This chapter examines the fiscal decentralisation in SEE countries10 focusing on the intergovernmental transfers as a political instrument which ensures the transmission of central to local policies, yet enables political influence on local governments. Decentralisation aims at ensuring the political, legal and fiscal appliance of the principle of subsidiarity through multilevel governance. This is intended to guarantee a certain degree of independence of local or regional governments in relation to central government. The concept of decentralisation is multi-dimensional, covering three distinct yet interrelated aspects – political, administrative, and fiscal. The dimensions are inter- dependent which means, ideally, there should be no fiscal decentralisation without political and administrative decentralisation and vice versa. As the SEE countries differ in population size, territory and history, their decentralisation models differ from each other as well. Countries in the region have varying electoral systems and governance structures, each facing unique challenges and political dynamics, affecting the established and emerging fiscal relations between central and local levels.

Table 1. Features of the multi-level governance framework and key local level bodies in SEE

Main features of the multi-level governance framework and key local level bodies


Unitary Parliamentary Republic

12 regions11

61 municipalities

Municipal Council (elected by direct vote for a 4-year term)

Mayor (elected by direct vote for a 4-year term)


Unitary Parliamentary Republic

28 regions12

265 municipalities

Municipal Council (elected by direct vote for a 4-year term)

Mayor (elected by direct vote for a 4-year term)

Federation of Bosnia and Herzegovina (FBiH)

Federal structure

10 self-governing cantons13

79 municipalities

Municipal Assembly (elected by direct vote for a 4-year term)

Mayor (elected by direct vote for a 4-year term)

Republika Srpska (RS)

Unitary Parliamentary Republic

64 municipalities

Municipal Assembly (elected by direct vote for a 4-year term)

Mayor (appointed by the municipal assembly)

District of Brčko (Former Brčko municipality)

Self-governing administrative structure

1 self-governing district

Municipal Assembly (elected by direct vote for a 4-year term)

Mayor Assembly (elected by direct vote for a 4-year term)


Unitary Parliamentary Republic

20 counties14

428 municipalities & 128 cities

Local Council15 (elected by direct vote for a 4-year term)

Mayor16(elected by direct vote for a 4-year term)


Unitary Parliamentary Republic

20 counties17

3,178 municipalities

Municipal Council (elected by direct vote for a 4-year term)

Mayor (elected by direct vote for a 4-year term)


24 municipalities

Municipal Assembly (elected by direct vote for a 4-year term)

Mayor (elected by the assembly with the majority vote of a total number of councillors for a period of 4 years)

North Macedonia

Unitary Parliamentary Republic

80 municipalities

Municipal Council (elected by direct universal suffrage for a 4-year term)

Mayor (elected by direct universal suffrage for a 4-year term)


Unitary Parliamentary Republic

42 counties18

3 180 municipalities (103 cities, 216 towns & 2,862 communes

Local Council (elected for a four-year term by universal, equal, direct and secret vote)

Mayor (elected for a four-year term by universal, equal, direct and secret vote)


Unitary Parliamentary Republic

1 autonomous province19 (Pokrajina Vojvodina)

117 municipalities and 28 cities

Municipal/City Assembly (elected by direct vote for a 4-year term)

Municipal president/Mayor in cities/Municipal Council (elected by the Municipal/ City Assembly)

Center for the Study of Democracy

Fiscal decentralisation

Although most of the SEE countries have made a substantial progress during the last 10 years, in one way or another the fiscal decentralisation remains a challenge for all of them. This report focuses on the subnational level, on the administrative units or entities, which exist beneath the national (central) government within a country. The subnational entities’ names and divisions vary by country, which makes the comparative analysis more difficult and nuanced. However, common terms include provinces, regions, territories, counties, municipalities, and others.

Subnational government revenue

According to the latest available data, local governments in Bulgaria, Croatia, Hungary, Romania, Albania, North Macedonia, and Serbia remain highly dependent on the central government with a significant share   of transfers compared to tax revenue. Their own revenues represent insignificant part of their countries’ GDP, ranking below the EU and OECD averages (17.9% and 17% respectively). The shares of transfers from central government remain high in most of the SEE countries.

Table 2. Subnational government revenue by category (% of total subnational government) for the nine SEE countries, 2020

Tax revenue
Tariffs and fees
Income from assets
Other revenues

EU27 (average)




OECD (average)







































North Macedonia


















OECD/UCLG, 2022 Country Profiles of the World Observatory on Subnational Government Finance and Investment, 2022.

In contrast, local tax revenue is relatively low. However, in some countries (e.g. Romania) the low share of the tax revenues is partly due to the reclassification of shared taxes (e.g. PIT21, VAT22) to the “transfers” category. A similar situation has also been observed in Serbia. Montenegro and BiH are exceptions. Both countries have relatively strong fiscal decentralisation. Regardless of the limited information available on the subnational government revenues in each BiH entity, it is known that the most important source of revenue for local level comes from sharing VAT revenues, rather than from the transfers. The shared taxes are first collected by the central level and then divided between the central state, the entities and Brčko District. The share of transfers from central level to local level also is exceptionally low in Montenegro where local governments are able to finance their assigned responsibilities mainly through their own-source revenue, including taxes, user charges and fees. Therefore, Montenegro is the most fiscally decentralised country in the region.

