Enabling Inter‑Municipal Shared Service Provision in Lithuania

4. Key recommendations and the action plan

Abstract

Based on the analysis of Lithuania's policy framework for shared services provision detailed in Chapter 2, along with insights from international best practices, particularly the Finnish model explored in Chapter 3, a series of recommendations and an action plan1 is proposed. These are designed to enhance Lithuania's legal, fiscal, and institutional framework for the provision of shared municipal services, thus supporting efforts to improve the efficiency, accessibility, and quality of these services.

4.1. Recommendations to establish and consolidate the legal framework for municipal shared services provision

This section outlines recommendations to address the fragmentation and incompleteness in the legal framework governing the provision of shared municipal services.

4.1.1. Establish a clear legal base for shared services provision and concentrate the core regulations concerning the establishment and governance of municipal collaboration within the Law on Local Self-Government (LLSG)

To address the challenges discussed in Chapter 2 and detailed in Figure 2.4, the recommendation is to improve the legal clarity and operational efficiency of shared services provision in Lithuania. In order to accomplish this, it is advisable to concentrate all foundational and technical regulation of shared services provision within the Law on Local Self-Government (LLSG) (see the next subsection about the recommended content of such legal provisions). For instance, the Finnish Municipal Act´s Chapter 8 specifies permissible shared services provision forms, foundational regulations for the establishment, governance, and financing of municipal collaboration.

Should the LLSG be updated as suggested herein, adjustments will be required in the existing legal framework that currently governs the formation and management of shared services provision, to avoid duplication in legal provisions. For instance, it would be advisable to refine the Law on Regional Development to avoid overlapping regulation concerning the establishing of the shared services provision2.

It is nevertheless advisable that some legal provisions concerning municipal collaboration are presented in other laws. Mandatory shared municipal service provision forms an example of such an exception3. If Lithuania should see a need for mandatory shared municipal service provision, such services should be regulated in specific laws. For example, in Finland, the Regional Development Councils and hospital services have been defined as mandatory municipal collaboration. The legal regulation for these two services are outlined in the Act on Regional Development and in the Hospital Act. These sector-specific laws refer to the Municipal Act for the overarching legal framework, thereby allowing specific legislations to focus on detailed regulations necessary for the formation of RDCs or hospital district collaborations. Furthermore, the laws that regulate municipal finances and public procurement, should also continue to contain legal provisions that apply to joint municipal bodies.

It is essential that other laws that contain legal provisions that concern shared municipal service provision align with the LLSG. This approach positions the LLSG as the primary legal instrument and an umbrella for other laws related to shared municipal service provision. By ensuring consistent regulation across both general (LLSG) and sector-specific and other relevant laws, this proposed structure fosters a cohesive and comprehensive legal framework for shared municipal services.

4.1.2. Specify authorised forms of shared services provision with more precision

As was discussed in detail in Chapter 2, the LLSG does not adequately steer or inform municipalities in establishing shared services provision. Overall, the current legal provisions fail to address the key practical issues involved in the establishment and operation of shared municipal services.

It is recommended for Lithuania to clarify the legal regulation for shared services provision by describing in more detail the permitted collaboration between municipalities. Establishing such legal framework would better enable municipalities to form both the soft and the more advanced cooperation in different sectors and for various purposes (such as in infrastructure, transport, healthcare, education, and social services).

More specifically, it is recommended that Lithuania revises and expands the legal framework for municipal collaboration, firstly, by introducing specific forms of shared municipal service provision: 1) joint decision-making bodies, 2) joint public staff posts4, 3) joint agreements on the management of official duties5, 4) joint municipal authorities, and 5) joint municipal companies. Such legal framework should make clear distinction to shared services provision that is based on joint municipal organisations (e.g., joint municipal authorities or joint municipal companies) and shared services provision based on contracts.

Secondly, it is crucial that the LLSG outlines clear minimum requirements for setting up such collaborative structures, as detailed in below.

Joint decision-making body (a host municipality)

In this shared services provision type, a single municipality is entrusted with carrying out a specific function on behalf of one or multiple municipalities. To oversee and manage this shared responsibility, the participating municipalities would establish a collaborative decision-making body.

A joint decision-making body, such as a joint committee, involves a setup where one municipality manages services for other municipalities. The shared governance committee is formed by representatives from all participating municipalities, who delegate their authority to the municipality in charge (the hosting municipality). The hosting municipality then takes on the responsibility for both producing and delivering the services.

