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Fiscal decentralization is based on two fundamental principles – ‘local self-governance’ and ‘subsidiarity’. Decentralization is a necessary condition so that local authorities could independently and responsibly manage public funds. We are convinced that common problems are most quickly and efficiently dealt with at the most basic possible level.

Given the contextual substantial transformations of the Bulgarian economy, decentralization is particularly important. In the decade following the 2009 financial crisis and the Bulgarian accession to the EU the transformation’s dimensions are generally two – an increasingly active integration of the private sector into international value added chains through growing exports and a gradual disappearance of low-productivity manufacturing based on manual labor which is being replaced by production with higher value added.

These processes are well illustrated by the shift of labor force amongst the sectors of the economy. For less than a decade the workers employed in construction have decreased with nearly 50%, while those in clothing and shoes manufacturing with a third. The employed in the food and furniture industries have also been diminishing despite the increased value of production. Simultaneously, more and more people are working in the automotive, pharmaceutical, electronics and power tools industries. Generally, manufacturing produces and exports significantly more than it did 10 years ago but with 100 000 fewer employees.

Chart 1: Change in the employed in selected sectors, 2017 to 2008

Source: NSI

The structure of exports has also changed notably – the share of the automotive industry has tripled, that of power tools has doubled, while the portion of the machine, chemical and pharmaceutical, metal and plastic manufacturing is also expanding. On the other hand, the importance for the export of fuel, basic metals, textile and clothing has been gradually dropping.

 Chart 2: Share of total exports of goods of main products, 2008 and 2018

Source: INTRACEN

Some of the main export goods are products completely new to the Bulgarian industry. This is the consequence of a lot of new greenfield investments and of the recovery and substantial increase of the capacity of factories which, until recently, were exporting minimal quantities. These novel export goods are various: lighting, resistors, electric installations’ components, rubber hoses, electric bicycles and mopeds, etc. If we look at the dynamics of bicycles and sports equipment manufacturing we register production increases of 3.5 and 2.5 times respectively for the last 8 years and a nearly double rise in the employed in these sectors. The last observation is just another confirmation of the continuously improving labor productivity.

Chart 3: Turnover and number of employed in the production of Bicycles and Mopeds and Sports Equipment

Source: Yearly financial reports

The perceived shift is not only in the structure of products but also in the geographic allocation of jobs creation. In the period following the 2010 ‘bottom’ levels of manufacturing there is a minimal but unequal increase in the number of the employed. Sofia (capital) loses manufacturing jobs, as well as Burgas, Blagoevgrad and Dobrich. At the same time, new investment centers for export-oriented production appear – Plovdiv, Sofia, Stara Zagora, Sliven, Gabrovo. The relatively high unemployment rate also attracts investors to Lovech and Vratsa and we expect the latest data to show the same trends in Pleven and Montana. It is not an accident that some of the successful bicycles and sports equipment factories are also located in the Northwestern region of the country.

Despite the rapid increase in consumption and resurgence of bank crediting in the last years, the number of the employed in trade and finance remain below the 2008 levels. Contrariwise, employment in the outsourcing of supportive business services is gradually growing as the sector is turning into a key employer of workers with relatively good education and mastery of foreign languages. Nonetheless, the uncontested leader in employment growth over the last decade is the IT sector. Software engineering and information services are on average the best paying jobs in the country – already even above the maximum insurance threshold. However, this phenomenon is limited to Sofia (capital) – more than 30 000 new jobs – and, albeit to a lesser extent, to Plovdiv and Varna. Even though recently there has been good news from other regions too (e.g. Burgas), these economic zones still fail to attract a sufficient number of IT companies.

Chart 4: Change in the number of employed in manufacturing, 2010-2017

Source: NSI

Having in mind the anticipated decline in the working-age population, the serious work force competition within the open and increasingly mobile common European labor market, as well as the achieved record-breaking employment levels, the challenge is to increase investment in those goods and services that create greater value added. These are activities that produce globally highly valuend goods and services created with contemporary technologies and highly qualified and productive laborers. Employers of this kind can offer sustained, long-term wage increases and can contribute to the general income growth of Bulgarian households.