Some countries have reverted to more centralised systems of fiscal management citing the effects of the economic crisis and the critical state   of subnational finance. For instance, the Hungarian government has initiated an extensive constitutional reform which resulted in the recentralisation of resources, responsibilities and related expenditures, and debt. This has led to the relocation of tasks between local and central level and has restrained the fiscal framework for local government financing. Therefore, now Hungary’s fiscal decentralisation model includes a mix of local autonomy and stronger financial ties with the central government.

Subnational government expenditure

The subnational government expenditure levels as a share of total government (public) expenditure and GDP in all nine SEE countries remain below the EU and OECD averages. The relatively low percentage indicates that central governments are still the major provider of public goods and services, and subnational governments are highly dependent on central government to finance their functions and competencies. It also suggests that governments in the region might experience resource allocation challenges where municipalities have limited financial resources to address local needs, leading to disparities in service delivery and development across regions. Croatia and Romania have higher percentage of subnational government expenditure as share of overall public expenditure, while BiH and Montenegro have the lowest. Yet, all four countries have different governance vulnerabilities related to central – local transfers when the revenue categories are also considered. Croatia looks the most balanced, with relatively high decentralisation of expenditures coupled with fairly higher level of local tax revenues. Romania, with its high share of local expenditure, which however, depends to an unusually high degree, on fiscal transfers from the central level is an example of high risks of political discretion. BiH and Montenegro are the most fiscally decentralised countries within the SEE region on the revenue side. Yet, the very low levels of public spending on sub-national level, in particular in BiH, could be a sign that some municipalities are practically deprived of public resources to secure even basic public functions. As a result, they could be an even easier prey to central government political pressure, which could also mean higher corruption vulnerability.

Table 3. Subnational government expenditure as share of public expenditure and GDP (2020)

Screenshot 2023 12 05 at 11.30.19
Overall, most SEE countries face similar challenges related to fiscal imbalances, limited local self-financing power and strong central control. In all SEE countries the distribution of transfers from central government is the main instrument of keeping the local services functioning. This and  the common lack of transparency and predictable intergovernmental system make the SEE local authorities vulnerable to clientelist or electorally motivated interventions from the central level.

Intergovernmental transfers: vulnerabilities to misuse and corruption

Fiscal relations between central and local governments, in particular the intergovernmental transfers, bear a number of governance risks related to local fiscal autonomy, social welfare and equitable development. Biased allocations to local level units and clientelistic spending are detrimental to the national economy, the rule of law, and the credibility of public institutions in general.

The intergovernmental transfers in almost all SEE countries can be considered as a key aspect of their political economy models of relations between central and local level. As a result, there are risks that central funding through transfers can undermine local fiscal autonomy, understood as the ability of subnational governments to raise tax locally to finance expenditures. Such autonomy though could also decrease local leaders’ motivation to increase the tax burden in their jurisdictions, through tapping transfers from the central government, financed by a “common pool” of resources collected elsewhere in the economy and minimising the costs of decentralised public service provision.23

Figure 1. Level of fiscal decentralisation in SEE (share of transfers to municipalities from all centrally allocated funds*, %)

Screenshot 2023 12 05 at 11.31.15

Note: *The level of fiscal decentralization in SEE is calculated as the net transfers from the central budget to the municipalities minus any taxes and other transfers the central budget has received from the municipalities, as a share of the total expenditures and transfers of the central budget towards all budget recipients.

Source: CSD, based on ministries of finance reports and official statistics.

The traditional approach to intergovernmental transfers assumes that the central government is a unitary actor trying to maximise the social welfare   of the nation. However, this approach often does not reflect fully the political environment at the central level, where politicians have loyalties at the regional and/or local level and will attempt to direct transfers towards their regional or local constituencies and even influence decisions on distribution formulas.24 Politically motivated transfers when not properly disclosed publicly, clash with formal rules of budget distribution, which could result in the creative bending of these rules. When the pressure of political competition is added, and if controls are not robustly enforced, intergovernmental transfers can be susceptible to corruption which can undermine the effectiveness of these transfers and lead to misallocation or diversion of funds

Conditional and unconditional transfers

The intergovernmental transfers systems in all nine SEE countries are similar. Municipalities rely on conditional and unconditional  transfers  or  their similar types – earmarked and non-earmarked transfers. Conditional transfers are linked to the implementation of specific policies, meeting certain standards, while non-conditional – are not. Both can be discretionary and non-discretionary, depending on whether they require or not annual approval by the government.

Table 4. Intergovernmental transfers systems in SEE


Tax revenue
Other revenues

Conditional transfers (e.g., Regional Development Fund, funds from ministries) for delegated functions – formula-based, published in the annual budget proposal and the budget execution report of the respective line ministries, as a specific annex listing all conditional transfers to local self-government units (based on expenses forecast for each activity carried out in implementation of delegated functions).

Unconditional transfers for exclusive functions – Re- construction Fund – formula-based transfers, pub- lished in the annual budget law (based on variables and equalisation threshold criteria).


