Conversation #65
New capital investment program for Bulgarian municipalities:
The way to decentralization or to centralization?
by Desislava Kalcheva
Sofia University St. Kliment Ohridski, Bulgaria
Previous Conversations (#13 by Cristina Stănuș and #63 by Dubravka Jurlina Alibegović) addressed the problems of formal intergovernmental relations and the need to reconsider vertical power dynamics within the governmental system as well as the importance of the fiscal autonomy of local authorities. Capital transfers represent a significant component of the transfer relationship between central and local governments.
The New Investment Program (NIP) in Bulgaria is the successor to the 2014 investment program and builds on an investment program for municipalities from 2022. However, for the first time, the list of investments is an annex to the State Budget Act, suggesting a degree of centralization.
In considering the design of the NIP, some questions arise regarding the level of decentralization in Bulgaria, namely - will the level of targeted transfers to municipal revenues significantly increase, will the revenue autonomy of municipalities be restricted, and could the program be a factor in increasing centralization?
It should be noted basic indicators evaluating the level of decentralization in Bulgaria have been decreasing in recent years. For example, 'Local tax revenue in Consolidated tax revenue' decreased from nearly 3% in 2008 to 2.3% in 2022; "Own local revenue in total revenue in local budgets" declined from 40.1% in 2015 to 29% in 2022, due to the increase in state transfers entering municipal budgets. The proportion of unconditional financial transfers to total financial transfers received by the local government decreased from 10.5% in 2011 to 6.41% in 2022.
The targeted subsidies allocated for distribution in the NIP will further strengthen the municipalities' dependence on state transfers, reduce the share of their own revenues in municipal budgets, and increase the share of targeted subsidies in the total amount of state subsidies.
In 2024, the Bulgarian government adopted a new approach for the distribution of additional funds for municipal investments: applying an indicative list of projects municipalities are expected to carry out during the current budgetary year. The selection of investment projects is based on municipality applications submitted to the Minister of Finance.
The application process has been simplified. There is a lack of clear criteria for project selection, unlike in the 2014 Investment program. The Ministry of Finance sent letters to all municipalities requesting investment project submissions based on priorities and directions/objects for targeted funding from the state budget, with a range of criteria for project approval/rejection including project readiness, possession of necessary permits such as for building or planning, and any prioritized projects.
There is an unlimited number of projects for which each municipality can apply under the NIP, although there are maximum thresholds of values based on population size. Thresholds are: category I - up to BGN 50 million; category II - up to BGN 30 million; category III - up to BGN 15 million; category IV - up to BGN 10 million; and category V - up to BGN 6 million. Additionally, for municipalities with a population exceeding 180,000 inhabitants, the total value of the projects can reach up to BGN 100 million.
The Minister of Regional Development and Public Works signed agreements with the mayors of municipalities with a deadline for implementation and commissioning of December 31, 2026. Eligible projects for funding include road network and infrastructure, water supply and sanitation projects, public buildings, sports infrastructure, financing of urban environment facilities.
The approved list, attached to the State Budget Act for 2024, included 1627 projects with a total value of around BGN 4 billion (EUR 2 billion).
The main risks to the program's implementation include the short deadlines for execution, which also encompass the period for organizing various public procurements. Additionally, considering the large scale of some projects, there is a risk of breaching the fiscal indicators stipulated in the Public Finance Act regarding the maximum number of commitments to be undertaken by local authorities. On the other hand, the methodology for determining priority projects is called into question. The mayor's opinion alone is not sufficient to determine the degree of project prioritization.
The targeted subsidy for financing the capital expenditure of municipalities remains outside the scope of the NIP. This subsidy is received annually by all municipalities and is part of the main budgetary relations between the central and municipal budgets. When calculating the annual capital subsidy, indicators such as municipality population, road length, and territory size are considered. According to the State Budget Act, the capital subsidy for 2024 amounts to BGN 426,310,200 (EUR 217,986,944).
In contrast to the Bulgarian methodology, European countries apply criteria such as population size, economic development of the municipality/region, external assessment of the priority of the investment for the local community, and assessment of the investment needs of local authorities as well as calculation of the direct investment capacity of the municipalities.