To ensure legal clarity and transparency, the law should stipulate a requirement for the preparation of an agreement to establish this joint decision-making body. While the municipalities should be responsible for agreeing on the detailed content of such elements, the agreement should encompass, at a minimum, the following key components:

• A clear description of the functions and responsibilities assigned to the joint decision-making body.

• The defined composition and structure of the joint decision-making body.

• A framework for determining costs associated with the function(s).

• A transparent mechanism for dividing these costs equitably among the participating municipalities.

• The specified duration of the agreement, along with provisions outlining how the agreement can be terminated.

An example of the legal provision of a host municipality arrangement and an example of the founding agreement of a host municipality arrangement are provided in Annex D.

Joint use of municipal human resources6

The second type of shared services provision could involve municipalities by jointly filling a job position. To ensure smooth operation, municipalities should reach an agreement regarding which specific municipality will bear the responsibilities associated with being the employer.

Furthermore, the collaborative agreement between the municipalities should comprehensively outline the following aspects:

• Principles of the determination of costs linked to the shared public position. This includes factors such as salary, benefits, and any other expenses associated with the position’s operation.

• To ensure equitable sharing of financial burdens, the agreement must detail the method by which costs will be distributed among the participating municipalities. This should include clear guidelines on how each municipality will contribute financially to support the shared public position.

• The validity and termination of the agreement.

This arrangement can be used for shared municipal HR resources in general.

An example of the legal provision for a joint municipal staff posts and an example of the agreement on a joint municipal staff post are provided in Annex D. A model agreement on transferring an official duty to a host municipality is provided in Annex E.

Joint municipal authorities

For the most advanced tasks, a joint municipal authority could be defined in the law. It is recommended that the LLSG defines that municipalities may agree that municipalities could jointly establish a joint municipal authority for shared municipal service provision to handle certain tasks on their behalf. A joint municipal authority should be defined in the law as a separate, independent public law entity from its member municipalities, with its own field of operation defined in its founding charter, as well as its own governing bodies and personnel.

The LLSG should regulate that a joint municipal authority can be formed by municipalities through a founding charter or an agreement mutually endorsed by the municipal councils of the participating municipalities. As a legally recognised entity, a joint municipal authority would possess the capacity to acquire rights, enter into obligations, and assert its right to representation in legal proceedings and before other public authorities.

The founding agreement should include at least the following elements:

• The functions of the joint municipal authority.

• The number of representatives in the joint municipal authority’s council and general assembly and their rights.

• Other decision-making bodies and their functions.

• Cost principles and sharing of costs for capital, assets and operations.

• The defined responsibility for the joint municipal authority’s finances and debt, as well as the procedures by which its deficit should be covered in a situation where member municipalities have not approved exceeded budget.

• Clear fiscal rules applying to joint municipal authority.

• The monitoring and reporting of the joint municipal authority’s finances and its auditing.

• The auditing of the joint municipal authority.

To this end, Lithuania should consider utilising the existing legal provisions and practice of municipal budgetary bodies, by amending the law to allow several municipalities to establish such body jointly and for municipalities to enter the existing bodies as new members, taking into account the recommendations of the founding agreement described above and in the Annexes.

An example of the legal provision of joint municipal authority and an example of a Founding Charter of a joint municipal authority are provided in Annex D.

Joint municipal companies

The Lithuanian LLSG mentions the possibility of establishment and operation of municipal companies, and the law defines "undertakings controlled by a municipality" as municipal undertakings operating pursuant to the Law on State and Municipal Enterprises. The LLSG also mentions the possibility of establishment of joint undertakings by municipalities.

While the key law for establishing municipal companies in Lithuania is the Law on State and Municipal Enterprises, this law does not allow for multiple municipalities to either establish joint municipal companies or to join existing joint municipalities.

It is recommended to amend the Law on State and Municipal Enterprises and other laws such as LLSG so that municipalities can establish joint municipal companies and join an existing one as a full-fledged co-owner and decision-maker (e.g., change the number of shareholders authorised).