Tax revenue
Other revenues

Earmarked subsidy for capital expenditures and general subsidy – allocated (based on the number of inhabitants, surface area and other criteria) and distributed via open calls, launched by the Ministry of Finance and/or given as transfers directly to municipalities from the state budget, or by the Ministry of Regional Development and Public Works.

Equalisation subsidy – formula-based (the equaliza- tion subsidy is set by law and cannot be less than 10% of the own revenue of all municipalities from the previous year. The mechanism for distributing the total equalisation subsidy per municipality is set out in the state budget act for the respective year).


Tax revenue
Other revenues


Conditional transfers26 for investment expenditures.

Formula-based that considers the population size (68%), and other coefficients related to the territory (5%), school-age children (20%), and the municipality’s development index (7% of relative wealth).


Conditional transfers for investment expenditures.27

Allocated according to the following formula: 75% on a per capita basis, 15% based on the territory and 10% based on the number of secondary school students. Also, equalisation transfer, calculated based on a series of criteria including: the total per capita revenues of registered businesses (35%), total bud- get revenue (25%), population density (20%) and the unemployment rate (20%).


Tax revenue
Other revenues

Fund for Decentralised Functions – 6% of the PIT is earmarked for specific decentralised functions, determined annually by line ministries.

Fiscal Equalisation Fund – redistributed according to local governments’ individual shares set annually in the budget, calculated based on 5-year per capita PIT revenue and target revenue.


Tax revenue
Other revenues

Task-based, expenditure-oriented system of earmarked transfers – equalisation criteria based on the tax capacity of each municipality.

Mandatory deficit grant designed to cover the deficits that the municipalities incur through no fault on their own (based on expenditure needs rather than on actual output).


Tax revenue
Other revenues

Other transfers related to EU-funded projects – small percentage of total municipal revenues, and are mostly intended for co-financing of European funds for projects aimed at municipal infrastructure development.

Equalisation Fund – allocation is formula-based and considers the fiscal capacity of the municipality (50%), total area and population (35%), and the re- maining 15% are distributed in equal amounts for all municipalities eligible.

N. Macedonia

Tax revenue
Other revenues

Capital transfers (allocated from the central govern- ment according to annual plans for such projects). Specific transfers (determined by the contract signed between the mayor and the line ministry).

Equalisation grant (funded by up to 4.5% of total VAT collection, and 65% is distributed on a per capita basis).

Block transfers (based on a formula that takes into consideration enrolment, employment, number of children entitled to free school transportation, num- ber of pupils and teachers, etc.).


Tax revenue
Other revenues

Sectoral block transfers (determined at county level and based on quantitative criteria (e.g., population)).

Equalisation transfers (according to a specific formula).


Tax revenue
Other revenues

Earmarked block transfers.

Equalisation grant (allocated to local governments in which the population‘s average income per capita is below the national per capita income as calculated by the relevant authorities.

Unconditional grant to individual local government is based on a formula including metrics related to the population size, territory, number of elementary and secondary school buildings, number of children attending preschool and number of preschool build- ings). Solidarity transfer (the allocation is based on a coefficient for development that divides municipal- ities into four groups).

Center for the Study of Democracy

Conditional transfers adjust the expenditure priorities of local authorities   to national policies. The process contains in itself a natural governance conflict, as it implies that the central government has to convince subnational authorities to pursue certain policies or goals, which do not necessarily reflect local priorities, and which might also be under-financed, leaving the local governments to bear the wrath of disgruntled voters. When spending decentralisation is funded through intergovernmental transfers this renders local officials subordinate to the priorities of the centre, with the associated rent-seeking effects and related risks of growing political bribery.28

Unconditional transfers, on the other hand, are primarily meant to provide equalisation of public financing across the country, and the amount which each municipality is receiving is determined by  a  formula.  However,  there are risks related to the political manipulation of the formula by the incumbent government or discrepancies between the determined by the formula transfers’ value and the  actually  distributed  amounts.29  Although the formula is a mechanism designed to limit the power of the central government in the distribution of funds30, when there is no transparency the risks of manipulating or overruling the formula are high.31 In addition, the complexity of formulas might make it less comprehensible to the public and more prone to manipulation.

The SEE countries use different formulas to try to achieve equity and efficiency based on social (e.g., population and poverty), geographical (e.g., marginalisation and size) or economic (e.g., tax collection and economic dynamism) criteria for distribution of transfers.32 However, their formula- based allocation of transfers in and of itself alone does not always assure transparency, which is a common issue for emerging and developing countries.33 The formula could be public, but the data used to calculate     the exact amount that should be allocated to municipalities might not be transparent and comprehensible for the general public. In other cases, the central government may decide to apply some elements of the formula, leaving at the same time space for discretion. Therefore, formula-based transfers are not fully immune from manipulation. Further, they sometimes may create loopholes which allow substantial and systematic circumvention. Loopholes which make formula-based transfers in SEE countries vulnerable to systematic circumvention, misuse and corruption include:

  • possible manipulation of the formula criteria, e.g., adjusting population figures, economic indicators, or other criteria to artificially increase the allocation for political or personal gain, data falsification;
  • formula complexity (designing a formula that is difficult for oversight bodies or the public to understand, making it easier to manipulate);
  • political interference in formula design (pressuring officials to adjust the formula to benefit specific areas or politically influential groups), insufficient oversight mechanism (e.g., auditing processes or weak enforcement of rules);
  • inadequate monitoring and evaluation (failing to conduct regular reviews and audits to assess the accuracy of data inputs and the fairness of the allocation process);
  • limited  public  participation  (not  involving  citizens  or  stakeholders  in the development of the formula, reducing the likelihood of detecting manipulation).

