the bulk of local government revenue

In 2018, local government revenue accounted for a relatively small share of GDP and public revenue, 7.5% and 20.5% respectively, well below the EU-28 average (15.5% of GDP and 34.4% of public revenue). Despite recent reforms aimed at increasing tax revenues, the share of grants and subsidies in subnational revenue remains very high, well above the EU-28 average (69% vs. 44%) (Figure 3.15). As a consequence, the share of tax revenues in Bulgaria is significantly below the EU-28 average (12% vs. 42%) while other revenues (tariffs and fees and property income) accounted for a relatively large share of revenue (19% vs. 13% in EU-28). The share of tariffs and fees is particularly high compared to the EU‑28 average (16% versus 12%) as well as the share of property income (2.8% vs. 1.2%).

Grants and subsidies have increased over the past 10 years, with an average annual growth rate of 3.2%. The increase has been particularly significant since 2015 (from BGN 3.2 billion to BGN 5.1 billion by 2018). However, the share of grants and subsidies in total municipal revenues has remained quite stable, fluctuating around 68%. The average annual growth rate of municipal own revenue (local taxes, user charges, fees, property income) was 2.8% between 2008 and 2018. Overall, the share of own-source revenue has been also quite constant around 32% (Figure 3.16).

Despite the increase in grants to local governments over the past ten years, these resources are still insufficient to cover both delegated functions and newly mandated functions by line ministries, resulting in underfunded mandates. Municipalities have to compensate for the gaps by using their own revenue to maintain the provision of delegated services, often at the expense of local investment (MRDPW, 2016[2]). It is estimated that in 2017-18, underfunded delegated functions “drained” EUR 50 million out of municipalities’ own revenues (NALAS, 2018[45]). The NAMRB identified the chronic shortage of funds for municipal roads, social services and public transport as key challenges for local governments. The national grants allocated to municipalities are often significantly lower than the amount requested. For 2020, municipalities sought an additional BGN 120 million in transfers for maintaining the road network but received BGN 20 million. They also requested an additional BGN 100 million to cover some social services and received BGN 30 million (SEGA, 2019[77]).

Figure 3.15. Subnational government revenue breakdown by category in EU-28 countries, 2018

Figure 3.16. Municipal revenue structure in Bulgaria, 2008-18

This funding shortfall may derive from the deficiency of the quantitative appraisal, i.e. a mismatch between population needs and funding allocation. For example, the allocation of education block grants is based on the uniform standard cost per student. Local governments consider that they are in general under-consulted during the process of determining the range of delegated activities, the standard for their valuation and quantitative appraisal (Nenkova, 2014[3]). As a result, the funding allocation formula may not reflect the needs in reality or, in some particular cases, the formula lags behind inflation without timely adjustment. New obligations from secondary legislation are also often transferred to local governments without preliminary discussion or co‑ordination, and/or without a robust financial impact assessment to take into account whether municipalities can indeed carry out these activities. As such, some small municipalities may not be able to cover the gaps with their own revenues, which can lead to reinforced territorial disparities in public service delivery.

Almost 90% of grants and subsidies are earmarked and/or conditional

The 2003 reform that eliminated tax sharing was accompanied by a change in the intergovernmental system, increasing central government transfers to compensate for the loss of PIT revenue. There are three main categories of grants: a general grant aimed at financing state-delegated responsibilities, a general equalisation grant and earmarked grants for capital investment (Box 3.9). Except for the general equalisation grant which is unconditional, all other grants are earmarked, leaving very little leeway for municipalities to decide on their use. This means that municipalities enjoy some autonomy on only 5% of their grant revenues via the equalisation grant. The vast majority of central government transfers are for delegated functions (87%), while capital grants account for 8% of total grants. Among the subsidies for delegated services, 74% are for education, 9% are for staff expenditure and 8% are for social services (Figure 3.17).

Box 3.9. The system of intergovernmental grants in Bulgaria

There are three main categories of intergovernmental grants: a general grant aimed at financing state-delegated responsibilities, a general equalisation grant and earmarked grants for capital investment.