An example of legal provision for joint municipal company and example of the founding agreement (shareholder´s agreement) of a joint municipal company are provided in Annex D

4.1.3. Develop a clear legal base for municipal pilots

Based on international examples for testing new solutions in the public sector, several concrete recommendations can be made for Lithuania to establish a favourable legal framework for carrying out trials and pilot experiments in municipal shared service provision. These could be applied when piloting shared services provision but also other important policies:

1. Establish a clear legal basis for municipal trials/pilots:

a. Introduce specific statutory provisions in Lithuanian law that allow for trials and piloting within the public sector, including the possibility of granting exemptions from existing laws or regulations under certain conditions.

b. Incorporate exemption clauses in existing laws or sector-specific regulations that permit deviations for the sake of piloting under certain conditions.

c. Amend special laws (e.g., education, health, social) to include trial provisions that allow for fixed-term deviations from standard rules.

d. Strengthen or establish legal provisions that facilitate shared services provision in conducting pilots, allowing municipalities to pool resources, share risks, and collaborate on larger scale projects.

e. Enshrine in law the provision of dedicated funding and resources for municipalities to conduct pilots. This could include financial support from the central government, as well as legal provisions that allow municipalities to seek external funding.

2. Consider establishing a specific Act for public sector piloting schemes:

a. Consider enacting a law or Act which allows for pilot schemes aimed at developing efficient forms of organisation and operation in public administration. This law could detail the process for applying for, conducting, and evaluating pilot schemes, while being general enough to be adapted to local contexts on a case-by-case basis.

3. Strengthen the capacity of municipal staff to conduct pilots:

a. Develop and implement a comprehensive guide on the legal aspects of conducting municipal pilots, including templates for application processes, criteria for approval, and frameworks for monitoring and impact evaluation.

b. Provide training to municipal staff on the legal aspects of municipal pilots.

c. Promote the exchange of knowledge and good practices among municipal stakeholders to run successful pilots and avoid common pitfalls.

An example of legal provision for piloting in public administration is provided in Annex D.

4.2. Recommendations concerning fiscal framework: enabling shared services provision by removing disincentives

4.2.1. Create an enabling funding model to encourage shared municipal service provision

As described in Chapter 2, the municipal fiscal autonomy is limited which potentially diminishes the appeal of shared municipal service provision, especially if the anticipated efficiency gains are not evident to municipalities. To cultivate a stronger, inherent demand for shared municipal service provision, and demand for more efficient solutions in general, it is recommended that Lithuania enhances its municipal fiscal autonomy over time.

To create the right fiscal incentives for shared municipal service provision, central government grant7 allocation mechanisms should encourage cooperation, rather than competition, among municipalities. Offering financial incentives for joint projects or collaboration on service delivery can help promote shared municipal service provision. But it should be emphasised that, while voluntary cooperation can be encouraged with temporary earmarked central government grants that cover part of the cost for setting up such arrangements, the main incentive for shared services provision for municipalities in the long-run should be the expected cost-efficiency improvement and better quality and availability of services. It should also be ensured that municipalities do not lose central government grants when engaging in shared municipal service provision. Municipalities should be able to keep the savings made with shared services provision arrangements.

To this end, the following recommendations are made:

• Continue strengthening municipal fiscal autonomy by reducing their reliance on central government grants and allowing them to retain a greater share of locally generated revenue.

  • Assign the residential property tax entirely to the municipal level.

  • Allow municipalities to set a surtax on the personal income tax, with a corresponding reduction of the national income tax.

  • Allow municipalities some tax rate setting autonomy over the personal income tax, maybe within bands set by central government.

• Reduce the use of earmarked grants (i.e. the state subsidies for delegated functions) in the central government grant system, as these can create administrative burdens and disincentivise municipalities to establish shared municipal service provision:

  • Ensure more stable and predictable grant revenues.

  • Reduce the share of earmarked grants and move away from input towards output regulation.

  • Allow municipalities to retain and reallocate efficiency savings on earmarked grants. In particular, abandon regulation that municipalities should return unused earmarked grants (i.e. the state subsidies for delegated functions).

  • Merge the different sectoral grants into a smaller number of larger general purpose grants.

• Provide temporary financial assistance to cover initial costs associated with establishing joint services or projects.

Full list of recommendations provided in the earlier OECD report, “Raising Local Public Investment in Lithuania: Ensuring quality while maintaining financial sustainability” (OECD, 2021[1]), are provided in Annex D.

