The Fiscal Decentralization Initiative

for Central and Eastern Europe

Regional Development and Decentralization

in Romania: Connecting the Dots

Written by
Casandra Bischoff and Victor Giosan
 Table of Contents

Introduction ................................................................................................................. 5

Regional Governance .................................................................................................. 6

Expenditure and Revenue Assignments for Local Governments......................... 6

Expenditure and Revenue Assignments at the Regional Level............................ 9

Regional Discrepancies and Regional Policy-Making ............................................. 12

Conclusions and Recommendations ......................................................................... 14

Annex: Romania’s Public Administration and Regional Arrangements ................... 15

References ................................................................................................................. 17

3
 Regional Development and Decentralization
in Romania: Connecting the Dots
Cassandra Bischoff and Victor Giosan
Introduction
Previous research on regional development in Romania
focused on investments channeled through regional
agencies (Davey, Ed. 2003) or problems in absorp-
tion of pre-accession and structural funds (IER, 2002).
Rightfully so, these studies are a response to the ardent
preoccupation of the country to ensure the necessary
co-financing for the investment programs.
However, recent studies (Ionita, 2005) show that co-
financing for structural funds will not create a budgetary
shock, as estimated until now. The volume of European
funds will increase considerably between 2007 and 2009
(up to 4% of GDP), but then it is likely to decrease as a
result of the GDP growth and possibly further apprecia-
tion of the local currency. Also, national co-financing
is likely to come from the same budget lines that the
country used for pre-accession funds, which means that
access to European funds will be safeguarded. Instead,
the problem is likely to be the capacity to absorb the high
level of funds for regional and local priorities, meaning
the ability of local governments to plan in a timely man-
ner, create projects and effectively spend funds.
Efficient absorption of structural funds is perceived
as an important indicator in the effort to reduce regional
discrepancies, and therefore is a priority for the European
Commission. What can ensure a good rate of disburse-
ment of the funds is yet to be understood, and the history
of EU candidate and member countries shows diverse
and uneven experiences. What seems to be common in
the experience of countries with a good absorption of
structural funds (such as Germany, Spain, Austria or,
more recently, Poland1), is a solid institutional setting
strengthened by a policy process based on building
partnerships. More specifically, all these countries
exhibit a decentralized system with a clear distribution
1
The experience of region Wielkopolska is men-
tioned as a good practice, see Gowacki, 2003.
5
of functional and fiscal responsibilities between local,
regional and national levels, and a high level of interac-
tion between national, regional and local actors in the
programming process.
There is a logical connection between these two
institutional dimensions and the planning and manage-
ment of regional programs and projects. Firstly, national,
regional and local authorities need clear expenditure and
revenue powers for them to be able to design plans in
a timely manner, create projects and effectively spend
structural funds2. A decentralized system enables full
decision making at the local level in aspects relevant to
the locality, increased accountability between local gov-
ernments and citizens, and the shaping of local priorities,
i.e investment programs.
Secondly, they need a predictable and simple policy
making environment for them to be able to support local
development in cooperation with other local partners.
A well functioning decentralized system cannot work
without extensive consultation processes between ac-
tors at different administrative levels, and between
public administration, civil society and the business
sector. This is not an easy task, as most of the ex-com-
munist countries have traditionally aligned main policy
responsibilities—such as budget formulation—only with
central authorities.
2
Decentralization was never an explicit reform re-
quested of candidate countries during accession negoti-
ations. To a large extent the preoccupation of the Com-
mission was that applicant countries institutionalize a
working regional development policy framework, at
the choice of the candidate country, to ensure that they
are able to optimize EU assistance for economic catch-
up. It remained an issue that the Commission highlight-
ed constantly in each Country Progress Report as an
important criterion for public administration reform.
6 Challenge of R e g i o n a l D e v e l o p m e n t i n S o u t h E a s t E u r o p e : S t r a t e g i e s f o r F i n a n c i n g a n d S e r v i c e D e l i v e r y
These are the two aspects questioned in the report:
what kind of 1) intergovernmental system and 2) policy
processes should be put in place to support the efforts
of public authorities in Romania to reduce regional
discrepancies.
Regional Governance
The functional and fiscal responsibilities of regional
structures are an uneasy debate, as this kind of evalua-
tion looks at an institutional scheme put in place almost
a decade ago with great political effort. Romania chose
in 1998 an institutional regional structure that some
authors call regionalization without creating a regional
level, or administrative regionalization (Marcou, 2003
and Davey, Ed., 2003)3. Similar to Slovenia, it created
eight regions without administrative power by adding up
existing sub-national governments (counties in Romania)
into regions. The development regions fall under the
NUTS II system and do not have executive or legislative
powers or separate budgets. Rather, they provide units
of observation for collecting statistical data according
to EU regional rules and policies. The actors involved in
the regional programming are the regional development
agencies and councils, local and national government,
NGOs and businesses (more on the institutional set-up
in the Annex).
The rationale behind creating a new institution is
important, as it lays the grounds for how efficiently it
will work. When there is no serious demand for it, its effi-
ciency becomes more expensive. In the case of Romania,
the choice to establish regions with no administrative or
fiscal responsibilities, while it accommodated requests
