Enabling Inter‑Municipal Shared Service Provision in Lithuania

Executive summary

Since 2000, Lithuania has undergone significant demographic changes, characterised by ageing, low birth rates and external migration, with the country´s population decreasing by more than 20%. These trends, combined with internal migration, have increased pressure on public services provision especially in shrinking rural and peripheral areas and have created disparities with growing urban centres like Vilnius. In response, Lithuania is exploring, among other measures, shared municipal service provision to enhance the efficiency, accessibility, and quality of public services, aiming for sustainable, high-quality service provision nationwide. However, these efforts are facing challenges. These include the legal framework that does not support shared services provision at the local level, as well as fiscal and institutional limitations. To fully benefit from shared municipal services, a comprehensive approach is needed.

This study evaluates the framework for shared services provision in Lithuania across key policy sectors and proposes interventions to establish a supportive legal, fiscal, and institutional policy environment for shared services provision. The report begins with setting the scene (Chapter 1). It then provides an analysis of the Lithuanian framework for shared services provision (Chapter 2). A description of the Finnish model of shared services provision is presented in Chapter 3, giving various examples from legal, fiscal, and institutional practices that could inform Lithuania's efforts to reform and facilitate shared services provision. Drawing on the analysis and examples of effective shared services provision practices from other countries, the study formulates recommendations and an action plan to reinforce the legal, fiscal, and institutional foundations for shared municipal service provision in Lithuania (Chapter 4). Finally, the report outlines two Roadmaps (Chapter 5) developed in this project for two selected services (primary healthcare and long-term care services) to support Lithuania in implementing pilots for shared services provision projects within the Tauragė+ functional zone.

Key findings

The legal framework for shared municipal service provision is complex and lacks sufficient detail to guide the establishment and governance of municipal collaboration. The legal provisions for shared municipal services in Lithuania are weak and incomplete, making it difficult for municipalities to establish shared services provision. Currently, these provisions are spread across different laws, requiring municipalities that want to collaborate with others to consult various legal documents. This fragmentation complicates the system for municipalities and can strongly discourage them from starting cooperative efforts. In contrast, many other EU countries have simpler and more straightforward regulations.

The Law on Local Self-Government (LLSG) falls short in guiding shared services provision efforts. While the Law on Local Self-Government (LLSG) mentions three forms of municipal shared service provision, these categories are only broadly defined, leading to uncertainty about the specifics of implementing municipal shared service provision, particularly the practicalities of establishing collaborative agreements for shared objectives. This is in sharp contrast with practices in several other countries, notably Finland, where similar laws to LLSG contain the bulk of the regulation concerning the establishment, management and governance of shared service provision.

A low degree of municipal fiscal autonomy and lack of specific incentives limit municipal shared service provision. Despite a substantial increase in municipal spending responsibilities in sectors like education, healthcare, and social protection, municipalities have not gained corresponding increases in own revenue generation. Over 90% of municipal funding is based on central government grants. This lack of municipal fiscal autonomy significantly undermines the motivation for bottom-up shared services provision initiatives. Furthermore, the absence of specific funding for joint municipal initiatives contrasts with practices in various OECD countries, where financial incentives and other regulations are designed to promote municipal collaboration, suggesting that Lithuania could benefit from a more integrated and incentivised funding framework in the budget law to enhance municipal shared service provision.

Fiscal constraints and the system of earmarked state subsidies for delegated functions discourage cooperative initiatives. State subsidies for delegated functions limit municipalities' flexibility, as unused funds must be returned. This requirement discourages initiatives for cost-saving shared services provision. Also, the inability to reallocate funds due to earmarking hampers local governments' efforts to meet emerging local needs or priorities. Although municipalities often collaborate to pool resources for more efficient service delivery, better accessibility, or improved quality, the requirement to return savings from these collaborations might deter them from entering such partnerships due to the risk of losing the saved funds.

Boosting municipal administrative skills, standardising data on service costs and usage, and fostering trust among municipalities are essential steps to improve shared services provision in Lithuania. Remote and rural municipalities in particular face challenges such as limited financial resources and a shortage of skilled workers. Their weak administrative capacity combined with lack of standardised data on municipal costs and service usage hinders the effective establishment and management of municipal shared service provision, complicating strategic planning for shared service provision. Additionally, a trust deficit among municipalities obstructs collaboration. Addressing these challenges through targeted interventions to enhance administrative capabilities, data harmonisation, and trust-building is crucial for the success of municipal shared service provision.