4.2.2. Establish practical and transparent funding models for municipalities to establish shared municipal service provision

As discussed in Chapter 5, there are four main alternative models for funding shared municipal service provision:

1. Member municipality contributions,

2. Central government grants,

3. Own revenue raising by the collaborative bodies (user fees, sales revenue etc.),

4. Other revenue.

These can be used as either a sole source of shared services provision funding, or in combinations. For example, in Finland, in case of municipal health and social services, the municipalities funded most operating expenditure of collaborative bodies with their own tax revenue and central government grants. In addition, the collaborative bodies were allowed to collect user fees within limits regulated by the law. In contrast to health and social services, in secondary education, the service providers received grants directly from central government, and the municipalities paid only the net cost (total cost minus central government grants received).

Member municipality contributions: models for equitable cost sharing in shared municipal service provision

It was recommended above that the LLSG includes a legal requirement for municipalities to establish a cost-sharing model within the founding charter of the collaborative body for the provision of shared services.

In order to define member municipality funding contributions of shared service provision, reliable information on costs based on solid accounting tools are needed for agreeing cost sharing. While the optimal cost sharing method depends on the type of public service and intensity of collaboration, and the eventual decision should be left with the participating municipalities, the following methods and principles should be considered by Lithuania:

• Full cost funding: All direct and indirect costs of the shared services are factored into the price. To share the full costs, two main alternatives are available8:

  • Matching principle: The collaborating municipalities cover the costs caused by the service use of their residents. Under this principle, municipalities in collaboration are responsible for covering the costs generated by their residents' usage of services. This method aligns costs more closely with the benefits received by each municipality. This approach, exemplified by the joint municipal authorities in Finland for health and social services, ensures fair cost distribution based on actual service consumption. However, it poses budgetary risks if municipalities initially under-budget their contributions or cannot control service usage. It is also possible that a municipality could face very high costs due to an unexpected event9. Additionally, in case of the host municipality model, the hosting municipality faces potential risks related to excess service capacity, particularly if substantial investments in infrastructure become underutilised due to reduced service demand or if other municipalities withdraw from partnership.

  • Population based cost sharing: This approach involves municipalities sharing the total service costs based on their populations (on per capita basis)10. The benefit of this method is its simplicity. This method assumes that the benefits of the shared services provision project are distributed proportionally to the population. It has been widely used in Finland for example in services like environmental healthcare, joint procurements, and sub-regional public transport services. The downside of this method lies in its limited motivation for cost control, as the burden of additional expenses resulting from one municipality's increased service usage is distributed among all members.

• Other methods for cost sharing include:

  • Equal share contribution: In this approach, each member municipality contributes an equal share of the total costs, regardless of size, usage, or demand. This method is simple and may be suitable for initiatives where benefits are equally distributed or difficult to quantify. In Finland, the equal share principle has sometimes been used to share costs of joint public transport services.

  • Ability-to-Pay contributions: Contributions are based on the fiscal capacity or economic strength of each municipality. Wealthier municipalities contribute more, providing a mechanism for financial solidarity among municipalities. This model has been used for example to share costs of regional policy councils in Finland.

  • Hybrid model: A combination of the above methods can be used to tailor cost sharing to the specific circumstances and objectives of the shared municipal service provision. For example, an initial cost might be equally divided, with additional costs allocated based on usage or population size. This method allows for flexibility and can be adjusted to meet the diverse needs of member municipalities.

Table 4.1. Summary of possible cost-sharing models for shared service provision

Cost Sharing Method	Description	Example use case	Likely benefits	Likely challenges
Full cost funding	All direct and indirect costs of shared services provision are included in the cost calculation.	Recommended general approach for shared services	Enables fair distribution of costs; clear accounting of all service-related expenses.	Complexity in calculating full costs; potential disagreements on cost allocations.
Matching principle	Costs are covered based on service usage by residents, aligning costs with benefits received. Recommended for services like health care.	Health and social services	Fairness in cost distribution; costs linked directly to usage.	Budgetary risks; possible cost overruns if usage exceeds forecasts.
Population based cost sharing	Costs are shared based on the population of each municipality, simple but may lack incentives for cost control. Widely used for services where benefits per capita are evenly distributed.	Rescue services, advisory services	Simplicity in calculation; suitable for evenly distributed or hard-to-measure benefits.	Limited motivation for cost control; additional expenses from increased usage distributed among all.
Equal share contribution	Each member contributes an equal share of total costs, useful where benefits are equally distributed or hard to measure.	Joint public transport	Simplicity; equality in cost sharing irrespective of size or usage.	May not reflect actual service usage or need; potential for perceived unfairness.
Ability-to-Pay Contributions	Contributions are based on the economic strength of each municipality, promoting financial solidarity.	Regional policy councils in Finland	Equity in financial contribution; wealthier municipalities support more.	Complex to determine fair contributions based on economic strength; may require frequent reassessments.
Hybrid model	Combines methods based on specific circumstances and objectives, providing flexibility and promoting fairness in cost distribution.	Customisable to various shared services scenarios.	Adaptability to diverse needs; can facilitate combination of fairness and flexibility.	Requires careful planning and monitoring to ensure effective implementation.