from Brussels, was a top-down compromise solution that
contained potential secessionist impulses in the country,
while complying with EU requests. Poland, in com-
parison, a sizable unitary country with administrative
structures similar to Romania, went through a bottom-up
approach in order to set up its institutions for regional
development. The focus of the public debate around
regional development was public administration reform
and later addressed EU accession issues; moreover,
the need for regional policies was identified from the
bottom up, when local governments’ associations tried
to improve service delivery in waste management and
3
More on the territorial and administrative organi-
zation of Romania in the Annex.
sewage treatment, areas which went beyond the jurisdic-
tion of their municipalities. This approach resulted in the
creation of a third regional administrative tier, equipped
with several functional and fiscal responsibilities.
Expenditure and Revenue Assignments for
Local Governments
Romania has devolved significant powers to local gov-
ernments, but never with a clear purpose to provide local
governments more decision power on the quantity and
financing of public services. This is why decentralization
has traditionally been an ad-hoc process that gave little
room to local governments to maneuver policy objectives
and resources. As a result, the quality of the services
delivered locally has not followed the positive trend of
local government public expenditures (an increase from
4% of GDP in 1998 to 6.5% in 2004).
One of the reasons was that the transfer of compe-
tencies to local governments, which started relatively
early, in 1990, was mainly driven by the aspiration to
off-load expenditures to local governments and reduce
the central deficit. The overall result was decentraliza-
tion or delegation of targeted sub-functions, with little
concern for the financial impact, and without consulting
the local governments prior to reallocation. The newly
allocated sub-functions either did not involve any de-
cision at the level of local governments (delegation)
or, if fully devolved, were unfunded mandates. This
generated additional administrative burdens and added
more pressure on the local government budgets, while
overshadowing other local policy opportunities.
Education is a good example of faulty transfer of
competencies or functions. The central government
transferred maintenance costs to local budgets in 1999
and teacher salaries in 2001. The full devolution of main-
tenance costs pushed local governments to contribute
local funds into schools. This raised serious problems,
given that the main source of funding for local govern-
ments—and in extenso for maintenance of schools—is
a percentage retained from the personal income tax
collected locally and transferred automatically to lo-
cal budgets as own revenue. Richer local governments
with a larger tax base collected more of the PIT and had
more to contribute to school expenditures, while poorer
rural localities collected less taxes and thus had to rely
on alternative funding (equalization funds) for schools.
The result was significantly uneven per student main-
tenance expenditures at the county level, reflecting the
economic prosperity of the county rather than a differ-
ence in student needs.
 Regional Development and Decentralization in Romania: Connecting the Dots
Unfunded mandates are not unique to Romania.
A similar situation occurred in Poland, where local
governments were given gradually between 1991 and
1999, responsibility over schools. This new competency
constrained local governments, and in the process some
returned the function to the central government (only to
take it back later). However, local governments managed
to cover these costs, even if they were supposed to be
fully funded through a central education subvention.
Moreover, their contributions rose from 0.22% of the
GDP in 1994 to 0.38% in 19994. What was different
in the case of Poland? Part of the answer lies in the
institutional incentives that the central government
created when it started the decentralization process.
On one hand the local governments received a larger
package of functions, including not only ownership
rights to school facilities, but also control over school
finances. And, most importantly, the government set
up intergovernmental fiscal arrangements supportive
Figure 1 .
Weight of education expenditures in local government total budget execution
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1997 1998 1999 2000
4
This was almost the same amount that the central
government did not provide for education (0.32% of
the GDP) (Levitas, Herczynski, idem).
7
of decentralization, equipping the local governments
with a combination of shares of shared taxes and some
limited but important tax powers right from the start of
the decentralization process. Unlike Poland, Romania
systematically missed aligning intergovernmental fiscal
relations with sectoral decentralization. As a result, the
central government consistently used conditions grants
and ensured discipline in education expenditures, but
lost the opportunity to increase the involvement of local
communities in the financing of education.
In the case of teacher salaries, Romanian central
authorities included in the budget law of 2001 a provi-
sion by which salaries would be paid through the local
government budgets from central sources. This was an
important new financial responsibility “decentralized”
to local governments, as school expenditures reached
around 40% of the total budget expenditures (see Figure
1.), with almost 80% of those representing personnel
expenditures.
Expenditures
Other expenditures
Transport
Public service and development
Social assistance
Culture, religion
Earmarked exp.
Health
Education
2001 2002
8 Challenge of R e g i o n a l D e v e l o p m e n t i n S o u t h E a s t E u r o p e : S t r a t e g i e s f o r F i n a n c i n g a n d S e r v i c e D e l i v e r y
It was, however, mere delegation, and local govern-
ments became pay agents for the central government, as
the transfer was not completed with additional manage-
rial authorities on either the hiring/dismissal of teachers
or level of payment. In comparison, Polish local govern-
ments also pay teacher salaries from central sources,
but they also have additional rights to provide teachers
with motivational bonuses beyond those mandated by
law. This created an incentive for higher teaching per-
formance and for contributing more of the community
wealth for education.
In 2004, the distribution of current functional re-
sponsibilities was clarified in the legislation and sepa-
rated for the first time between own, shared and delegated
functions among the municipal/county/central levels5.