The general grant, despite its name, is a specific-purpose grant aimed at financing state-delegated responsibilities (social services, education, health, culture, municipal staff, etc.). The calculation of the amount is based on service costs, in accordance with established cost standards and socio-demographic indicators that vary according to the expenditure area (population size, number of pupils, municipal staff, etc). This grant is conditional, meaning it is allocated to a specific sector such as education, social assistance, culture or healthcare. The corresponding financing standards are annually negotiated between the central government and the National Association of Municipalities (NAMRB) and then adopted by the Council of Ministers (CoM). They are therefore subject to central government budget constraints. For education, for example, funds are determined on the base of uniform expenditure standards per pupil that are approved by the CoM. At least 80% of the funds must be allocated based on the formula.
The general equalisation grant is unconditional. Municipalities have full autonomy over how they spend it. It aims to ensure a minimum level of local service provision by each municipality. By law, the annual size of the equalisation subsidy cannot be less than 10% of the own revenues of all municipalities in the previous year. Its total amount is 10% of all transfers. The allocation between municipalities is based on 2 criteria (defined in the annual budget law, they may vary from year to year): revenue potential – it benefits municipalities whose per capita own-revenues fall below 90% of the national average; and expenditure needs based on standard costs for pre‑schools and homes for the elderly, combined with the municipality’s surface area. Municipalities with per capita expenditures of less than 100% of the national average are entitled to 100% of the difference. Municipalities whose expenditures are higher than the national average receive 50% of the difference.
A small share of transfers is made up of earmarked grants for capital expenditure, which can be disbursed for both local and delegated activities. The total amount of the investment grant is determined annually in the state budget laws (8% of all transfers). Its allocation is based on objective criteria – number of inhabitants, number of settlements and surface area, to name a few. Since 2007, these transfers have mainly been used for rebuilding municipal roads and streets. Bulgarian municipalities have also received nearly EUR 4 billion in grants from the EU to improve their environmental, social and technical infrastructure (municipalities receive up to 60% of the EU funds allocated to Bulgaria).

In addition to these three major grants, the Public Finance Act also allows for other earmarked expenditures and financial compensation by the state. The NAMRB plays an important role in negotiating standards, allocation mechanisms and annual levels with the Local Government Financing Directorate at the Ministry of Finance.

Source: OECD/UCLG (2019[78]), 2019 Report of the World Observatory on Subnational Government Finance and Investment – Country Profiles, http://www.sng-wofi.org; Nenkova, P. (2014[3]), “Fiscal decentralization and local finance reforms in Bulgaria: A review of ten years’ experience”, http://dx.doi.org/10.5901/mjss.2014.v5n23p342; Geißler, R., G. Hammerschmid and C. Raffer (2019[79]), Local Finance in Europe - Country Reports, BertelsmannStiftung & Hertie School; Nenkova, P. (2019[80]), “An analysis of equalizing capacity of state transfers for local government activities in Bulgaria”, Economics Alternatives 4, pp. 627-640; NALAS (2018[45]), Fiscal Decentralisation for South-East Europe, http://www.nalas.eu/Publications/Books/FDReport_18.

Figure 3.17. The majority of transfers are for delegated functions

These earmarked grants are associated with guidelines, norms and strict controls. In addition to limiting local autonomy, micromanaging at the central level via earmarked transfers impedes the effective use of the funds, especially when norms and controls are excessive. These earmarked funding may also not adapt to local circumstances, i.e. not taking into account the regional disparities (NALAS, 2018[45]). The earmarked and ad hoc nature of the investment grants also makes this transfer highly volatile and thus municipalities are not able to incorporate these resources into long-term investment planning. Many municipalities often increase their investment due to the additional funds received that are made on a provisional and discretionary basis. Such a piecemeal approach prevents municipalities from financing integrated local development programmes and co‑ordinating different sub-projects, and significantly reduces the stability of public investment.

Some improvements to intergovernmental transfers have recently been made. For example, since 2018, the unused funds from the central government transfers can be used for capital expenses in their corresponding function/sector (e.g. education, transport, etc.), as long as this is not contradictory to the conditions defined in the legal act. However, some stakeholders stated that changes to the allocation methodology were made without consultation with the NAMRB and several municipalities are not satisfied with the adjustments.

The share of own-revenue in municipal revenue is small and mainly composed of non-tax revenues

The share of own-revenues in municipal revenue has increased very slightly since 2008 to 32% of municipal revenues in 2018 (see above Figure 3.16). User charges, fees and property income account for almost 60% of municipal own-revenue while tax revenues account for the remaining part. However, these averages hide significant disparities amongst municipalities. Only a small number of municipalities enjoy a relatively high level of own revenues i.e. tax and non-tax revenues. Figure 3.18 reveals that larger municipalities receive a larger portion of their income from local taxes and fees, whereas smaller municipalities depend heavily on state budget subsidies and other grants. In addition, larger municipalities also tend to have a higher share of local taxes than fees in their own revenues.

Figure 3.18. Small municipalities have a lower share of own revenues and tax revenues than larger ones

The average percentage of tax revenue and own revenue in total revenue, by different sized municipalities, 2018

Municipality size, however, is not the only criteria. Some municipalities along the Black Sea Coast and in the mountainous areas, such as Mirkovo, Nesebar, Primorsko, Sozopol and Tsarevo, stand out for strikingly high proportions of own-revenue in their total revenue, over 60%, even more than that of Stolitchna municipality (Sofia). Except for Mirkovo, which is located in the Sofia district, these are all major seaside resort cities, comprising between 2 400 to 27 000 inhabitants, that benefit from a very dynamic economic development and real estate market. By contrast, studies confirm that municipalities under 10 000 inhabitants (103 municipalities) are unable to conduct effective local development policy if they purely rely on own revenues (i.e. without central government transfers) (Houbenova-Delisivkova, 2017[55]).