Source: Author´s elaboration.

Box 4.1. Aspects to consider when choosing a cost-sharing model for shared municipal services provision

1. Is the service usage easy to measure?

• Yes: consider measure-based cost-sharing (go to step 2).

• No: consider cost-sharing based on other than measure-based factors (go to step 3).

2. Is the service usage similar across municipalities?

• Yes: consider the population based cost sharing.

• No: consider the matching principle cost-sharing.

3. Are the benefits of the service equally distributed?

• Yes: consider equal share contribution.

• No: consider cost-sharing based on ability-to-pay or a hybrid model (go to step 4).

4. Is there a significant economic disparity between the municipalities?

• Yes: consider ability-to-pay cost-sharing.

• No: consider using a hybrid model that combines multiple cost sharing methods.

5. Implementation

• Include all direct and indirect costs of shared services in the cost calculation (i.e. use the full cost model).

• Establish the chosen model in the founding charter of the municipal collaboration.

• Monitor and adjust the model as needed based on actual service usage and financial outcomes.

Note: This presentation is indicative and does not aim to be exhaustive. It aims to give examples on factors to take into consideration when deciding the cost-sharing methods. In the above, “service usage” refers to the extent in which the joint municipal service is utilised by the residents or entities within each municipality or joint body. It involves quantifiable measures of how often or to what degree the service is used or consumed. An example could be shared water supply service, in this case service usage could be measured by the volume of water consumed by each municipality´s residents. “Benefits of service” refer to the positive outcomes or advantages that municipalities and their residents receive from the shared municipal service. These benefits can be economic, social, or environmental, among others, depending on the service in question. When considering cost-sharing models, it is important to try to evaluate how the benefits of the shared service are distributed among the municipalities. If the benefits are equally distributed, an equal share contribution might be fair. If benefits vary significantly, cost-sharing models may need to account for disparities, ensuring that each municipality pays a share proportionate to the benefits received. As an example, for a shared public transportation system, the benefits might include improved mobility, reduced traffic congestion, and environmental advantages. If all municipalities benefit equally, costs can be split equally. However, if some municipalities gain more due to higher ridership or more significant reductions in congestion, a different model, such as one based on ridership or economic benefit, might be more appropriate. The “economic disparity” in above refers to the differences in economic wealth, income levels, and financial capacity among the municipalities involved in the shared service provision. Economic disparity can significantly impact each municipality's ability to contribute financially to the shared service. If there are substantial differences in economic strength, a cost-sharing model that accounts for these disparities can ensure that all municipalities can participate fairly and sustainably.

Source: Author´s elaboration.

Fostering shared services provision with central government financial support

Central government financial support can play a role in encouraging municipalities to engage in shared municipal service provision. One potential cost-neutral method is to channel central government grants (in the Lithuanian case: the subsidies for delegated functions, or the funds based on shared income tax revenue) directly to collaborative entities rather than to individual municipalities. This approach ensures that funds are specifically used to support joint initiatives, making collaboration financially attractive. Such central government grants to municipalities can cover a range of collaborative efforts, from shared infrastructure projects to joint service delivery, encouraging municipalities to pool resources and expertise.

Another potential strategy involves defining the central government grant amount based on wider-than-single municipality areas. By tying central government grant eligibility or the amount of funding to the scale of collaboration, central governments can encourage municipalities to seek partnerships with neighbours. The risk in this alternative is that smaller and poorer municipalities may find it unfair if the level of central government grants does not match the local needs. The model requires high quality information on the local circumstances to ensure a fair allocation of grants.

An example of a conditional grant to incentivise municipal collaboration and an example of channelling central government grants directly to collaborative entities rather than individual municipalities are provided in Annex D.