The Memorandum highlights the fragmentation of func-
tions among levels of government and the cohabitation
of de-concentrated and decentralized structures.
One can say that the fragmentation of competencies
reflects an existing variation of capacity among layers
of government. While administrative capacity is indeed
a problem, excessive fragmentation of functions into
sub-functions does not help to solve it. Sub-functions
such as hiring of school directors or hospital directors
that are divided among government tiers into smaller
activities—“proposal” drafted by school/local govern-
ment, intermediate approval (aviz) given by a county
de-concentrated authority and then final decision made
by the central government—reflects massive bureau-
cracy and a choice over centrality, which means a slower
service delivery and weaker accountability of various
actors in the process.
Another case is the involvement (although signi-
ficantly reduced recently) of the central apparatus in
the implementation of the service delivery. Such is the
case of the ministry of health, which is still involved
through its de-concentrated units at the county level
in maintenance of public health units of local inter-
est; similarly, the Ministry of Education is in charge
of setting up and closure of schools, recruitment,
promotion, dismissal of teachers, curriculum, hiring
of school directors at the pre-school, primary and sec-
5
Memorandum privind asumarea de catre Guvern
a situatiei alocarii competentelor autoritatilor adminis-
tratiei publice locale de la nivelul judetelor, respectiv
comunelor si oraselor, in furnizarea serviciilor publice
locale, potrivit cadrului normativ actual, 2006.
ondary school level6. Or, to mention a last case, smaller
and medium sized local governments (communes and
towns) can undertake the management of shelters for
the elderly as an exclusive responsibility if they have
administrative capacity, but there is no clear criteria for
defining administrative capacity. In practice, most often
the county government takes over the administration of
the service.
There are, nevertheless, important functions that are
the responsibility of the local government7 (exclusive
functions): the management of emergency situations at
the local level, water supply, district heating, culture,
spatial planning, some areas of protection of the elderly
and for the victims of family violence, management of
selected public health institutions, the management of
local airports in the case of large municipalities, etc. All
these are financed from own resources, which would
indicate a high degree of decentralization. A remaining
issue is the definition of own resources, as law no 273 on
local public finances still includes shared taxes as own
revenues for local governments, even if they have neither
the power to adjust the base and rate, nor to piggyback
the personal income tax.
In both countries there are also the shared functions.
Typically pre-school, primary and lower secondary edu-
cation are provided by municipalities, while upper level
secondary schools are managed by upper administration
levels (counties in Romania and districts in Poland). In
Poland the districts are responsible for all non-school
educational institutions such as boarding houses, special
education centers, cultural institutions, sport facilities,
and youth hostels, psychological and pedagogical advi-
sory centers. Romania follows with a few nuances the
same pattern.
Basic health is provided by local governments, while
the districts and counties are responsible for hospitals.
Romania has plans to decentralize the management of
hospitals to local governments. Social assistance is also
shared—in both countries, social home care is delivered
at the local level, while the district or county delivers
residential services for the elderly.
6
The Ministry of Education is currently running de-
centralization pilots in selected schools in eight coun-
ties, testing newly decentralized management func-
tions.
7
With the exception of the regulatory/policy author-
ity and price/tariff setting.
 Regional Development and Decentralization in Romania: Connecting the Dots
National mandates should not be transferred from
the level of the central government, as a rule. However,
delivery of cash benefit programs involves local gov-
ernments increasingly around the world, given their
proximity to the beneficiary and the advantage of having
better information about poverty in their jurisdiction.
Romania makes no exception, but unlike other countries,
the means-tested minimum income guarantee program
is co-financed by local governments (20% of the total
pool). Local governments were also given discretionary
powers for screening beneficiaries8. As a result, most of
the poor local governments who could not contribute to
the welfare program in the percentage recommended,
reduced the pool of the beneficiaries by introducing ad-
ditional eligibility criteria and thus creating inequality.
The other problem with delegated mandates is the
administrative burden on local governments and the op-
portunity costs they generate. In the same area of cash
benefits, for example, Romanian local governments run
around ten central mandates, such as child allowances,
newly born allowance, financial aid, emergency aid,
heating subsidies, support for military wives, refugee
support, micro credits, financial aid for persons with dis-
abilities, etc. All these, added to teacher salaries and other
mandatory expenditures financed through conditional
grants established a pervasive control mechanism that
leaves little maneuver space for mayors to think strategi-
cally of other local or regional policy issues.
Starting with the year 1998, the fiscal autonomy
of local governments grew significantly through the
adoption of the Law on Local Public Finances. On one
hand, local governments received the right to setup lo-
cal taxes, decentralizing the monitoring and collecting
mechanisms. On the other hand, the law introduced tax
sharing mechanisms, which automatically transfer part
of the income tax to the local budget (based on a percent-
age set in the law). However, the level of own revenues,
representing the most significant indicator of local
autonomy, decreased as a share of total local revenues,
from 44.6% in 1999 to 20.9% in 2003 (Tobă, Giosan,
Moraru 2005). Additionally, subsidies for welfare from
the central government increased, thus making the po-
sition of local authorities more dependent on the state.
In addition, the difference can be seen according to the
size of the local government—reliance on own revenues
8
At the time of writing this report the Ministry of
Labor is rethinking the financing arrangement, towards
securing all the funding from central sources.