User charges, fees and property income: A relatively significant source of revenues

Municipalities have more autonomy regarding setting user charges and fees compared to taxes. Since 2003, the Local Taxes and Fees Act assigns full legal rights to the municipal council to set the base and size of local fees by application of the cost-recovery principle. However, revenues generated by fees (35% of municipal own revenue) are less “flexible” compared to tax revenues, as they cannot be used to finance local capital expenditure (Kalcheva and Nenkova, 2019[47]). In addition, according to experts, the fee in many cases does not cover the actual cost of the service provided (Geißler, Hammerschmid and Raffer, 2019[79]). Waste fees represent the biggest relative share of user fees (72% of municipal fee receipts) over which municipalities have full autonomy to set the rate and base by municipal order. Other fees include water tariffs (set by the central regulation with municipalities having little discretionary power) as well as kindergarten fees, retail and wholesale markets, fairs, specialised social services institutions, technical and administrative services, dog ownership and the use of sidewalks, squares and roadways.

Property income accounts for 23% of municipal own revenue, which is high by international comparison. They are composed of revenues coming from the sale and management of municipal properties, fines, penalties, dividends from municipal enterprises and revenues from concession contracts. Over the years, local governments have sold property largely to balance their cash flows (Nenkova, 2014[3]; OECD/UCLG, 2019[78]).

Tax revenue is low, with structural deficiencies in the local tax system

The structure of tax revenue has significantly changed since the 2003 and 2007 fiscal reforms, which abolished the tax sharing arrangements to replace them by sectoral block grants (see above) but also by own-source taxes. Since then, municipalities generate tax revenue exclusively from local taxes, which is a rare feature in the EU and OECD where subnational governments largely receive revenues from shared taxes or surcharges on national taxes.

While providing taxing power to municipalities represents great progress towards fiscal autonomy, this has not improved the fiscal situation of municipalities as revenues generated by local taxes have remained low since the reform (see above Figure 3.16). In addition, the taxing power of municipalities remains constrained. Municipalities can set tax rates but only within legally predetermined brackets. Furthermore, local governments cannot set the local tax base, nor do they have the right to modify or create taxes or to provide additional (or remove existing) legal tax breaks for certain taxpayers (Stoilova, 2013[83]). However, it is also reported that not all municipalities realise the full potential of their existing taxing power. For example, they rarely increase rates up to the maximum allowable limit and since increasing tax rates is rather unpopular, some municipalities have barely raised rates since 2008 (Geißler, Hammerschmid and Raffer, 2019[79]).

Finally, while decentralising local tax collection in 2006 was a first step towards improved efficiency in Bulgaria (with tax revenues increasing between 2005 and 2007), local tax collection performance still faces three main challenges: the administrative burdens embedded in the local tax system, the weak capacity of local administration for effective tax collection, including a lack of technological tools (IT systems, e‑Government – to date, electronic payment only exists in around half of all municipalities) and the expensive administrative costs, especially for small municipalities with limited capacity. Some municipalities try to address this capacity deficiency by outsourcing the collection of some local taxes to concessionaires. Moreover, as municipalities are not able to perform a forced collection of unpaid voluntary tax liabilities for local taxes, they struggle to collect unpaid taxes. Therefore, there remains significant room to reach a higher local tax collection rate. In 2018, the average collection rate of local taxes was slightly above 70%, and mainly for the collection of property and transport vehicle taxes (NALAS, 2018[45]). There are municipalities where local tax collection is between 20%-30% of total possible tax revenue.

In 2018, tax revenues accounted for around 12% of local government revenue (versus 42% in the EU on average), 0.9% of GDP (versus 6.5% in the EU) and 4.4% of public tax revenues (versus 24.2% in the EU) (Figure 3.19). It is important to note, however, that in many other countries subnational tax revenue includes both local taxes and shared taxes.

Figure 3.19. Subnational government tax revenue in EU-28 countries, 2018

As outlined above, there are substantial disparities among municipalities regarding the level of local tax revenue. In 2018, the average local tax revenue per capita in Bulgaria was BGN 139. However, 240 municipalities (90%) are below this average, meaning only 25 municipalities perform above average. In around three-quarters of municipalities, tax revenue accounts for less than 30% of their total municipal revenue – this ratio is below 10% in 8 municipalities (see above Figure 3.18).

Out of 8 categories of local taxes, only 3 are significant, accounting for 96% of all municipal tax revenues in 2018 and 11.5% of total municipal revenues from all sources. These three taxes (transport vehicle tax, immovable property tax and property transaction tax) are all related to property and have about the same weight in municipal tax revenues (Figure 3.20).

Receipts from vehicle taxes, the leading local tax accounting for 34% of local tax revenues, have been steadily rising over the years due to enhanced revenue collection, increases in tax rates and fewer exemptions. In 2019, a new method for determining the tax on light vehicles and trucks was introduced into the Local Taxes and Fees Act and is expected to increase municipal tax and fee revenue by BGN 20 million (0.02% of the projected GDP).