Key recommendations

Establish a clear legal base for municipal shared service provision. A solid legal framework is essential for facilitating effective shared municipal service provision. Currently, the legal regulation of shared services provision is scattered across various laws, making the process for establishing municipal collaboration complex and discouraging municipalities. It is recommended to consolidate the provisions concerning the establishment and governance of shared municipal service provision into the Law on Local Self-Government (LLSG) to improve legal clarity and operational efficiency. This would also necessitate adjustments in existing legislation to eliminate duplication and ensure seamless alignment with the revised LLSG. Here, the inspiration from the Finnish approach, which specifies shared services provision forms and foundational regulations in the Municipal Act, supported by sector-specific legislations, would be useful. While in most cases the LLSG should form sufficient legal basis for establishing shared service municipal provision, in some cases references to other relevant laws would be still needed. In addition, should Lithuania consider it necessary to establish a mandatory shared municipal service provision for some specific municipal services, the sectoral laws should contain the specific regulation concerning such collaboration.

Lithuania needs to enhance its legal framework regarding shared services provision by specifying authorised forms of shared services provision with greater precision. The existing LLSG sketches out three the forms of collaboration only broadly, leaving room for ambiguity in their practical application. To promote wider cooperation between municipalities in services like transport, healthcare, education, and social services, it is recommended to significantly expand and clarify the legal provisions for shared services among municipalities. Introducing specified forms of municipal shared service provision: joint decision-making bodies, joint public staff positions (these can be new or existing human resources), joint municipal authorities and joint municipal companies — and setting clear guidelines for these collaborations will offer municipalities a straightforward route to establish cooperative arrangements. Additionally, the law should require the creation of a comprehensive agreement for establishing municipal shared service provision. This agreement must cover critical details like the entity's functions, responsibilities, structure, and composition, alongside mechanisms for cost calculation, cost sharing among participating municipalities, and stipulations on the agreement's duration and termination clauses. Enhancing legal precision in this manner will better equip municipalities to undertake a variety of cooperative ventures, effectively bridging the current legislative gaps.

Create an enabling funding framework to foster municipal shared service provision. Currently, with almost 90% of municipal funding coming from central government grants (consisting of municipal share of income tax revenue - considered as a general grant - and the state subsidies for delegated functions) and 36% of these funds earmarked by the central government, municipal fiscal autonomy is significantly restricted. This limitation may diminish the incentive for municipalities to pursue shared service provision. Enhancing municipal fiscal independence is crucial for incentivising more efficient and quality service solutions through municipal shared service provision. Fiscal incentives should be structured to promote, rather than discourage, cooperation by offering financial rewards for joint projects and ensuring municipalities benefit from the cost savings of such collaborations. Recommendations to achieve this include increasing municipal revenue autonomy, reforming the central grant system to municipalities to empower municipalities with greater resource allocation flexibility, reducing the earmarked state subsidies for delegated functions in favour of general-purpose grants, allowing municipalities to keep savings made from shared services provision, and providing temporary assistance to support the initiation of joint services or projects. These steps aim to motivate municipalities towards cost-efficient and improved service delivery through shared service provision.

Adopt flexible and equitable cost-sharing models for shared services provision based on reliable cost assessments and solid accounting practices. To facilitate fair contributions among member municipalities, it is, firstly, recommended to use the full cost funding, which includes both direct and indirect service costs. To share the full costs among the member municipalities, two models are recommended: the matching principle and the per-capita cost sharing. The matching principle, which allocates costs among the member municipalities according to service usage by residents, ensures fairness but carries some budgetary risks for municipalities. Such a method can be used in case of health care for example. Alternatively, population-based cost sharing offers simplicity by distributing costs according to municipality population size but may lack incentives for cost control. This method could be used in case the benefits are divided equally among member municipalities, or if the benefits are hard to measure. In Finland, this method has been used in many shared services such as rescue services, advisory service to farmers, joint procurement, and joint public transportation. Other methods such as equal share contributions, ability-to-pay contributions, and hybrid models offer additional flexibility and fairness in cost distribution, catering to the varied circumstances and objectives of shared services provision projects. Adopting these models will enable Lithuania to foster more effective and equitable shared services provision. The LLSG should incorporate a regulation requiring municipalities to establish a cost-sharing model within the founding charter for the provision of shared services. However, the decisions regarding the specific type of cost-sharing model to be implemented should be left to the municipalities themselves. This report recommends that CPMA acts as an expert organisation to help municipalities establish shared service provision, and defining the right cost sharing method should be part of such consultation.