Therefore, it is crucial that countries within the SEE region not only focus their efforts on implementing correctly formulas but also increase their transparency in terms of political objectives. Reducing formula complexity and increasing its transparency during and after implementation is a logical step for the SEE countries to avoid or reduce political capture. The simpler the transfer formula is to apply, the easier is the oversight of its implementation.

Both transparency and accountability rules are equally important to the formula structure, including the source of data and the methodology of calculation   of the indexes used in the formula. For instance, the highest weight in the formula should not rely on inaccurate or outdated data sets. Criteria used by the SEE central governments should be clearly articulated to the public. Responsible institutions controlling the formula should be pressed to make public the data used for running the formula and the results obtained. Further, formulas should be kept protected from frequent changes, unless no clear rational is provided to the public.

At the same time, both conditional and unconditional transfers can be discretionary or non-discretionary. Though the division is not clear cut, discretionary transfers are typically such that are decided by the central government on an annual basis, whereas non-discretionary are decided on  a longer-term basis. As such, discretionary (unconditional) transfers in the SEE countries are the most vulnerable to corruption and state capture risks, as they are the subject of negotiation between central and sub-national authorities in which central authorities may be more or less disposed to favour the particular municipalities to which the transfers apply. The discretionary transfers are especially prone to undue sub-national influence.34 While they provide flexibility, they are more susceptible to corruption risks due to potential abuse of power and lack of transparency.

Common risks for the SEE countries, making the discretionary transfers vulnerable to corruption are political favouritism, clientelism and patronage (allocating funds to politically important areas during elections), inadequate oversight (lack of regular audits or independent reviews to monitor how discretionary funds are allocated and spent), arbitrary decision-making (decision-makers allocating funds without a clear rationale or justification), misallocation of resources (allocating funds to projects without contribution  to the overall community well-being), limited competitive process (allocating funds without open competition or bidding process), lack of transparent decision-making (without disclosing the criteria or considerations used). Although they are necessary in the case of unique or temporary projects, such as the construction of infrastructure or the improvement of the regional or local economic structure, it is important that the central level choose the procedures of project selection and design and the role of negotiations and contracts with sub-national authorities. In this respect, the progress in the process of EU integration, with its capacity building for planning and oversight of discretionary project spending is particularly important for the region.

Risks associated with municipal or regional development funds

Risks of political bias in intergovernmental transfers are particularly present when the funding for municipalities is distributed by various national funds, by the ministries of local/regional development and/or by government-controlled foundations. By design, these funds are tasked to allocate the financial support on a competitive basis (applications received by individual municipalities),   or based on the needs of the municipalities according to fixed criteria. Yet, evidence suggests that the distribution of such funding in SEE might often  be based on political alignment and misuse of the received funds for election campaigns.

In Albania, the Regional Development Fund distributes conditional transfers upon application by local government units. The distribution of transfers and management of the Fund is carried out by the Committee for the Development of Regions, consisting of the prime minister, the deputy prime minister and relevant ministries35. However, there are indications that the funding is allocated based on political ties, which do not reflect local development goals. For example, 26 municipalities controlled by right-wing parties36 from the opposition have managed approximately 20% of the Fund in the period 2016 – 2018, while 34 majority-run municipalities were awarded the remaining 80% of the Fund.37 Moreover, the size of the Regional Development Fund has increased significantly, leading to concern that it collects the funds that should have been allocated through unconditional transfers (budget transfers). Municipalities with low project application capacity and small populations often face difficulties benefiting from this Fund. The Fund’s reports are not published online.

Hungarian organisations (mostly CSOs) with ties to the Fidesz party have been recipients of substantial financial support through the state’s civic fund, particularly under the auspices of the Municipal Civil Fund.38 Notably, Fidesz-affiliated groups have secured the largest disbursements of funds for election campaigns and the development of pre-election media resources within the framework of this Fund. Of the 83 grant recipients receiving HUF 11 million (EUR 29,657) each, almost half (38 organizations) are associated with Fidesz politicians.39  An additional 12 entities maintain indirect connections  to the ruling parties. These indirect links manifest through initiatives such as arranging campaign functions for local politicians or disseminating government messages via printed publications.