Figure 3.20. Share of different local taxes, 2018

The immovable property tax on land and buildings is the second most important tax for municipalities (33% of total local tax revenues). It ensures steady receipts which continue to grow over the years. Following a 2006 reform, the tax is no longer based on the assessed value of the property and, since a 2011 reform expanded the tax base, municipalities now have the ability to tax the higher value/real value in a property value assessment, instead of using the book value (historical price) as was done previously. Despite these reforms, this revenue stream remains low. Property tax rates are determined by an Ordinance of the Municipal Council within the range of 0.1 to 4.5 per thousand of the tax value of the immovable property. Other deficiencies limit the efficiency of this revenue source. In 2016, the immovable property tax accounted for 0.3% of GDP compared to 1.1% in the OECD on average. In countries like Canada, France, the United Kingdom or the United States, property taxes reach between 2.5% and 3.5% of GDP (Box 3.10).

The property transactions tax revenue represents a similar share of 29% of local tax revenues but this tax is volatile, subject to economic fluctuations and difficult to manage at the local level. Rate increases tend to discourage transactions that would allocate properties more efficiently and may have a negative impact on labour mobility.

In general, the remaining categories of taxes account for a negligible proportion of total local tax revenue, with some exemptions being the tourist tax and the taxi passenger transport tax in large municipalities and those with strong tourism sectors (NALAS, 2018[45]).

Box 3.10. International comparison of immovable property tax in subnational governments

Although being a local tax “par excellence”, the significance of recurrent taxes on property in subnational tax revenue and GDP remains modest. There is considerable variation across countries, with immovable property tax representing between 90% and 100% of local tax revenue in Australia, Ireland, Israel, New Zealand and the United Kingdom, which are mostly Anglo-Saxon countries. At the other end of the spectrum, it is a minor local tax revenue source in Nordic countries, Luxembourg and Switzerland (Figure 3.21).

Figure 3.21. Subnational government recurrent property taxes as a percentage of GDP and percentage of total subnational government tax revenue in EU and OECD, 2016

Municipal borrowing is low and constrained by fiscal capacity and debt rules

Despite a substantial increase in municipal debt in the past two decades, largely driven by the 2008 global crisis and the creation of the Fund for Local Authorities and Governments in Bulgaria (FLAG) to support local government absorption of EU funds (Box 3.11), the level of local government debt remains moderate by international standards. In 2018, the local government debt accounted for 1.2% of GDP and 5.5% of total public debt, well below the respective EU averages of 11.6% and 14.5% (Figure 3.22).

Bulgarian municipalities can tap into the credit and capital markets by issuing bonds, without prior authorisation from the central government. Although, as in many other EU unitary countries, loans remain the dominant credit instrument. In 2018, almost 90% of the outstanding financial debt was composed of loans. Municipalities can also borrow through financial leasing, for example, leasing a fleet of government vehicles or waste collection equipment. Municipalities can borrow from commercial banks and foreign creditors but also from the Fund for Local Authorities and Governments in Bulgaria (FLAG), from the central budget through interest-free loans and from special sectoral funds created by the central government such as Enterprise for Management of Environmental Protection Activities (EMEPA) and the Energy Efficiency and Renewable Sources Fund (EERSF) (i.e. for environment and energy efficiency). The latter are targeted at municipalities with weak financial capacity but also groups of municipalities. In 2014, FLAG borrowing accounted for 41% of the municipal debt (Kalcheva, 2015[84]).

Figure 3.22. Subnational government debt in EU-28 countries, 2018

Box 3.11. Fund for Local Authorities and Governments in Bulgaria (FLAG)

The Bulgarian government established the FLAG in 2007. Its mandate is to provide financial assistance to municipalities (and groups of municipalities) for the absorption of EU funds for municipal infrastructure and to support the required administrative capacity of municipalities for project development and implementation.

FLAG is an independent legal entity with the status of a joint-stock company that is fully owned by the state. To be able to finance projects, FLAG is assisted by a managing bank (UniCredit Bulbank). FLAG provides bridge financing in the form of low-interest loans only to “beneficiaries” that are eligible for EU funding – municipalities, groups of municipalities and public entities that are owned or controlled by municipalities. The loans provided by FLAG are repaid by municipal budgets as due debt. Between 2009 and 2016, FLAG provided loans with an aggregate value of over BGN 1 billion for 931 co-financing EU projects from municipalities. At the end of 2015, FLAG funding constitutes about 41% of the domestic municipal debt incurred through municipal loan contracts (debt paper).

On 17 January 2020, a memorandum of understanding was officially signed between the European Investment Bank (EIB), the Fund of Funds and FLAG, the purpose of which was to establish a Bulgarian Investment and Co‑ordination Platform for Urban Development to support sustainable urban development projects in Bulgaria.