4.2.3. Improve access to financing to better enable joint municipal investments

Municipalities are currently allowed to contract short-term and long-term loans (article 10 of the law on Budget Structure). However, they have low borrowing autonomy and are subject to stringent budget rules as defined in the Constitutional Law, Law on Budget Structure and in the law on the Approval of the Financial Indicators of the State Budget and Municipal Budgets, compared to other EU countries (e.g., different balanced budget rules, capacity to issue bonds at municipal level) Table 2.5. As discussed in detail in the OECD report “Raising Local Public Investment in Lithuania” (OECD, 2021[1]), there is no pooled financing mechanism in Lithuania contrary to other EU countries (e.g., Finland, France, the Netherlands). As a result, municipalities, especially smaller ones, have limited access to external financing for large projects.

It is recommended that Lithuania establishes a pooled financing mechanism (e.g., credit institution owned by municipalities, such as in France, Sweden, Denmark or Finland) as a mean to increase cooperation between municipalities in large projects. These aspects are discussed at length in (OECD, 2021[1]), so here are listed only the key aspects:

• Create an agency for pooled municipal borrowing, either owned by the municipalities or jointly by municipalities and central government.

• Avoid explicit or implicit central government guarantees on individual municipal loans.

An example of a joint municipal body for municipal and joint municipal borrowing is provided in Annex D.

4.2.4. Ensure clear fiscal rules for shared services provision

Lithuanian municipalities are subject to various fiscal rules, including a balanced budget rule. Compliance with fiscal rules is monitored by the Ministry of Finance and State Audit Office. Small and large municipalities are treated differently by the rules. If a municipality does not comply with the rules, the primary consequence is the loss of eligibility to receive central government grants for the co-financing of EU Structural Funds. While it appears that shared municipal service provision in Lithuania is governed with same fiscal rules as municipalities, the regulation could be clarified and amended.

Here are recommendations to enhance the fiscal rules for shared municipal service provision in Lithuania:

• Ensure that a fiscal oversight mechanism applied for monitoring municipal finances is tailored to shared service provision, involving regular financial reporting, performance evaluations, and external audits, to ensure accountability and transparency.

• Joint municipal authorities (see the recommendation that was made earlier in this section) and Joint municipal companies (described above) should be allowed the legal right to borrow for investments. The borrowing rules applied to single municipalities should be tailored for joint municipal authorities, ensuring that the regulations do not create incentives to bypass the fiscal rules using the collaborative arrangements. In the same vein, the borrowing rules for joint municipal companies should follow the same principles as those for municipal companies owned by a single municipality.

• Develop a tailored non-compliance financial rule management subprocess for collaborative bodies, focusing on early detection of financial distress.

• Ensure that there is clear framework for interventions by individual member municipalities to prevent financial crises. This could be done by requiring in the legal framework (LLSG) that the founding charters of municipal collaborative bodies should include a governance process to describe how the board of joint municipal authority organises negotiations with the member municipalities on financial matters. In other words, formalise the role of member municipalities in the founding charter in monitoring and supporting the financial stability of collaborative bodies, ensuring that early intervention mechanisms are in place.

An example of legal provision for funding the municipal collaborative bodies and financial rules is provided in Annex D. The Annex D also provides an example on how to formalise financial negotiations between the collaborative body and member municipalities (agreement´s section on Corporate Governance).

4.3. Recommendations for a supportive institutional framework for shared municipal service provision

4.3.1. Reinforce the role of Central Project Management Agency (CPMA) in supporting municipal shared service provision

Lithuania would benefit from CPMA providing advisory services for municipal shared service initiatives, leveraging its existing mandate to support government bodies. Enhancements to CPMA's capabilities should include guaranteed funding for these roles, authority to provide technical, legal, and administrative assistance, and facilitating forums and networking events for shared services. From the municipal perspective, this support would simplify drafting founding charters, establishing cost-sharing mechanisms, and managing collaborative projects, with potential input from the competence network (Kompetencijų tinklas) for additional expertise.

• Empower CPMA to offer comprehensive technical support on financial and administrative aspects of shared services provision to municipalities initiating collaborative projects.

  • Enable CPMA to assist in planning and negotiating the content of founding charters/basic agreements, focusing on service cost determination and the establishment of cost-sharing mechanisms (membership fees).

  • Ensure regular funding for CPMA for being able to offer technical, legal and administrative support for municipalities for establishing shared service provision arrangements.

• Designate CPMA to organise forums facilitating dialogue among municipalities on shared services provision topics, to share success stories (e.g., national champions) and good practices, and to organise networking events.