Yet, the described transformation of the Bulgarian economic structure is a process encompassing hundreds, even thousands of separate investment plans. The initial step is the choice of Bulgaria as a country to invest in, which is then followed by the decision to build a factory or establish a service in a specific city or region. Municipalities must be especially active in this process, since they determine the conditions for the choice of location of a potential investor. Precisely this, together with the regional quality of living, should be at the center of local elections’ debates and, even more, it should be at the basis of the following four years of local self-governance

A few days ago, with its decision No.513 dated August 26, 2019, the Council of Ministers approved the establishment of a new hospital - Multidisciplinary Hospital for Active Treatment "St. Ivan Rilski” in the town of Gabrovo. For the first time, the government is taking advantage of its new powers to authorize the opening of new hospitals after an amendment to the Health Care Facilities Act, effective from April this year.

It remains unclear what analysis justifies this decision and what calculations has the Ministry of Health presented. The formal adherence to the requirements of article 37a, paragraph 1 of the Law for Medical Institutions does provide an answer to the question whether or not another hospital is needed in Bulgaria. This must only be decided on the basis of an evaluation of the real necessity of health services of a certain quality that the National Health Insurance Fund (which is financed by taxpayers) can pay for.

According to the National Statistical Institute, by the end of 2018 there were 346 medical help institutions with over 53 000 beds in Bulgaria. The latest data of Eurostat (2017) shows that Bulgaria has the highest per capita number of hospital beds in the European Union. As a result of the large number of hospitals and beds, the number of hospitalizations in the country is among the highest (Figure 1).

Figure 1. Number of hospitalizations per 1000 inhabitants 2008-2018

Source: NSI

Despite the attempts of the NHIF to restrict hospitalizations in recent years and the partial success of 2018, more than 1 200 000 people have received hospital services throughout the last year. This means that almost every fifth Bulgarian has stayed in a hospital at least once in 2018. The large number of hospitalizations is typical for countries whose health systems provide an easy access to hospital treatment and where conditions exist for irregularities and unsatisfactory control of financing.

Why in Gabrovo?

Hospital treatment in Gabrovo is currently accessible in 6 hospitals with 860 beds in total. The region’s population is slightly over 109 000 people. Compared to the rest of the country, Gabrovo has a good amount of hospitals and beds (Figure 2). The region has 4.5 beds per 1000 people, whereas the ratio for the country is 5.3.\

Figure 2. Number of hospital beds per 1000 inhabitants by district, 2018

Source: NSI, IME calculations

When it comes to the number of treated patients, however, the region is among the leaders (Figure 3). In 2018, 240.8 per 1000 people have visited a multidisciplinary hospital for active treatment, given a country average of 171.4. Larger numbers have only been registered in the regions of Pleven and Sofia.

Figure 3. Number of treated patients per 1000 inhabitants by district, 2018

Source: NSI, IME calculations

From the presented data we can conclude that a new hospital in Gabrovo is hardly necessary. Even if we accept the need for a healthy competition between the medical institutions and for a greater possibility for citizens to choose where to be treated, the more important issue remains – what would be the relationship of the NHIF with this hospital and the rest of the medical institutions in the region? The negative statement of the NHIF regarding the establishment of a new hospital in Gabrovo is reasonable and is driven by fears of unjustified spending. Until when, however, would the NHIF continue to sign contracts with all medical institutions regardless of the financial constraints and the requirements for a certain quality of health services? The solving of the problem of the excessive amount of hospitalizations and the irregular financing of medical treatment must follow these stages:

• Selective contracting with medical institutions on the basis of ‘value for money’ calculations which should include the attainment of quality parameters of health services and the results of the medical institution;
• Clear valuation of medical services;
• Rigorous control of payments from the financing institution;
• Improvement in out-of-hospital services which should reduce the need for trivial medical treatment to be conducted in hospitals and will restrict hospitalizations to only the necessary cases;
• Stricter requirements for availability of infrastructure and staff.

For the second time in a row, right on the eve of local elections, the idea of fiscal decentralization through personal income tax increase has emerged. In 2015 this happened after a statement of the Minister of Finance Vladislav Goranov and this year the occasion was an interview given by the deputy prime minister Tomislav Donchev. Although he later advocated for decentralization by sharing a portion of the already collected income tax, the discussion had an initial false-start.

In 2015 and also this year, the focus is put on the income tax increase (of up to 2 percentage points) benefiting the municipalities (10+2) instead of implementing the strategic commitment to share part of the collected tax (8+2). For a second time in a row, right on the eve of local elections, the decentralization debate turns into a debate for higher taxes - a topic that, as we reviewed a month ago, is taboo for the local authorities as elections approach. Nobody has an interest to discuss higher taxes, while the voters are headed to the ballot boxes, including the prime minister Boyko Borisov, who promptly tried to put an end to the debate.