Source: FLAG (2020[85]), “Additional funds mobilized for the development of Bulgarian cities”, https://www.flag‑bg.com/en/?cid=3&NewsId=132.

Municipal debt in Bulgaria is very unevenly distributed. Large municipalities, which are in a good fiscal position with a high share of own revenue, financial assets and easier access to international creditors, represent the bulk of the municipal debt stock. By the end of 2015, the debt exposure of Stolitchna municipality (Sofia) was around 47% of total municipal debt, whereas Burgas, Plovdiv, Stara Zagora and Varna jointly accounted for another 25% of the total domestic municipal debt (Kalcheva, 2017[86]).

This low level is the result of both the strict borrowing framework and the weak creditworthiness of a large number of municipalities. The first comprehensive borrowing framework for municipalities was established in 2005 with the adoption of the Municipal Debt Act. Short-term and long-term borrowing is permitted under some prudential rules: long-term borrowing is authorised only for investment projects (“golden rule”), refinancing of existing debt, ensuring payments required for municipal guarantees and municipal public-private partnerships projects (OECD/UCLG, 2019[78]). The 2014 Public Finance Acts clarified the legal requirements regarding municipal debt and municipal guarantees. Municipalities’ annual debt payments must be lower than 15% of the annual average sum of their own revenues and the block equalising grant for the last 3 years. Article 94, paragraph 3, point 1 of the Public Finance Act regulates the allowable level of debt for expenditures and caps it at 15% of the average annual amount of reported expenditures for the previous 4 years which should not be exceeded (OECD, 2019[87]). Additionally, the nominal value of municipal guarantees may not exceed 5% of the same amount (Ladner, Keuffer and Baldersheim, 2015, p. 120[46]). The Local Government Financing Directorate of the Ministry of Finance maintains the Central Municipal Debt Register.

Despite sound fiscal conditions for the overall local government sector over the last year (local government balance accounted for only 0.1% of GDP in 2018), some municipalities are confronted with a difficult fiscal situation and weak creditworthiness. Creditworthiness depends on the municipality’s capacity to raise own-source revenues, on the stability, predictability and to some degree “unconditionality” of intergovernmental grants, as well as on the technical capacity to manage their debt. The majority of Bulgarian municipalities do not meet these criteria, in particular that of own-revenue. For many municipalities, debt financing is almost impossible or simply too risky. While bank loans remain the major financial instrument for public investment, financial institutions are often reluctant to lend to these municipalities with poor fiscal conditions.

The fiscal framework for municipalities is sound

Bulgaria has a strict fiscal framework for municipalities, which has been further strengthened by the 2014 Public Finance Act adopted to implement the EU Stability and Growth Pact in Bulgaria. It imposes a balanced budget on municipalities. The law also strengthened the medium-term budgetary framework (MTBF) and enforced fiscal discipline. Similarly, it also introduced a new fiscal rule determining that the average growth of local expenditure must not exceed the average growth rate of local expenditure as reported over the previous four years.

Compliance with the fiscal rules is monitored by the Ministry of Finance through a set of six indicators. If a municipality does not comply with at least three indicators, it is considered in financial difficulty and put under a programme aimed at restoring local financial soundness. An unbalanced budget three years in a row, for example, counts as one of the six criteria as well as a high level of indebtedness or a low rate of own-revenue collection. Municipalities cannot officially declare bankruptcy. Instead, per the 2014 Public Finance Act, they are placed under a fiscal recovery programme established by the Ministry of Finance in 2016. By March 2019, 17 municipalities were part of the programme versus 32 when it started (Box 3.12).

Box 3.12. Recovery programme for municipalities in financial difficulties

In the post-crisis period, as part of the implementation of the stricter EU legal framework for fiscal discipline, the Bulgarian government adopted the Amending and Supplementing Act of the Public Finance Act. The act identified the need to take action to set the municipality budget position in accordance with national fiscal requirements.

The Ministry of Finance introduced the financial recovery programme for municipalities in financial trouble. Municipalities identified as being in financial distress according to a set of fiscal indicators (debt, compliance with fiscal rules, own-source tax revenue collection rate, expenditure commitments, budget balance, indicators of financial independence, sustainability and efficiency, etc.) are put under strict monitoring for the execution of their budgets. The plans include measures to increase the financial sustainability and stability of municipalities under monitoring by optimising municipal expenditure, increasing the revenue collection rate, decreasing and liquidating overdue obligations, and reducing the municipal budget deficit. The programme also provides participants with access to interest-free loans and additional subsidies from the central government.

At the beginning of March 2019, 17 municipalities were classified as being in financial difficulty versus 13 municipalities in 2018. Four municipalities were removed from the list from 2018 to 2019, while eight were added in 2019. Seven municipalities have consistently been in financial difficulty, remaining on the list from 2016 until 2019.

Source: Ministry of Finance of Bulgaria (2019[88]), Convergence Programme 2019-2020, https://www.minfin.bg/en/868.