The lack of clear criteria raises doubts about the necessity for the implementation of the respective projects in municipalities. Local population preferences have not been taken into account, and standard criteria for the distribution of state subsidies and grants have not been applied. It should be emphasized there is no evidence of the correct classification of approved projects based on municipalities' investment needs.
The examined practice shows the design of the NIPs could include a mix of state subsidies and the municipality's own financial participation. This would lead to financial discipline, incentivizing municipalities to develop their revenue potential in order to allocate more funds for municipal investments.
According to the European Charter of Local Self-Government: “As far as possible, grants to local authorities shall not be earmarked for the financing of specific projects. The provision of grants shall not remove the basic freedom of local authorities to exercise policy discretion within their own jurisdiction.” In this context, consideration needs to be given as to whether the government should increase the size of unconditional financial transfers, which have actually decreased in recent years.
Additionally, according to the Council of Europe recommendations for the development of decentralization in Bulgaria, the model observed within the local sector in Bulgaria resembles an 'omniscient benevolent dictator' who is capable of (or tries its best in) identifying the needs of the population over the entire country and adapts the financial needs of the different municipalities according to the characteristics of the local situation.
The observed processes in Bulgaria are concerning; municipalities are becoming increasingly dependent on state transfers and additional disbursements from the state budget. It must be stressed there is a decrease in the share of general subsidies, with targeted subsidies for municipalities taking precedence.
The idea itself of providing funds from the central budget for municipal investments is not inherently bad. The problem lies in the absence of objective criteria that align with good European practices, as well as a lack of transparency and additional data regarding how projects are selected.
Last, but not least, when municipalities receive funds from the central government 'without efforts,' they lack the incentive to develop their revenue capacity and to promote specific development of local businesses. If the proposed funds are supplementary rather than primary, municipalities will be motivated to generate more income, even seeking external financing for the implementation of more sustainable and significant investments.
As I read the discussion about this new governmental programme in Bulgaria, I experienced a distinct feeling of déjà vu. From various perspectives, this bears resemblance to discussions around a governmental initiative in Romania. Similar to our Bulgarian colleagues, we too express disapproval of this programme due to its insufficient transparency, flawed project prioritisation, and its overall utilisation of public funds. Nevertheless, there is a contradiction present. On the one hand, we condemn the insufficient fiscal decentralisation and how it affects the autonomy of local governments, particularly because we consider local autonomy primarily from a financial perspective. On the other hand, we criticize the fact central government initiatives that provide financing to local governments do not use specific criteria to accurately determine local areas’ investment needs, instead allowing local governments to decide for themselves what their needs are.
These central government initiatives offer a solution to a longstanding issue. The party or coalition in power, and often even the opposition, opposes the notion of fiscal decentralisation. Meanwhile, the party is dependent on local elected officials for votes, and these officials are making requests for more resources from the bottom up. In countries like Romania and Bulgaria, this occurs amidst a context of significantly underdeveloped fundamental local infrastructure, particularly in rural areas. This leads to the creation of funding initiatives for local government investment projects. My aim here is to briefly analyse the programme detailed in Conversation #65 from an alternative perspective.
The inclusion of thresholds within the programme ensures funds are disbursed as evenly as possible across the territory. Furthermore, it does not allow municipalities governed by members of the ruling party to obtain additional funds at the detriment of similar municipalities governed by the opposition. Undoubtedly, the allocation of funds to each municipality could have been based on more refined criteria, such as its socio-economic development. However, by establishing such specific criteria, the funding decision-making process becomes more subjective, and the governing party can potentially allocate more funding to the municipalities under its rule. The less sophisticated “population size” does not do this, which means the programme might work well in the highly politicised intergovernmental relations of a country such as Bulgaria.
Another aspect of this program is the set of criteria (or lack thereof) that the central government uses to determine funding. It appears to be based on a pessimistic view of local governments and their ability to make use of the autonomy granted to them. Can we affirm that none of the projects being funded consider the specific needs and requirements of the local community? Is it certain the mayor made the decision regarding which projects to propose without any input from other local actors? Can the central government accurately classify the relevance of small local projects? By allocating financing to each municipality based on a certain formula and allowing the municipality to have significant control over which projects are funded, an unusual kind of local autonomy has been produced. Naturally, this strategy has certain hazards. It is conceivable that certain mayors may independently make imprudent choices, leading to the waste of resources. Nevertheless, citizens do hold them accountable in elections.