We remind you that the failure of several governments to implement the idea of fiscal decentralization as promised a long time ago, is clearly described in the Decentralization Strategy 2016-2025 that is already in force. Regarding the execution of the previous strategy (2004-2015), in the new one it is stated: The decentralization process was blocked [...due] to the refusal of the central government to transfer part of the personal income tax proceeds to the municipalities as their own revenue. 

Imagine how different the pre-election debate would look like if the candidates for municipal council and municipal mayors were able to freely manage a portion of the collected taxes instead of having the right to increase them. This would constitute the preconditions for a genuine political competition, based on identifying local problems and offering local solutions, which is a far cry from the typical bragging/dissatisfaction with the results of the European projects. Sharing part of the already collected personal income tax with the municipalities would decrease the level of government dependency, namely the constant requests to the Council of Ministers for additional funds for the local authorities, but it would also make them less dependent on the European funds. The structural effect that the “8+2” model would achieve on public expenditure distribution between central and local authorities would even purely mathematically be more clearly defined than the alternative “10+2”. In the best-case scenario, the municipalities would not only be entitled to a portion of the proceeds, but would also have the authority to set the tax rate within certain limits. This would better enable the municipalities to impact the business and the living conditions, compared to the alternative which would increase the burden on taxpayers.

In addition, if the fiscal decentralization process takes an upward direction, it would set a precedent that would be difficult to overrule in the following years. If the central government keeps the whole amount of the 10% on the personal income, it is logical to expect the following steps towards fiscal decentralization to be related again to heavier tax burden in general. This approach: 1) would make each step towards local financial independence harder and publicly unacceptable and 2) would leave the taxpayers foot the bill and at the same time lead to decrease of the external competitive power of the Bulgarian economy.

As the end of the current Programming period of the European funds approaches and 2020 is knocking on the door, we are witnessing a significant increase in the amount of funding. This is clear from the annual review conducted by IME of the allocated European funds at the district and municipal level. Besides the considerable increase, in most regions the ranking of districts and municipalities is basically unchanged compared to last year. The same goes for the nature of the larger projects.

Source: ISUN, ISUN 2020, IME calculations

As usual, most European funds per capita have been awarded in the capital city and Gabrovo district - 3129 leva and 3234 leva per capita respectively. This is calculated by using the average annual population in these regions for 2018. Relatively large amounts of money from the European funds are awarded in the Northwestern districts of Bulgaria, but this is partly due to the faster pace of population decline there. On the contrary, in Sliven, Kyustendil and Pernik districts, European funds are estimated to be less than 1000 leva per capita, but there is a high probability that by the end of the programing period these districts would exceed this amount.

The largest projects are in the infrastructure - for instance, the extension of the Sofia metro system, construction of roads and water cycles, due to their nature, require larger investments compared to other activities. This could be observed in the capital city, where the actual amount received for the Sofia metro improvement exceeds 500 million leva and in Blagoevgrad, where the funding for Struma highway construction amounted to 329 million leva.

Compared to the small number, but costlier infrastructure projects, there are many other projects that cost less. They are mostly focused on the improvement of urban environment, educational infrastructure and providing social benefits. The last two groups are key in the Southern regions in the country and especially in Kurdzhali the most expensive projects are precisely for renovation and reconstruction of schools and providing warm lunch.

Source: ISUN, ISUN 2020, IME calculations

Undoubtedly, more interesting is the data regarding the distribution of European finding at a municipality level, because it reveals in greater detail the regional imbalances in the fund utilization. The most visible in the distribution at a municipality level are the projects concerning water supply improvement and construction of waste disposal systems. These projects are usually shared between several municipalities and their cost significantly exceeds the cost of the projects that each municipality (especially the smaller ones) is able to use on its own. This is evident in several municipalities at the seaside, as well as in Pleven, Vratsa and Montana.

Since the beginning of the European funding distribution in our country until the middle of 2019, the largest amount of European funding per capita is in the districts:

• Dobrich - 5683 leva, due to a big project for a water supply improvement in the city; 
• Kostinbrod - 5402 leva, due to a number of projects related to energy efficiency;
• Sozopol - 5172 leva, substantial part is from the previous programming period.