Within the past several years, Bulgaria has made substantial progress in strengthening its accountability systems. This effort has included enhancing public accounting, restructuring the internal audit system and improving external auditing through the establishment of the NAO (Hawkesworth et al., 2009[89]). At the municipal level, internal audits are made by municipal auditors. Municipalities, in particular smaller ones that do not have their own unit for internal auditing, can also hire private auditors. For large municipalities with budgets exceeding BGN 10 million (EUR 5 million), the external control over the implementation of the budget and other public resources rests with the Ministry of Finance and the NAO. According to the Bulgarian Law on Internal Audit in the Public Sector, these large municipalities must establish a unit for internal audits. Smaller municipalities with lower budgets do not have to be audited annually; audit dates are specified by the NAO or based on a risk assessment. These small municipalities may also establish mutual auditing units with neighbouring municipalities (Geißler, Hammerschmid and Raffer, 2019[79]). The NAO conducts three types of audits: financial, compliance and performance. Recent NAO performance audits include one audit entitled the “Optimisation of the transport connectivity among districts of the Northwest region for the period 2014-2016”, and another on the “Conditions for balanced and sustainable regional development for the period 2012-2016” (NAO, 2019[51]). In addition, the State Financial Inspection Agency and the Agency for Public Procurements perform regular audits and surveys.

Diagnosing regional governance for regional development

An effective intermediate level between the central and municipal levels is missing in Bulgaria. In practice, there are several actors responsible for implementing national and sectoral policies at the territorial level, including the 28 districts and the 6 planning regions, as well as the numerous territorial units and directorates of line ministries and national agencies. These “regional” actors however do not participate in designing or implementing actual regional development policies for the country; rather, this mandate mainly falls on the Ministry of Regional Development and Public Works. Ultimately, a fit-for-purpose and robust regional governance structure is not in place to enable a place-based regional development policy. This section diagnoses the challenges in public administration at the district and the regional planning levels in Bulgaria. The current regional governance model is not conducive to effective regional policy. Districts lack resources, capacities and authority to carry out their functions and implement regional policy, which should be one of their main functions. Planning regions have no legal personality and therefore are not equipped to develop regional development policies.

Districts lack resources, capacities and authority to carry out their functions and implement regional policy

On paper, districts are a key component of the state territorial administration

Districts are an administrative territorial unit recognised in the 1991 Constitution as representing the central government at the regional level (NUTS 3). According to Article 142 of the constitution, districts are in charge of regional policy, implementing state governance at the local level and ensuring the alignment between national and local interests.

They are headed by a governor appointed by the CoM, who is supported by a deconcentrated administration. Therefore, district governors ensure the implementation of the state’s policy, the safeguarding of national interests, law and public order, the management of state property located in the regional territory, and administrative control, i.e. the monitoring of the compliance of municipal decisions with the law as well as the control of acts and actions of other governmental entities located in the region. The administrative control of municipal acts is a strict control of legality (and not of appropriateness or efficiency) and can be done only when it is authorised by law, as it is the norm in decentralised systems. Beyond this control function, districts have played an important role as “mediators” between the central and local governments since 1999 (Stoilova, 2007[4]). District governors also have specific tasks assigned under sectoral acts, such as the control over water infrastructure or dams.

Although being a state deconcentrated administration, each district also contains a deliberative organ, the district development council (DDC), whose main responsibility is regional development, according to the 1999 Regional Development Act. DDCs are in charge of several tasks related to the regional plan for the spatial development of the district, the district development strategy and the co‑ordination of municipal initiatives, including their financing. DDCs can also sign co‑operation agreements with other districts inside or outside Bulgaria, for carrying out joint activities in the area of regional development and territorial co‑operation. Thus, they play an important role in cross-border co‑operation (Troeva, 2016[90]).

Chaired by the district governor, DDCs are comprised of the mayors of all municipalities within the respective district, representatives of the municipal councils and representatives of organisations of employers and employees. The heads of the regional units of the Ministry of Regional Development and Public Works (MRDPW) (based in planning regions) also participate as members of DDCs with voting rights in the discussion of issues related to their mandate.

In practice, districts have insufficient human and financial resources to fulfil their mandates

Districts do not have sufficient authority, human capital and financial resources to carry out their mandated responsibilities, which include: implementing regional policies, designing development plans, co‑ordinating line ministries’ work at the district level, controlling municipalities’ work and conciliating national and local interests. The current level of human resources in districts is far from adequate. District staff account for around 1% of all government employees – around 1 050 employees for all 28 districts or roughly 35 staff in each administration. In fact, all districts are below this average, except for Burgas, Plovdiv, Sofia (capital) district, Sofia district and Varna, which have between 43 and 58 employees (IISDA, 2020[91]). Even though the districts co‑ordinate national and local interests, they do not perform executive functions.

The district budget is very small, on a relative scale, as it is a second-level spending unit under the budget of the CoM, accounting for only 0.1% of the consolidated public expenditures and 0.04% of GDP. In some cases, district administrations can pool resources from the municipal budget, EU funds and international assistance, which in itself can be administratively demanding and yet, this additional funding is still far from being sufficient to finance their activities (NAO, 2019[17]).