Incentivise shared services provision by strategically utilising central government grants to municipalities and by removing budgetary restrictions for municipal collaboration. Directing central government grants to collaborative municipal entities rather than individual municipalities in specific cases could significantly support joint initiatives, making them financially appealing and fostering resource and expertise pooling. The legal provisions for such central government grants could be made in a specific section of the budget law or in LLSG for funding collaborative bodies. For instance, in Finland, while the general-purpose grant to municipalities is defined in the law of intergovernmental grants, in case of secondary education (vocational schools, gymnasiums) and in case of polytechnics, the grants are paid directly to providers. Education service providers include municipalities, joint municipal authorities (shared municipal service provision), municipal companies and private bodies. In addition, Lithuania should consider removing unnecessary budgetary restrictions for joint municipal actions by improving access to finance.

Establish clear and tailored fiscal rules for municipal shared service provision. Recommendations include adopting a comprehensive oversight mechanism with regular financial reporting, audits, and performance evaluations. Extending existing municipal fiscal regulations to collaborative arrangements with necessary adjustments acknowledges their distinct nature and operational requirements. Furthermore, empowering member municipalities to play a proactive role in monitoring and intervening ensures stability and fosters a culture of accountability. Periodical financial reports (quarterly or monthly if considered necessary by the member municipalities) provided by the management of the collaborative bodies to the decision-making body and the member municipalities is a necessary requirement for ensuring that member municipalities have the information on the financial position of the collaborative body. The LLSG should regulate that the founding agreement or charter must include an economic and operational monitoring system and reporting to the member municipalities. Implementing budgetary controls and addressing soft budget constraints through penalties for unauthorised overspending will encourage prudent fiscal management. It is recommended that collaborative bodies are assigned a balanced budget rule with the requirement that any exceeding in the budget must be approved by member municipalities in advance and that any deficits should be covered within a certain time limit (for example within 3-4 years).

Reinforce the role of the Central Project Management Agency (CPMA) in supporting municipal shared service provision. Lithuania would benefit from an advisory service for municipal shared service provision. Given the current legal mandate and the functions already assigned for CPMA to support government agencies and municipalities, CPMA would be well-positioned to provide technical support to shared services provision initiatives across Lithuania. Recommendations for enhancing CPMA´s capacity include ensuring regular funding for CPMA for providing this support as facilitators of forums for dialogue, sharing of success stories, and organising networking events on shared municipal services. Additionally, providing CPMA with the authority to offer technical, legal and administrative support for municipalities embarking on shared services provision projects can significantly ease the collaboration process. This includes assistance in drafting founding charters, helping municipalities to establish cost-sharing agreements and mechanisms, and recruiting project managers to support municipal collaboration efforts. Also, the competence network (Kompetencijų tinklas) could be involved in this work for advice.

Enhance the standardisation, collection and analysis of data related to municipal costs and service usage. Key recommendations include developing a unified data collection framework to ensure consistent and comparable data across municipalities, implementing standardised classification and reporting guidelines, and investing in the training of municipal officials and service providers. Additionally, promoting data sharing and transparency, integrating data collected from municipalities with national databases, regularly reviewing data collection methods, leveraging IT technology, and fostering collaboration among stakeholders are crucial steps. Standardised information on costs and service use collected from municipalities is necessary for enabling informed decisions on establishing municipal collaboration and shared service provision.

Establish a continuous monitoring and assessment mechanism to evaluate the impacts of municipal shared service provision. Developing indicators to measure service quality, costs, usage, and accessibility is crucial not only for shared services but also for planning and development of municipal services in general. Furthermore, implementing performance management procedures, conducting regular reports, and carrying out citizen satisfaction surveys will provide essential feedback and ensure that shared services initiatives effectively meet community needs. Examples of indicators for primary healthcare (PHC) and long-term care (LTC) services are discussed in Section 5, with additional examples included in the Annex.