On the contrary, Kovachevtsi municipality has acquired only 32 leva per capita and is still the only municipality that does not have a single project in the new programming period. Similar situation could be observed in Dulovo (62 leva) and Dobrichka (116 leva). We could also add some of the smallest municipalities in the country that have only one project each for insignificant amounts of money. The major reason for that could be the limited administrative capacity of the small municipalities that does not allow them to compete effectively for European funding.

Most municipalities in the country acquire funding less than 1000 leva per capita- including 161 out of 265 municipalities in Bulgaria in total. Between 1000 and 2000 leva are another 70 municipalities and 7 are above 4000 leva.

When reviewing the utilization of European funding, we have to take into account that there is still no evidence of achieving the main purpose of the funds - cohesion, within the country as well as the towards the average European level of economic development. Furthermore, the local administration might focus mainly on the European funds instead of attracting private investments. The latter is proven to be more effective in creating new jobs and improving the living standard at a local level. This controversy highlights again the necessity for a reform in municipal finance and fiscal decentralization, combined with administrative reform and increase in the capacity at a local level. 

At first it may seem that the matriculation exam results published by the Ministry of Education show significant decrease in the average grade in Bulgarian Language and Literature - from 4.24 last year to 4.06 in 2019. On the national level this is the sharpest fall from one year to another since the beginning of the matriculation exams in Bulgaria. The data on the regional level reveal a different situation that we will examine in detail in this article.

District level results in Bulgarian language and literature

Source: Ministry of education, data requested by the IME

As the map above shows, there are barely any changes in the order of districts as compared to 2018 - those that typically score high are leading the ranking, whereas regions with weak performance are again at the bottom. Sofia City continues to get the highest score in the country (4.53, which is of even greater significance taking into account that in this district the largest number of students sat the exam) followed by Varna, Plovdiv and Smolyan which have similar results. There is a shift in the districts with the worst performance - this year the students in Silistra have scored the lowest (3.77) followed by Kardzhali (3.78), Razgrad and Yambol (3.80 in both districts). Most districts score close to “Good” 4.

Source: Ministry of education, data requested by the IME

Much more interesting dynamics can be observed on the district level - although the overall grade on the national level presented by the ministry of education has fallen compared to the previous year, in 23 out of the 28 districts, there is an increase compared to 2018. There is no district, where the decrease is as sharp as the one on the national level - within a year, Smolyan district has lost 0.14 of its average grade compared to 0.18 for the country as a whole, and this is the most substantial drop. In the other districts, where a decrease is present, it is less severe. This contradiction indicates that probably this year there were some specifics in calculating the overall grade for the country. We would be able to check the factuality of this statement when the open data on the school level is published, including the number of students that sat the exam.

Apart from the above-mentioned districts, almost all of the regions have improved in Bulgarian Language and Literature. This is particularly valid for districts with weak performance - Yambol has improved by 0.25, Pleven - 0.23, Vidin and Kardzhali - 0.22. There is still no district that has reached its best results from the past decade, but this could be explained by the different exam structure and stricter control during examination. It is too early to discuss an upward trend in general - the increase within a year could be due to specifics in the edition of the exam; furthermore, matriculation exam results are merely one of many student performance indicators. 

Source: Ministry of education, data requested by the IME

The percentage of students that failed the matriculation exam by district comes as no surprise. The most fail grades are in the regions where students have performed poorly - Kardzhali (20.4%), Yambol (18.2%), Silistra (17.7%), while in districts that typically perform better, the share of failed students is smaller – Sofia City (2.64%), Smolyan (4.18%).

It is more disturbing that next to the improvement of the average grades in 2019, we can observe a considerable increase in the number of failed students, which is an (anti)record for the whole history of matriculation exams. Compared to the year before, the most significantly has raised the number of “fail” grades in Razgrad (6.4 pps) and Shumen (6.1 pps); the slowest increase is in Montana (0.9 pps), Gabrovo and Pernik (1.1 pps) and in most districts it is close to 3-4 pps. As with the outcome discussed above, it is possible that the result for 2019 is an abnormality; a mere deviation from the trend in the matriculation exam performance. Otherwise, the greater number of “fail” grades reveals a negative tendency in the literacy of the students and their inability to cover the minimum educational requirements.

Source: Ministry of education, data requested by the IME

In conclusion

The regional results from the matriculation exam this year outline two opposing trends – a considerable rise in the average grade in most districts, but at the same time significant increase in the number of “fail” grades. In other words, students who have not received a “fail” grade have improved their results, but the problem is that the number of failed students increases. Although these trends are contrary to the ones from the previous year, when there was a decrease in the share of “fail” grades, but also a fall in the average grade, we are not able to comment on the long-term performance of the students. It is still unclear how the average grade on national level is calculated, which has dropped dramatically compared to the increase in most districts.