Districts cannot be considered as leaders or “engines” of regional development policy

The DDCs are also unable to effectively carry out their numerous tasks related to regional development. Besides a lack of resources, there are also organisational problems. Not all districts have adopted internal rules for the organisation of the DDCs’ work to ensure the correct, timely and effective implementation of their activities beyond the basic national legislative requirements. Additionally, not all DDCs take the opportunity, provided by the law, to set up permanent or temporary committees to further incorporate expertise and support the council’s work in a variety of areas, such as spatial development, spatial planning and construction, new technologies, transport and energy, tourism and environment, healthcare, education and labour market. These committees could be helpful for strengthening DDC administrative capacity, yet few DDCs have set them up. Finally, although DDCs are the ones responsible for designing district development plans, they do not implement or finance any programmes or projects. This disconnect prohibits the development of a realistic and robust regional development strategy for the district. To some extent, the district development plans are mainly an aggregation of municipal development plans. In the current programming period, DDCs play a negligible role in EU fund programming or implementation and it is very rare that districts are considered as eligible partners in the development of EU fund programmes or regional development policies. According to the latest amendments to the Regional Development Act in 2020 (see below), the district development strategies have been removed from the system of strategic documents (MRDPW, 2019[92]).

Districts lack the authority to fulfil their co‑ordination role across and within levels of government

Districts are unable to properly fulfil their role of “vertical co‑ordinator” or “mediator” between the central government and the municipalities. The main reason is that districts do not have authority over the deconcentrated territorial unit of line ministries and state agencies, making it impossible for them to fulfil their co‑ordination function as set out by the constitution. These territorial units are more vertically tied and hierarchically subordinate to the line ministries and national agencies (Kalfova, 2019[15]). Apart from the loophole in the authority hierarchy, the problem is also related to the absence of specific, clearly stated co‑ordination mechanisms and procedures between district governors and territorial administrations.

Box 3.13. Public employment significantly concentrates at the central government level

By 2019, there were around 150 000 general government employees in Bulgaria, serving a total population of 7 million inhabitants. Seventy-six percent of them are employed at the central level, a significantly higher share than in many OECD countries (Figure 3.23). Among those employed at the central government level, around half are in the Ministry of Interior and the Ministry of Defence. The territorial level (deconcentrated and decentralised units) constitutes the remaining 24% with a great majority of them at the municipal level (23%, including sub-municipal administration). The district-level accounts for less than 1%, i.e. around 1 050 employees for 28 districts. This central-local distribution of public workforce in Bulgaria clearly demonstrates the high level of centralisation and the weaknesses of districts and has remained almost unchanged over the past decade (Figure 3.24).

Figure 3.23. Share of sub-central government employment as a percentage of general government employment, 2017

Figure 3.24. Breakdowns of general government employment in Bulgaria, 2011-19

This is also the result of a highly fragmented deconcentrated territorial administration. Currently, there is no legislation or regulation in place to regulate the establishment and structure of territorial deconcentrated bodies. As a result, the territorial scope of these structures is extremely diverse, with different administration statuses and territorial coverage that may or may not coincide with the territorial divisions (e.g. 28 regional departments for the Ministry of Education, 16 Regional Inspectorates of the Environment, 28 Regional Health Inspectorates, 5 territorial directorates for the National Revenue Agency, etc.) (Kalfova, 2019[15]). There are also around 190 special territorial units, which execute the functions of ministries and national agencies mostly at the district level, including overseeing national parks, water catchment areas, etc. Around 6 500 employees (4% of total public employees) work in 190 special territorial units under line ministries and executive agencies. This complexity entails huge difficulties for any kind of efforts aiming to mobilise and co-ordinate various ministries. This fragmentation also leads to the duplication and overlapping of functions that hinder the implementation of sectoral and horizontal policies at the regional level. A lack of political will has also been one of the major bottlenecks preventing the restructuring and enhancement of the state territorial unit system in the past two decades.

Planning regions are weak

The six planning regions were established by the 1999 Regional Development Act to create NUTS 2 statistical regions, access the EU funds and develop regional development policies. However, they do not have an administrative status and, therefore, they do not have the human and financial resources to carry out their functions. Similarly, they suffer from a lack of representativeness and legitimacy. Despite several regional development responsibilities, the planning regions mainly act as consultative bodies and “conduits” for regional planning and EU funds programming but with limited powers.