The objectives of state funding to independent civic organisations have evolved over time. While media infrastructure took precedence in the allocation of funds in 2022, the primary focus has shifted in 2023 towards orchestrating events designed to promptly engage and mobilise voters.40 Some of these organisations claim to be politically independent. However, their active involvement in local elections and collaborative  candidacy with Fidesz in electoral coalitions exposes  their  close association with the ruling party. There have been multiple instances of presence of local Fidesz candidates at these events. Moreover, the upper limit for funding across both application rounds was set at  HUF 26  million (EUR  70,100), a threshold solely attained by organisations affiliated with the governing party.41

In Romania, the National Programme for Local Development (PNDL)  is the main source of financing for local infrastructure in areas such as healthcare, education, water and sewage, heat and electricity, including public lighting, transport, roads, sanitation, culture, worship, housing and sports. Funding comes from the central government, which retains ample discretion regarding allocation and oversight of spending. In the period 2007-2022 funding from PNDL and its predecessors, the Reserve Fund and other emergency funds, have been allocated based on political criteria, with mayors in power receiving even up  to  three  times  more  than those in opposition. The calculations also  show  that  mayors  from the funded counties have changed their political allegiance.42 Experts monitoring the funds conclude that there is a lack of administrative capacity within the Ministry of Local Development, Works and Administration (MDLPA) to implement PNDL, Projects are managed on paper only, project implementation data are missing or are obtained long after completion, there are no effective controls and no performance audit to show whether or not PNDL is successful.43,44

Understanding governance risks in intergovernmental transfers: who wins what?

In order to correctly identify the risks of transfers made for purposes other than equitable local development and in order to design efficient counter- measures, policy makers should first understand the “incentives”, the “benefits” and the “payment” expected for these benefits for each of the involved parties.

Central and local governments, as well as the incumbent political parties, benefit by:

  • Building central and local leaders’  reputations,  securing  votes  and re-election. The process is often associated with promises and announcements made during election campaigns. It is not, however, necessarily limited to campaigning and can arise in any part of the electoral cycle. The idea behind the practice is that the money allocated to the representative’s district, canton or municipality will benefit the lives of the local constituents, thereby securing their support and votes. Support in this context can also mean contributions to that politician’s next election campaign.45
  • Securing and/or changing the political allegiance of mayors. The previous allocation of funds could re-confirm the political loyalty of mayors. However, the promise of future funding tends to sway some mayors to change their allegiance toward the political party, which is most likely to win the upcoming elections.46
  • Decision-making power over local level  contracts,  investments  and projects. Non-transparent and discriminatory allocation of public procurement contracts, state aid, concessions, and investments projects based on political connections or pressure become an extension of privileged intergovernmental transfers thereby further exacerbating the misuse of public finances.
  • Decision-making power over political  appointments.  In  exchange for the national or foreign donor funds, the central level and/or local level leaders could ensure the political appointment of close to them persons  in the municipalities, state-owned enterprises (SOEs) and/or companies (usually large employers).


When the territory (municipality) is politically aligned with the incumbent party(s) of the central government it can benefit by:

  • higher allocations from central budget funding compared to similar in size and needs municipalities run by the opposition;
  • higher share of foreign donor (including EU) funding;
  • debt annulment or low-interest loans provided by the central government, which further discourages the strict financial management of the municipality/canton and compromises the oversight over investment decisions;
  • decision-making power over political appointments of close to the mayor / municipal council members in local companies, SOEs, and other recipients of the national or foreign donor funds.


Local companies, usually large employers, as well as sometimes SOEs, non- governmental, academic and media entities, benefit by:

  • non-competitive award of municipal budget funding, foreign donor (including EU) funding, procurement contracts, concessions, permits and state aid;
  • debt annulment or low-interest loans provided by the state or the municipality;
  • the opportunity to purchase underpriced municipal property;
  • securing political appointments in the municipal or central-level public bodies.

Figure 2. The intergovernmental spending channels exposed to corruption and state capture risks (clientelist transfer channels)

Screenshot 2023 12 04 at 14.31.57

Source: Center for the Study of Democracy

Box 1.   Unmasking party-political agendas at the local level: unveiling election-powered fiscal flows through data and statistical analysis (Croatia and North Macedonia)

The increase in governmental transfers to municipalities before elections is a well-known phenomenon in various countries, particularly pronounced in developing ones.47 This practice  often  occurs  for  political  reasons,  aiming to improve the public image of the ruling party or government as a form of vote-buying. In the context of decentralization efforts, there may be a natural increase in transfers to municipalities as they take on more responsibilities. These increases may coincide with election cycles. The threat posed by opposition parties during election campaigns can lead incumbent governments to boost transfers to municipalities to ward off opposition threats and secure their reign.

Engagement in tactical distribution of resources may be influenced by the stage of the electoral business cycle, especially if incumbent governments are more active in clientelistic practices in the run-up to elections.48 This increases the vertical dependency of local on national governments and serves as a call for a fundamental re-evaluation of municipal financing policies.49 Moreover, it adds to the existing debates on decentralization and dependence, arguing that, regardless of any potential efficiency gains, a departure from the reliance on intergovernmental grants could help minimize pork-barrelling diseconomies.50 Thus, understanding how electoral factors shape resource allocation  is  crucial not only for policymakers but also for the broader public as it sheds light on the inner workings of governance and its implications for society at large. Addressing the challenges posed by distributive politics and ensuring that resource allocation aligns with the overarching goals of equity, efficiency, and countercyclical stability remains an ongoing imperative for governments around the world.