9
decreases as one grows from large municipalities (29%
in 2003) to towns (25%), communes (17%), and coun-
ties (8.5%) (World Bank, 2006). The explanation is that
few fiscal responsibilities were actually decentralized
to the local level.
The local administration does not have the right to
decide upon the taxation level or base (e.g. property tax).
The degree of autonomy in terms of influence through
piggybacking various local tax rate varied over time,
depending on changing political whims. Law 189 of
1998 on local public finance allowed local authorities
to reduce or increase the taxation level by up to 50%.
Later, this right was limited through the Fiscal Code in
2004. Today, local authorities can now add up to a 20%
quota to the tax level which is decided by the central
administration.
The tax collection level remains lower than expected.
Recent studies (e.g. ARD, 2005) show that municipalities
with an important financial power (Iasi, for example)
cannot collect more than 80% of the potential, even if
tax collecting was entirely decentralized, therefore local
governments have sufficient control. One of the reasons
for this is the tax collection system itself, which lacks
objectivity and transparency; on the other hand there
is no inter-administrative coordination for collecting
progressive taxes on multiple properties.
Expenditure and Revenue Assignments at the
Regional Level
As already mentioned, regional structures in Romania
have no functional or fiscal responsibility, therefore no
policy-making power. Regional councils and agencies
are in charge of drafting strategies for development at
the regional level and deciding on the allocation of funds
for development projects.
It is not clear to whom regional structures are ac-
countable for the decisions they make. The composition
of the council allows for representation of local and
county government interests, which means that decision
making is shared among members elected directly (may-
ors) and indirectly (county council presidents). However,
the presidents of the county councils are usually stronger
politically than mayors, as they hold the responsibility
of equalization at the county level9, a process that is
9
The recently adopted law no. 273 on public financ-
es will reduce considerably the equalization power of
county councils starting in 2007.
10 Challenge o f R e g i o n a l D e v e l o p m e n t i n S o u t h E a s t E u r o p e : S t r a t e g i e s f o r F i n a n c i n g a n d S e r v i c e D e l i v e r y
itself highly politicized. As a consequence, it is almost
natural for the president of the county to carry the same
political influence in the meetings of the regional council.
It would be fair to say that neither the structure nor the
composition of the regional council are able to reduce
the politicization of the decision making process on
regional development.
In Romania the regional structure has no involve-
ment in delivery of services with a regional scope.
These are undertaken by the national government, either
through direct involvement or through its de-concen-
trated offices. Such is the case of vocational education,
which is currently managed by the Ministry of Educa-
tion, the building and maintenance of highways, or
labor integration services, which are also the function
of the central authorities, exercised at both national and
county/de-concentrated level.
The provision of regional services by national
government is problematic, given the tension between
sectoral and regional approaches to investment. The
objective of regional development is to reduce dispari-
ties (in GDP per capita). This is clearly not the objective
of line ministries in charge of public services or plan-
ning for capital investments, even if geographically the
flow of funds eventually reaches a region. Ministries
address disparities within individual services through
segmented programs, most of the time designed in isola-
tion. Moreover, accountability is also a problem, since
it is directed towards upper Government (the Cabinet)
rather than the region.
Table 1.
Regional governance, main actors in Romania and Poland (selected functions)
Functional responsibility
Regional development strategies
Regional labor market policy
Vocational education
Teacher training
Maintaining and developing highway
infrastructure
Specialized hospitals in the health care sectors
Cooperation between academia and business
Development of technology and innovations
International cooperation and promotion of the
region
Source (for Poland): Gowacki, 2003
Evidently, fiscal infrastructure at the regional level
is completely absent. Regional units lack any fiscal
authority to plan and implement projects of regional
importance, as their sole function is to decide which
projects to finance, under strict guidelines of the Euro-
pean Commission (more on the regional structures in
the Annex)
The experience of Poland is interesting, as they
began from a different premise when they started the
process of regional development. The idea they started
with was to replace the mixture of territorial and sectoral
administration with a clear three-tier system, organized
as a complementary rather than hierarchical system, with
separate scopes of authority and responsibility. Sixteen
regional voivodships were established later, in 1999, and
were provided with strong self-government and equipped
with property and a budget. They were designed to be
large enough to have strong economic potential and gen-
erate income from taxes. The central government placed
its own representative in each voivodhsip, to guarantee
the unitary character of the state. While unavoidable
conflicts may arise between the two, separation of scopes
of each tier has made the system work so far. The self-
governments at the regional level were given functions
in stimulating the labor market; promotion of the region,
maintaining and developing the technical infrastructure;
education and health; supporting cooperation between
academia and the business community; supporting the
development of technology and innovations; environ-
ment protection. To illustrate with a sector, in the area
Poland Romania
Voivodship Agencies for regional development
Voivodship Ministry of Labor through de-concentrated offices at the county level
Voivodship Ministry of Education
Voivodship Ministry of Education through de-concentrated offices at the county level
Voivodship Ministry of Constructions
Voivodship Ministry of Health, counties
Voivodship Ministry of Education, Ministry of Economy
Voivodship Ministry of Education, Ministry of Economy
Voivodship Ministry of Economy, agencies for regional development, local governments,
counties
 Regional Development and Decentralization in Romania: Connecting the Dots 11