Planning regions are just territorial units, with low capacity and representativeness

Planning regions are just territorial units without an administrative status. They do not have their own budget nor do they manage a budget for regional policy implementation. Their operational funds are allocated from the budgets of the relevant district administrations chairing the council during the respective year to cover urgent operational needs. This budgetary method does not provide security or stability to the resource allocated to Regional Development Councils (RDCs) and makes it impossible to conduct multi-year planning, as funds remain highly insufficient. For example, according to the legislative framework, the RDCs should discuss and approve the draft of the regional spatial development scheme and regional development strategies. These obligations cannot be fulfilled, given that a minimum amount of merely BGN 10 000 was requested for the preparation of the regional spatial development schemes of the six planning regions. For comparison, the cost of developing the spatial development scheme for the Pleven District alone totalled BGN 243 600 (NAO, 2019[17]).

Planning regions do not have their own administration or permanent staff nor do they exercise any administrative functions. The secretariat of each region is carried out by the central government (MRDPW), through its deconcentrated regional offices (Troeva, 2016[90]). In addition to preparing and co‑ordinating regional development plans and monitoring reports, regional offices also assist the MRDPW in its role as MA of OPRG 2014-20. However, the rules of procedure do not clearly specify the functions of regional offices.

The 2009 Regional Development Act introduced some governance tools, in particular, regional development councils (RDCs). RDC members are appointed by the central government and comprise representatives of almost all ministries, district governors of the region, representatives of municipalities and partner organisations of employers and employees. Municipal representatives are appointed by each district governor depending on the population of the district; it ranges from 2 representatives for districts below 200 000 inhabitants to 6 representatives for districts above 500 000 inhabitants. This composition further entrenches a centralised and siloed approach to regional policy design and development. Currently, RDC membership is dominated by representatives of the individual ministries. The quota-based system limits the representation of municipalities and is unfavourable to districts with small and rural municipalities, calling into question the representativeness and legitimacy of planning regions. Under the current system, municipalities do not feel included in the RDCs (NAO, 2019[17]). Representatives of universities, research organisations, natural persons and legal entities, and NGOs may attend the sessions but only in an advisory capacity at the invitation of the governor. This composition does not reflect an effort to open up the governance process, which would involve local government and other stakeholders for a place-based approach to regional development.

RDCs are chaired by a “rotating” governor, i.e. by one of the district governors on a rotational basis for a six-month period. In performing his/her functions, the governor is supported by a deputy chairperson, who is a representative of a municipality in the same district the RDC governor comes from. While having a rotating governor allows for equity between districts, it does not enable the design and implementation of any long-term policies. This instability is an obstacle to the development of a regional vision going beyond the interests of the district alone.

To help carry out the RDCs’ co‑ordination function in the implementation of OPs, co-financed by EU funds, RDCs establish regional co‑ordination committees. Chaired by the regional governor, they are composed of representatives of different bodies including RDCs, managing bodies of the OP, the central co‑ordination unit of the administration of the CoM, and district governors. To reinforce its expertise and support its activities, RDCs can also set up specialised committees in the areas of public infrastructure, competitiveness, human resource development and environmental protection, however, not all the RDCs have exercised this right.

Planning regions are mainly consultative bodies

The main responsibilities of RDCs are to discuss and approve a series of regional documents, including regional development plans, regional spatial development schemes, regional strategies, resource support schemes and more. They are also in charge of discussing, approving, co‑ordinating, monitoring and controlling the implementation of strategic and planning documents for regional development as well as assessing the impact of OPs co-financed by EU funds in the region. Furthermore, they discuss and co‑ordinate the drafts of district development strategies included in their regional area as well as ex ante, interim and ex post evaluations. This provides an opportunity to co‑ordinate actions and concentrate resources on the implementation of priorities that are common for several territorial communities (Troeva, 2016[90]). However, with such a weak institutional and operational setup, planning regions play a limited role. They discuss and co‑ordinate but cannot make decisions on the implementation of projects of regional and interregional importance. They perform a consultative role as decisions are taken at the central level, and for some areas, at the municipal level.

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Notes

← 1. The partnership principle suggests that each programme be developed through a collective process involving authorities at the European, regional and local levels, social partners and civil society organisations. This partnership applies to all stages of the programming process, from design through to management, implementation, monitoring and evaluation. The principle is provided in Article 5 of the Common Provision Regulation.

← 2. Within education spending, almost two-thirds were spent on secondary education.

← 3. 12% = (own revenues - expenditure for local responsibilities + capital transfers) / municipal revenues.

← 4. The 14 areas are: green system, cadastre, construction control, local taxes and fees, notary activities, civil registration and drafting, advertising, agriculture and ecology, social services, transport, trade and tourism, municipal property, spatial planning and legal issues.

← 5. LEADER: Liaison Entre Actions pour le Développement de l’Economie Rurale – Links between the rural economy and development actions.

← 6. According to the EU-OECD definition, an FUA consists of a cluster of local administrative units that are either part of a city or the commuting zones of that city. Local units in the commuting zones have at least 15% of their working population commuting to the city for work (Dijkstra, Poelman and Veneri, 2019[95]). Metropolitan areas are FUAS of more 250 000 inhabitants. “Large metropolitan areas” have between 1 and 5 million inhabitants and “very large metropolitan areas” have more than 5 million (OECD/EC, 2020[96]).

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