The analysis of available statistical data around elections could prove to be a powerful tool for detecting potential risks of discrimination and conflicts of interest in allocating intergovernmental transfers and loans. Yet, such data is not readily available in SEE, which limits transparency and oversight control considerably. Below are the findings from multiple regression analyses of data on election outcomes and fiscal transfers in Croatia and North Macedonia for the past decade.

The analysis of the available data for Croatia, covering the 2014-2021 period, shows that: 
  • Intergovernmental transfers to municipalities increase by 20% in pre- election years and by 57% during the election year. However, during the election year, these transfers increase by 62% if the municipality is run by the candidate’s party, and by 64% if the mayor is from the same party. The transfers usually drop by 30% after the election has passed. The right-wing party coalition tends to provide the largest (60%) increase of transfers to municipalities during election years, while the centre and left-wing parties provide lower shares (45% and 35%) respectively. 

  • Government’s loans to municipalities also increase – by 85% in pre- election years and by 140% during election years.


Similar trends are observed in North Macedonia. The statistical analysis of elections, mayor party affiliation, and budget transfer data from the past 10 years shows that the municipalities whose mayor is from the governing party get double the earmarked funds per capita compared to the other municipalities.

Anti-corruption and oversight of local government finances

Data from the State Capture Assessment Diagnostics at Sectoral Level Integrated Tool (SCAD-SLIT), demonstrates that SEE municipalities are often affected by lack of integrity and impartiality. For example, in Bulgaria, the lack of impartiality of municipal administrations was pointed out by 49% of the respondents of the 2021 SCAD-SLIT survey. In comparison, the district administration was selected as a body which lacks impartiality by 42%, followed by the Customs Agency (38%), National Revenue Agency (35%) and the National Audit Office (23%). The municipal administrations are further assessed as lacking integrity by 45% of the experts, while 64% believe they have ineffective anticorruption policies. Similarly, in Romania 55% point out to the lack of impartiality of the municipalities – the highest share among all assessed public bodies. A total of 35% highlight the lack of integrity, while 67% note the ineffectiveness of their anticorruption policies.51

Figure 3. Lack of impartiality and integrity in municipalities

Screenshot 2023 12 04 at 14.48.25

Source: CSD, Assessing State Capture Vulnerabilities at the Sectoral Level, 2021.

Fiscal oversight institutions

Effective fiscal oversight involves collaboration and coordination among multiple public bodies to ensure transparency, accountability, and the equitable distribution of resources between central and local governments.  In addition, it is often reinforced by anti-corruption institutions, which work    in tandem with fiscal authorities. The following bodies and institutions are typically engaged in overseeing and managing central-local government fiscal relations:

  • Parliaments and municipal councils have the highest oversight authority related to fiscal matters. They are reviewing and approving fiscal policies, budgets, and transfers to local governments. Annual national budget discussions in parliaments are typically the most awaited policy debates in SEE countries. Yet, they tend to focus mostly on central level allocation. Municipal council discussions on the other hand, which debate local budgets, most often remain under the radar of national media and public attention, with the exception of the capital city budgets.
  • Ministries of finance or treasury. In all 9 SEE countries ministries of finance play a key role in overseeing fiscal relations with local governments. The State Treasury in Hungary is supervising the transfers allocated to local governments considering the findings and recommendations from the State Audit reports. Financial ministries formulate fiscal policies, establish budgetary guidelines, and allocate financial resources to lower-level units.
  • Central fiscal authorities. Both BiH and Romania have established central fiscal councils. They are responsible for monitoring and regulating fiscal relations between central and local governments. In BiH, the institutions overseeing the fiscal activities at entity level also enforce compliance  with the budgetary calendar. In Romania, it acts as an independent body, responsible for designing and implementing the national fiscal policy and promoting public finances’ transparency.
  • Local  government  associations  represent   the   interests   of   local or regional governments. They advocate for the financial needs and autonomy of local governments and thus engage in negotiations with the central governments regarding fiscal matters. The National Association  of Municipalities in Bulgaria, for example, has a crucial role in negotiating spending standards and fiscal allocation mechanisms with the Ministry of Finance.
  • Independent audit institutions,  such as the Auditor-General’s  Office  or similar bodies, play a crucial role in ensuring transparency and accountability in fiscal  relations  between  central-local  government level. As independent oversight institutions, they conduct audits of local governments finances and report on compliance with fiscal regulations. Audit institutions are considered key organisations in fiscal relations between central and local level in Albania, Bulgaria, Croatia, Hungary, North Macedonia and Romania.
  • In addition, local governments themselves, in particular of larger municipalities, have fiscal authorities responsible for budgeting, financial management, and revenue collection within their jurisdictions to guarantee compliance with both national and local fiscal relations.

Some countries have established special inter-governmental coordination committees or councils composed of representatives from both central and local governments to facilitate dialogue, negotiate fiscal agreements, and resolve disputes. For example, Serbia has established Local Government Financing Commission (known also as the “Commission for Intergovernmental Finances”) to monitor the implementation of the intergovernmental finance system and make recommendations in this area. Similar structures also  exist in North  Macedonia  (Committee  for  Monitoring  and  Development  of Local Government Finance System with members from  national  and local governments) and Romania (Inter-ministerial technical committee for decentralisation and working groups for the decentralisation of competences).