Over the past 10 years, the Bulgarian economy has changed dramatically. The manufacturing sector is gradually shifting towards higher value added production. The number of employed in traditional industries, for instance the clothing industry and furniture manufacturing, has dropped significantly. At the same time, the production of machinery, electrical equipment and auto parts has grown, hence more hired individuals in these sectors. However, the most remarkable increase of employed in a single industry is not in the classical manufacturing, but in the ICT sector (Information and Communications Technology) – an increase of 31,000 hired for the period from 2009-2017. In the beginning of 2019, this upward trend continues including around 8,000 new jobs in the ICT sector compared to 2017.

The sector deserves our attention not only because it is the most dynamic one in the Bulgarian economy, but also due to other factors. First, the increase of the employed in the ICT is almost entirely on the account of information technology - around 50,000 individuals are hired in the IT sector, compared to less than 20,000 10 years ago. Secondly, the highest salaries in the country are in the ICT sector – the average salary is typically close to the maximum insurable income. The trend remains the same for the current year - the average salary exceeds 3000 BGN in March 2019. Thirdly, this is the sector, where the majority of the hired are young and qualified specialists.

The mix of these three factors is quite interesting, because it is new to our economy. This is the first time when a sector was formed within the service industry that was different from tourism, where a great number of young people could earn high salaries without occupying a managerial role. This is important, because a weak service sector - one that only serves the local community and is not able to provide high salaries, is practically a guarantee of demographic problems. Urban areas in our country are the most dynamic in those regions, where young people could find alternatives that provide high remuneration.

Namely these considerations - demography and urban area - make the regional outlook on the ICT sector important.
Which are the regions that benefit from the increase in the number of employed in the IT sector?

Unfortunately, the answer is short. The increase of 31,000 hired for the period from 2009-2017 broken down by regions is the following - rise of 31,000 in Sofia (City), 1,700 in Plovdiv and 1,100 in Varna. All other districts have either a slight increase, or even a decline in the number of employed in the ICT sector. This huge concentration in Sofia is one more factor that contributes to the progress of the city, whereas in the other parts of the country, the processes are much harder. 

In fact, one of the most essential questions regarding the regional development in Bulgaria is to what extent the ICT upsurge would affect the other cities in the country? It is important not only income-wise, but also considering the urban area and stopping the outflow of young people, which could be observed even in the top 10 cities in the country. A positive impact from the ICT expansion is perhaps most visible in Plovdiv.

In 2008, 2,250 people are employed in the ICT sector in Plovdiv and their avarage salary is relatively high - around 1.4 times higher than the average salary for the district. However, in 2017 the situation is quite different. The number of employed people in the ICT sector in Plovdiv is 4,000 with salary (close to 2,050 BGN in 2017) that is 2.3 times higher than the average for the district and 2.2 times above the average salary in the manufacturing industry in Plovdiv. Practically, the development of the ICT sector in Plovdiv had led to the formation of a group of roughly 1,700 young people, who found a well-paid job in the service sector. For the majority, the alternative would be to start a job that pays at least two times less or migrate to the capital city or move abroad looking for a better-paid job.

It does not come as a surprise that within the same time frame, the urban area in Plovdiv has changed - the latter is supported by other factors. However, in other major cities one could hardly observe the same trend. For instance, in Stara Zagora 690 people are employed in the ICT sector in 2017 with a slight increase only in the last 2-3 years (around 70-80 people). The average salary in the sector barely surpasses the average for the region. Veliko Tarnovo also registers some positive trends. Within a 3-year period (2015-2017), there is an increase of about 120 hired with an average salary in the sector 1.6 times above the average in the region. The scale is still relatively small to talk about a spillover effect on the local economy and urban area.

As we mentioned in the beginning, in 2019 the number of people employed in the ITC sector continues to grow with roughly 8,000 new hires after 2017. There is still no data what their regional distribution is, therefore we could only speculate. Indisputably, the majority would be in Sofia, probably we would observe an increase in Plovdiv and Varna. It is unclear whether other districts have managed to achieve growth. It is a fact that some of the smaller district towns in the country, including the northwest region, have different initiatives aimed at developing the ICT sector on a local level. We have yet to examine whether they will be able to foster more complex process.

The article will be available in English on July 7th, 2019.