• Empower CPMA to collaborate with other central government agencies, ministries, municipalities, ALAL, and the competence network (Kompetencijų tinklas) to ensure that shared services provision can be organised more effectively.

4.3.2. Establish standardised descriptions of municipal public services

It is recommended that Lithuania establishes a standardised classification and description of the municipal public services. This would significantly enhance the municipal governance and would lead to improved data accuracy and reliability, which would allow for more accurate comparisons and benchmarking between municipalities.

To this end, the following steps are recommended:

1. Establish a steering committee composed of representatives from various municipalities, ALAL, Statistics Lithuania, key ministries responsible municipal public services, CPMA, other government agencies and stakeholders, to oversee the development and implementation of the classification system.

2. Conduct research on existing classifications in other countries, such as the Finnish “JHS 200 Municipal and joint municipal authorities' service classification” (see Annex D).

3. Define service categories by explicitly outlining what constitutes municipal services (delegated and independent), and group them into broad categories such as economic sectors. This could include utilities, education, healthcare, public administration, etc. Utilising the COFOG classification and handbook is advisable.

4. Collaborate with municipalities to collect feedback and ensure the classification meets local needs and conditions. This can be achieved through workshops, forums, public consultations and written comments.

5. Execute a pilot project in selected municipalities to test the classification system. Analyse the results and make necessary adjustments based on the feedback and practical challenges encountered.

6. Finalise the classification system and establish a timeline for national rollout. Provide training and resources to municipalities for implementation.

7. Create a procedure for regular updates to the classification system to accommodate new services and changes in municipal functions. This could involve a dedicated team or periodic reviews every year.

8. Ensure the classification system integrates seamlessly with national statistics and reporting systems to enhance data collection and analysis capabilities.

An example of the standardised classification of municipal public services in Finland (JHS 200 Municipal and joint municipal authorities´ service classification) is provided in Annex D.

4.3.3. Improve the quality and reliability of data concerning municipal costs and service use to enable shared municipal service provision

Building on the work of standardising descriptions of municipal public services, it is recommended that Lithuania also begins to enhance its database on municipal service costs and the usage of services. This will help improve the service planning, delivery, and financial management at the municipal level and facilitates comparisons and analysis at the national level.

To this end, the key recommendations for Lithuania include:

• Develop standardised classification and reporting guidelines. Adopting a standardised system for municipal accounting11 and reporting municipal of service costs would facilitate consistent financial reporting and analysis. This includes defining clear categories and content (which items should be taken into account) for services and costs, ensuring that data from different municipalities are comparable.

• Develop a platform for collecting, storing, and analysing data on municipal service costs and usage. Using an automated data collection technology would enable quicker data collection.

• Once the standardisation is finalised, Lithuania should build municipal capacity and train officials in municipalities and service providers to data collection and reporting techniques.

• Encourage experience sharing, comparing results and transparency among all stakeholders participating in the exercise.

• The other existing data sources containing data on municipal public services should be reviewed and a comprehensive system should be put in place combining different sources.

• Review regularly and improve data collection methods. Continuous evaluation by national statistical authorities and other stakeholders involved in the data collection and reporting process is crucial. This includes regularly reviewing the relevance of collected data, the efficiency of data collection methods, and the quality of data analysis. Feedback from users of the data should be used to make iterative improvements to the system.

Lithuania could utilise Finnish experience has shown that fostering collaboration between municipalities, government agencies, research institutions, and other stakeholders can enhance the quality municipal service data. Partnerships can facilitate knowledge exchange, joint projects, and the pooling of resources for data collection and analysis efforts. Finnish experiences include the development of initiatives like the "Kuntatieto-ohjelma" (Municipal Data Program), the "Aura-käsikirja" (Aura Handbook) (Annex F), and the Sotkanet database by the National Institute for Health and Welfare (THL), for planning and carrying out reforms on cost accounting and reporting in municipal services.

A translated version of the “Automated financial reporting manual for municipalities and joint municipal authorities” (AURA Handbook) is provided as an example in Annex F (unofficial translation from Finnish to English). In addition, the Finnish chart of accounts of municipalities, joint municipal authorities, municipal enterprises, joint municipal enterprises and balance sheet units and the consolidated financial statements of municipalities and municipalities is provided as an example in Annex G.