Table 2.
GDP/inhabitant (PPS) evolution by development regions in 1998–2002

Region Ro NE SE S SW W NW C BI

1998* 4,699.2 3,739.1 4,685.7 4,008.8 4,248.3 4,793.4 4,505.1 4,993.3 7,704.9
2002 6,058.0 4,337.1 5,198.9 4,853.1 4,867.2 6,593.8 5,726.2 6,547.3 12,564.7
Relative growth 1.29 1.16 1.11 1.21 1.15 1.38 1.27 1.31 1.63

Source: EUROSTAT and other calculations.

Note: * EUROSTAT estimations.

Table 3.
Interregional disparities within the EU-27 and CEE countries in 2002

Country Regions with maximum Relative Regions with Relative Report

GDP GDP11 minimum GDP GDP max/min

Austria Vienna 172.9 Burgenland 81.5 2.1

Belgium Brussels–Cap. 234.5 Hainaut 74.9 3.1
Bulgaria Yugozapaden 41.7 Yuzhen Tsentralen 23.2 1.8
Czech Rep. Prague 152.8 Stredni Morava 52.4 2.9
France Ile–de-France 176 Guyane 57.3 3.1
Germany Hamburg 187.8 Dessau 66.5 2.8
Greece Sterea Ellada 108.9 Dytiki Ellada 58.3 1.9
Holland Utrecht 154.5 Flevoland 90.4 1.7
Hungary Kozep –Magyaroszag 96.0 Eszak-Magyarorszag 20.4 4.7
Italy Bolzano/Bozen Province 159.6 Calabria 67.7 2.4
Poland Mazowieckie 69.5 Lubelskie 32.0 2.2
Portugal Lisbon 111.8 Norte 61.5 1.8
Romania Bucharest 59.4 North-East 20.5 2.9
Slovakia Bratislavský 119.7 Východné Slovensko 38.7 3.1
Spain Comunidad de Madrid 126.7 Extemadura 61.6 2.1
Sweden Stockholm 158.2 Norra Mellansverige 97.9 1.6

Source: National Development Plan.

of education, regional governments can manage some

specialized secondary schools and can also apply to set-
up a university-level professional school, to be financed
entirely by the regional government. They were also
assigned responsibility for medical high schools for
nurses and teacher colleges and in-service vocational
training centers.
As the decentralization process continues, the
regions are planning to undertake new tasks which at
present are not currently carried out at full capacity (such
as creation of regional systems of innovation, technology
transfer centers, international promotion etc.)10.
From a fiscal perspective, regional government has
a weaker position in Poland than districts and local gov-
10
Poland also established an Agency for Regional
Development in 1993. The Supervisory Board of the
Agency is formed exclusively of government repre-
sentatives (all ministries involved in regional develop-
ment). Unlike in other countries, since the core regional
policy formulation and implementation is undertaken
by administrative government, the main role of the
Agency is promotion of regional and local development
(through publications and conferences) and implemen-
tation of targeted development programs (such as Phare
Economic and Social Cohesion).
11
As percentage of EU average.
12 Challenge o f R e g i o n a l D e v e l o p m e n t i n S o u t h E a s t E u r o p e : S t r a t e g i e s f o r F i n a n c i n g a n d S e r v i c e D e l i v e r y
ernments, as they received almost no revenue sources,
and very modest shares of PIT and CIT. The remaining
revenue consists of: earnings from regional govern-
ment property, bequests and donations, payments from
other regional governmental units, interest on delayed
remittance of shares, grants and subsidies by the central
government.
Regional Discrepancies and Regional
Policy-Making
Regional income per capita in Romania is low compared
to the European average. With the exception of the Bu-
charest–Ilfov Region, all Romanian regions have a GDP
per capita under the minimum value of UE-25 (32%).
In 2002, the Bucharest-Ilfov region had a GDP per
capita (PPS) representing 59.4% of the EU average,
while the North-East Region was at a 20.5% level.
The max/min ratio, 2.89, places Romania somewhat
in the middle, between countries with higher and low
disparities.
Addressing these imbalances through regional poli-
cymaking is a challenge, given the complex institutional
setting that has yet to devolve important functional and
fiscal responsibilities to local and regional structures. The
policy processes are also important, as they can stabilize
or make even less participative and predictable the rules
of the game, to the benefit or loss of the regions.
Romania has adopted as the first legal instrument
for regional policy, law 151 of 1998. It includes general
provisions such as diminishing existing regional imbal-
ances by stimulation of balanced development, acceler-
ated recovery of lags in the development of disfavored
zones; preparation of the institutional framework to
meet the criteria of integration into the structures of the
European Union, and of access to the Structural Funds,
and to the Cohesion Fund of the European Union; cor-
relation of government sectoral activities and policies
at the regional level by stimulation of initiatives, and
by turning to good accounting of the local and regional
resources, for the purpose of their lasting socio-economic
and cultural development; stimulation of inter-regional
cooperation, both internal and international, and of
trans-frontier cooperation, within the framework of the
Euroregions, as well as participation of the developing
regions in the European organizations and structures
promoting their institutional and economic development
for the purpose of achieving projects of common interest
and conforming to the international agreements to which
Romania is part.
The main multi-annual financial planning and
programming document that builds on the regional
legislation is the National Development Plan (NDP).
A first plan, drafted in 2004 by the Ministry of Finance,
repeats to a large extent the content of the legislation.
A second plan for the period 2007–2013 builds on the
experiences accumulated under the previous one and
focuses on the absorption of Structural Funds and the
Cohesion Fund, with the final scope of reducing re-
gional and other (urban—rural, etc.) discrepancies. The
document is not a substitute for an economic develop-
ment strategy. Its purpose is to prioritize among public
investment projects and to decide on the allocation of
public internal resources (local and central budgets) or
external resources (Structural Funds, external credits).
Accordingly, the objectives are very general, in line with
the results of the negotiations on Chapter 21 “Regional
Policy and Coordination of Structural Instruments”,
formally closed in September 2004: increase economic
competitiveness and the knowledge-based economy,
develop and modernize transport infrastructure, improve
the quality of environment, develop human resources
and combat social exclusion, as well as ensure balanced
participation of all Romanian regions in the socio-
economic development process.
If the NDP reveals the regional development objec-
tives in a more general manner, the Regional Operational
Program (ROP) is the document to outline the specific
local and regional priorities. The ROP is one of the
six programs that will be implemented under the EU
Structural Funds and the Agricultural Fund assistance
in Romania in the period 2007–2013. Unlike the NDP,
the ROP relies in a larger degree on local priorities. The
draft ROP (Romania ROP, 2005) focuses on the objec-
tives and activities listed in Table 4.
While it has the merit of being more focused on
regional and local priorities, the ROP displays a sig-
nificant bias towards sectoral planning. Most of the
activities identified are the aggregation of mostly local
disparate projects.
The actors who should be most involved in the prac-
tical and critical task of adjusting regional policy-making
to locally identified needs are the regional development
agencies (RDAs). Their position in the region, their
proximity to the “regional” beneficiary is an advantage,
and RDAs have a history of successful consultative
workshops where local and regional actors prioritized
problems and solutions, outlines the strategy and action
plan. However, RDAs lack the necessary authority to
drive the process, and several bitter situations where,
because of timing problems before accession, the central
 Regional Development and Decentralization in Romania: Connecting the Dots 13