SEE EU member-states have established separate systems for ensuring the sound spending of EU funds. These have been certified by the European Commission, and undergo regular monitoring. Central European institutions, like OLAF have local counterparts in the member-states responsible for investigating fraud with EU funds. The European Public Prosecutor’s Office also has direct authority to investigate cases that infringe EU financial interests. In SEE non-EU countries, international organisations and aid agencies (e.g. the World Bank, bilateral donor programmes, the European Delegations, etc.) are overseeing fiscal relations in project-based funding through developing stricter rules of evaluation of projects to ensure transparency and promote good governance practices.

Box 2.   Fight against fraud to EU’s financial interests

On 5 July 2017, Directive (EU) 2017/1371 on the fight against fraud to the Union’s financial interest by means of criminal law (PIF Directive)52 was adopted. The PIF Directive sets common standards for Member States’ criminal laws, seeking to protect the EU’s financial interests by harmonising the definitions, sanctions, jurisdiction rules, and limitation periods of certain criminal offences affecting those interests. These criminal offences (the “PIF offences”) are:

(i) fraud, including cross-border value added tax (VAT) fraud involving total damage of at least EUR 10 million; (ii) corruption; (iii) money laundering; and

(iv) misappropriation. The harmonisation of standards also affects the scope of investigations and prosecutions by the European Public Prosecutor’s Office (EPPO) because the EPPO’s powers are defined by reference to the PIF Directive as implemented by national law.53

The deadline for transposing the Directive expired on 6 July 2019. As of 10 June 2023, the Commission opened infringement proceedings against 20 Member States for incorrect transposition of the Directive.54 The difficulties for the full transposition are due either to some deficiencies in the definitions of the offences (e.g. “money laundering”, “passive corruption”55), or to the lack of a criminal offence covered by the PIF Directive among the predicate offences.

National anti-corruption strategies and legislation

National anti-corruption strategies and legislation in SEE rarely identify specific corruption risks related to the misuse of national and foreign do- nors’ funds from the central to the local level; if they are mentioned in the national integrity strategies at all, it is in a very general terms. The Bulgar- ian Public Finance Act (Article 20)56, for example, stipulates that the use of funds should be based on the principles of comprehensiveness, accountabil- ity and responsibility, adequacy, economy, efficiency, effectiveness, transparency, sustainability, and legality. The National Anti-Corruption Strategy  of Bosnia and Herzegovina 2022-202457 recognizes the following risks as obstacles to a successful fight against corruption: lack of political will, failure to meet internationally assumed obligations, insufficient independence, lack of financial and other resources, the complexity of the political sys-   tem, lack of systematic approach and coordination. The national anticorrup- tion strategy does not distinguish risks according to levels of government and does not identify the public bodies that should address such risks. The Hungarian National Anti-Corruption Strategy 2020-202258 identifies corrup- tion in public procurement, nepotism and clientelism, money laundering and financial fraud, corruption in budget planning, bribes and payoffs and corrup- tion in the tax system as risks.

SEE anticorruption agencies are usually not the main institution responsible for overseeing and investigating complaints related to fiscal matters, although they may cooperate with the fiscal control bodies listed above in cases of allegations of corruption in central-local fiscal relations. Only in Bulgaria and Croatia inspectorates perform oversight functions both over fiscal spending and anticorruption.

Anticorruption strategies in SEE identify some risks which could indirectly be linked to the abuse of fiscal transfers. However, the majority of these risks and related measures concern the planning and spending of national and foreign donor funds at the local level rather than any discriminatory or partisan bias in the decision-making related to the transfers from the central budget. The main focus is placed on:

  • The insufficient transparency of local level budgets. Measures in that respect are usually foreseen in local anticorruption and integrity plans, or the national anticorruption strategies.59 For example, the frequent changes to the regulations on the publication of information by local-level authorities is recognised as a risk by the Operational Plan for the Prevention of Corruption in Areas of Special Interest of Serbia (2022).60
  • Weak financial controls and inadequate monitoring mechanisms at local level are highlighted in Albania61 and Romania62, corruption in budget planning in Hungary63, and sudden changes in budget allocation patterns – in Romania.64
  • Risks of favouritism in awarding contracts and tenders, non-trans- parent procurement procedures, lack of competitive bidding and market assessment are identified as corruption risks in Romania65 and Hungary66.

The anticorruption agencies in SEE often provide methodologies, guidelines and red flags for assessing the corruption risk at local level, intended to help the preparation of the integrity plans. The anticorruption agencies are also tasked with checking reports on municipal integrity plans’ implementation. Very often though agencies, rely only on self-assessment reports prepared by the local level units as the sole source of information. There is also a distinct lack of sanctions in case plans have not been developed or published.

