Formula for poor municipalities: Centralization + fragmentation

Possible solutions include consolidating functions or merging municipalities. The first is easier, while the second will have an economic effect.

The text was published in issue 8 (48) of the Business Global magazine.

There is no doubt that decentralization is generally the right solution. It allows local authorities and regional communities to take their fate into their own hands and apply local solutions to local problems that are far from the priorities and focus of central government. However, the downside of decentralization is fragmentation – the division of the state into excessively small pieces, which hinders effective governance and does not allow for real independence. In Bulgaria, there is currently a relatively high level of centralization and at the same time fragmentation, which is more than visible, along with its negative consequences.

The main unit of local self-government in the country is the municipality – responsible for providing local administrative services, maintaining infrastructure, managing educational and health institutions, and various other activities ranging from waste collection to kindergartens. To answer the question of whether there is fragmentation in local government, we need to determine whether there are municipalities with a significant capacity deficit to carry out these functions – in other words, whether there are too many municipalities.

Fragmentation in numbers

After the creation of Sarnitsa in 2015, the number of municipalities in Bulgaria reached 265. There are huge differences in their sizes – by 2023, Sofia’s average annual population is 1.28 million, while Trekliano has only 511, and Boynitsa – 742. Despite these drastic population differences, the functions municipalities perform are fundamentally similar, inevitably leading to variations in their ability to self-manage, provide adequate services, and represent independent economic units.

This is the reason why the Law on administrative-territorial structure establishes a minimum population requirement for creating a new municipality. The established criterion is that municipalities must have at least 6,000 people – whether this is adequate for the role and functions of a municipality, or whether it should be higher, is a topic for a separate and more in-depth analysis. The key here is that once created, municipalities are not required to continually meet this requirement, and there is no procedure for their closure if the local population significantly drops below the threshold.

Given the demographic processes – a general decline in population combined with increasing concentration of young people in cities and outflow from rural areas – more and more municipalities do not meet this criterion. By 2023, the number of municipalities with a population under 6,000 was 84, or exactly one-third of all municipalities. Ten more municipalities are between 6,000 and 7,000 people, and expanding the criterion to 10,000 would place 142 municipalities, or more than half of all, under the threshold. As most small municipalities are seeing a population decline, the number of those failing to meet the set criterion or are dangerously close to it is likely to increase in the near future.

Key consequences

This clearly visible and increasing fragmentation of local government carries several key consequences.

1. The most visible trend is the ongoing decline in population per municipal employee: This is the number of residents served by one municipal employee. On a national level, this indicator shows a slight improvement over the past year, from 264 to 265 people per municipal employee, according to data published by the Ministry of Finance. However, this mostly reflects the continuing concentration of the population in large cities, combined with a steady size of the municipal administration. There are significant differences between municipalities – while in the smallest, like Trekliano and Boynitsa, one employee serves 15 and 38 people respectively, at the other end of the scale is Plovdiv with 621, Kostinbrod with 495, and Kazanlak with 493. In the smallest municipalities, the question is whether it is rational to maintain a full-fledged local administration, while in the largest, the problem is whether the administration can provide quality and adequate services to such a large number of people.
2. The state as the main employer: In smaller municipalities, the state is the primary employer – by 2023, the public sector accounts for over 50% of employment in 42 municipalities, and in some of them (Boynitsa, Trekliano), it approaches 90%. It is noteworthy that, if we ignore a few municipalities where the energy sector, dominated by the state, is predominant, the rest are almost without exception characterized by low economic development and low living standards. On the other end are smaller municipalities in strong industrial peripheral areas of city centers, where high-value-added economic activities are concentrated, and there are well-paid and sought-after jobs. In these municipalities, the role of the state as an employer is typically low, but the incomes are higher.

In the long term, the public sector is expanding into the labour market in almost all municipalities – over the past five years, its share in local employment has increased in 204 out of 265 municipalities in the country. This is a consequence of the more severe impact of the crisis on the private economy, as well as emigration from the least developed regions.

3. Visible consequences of municipal fragmentation and low administrative capacity: Small municipalities face significant difficulties in attracting qualified and motivated personnel, who prefer to move to larger cities, central administration, or the private sector. This, in turn, means that these municipalities face considerably greater difficulties in managing European funds – often the only way to improve the public environment in poorer municipalities – as well as in improving the business environment and attracting investors who can create sustainable jobs and wealth.

The lack of capacity condemns many small municipalities to further divergence from the standard of living and the quality of life in large cities and their associated industrial centers, which only intensifies the migration process.

Financial (In)dependence

However, let’s return to the criteria for creating a municipality, as there is another requirement that is no less important than the population size. This concerns the requirement for a certain level of financial independence and viability. Each new municipality must be able to prove its ability to finance its expenses to at least half of the national average level (according to the latest annual report on municipal budget implementation). However, this requirement does not apply to existing municipalities, just like the population criterion. In other words, municipalities are not closed down due to high dependence on transfers from the state budget and the lack of their own tax base to generate the necessary minimum revenue.

If we look only at local activity expenses, excluding those delegated by the state, as of 2023, only 49 municipalities have higher own revenues than their expenses. The national average coverage is 74%. In other words, more than a quarter of all local expenses are funded with assistance from the state. It is noteworthy that municipalities with high own revenues have a clear profile – most of them have either a developed tourism industry, mining which brings significant additional revenue to the municipal budget, or a highly developed industry that directly supports local government to improve the environment.

The share of local revenues in the total revenues is also indicative – in the smallest and least developed municipalities, for example in Northwestern Bulgaria, it is under 10%, and the rest comes from the state budget.

The state of local budgets clearly demonstrates how little influence municipalities have on their own development trajectory. Most important decisions continue to be made in Sofia, and this cannot change until real fiscal decentralization is introduced. The funds from several local taxes and fees, which municipalities currently have, are by no means sufficient to conduct their own policy, and even with these, their influence is limited. True independence is possible only in an environment where municipalities have much greater own resources with which to set their own direction and solve local problems.

Possible Solutions

The current fragmentation of municipalities, with all the negative consequences we described, has two visible solutions.

One, seemingly easier and quicker to achieve, is to retain the current administrative distribution and existing municipalities, but to merge some of their functional units – providing administrative services where possible, or internal processes for management and accountability. This process goes hand in hand with a wider digitization of local services and administrative activities, an area where we have seen significant progress in recent years. Such merging would, on the one hand, reduce municipalities’ costs for providing services, and on the other hand, reduce their influence on local labour markets due to the reduced need for administrative personnel.

A much more difficult solution, but one with more serious consequences, is to carry out a territorial-administrative reform that would consolidate some of the fragmented municipalities. Many of the metrics this reform should be based on have already been described – demographic status and structure, economic potential, ability for fiscal and financial independence, or at least minimal dependence on the state budget. Other important metrics include the ability to provide quality municipal services, taking into account geographical and infrastructural realities, as well as considering the characteristics of local communities that must be represented by local authorities. This process, of course, should be planned and executed carefully, not chaotically, because there is significant potential to worsen the current situation, despite good intentions.

However, a territorial-administrative reform has the potential, if not to solve the problems of fragmentation of local government, at least to alleviate them significantly, especially if combined with significant fiscal decentralization. At this stage, both key measures for local authorities and regions are stalled – first, due to the COVID-19 pandemic, which shifted the focus of the entire country, and then due to the political crisis, which does not allow for the establishment of a stable government capable of making fundamental changes. There is only hope that when the chaotic period ends – and eventually, it will – interest in the fate of the regions will return, and from there, interest in decentralization and local government reform.