Table 4.
Funding for ROP

ROP priorities Total public Community National

expenditure (EUR) contribution (ERDF) Contribution

1=2+3 2 3

1. Improvement of regional and local public infrastructure 2,136,000.000 1,708,800.00 427,200.00

2. Strengthening of regional and local business environment 712,000.00 569,600.00 142,400.00

3. Development of regional and local tourism 534,000.00 427,200.00 106.800.00

4. Sustainable urban development 979,000.00 783,200.00 195,800.00

5. Technical Assistance 89,000.00 71.200.00 17,800.00

Total 4,450,000.00 3,560,000.00 890,000.00

Table 5.
ROP Priorities and Activities

Priority 1: 1.1 Improvement and development of transport networks

Improvement of regional and
local public infrastructure 1.2 Support of health care social services infrastructure

1.3 Development and rehabilitation of education infrastructure

Priority 2: 2.1 Development of business support infrastructure

Strengthening of regional and
local business environment 2.2 Support and modernization of local and regional businesses

2.3 Development of business support services in the regions

Priority 3: 3.1 Rehabilitation of tourist areas, renovation of historical and cultural patrimony, protection and
Development of regional and valorization of the natural heritage
local tourism
3.2 Development of business environment in tourism

Priority 4: 4.1 Support of community development integrated projects

Sustainable urban development
4.2 Support of environment friendly transport infrastructure, related public utilities and public services

4.3 Rehabilitation of in situ brownfield areas for development of new activities

Priority 5: 5.1 Support of the implementation and overall management of the ROP
Technical Assistance
5.2 Support on the communication and evaluation of the programme