The Croatian strategy for prevention of corruption for the period from 2021 to 203067 identifies several risks related to local level budget management: low integrity of local government officials and civil servants; companies owned by the local government could appoint politically connected persons to management positions; companies owned by local governments can assume debt guaranteed by the local government, which could result in potential debts for local governments, especially if these companies are poorly managed and if the leaders are politically connected.

The Bulgarian Strategy for Preventing and Combatting Corruption (2021 – 2027)68 underlines as risks the ineffective public and internal institutional supervision over the management of municipal property, the spending of public funds through public procurement and the planning/implementation of municipal budgets. It also warns that public consultations with the interested local communities could be done just as box ticking and that there is insufficient transparency in the relationship between local authorities and local business.

In Montenegro, the Agency for Prevention of Corruption has prepared Rules for the Drafting and Implementation of the Integrity Plans (2016)69. The rules place strong focus on the need of cooperation during the elaboration of the plans with the oversight bodies, especially the internal financial control or internal audit regarding risk of corruption, other illicit or unethical behaviour. Key risks include the area of financial planning and management (risks related to the budget planning process, public procurement planning, implementation of public procurement, drafting and signing of contracts, monitoring of enforcement   of contracts, financial reporting, financial management and control, budget execution, etc.). Risk intensity is measured by an assessment of “probability”

of occurrence of risk in a specific time period and the “consequence” that the risk causes – e.g. financial damage, loss of expected revenues, as well as other forms of non-material damage, such as loss of trust of the public in the work of the authority, harming the reputation of the authority, etc.

In Serbia, the at-risk areas identified in the Manual for the Integrity Plan Development and Implementation70 published by the Anti-Corruption Agency include payments to third parties (subsidies, donations, premiums, loans, sponsorships), the generation of revenues (fiscal and parafiscal levies, fees) and contracting which is not regulated under the public procurement. The risk is measured via an electronic questionnaire, filled in by the employees  of the public body.  A software application that classifies risk intensity at   low, moderate and high levels. The probability factor of the risk can also be measured as small, moderate or high. The survey results are then reviewed by a working group, and the head of the institution appoints a person responsible for implementation of planned improvement measures.

Anticorruption provisions related to fiscal transfers to the local level are mostly contained in local government integrity plans. These are internal documents with legal and practical measures, which aim to prevent and eliminate possibilities for the occurrence of various forms of corrupt and unethical behaviour within local government bodies. Integrity plans focus    on managing risks related to budget planning, public procurement planning, public procurement implementation, contract drafting and conclusion, financial management and controls, etc. Yet, local government bodies entrusted with implementing and overseeing these integrity plans have low capacity and powers, mostly limited to inspections and referrals of complaints and suspected corruption cases to other relevant authorities.

Integrity provisions at the municipal level in SEE are often very general, target low-level civil servants rather than decision-makers, lack clear deadlines for their implementation and are not tailored to local circumstances. For example, in Albania, local government units are obliged to allocate an item in their budgets for the improvement of integrity instruments. However, none of the municipalities have allocated more than 1% of the budget for the approval and implementation of plans according to the forecasts in the Anticorruption Action Plan 2022.71

Financial inspections and audits

When applied effectively, financial inspections and audits are among the strongest government tools which could be employed to detect and tackle irregularities, political interference and conflict of interest in the budget distribution and spending at all levels.

In North Macedonia, the State Audit Office has highlighted deficiencies in the criteria for evaluating projects seeking capital development transfers from the ministries. This deficiency raises questions about the efficacy of the evaluation process. In Bulgaria, the Agency for State Financial Inspection monitors the spending procedures of state funds and performs checks for fraud.72 The Agency cooperates with the National Audit Office and the European oversight authorities.

In Croatia, the financial audit of local governments is conducted annually by the State Audit Office for a selected number of municipalities.73 The state auditors assess the risks of significant misrepresentation of data in financial statements and the risks that procedures are not conducted  in accordance with the law. They also inspect internal controls over the preparation, compilation and publication of financial statements, as well as internal controls that ensure business compliance. The State Audit Office cannot impose sanctions; however, it provides a conditional opinion and recommendations for improvements.  The  audit  office  is  also  supposed  to inspect whether the local government has followed up on previous recommendations, but audits of the same local government are rarely conducted.

Box 3.   Financial management guidelines

The Strategy of the Council of Europe for Innovation and Good Governance on Local Level from 2007 is based on 12 principles, including “Efficiency and Effectiveness” (i.e. best possible use is made of the resources available, audits are carried out at regular intervals in the municipality to assess and improve performance), “Stable Financial Management” (an internal audit function reviews financial transactions to ensure compliance with approved internal procedures, multi-annual budget plans are prepared, with consultation of the public), “Openness and Transparency” (the public in such a way as to enable it to effectively follow and contribute to the work of the local authority), “Ethical Conduct” (the local public interest guides the allocation of budgetary resources of the municipality) and “Rule of Law” (common interests of all residents do prevail, not the special interests).74

In Romania, the Court of Auditors assesses financial management and compliance with anticorruption policies at the local level. Their reports provide insights into corruption risks in the distribution of public funds. However, given that the distribution of funding is very much discretionary, there are few provisions regarding how funds are allocated, particularly for investment. Still, what few provisions exist are generally complied with.