Albania has undertaken major reforms inits system of local government finance since 2000. What hadbeen a system in which local functions were ambiguous andfinancing was largely provided through tightly controlledearmarked grants is now one in which functions arerelatively clear and local governments have more autonomyover the allocation of funds. A new system of competitivegrants for infrastructure investment has been introduced.Parliament has enacted a new law on local borrowing. Withinthis framework, however, several controversies remain whichare addressed in this policy note. In the long term Albaniamust also grapple with certain organizational issues. One isthe role of regional governments, which now lack any majorclearly defined function. While the Government'sdecentralization strategy proposes a range of possiblefunctions for regional governments, most of these rolescould be carried out through other means. The otherorganizational issue is the consolidation of small communes.The Government's decentralization strategy proposes theeventual consolidation of small local governments intolarger units. International experience, however, suggeststhat the efficiency gains of consolidation are limited andmay not be sufficient to justify the political costs ofdoing so. Efforts to consolidate local governments shouldconsider alternative solutions such as inter-municipalagreements and joint service companies before proceeding.
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