government took the lead in programming in the midst
of the process, should be a lesson and issue to address
for the future.
Another problem is the disconnect between the
regular budgetary cycle and the regional planning
cycle. Local governments (councils) adopt every year,
together with the budget, the investment plan for the
year. If financing comes only from the current revenues
of the local budgets the proposed investment projects
need only the approval of the local council and they are
included in the investment program after the technical
and economic documentation has been approved by the
council. If financing is sought from conditional transfers
for investments, an approval by the central administra-
tion is needed. The regional investment projects need
more time before growing into a final proposal, as they
should, ideally, rely on partnerships with local and
regional actors. These should, however, be reflected in
the local and national budget, in order to mainstream
the process of prioritization and budgeting of local and
regional projects.
Another interesting policy instrument that Roma-
nian regions could use for mainstreaming the regional
policy making is regional contracts. It is widely used in
Poland and represents a legal agreement between the
regional government and the central government that
provides a framework for central government support
for the development of the region. Two types of tasks
14 Challenge o f R e g i o n a l D e v e l o p m e n t i n S o u t h E a s t E u r o p e : S t r a t e g i e s f o r F i n a n c i n g a n d S e r v i c e D e l i v e r y
are included in the contract: the tasks formulated by the
regional government included in regional development
programs supported by the central government, as well
as the sectoral ones, to be supervised by ministries.
The contract is very specific and contains at a mini-
mum the following items (see for more details Gowacki,
2003):
• duration of the contract;
• tasks included in the contract;
• procedure and time schedule for the implementa-
tion of tasks, as well as rules for supervising the
implementation;
• identification of authorized institutions;
• total expenses for the implementation of tasks
included in the contract and the extent, means and
sources of financing;
• accounting procedures and deadlines;
• the contents and procedure of reporting;
• rules for the assessment and control of the imple-
mentation of tasks, including financial control;
• actions to be taken in case of disclosure of ir-
regularities in implementation or financing; rules
and procedures for the settlement of any conflicts
or disagreements between parties to the contract,
including financial claims;
• rules for cancelling or changing the contract;
• rules and procedures for satisfying claims of au-
thorized institutions in the event that the contract is
cancelled or modified;
• appointment procedure, composition and tasks of
the regional monitoring committee that will be in
charge of evaluating the effectiveness and quality
of contract implementation.
The contract ensures compatibility between the
development plan of the region and the national devel-
opment plans, as well as other development initiatives,
regardless of who is the financing entity. This way
tasks financed with pre-accession funds, for example
(SAPARD and ISPA) or other programs financed from
international sources (e.g., a rural development program
financed by a World Bank loan) were coordinated within
the national regional policy if the area of intervention
was similar. The participation of local governments in the
establishment of regional contracts is not clearly regu-
lated yet. However, the process tends to be as follows:
the regional government formulates the development
strategy for the region in close cooperation with local
governments. The regional board is obliged to consult
them over the application for the regional contract and,
eventually, if local governments want specific local tasks
to be included in the regional contract, then they must
apply to the regional government.
It is too early to say whether the implementation of
regional contracts in Poland is a success story. However,
several benefits can be easily noted. Firstly, it reduced
politicization significantly, as it provided a clear legal
framework for activities that previously took place
only informally. It also increases transparency in the
relations between regional governments and the central
government. It coordinates among several development
initiatives and reduces overlaps, and also mainstreams
the sources of finances in one document.
Conclusions and Recommendations
The existence of a regional government is not a condi-
tion sine qua non for ensuring efficient absorption of
EU structural funds and for reducing regional economic
differences. An important number of European member
states still do not have regional governments. There
are also no formal requirements concerning the size
of administrative units or the number of tiers in public
administration.
There is, though, a pattern of “better” experiences
with spending structural funds in countries where a co-
herent and comprehensive transfer of expenditure and
revenue powers took place already. The ability of local
governments to be effectively involved in formulating
and implementing regional development plans is higher,
the more autonomy they have.
Where the creation of a distinct regional government
took place, the key issue was to integrate sectoral admin-
istration into the new regional administration. Romania is
still struggling with sectoral decentralization and, more
specifically, with cohabitation of de-concentrated offices
and decentralized self-governments. Line ministries are
still involved in management of programs and disbursing
funds rather than sending the funds to the local govern-
ments. The central government needs to reshape their
functions and limit them to regulatory and evaluation
responsibilities, as opposed to implementers in the case
of decentralized services. The same issue is even more
important in financing capital expenditures.
 Regional Development and Decentralization in Romania: Connecting the Dots
Limiting the functions of the central government to
policy formulation, monitoring and evaluation implies
that the remaining functions should be decentralized to
local government tiers. It is essential that fiscal decen-
tralization accompanies the transfer of competencies, if
more autonomy is to be given to local governments. Tax
sharing can be piggybacked, the transfer system can be
adjusted for more transparency and predictability, such
as financing local governments through block grants,
clarifying the level of the equalization in primary legisla-
tion and preferably as a percentage of macro indicators
such as the GDP.
It is important that responsibilities that benefit areas
outside the counties are undertaken by regional stake-
holders. Elaborating regional development strategies,
implementing regional labor market policies, provid-
ing services of regional importance, creating regional
systems of innovation, setting-up technology transfer
centers (international promotion, etc); all these cannot
be done efficiently at the central level nor at the county
level. Regions should also take over competencies whose
implementation at the county level does not fulfill the
criteria of economies of scale and/or subsidiary, such
as: vocational education or universities, secondary
health care services, environmental protection, regional
infrastructure planning, regional economic development
responsibilities.
The role of the center should be clearly limited to
what is of national interest: construction and moderniza-
tion of major transportation corridors, enhancing trans-
border cooperation and assisting regions in developing
their education and R&D potential, in order to increase
the competitiveness of the regions.
The role of the regions is debatable and an uneasy
topic. The problem of accountability is an important
one—regions should become accountable to the citizens
of the regions themselves. This can be done several ways,
depending on the commitment of the government to
reforming its public administration. One option would
be to gradually turn the current regional councils and
agencies into self-government government. Regions
could be allocated economic powers to generate suffi-
cient income from taxes to implement regional policies.
Another could be maintaining the status quo and
including clear and transparent legal instruments—such
as regional contracts—to ensure high performance in
implementation of the regional strategies and the full
involvement of the relevant stakeholders.
15
Annex—Romania’s Public Administration and
Regional Arrangements
The new Constitution of 1991 preserved a unitary system
by including provisions of “a sovereign, independent,
unitary and indivisible national state” (Art.1). This par-
tially explains why in 1995, when the European Com-
mission submitted a formal request for the establishment
of regional structures in charge of the management and
distribution of European pre-accession funds, Romania
was consistent with its choice that regional administra-
tion was not needed, and established regional structures
with no administrative responsibility. The regional issue
was therefore laid to rest by a law adopted in 1998 that
introduced administrative regions with Regional Devel-
opment Agencies whose powers were carefully guarded
within a hierarchical national framework under the
control of the Prime Minister (subsequently transferred
to the Minister for Regional Development).
Romania’s territorial system includes a two-tier self-
government system, stipulated by the Constitution and
the Law on Public Administration adopted in 1991. The
Constitution endorses the principle of decentralization by
recognizing “communal and town authorities” (Art. 119)
“as autonomous administrative authorities” (Art. 120/2).
This is the lowest level of self-government, consisting
of around 3,300 local governments (divided in three
categories based on size and population—municipalities,
towns and communes). The second layer of self-gov-
ernment is the county (42), which has the authority to
coordinate the activity of municipalities in those areas
of interest to the county. County authorities co-exist
with deconcentrated units of central government. At
the county level there are usually around 40 offices that
serve the interest of the ministries. These are each run by
a prefect, the representative of the central government in
the territory. The jurisdiction of the prefecture coincides
with that of the counties.
The Constitution in 1991 gave the Prefect the right
to challenge the acts of local governments, which also
means that the act thus challenged would be suspended
de jure (Art. 122/4). This is currently the most important
legal constraint to local autonomy, although anecdotical
evidence shows that prefect interferences have signifi-
cantly decreased.
The complex regional institutional structure that
Romania established12 was reiterated in the modifica-
tions made to the fundamental law in 2004. Art. 135/2/g
12
Through Law 151 of 1998.
16 Challenge o f R e g i o n a l D e v e l o p m e n t i n S o u t h E a s t E u r o p e : S t r a t e g i e s f o r F i n a n c i n g a n d S e r v i c e D e l i v e r y

provides that the state has the obligation to secure the • Eight Regional Development Agencies, the executive
implementation of regional development policies in com- arms of the regional councils. These are non-govern-
pliance with the objectives of the European Union. mental organizations for the public benefit that draft
The territorial division of Romania according to the regional programmatic documents and implement
NUTS system includes: them upon approval of the regional councils; they
manage the regional development funds, submit
NUTS I Romania proposals to the regional councils for projects to
NUTS II 8 development regions be financed and monitor the implementation of the
NUTS III 42 counties projects; they are responsible for securing additional
NUTS IV municipalities revenues for financing projects, etc.
NUTS V n.a
Figure 2.
Unlike Poland, Romania chose not to introduce Regions in Romania
regional entities by reforming the public administration
Region 1: North—East
body. Law 151 of 1998 created eight administrative Region 2: South—East
regions that correspond to the NUTS II level (Figure Region 3: South
Region 4: South—West
1.). The development regions were formed through the Region 5: West
voluntary association of five to six counties. The regions Region 7: Center
Region 8: Bucharest Ilfov
thus established are not a territorial administrative level
and do not have a legal personality.
The following set of national and regional structures
regulate regional development in Romania: Source: Ministry of Integration, www.mie.ro.

• The National Council for Regional Development

(NCRD) sets the national strategy, approves national
funds for regional development and manages struc-
tural funds from the EC.
• The National Agency for Regional Development
(NARD13) is the executive arm of the structure
which operates the regional development programs;
it suggests subsidized areas for nomination by the
National Council and manages the financial and
technical aspects of the National Fund for Regional
Development; it also liaises with the EC and man-
ages the distribution of funds from the ERDF and
Cohesion Funds; the agency is under the authority
and direct supervision of the prime minister.
• Eight Regional Development Councils that setup the
regional plans and oversee their implementation. Be-
sides deciding on the regional development strategy
and programs, they also decide what projects receive
financing, as they approve the priorities, destination
and criteria of allocation for the resources collected
in the Regional Development Fund.
13
At the end of 2000, NARD was incorporated into
the new Ministry of Development and Prognosis, trans-
formed in 2002 to the Ministry of European Integra-
tion.
Several central institutions also have coordination
roles in regional policy:
The Ministry of European Integration coordinates
the national regional strategy and the accession pro-
cess.
• The Ministry of Public Finance manages the finan-
cial contribution provided by the European Com-
mission and coordinates the National Development
Fund.
• The Ministry of Administration and Interior has the
leading role in the reform of public administration.
It has recently included regional development in its
decentralization policy.
• The Ministry of Labor, Social Solidarity and Fam-
ily has sectoral responsibilities that overlap with
regional development, such as drafting the labor,
protection and social assistance policies.
• The Ministry of Agriculture, Food and Forestry
drafts the national agricultural and rural develop-
ment strategy, as well as the fishing strategy. It also
coordinates the implementation of the SAPARD
pre-accession instrument.
• The Ministry of Public Works, Transport, Housing
and Tourism formulates the railway, road, inland
 Regional Development and Decentralization in Romania: Connecting the Dots 17

rivers, air transportation, constructions and spatial Ministerul Administratiei si Internelor. 2006. Memoran-
panning policies. It coordinates the implementation dum privind asumarea de catre Guvern a situatiei
of the ISPA program. alocarii competentelor autoritatilor administratiei
publice locale de la nivelul judetelor, respectiv
• The Ministry of Waters and Environment Protection
comunelor si oraselor, in furnizarea serviciilor
updates the national strategy for implementing the
publice locale, potrivit cadrului normativ actual,
ISPA section on environment.
Bucuresti.
• The Ministry of Education and Research has respon-
Popa, A., Antonevici, P., Giosan, V., Pop, C. (2002).
sibilities for the scientific research and educational
Local Government Budgeting: Romania, LGI/OSI,
policies relevant to the regional level.
Budapest.
World Bank (2006). Romania: Public Expenditure
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18 Challenge o f R e g i o n a l D e v e l o p m e n t i n S o u t h E a s t E u r o p e : S t r a t e g i e s f o r F i n a n c i n g a n d S e r v i c e D e l i v e r y