4.4. Action Plan

4.4.1. Legal framework

 

Establishing a clear and enabling legal base for shared municipal service provision

Context for Action

See recommendations and examples made in Chapter 4. Currently, the Law on Local Self-Government (LLSG) and other existing legal frameworks in Lithuania do not include a comprehensive set of provisions for municipal shared services provision. The current legal provisions for municipal collaboration are dispersed across various sectoral laws, and there are notable gaps in the regulatory landscape. It is advisable for Lithuania to expand its legal framework and to consolidate these regulations within the LLSG.

Actions

Utilise the review of the current legal regulation made in this report, making sure that the mapping made in Figure 2.4 covers all existing relevant legal provisions for shared service provision. Start the legislative drafting for updating the LLSG to cover the gaps of legal provisions identified in this report. Prepare a separate chapter in the LLSG that provides legal provisions for shared services provision for (see recommendations made in section 4.1.2): The forms of shared municipal services provision: 1) joint decision-making bodies, 2) shared HR resources 3) joint municipal authorities, 4) joint companies. The content of Founding Charter or basic agreement of shared service provision body (administration, funding, cost-sharing etc). Decision-making bodies of shared services provision bodies (council, board, assembly). Withdrawal from collaboration. Resolution of disputes in collaboration. Abolish the three forms of shared service provision currently mentioned in the LLSG. Concentrate all legal regulation concerning the establishing and governing of shared services provision to LLSG, except the specific regulation that may be needed for mandatory municipal collaboration, which should be defined in sectoral legal regulation. Make sure that LLSG contains all the core legal regulation of shared municipal services provision and that the sectoral laws refer to it. Only in rare specific cases allow sectoral or other legislation contain legal provisions on municipal collaborative arrangements. Alter the other legislations (see the first step in this list of Actions) currently regulating shared services provision by reducing the provisions which have been moved to LLSG to avoid overlapping regulation.

Actors

Central government level

 

Develop a legal base for public sector pilots to enhance shared services provision initiatives

Context for Action

See recommendation and example made in section 4.2. Establishing a clear legal basis for public sector trials/pilots is recommended to Lithuania to ease establishing pilots and to ensure that pilots are executed with high quality.

Actions

Establish a specific Piloting Act for public sector pilot schemes or introduce specific statutory provisions and/or exemption clauses in existing laws in Lithuania that allow for trials and piloting within the public sector: Establish legal provisions that allow temporarily relaxing existing legal provisions for the pilot experiment (e.g. flexibility in staffing, use of central government grants, tax revenue). Establish legal provision that ensures funding and resources to conduct pilots; Strengthen the capacity of municipal staff to conduct pilots: Develop and implement a comprehensive guide on the legal aspects of conducting municipal pilots: Definitions of different types of experiments How to initiate and carry out a pilot experiment (applications and funding) How to evaluate the impacts of pilot experiments How to utilize the information provided by the pilots Provide training to municipal staff on the legal and aspects of municipal pilots on the above-mentioned aspects. Establish an expert network on public sector piloting, consisting of legal experts, researchers, administrators in central government and municipalities, to promote the exchange of knowledge and good practices to carry out successful pilots. Organising annual thematic conferences on public sector piloting. Creating a website “experimentalLithuania.lt”, or similar, to publish practical support for piloting.

Actors

Central government and municipalities

4.4.2. Fiscal framework

 

Create an enabling funding model for shared municipal service provision

Context for Action

See recommendations in 4.2. Lithuania’s municipal funding is mostly from central government grants, which may discourage shared services due to limited fiscal autonomy. To promote shared services, Lithuania should increase fiscal independence, encourage cooperation over competition in central government grant mechanisms, and allow municipalities to keep savings from shared services.

Actions

Enhance municipal revenue autonomy: Implement policy changes to allow municipalities more control over local revenue, reducing reliance on central government grants. Reform the central government grant system: Revise the Law on Methodology of Determination of Municipal Budget Revenue and other relevant legal provisions for municipal revenue to prioritise general grants over earmarked grants (the state subsidies for delegated functions), giving municipalities flexibility in resource allocation and promoting shared services provision initiatives. Enable savings retention from shared municipal service provision: Modify budget law to permit municipalities to keep any savings made from shared municipal service provision. Initiate financial support for shared municipal service provision: Provide financial assistance to municipalities to cover the initial costs of establishing shared services provision projects, making collaboration more feasible.

Actors

Central government

 

Establish practical and transparent cost sharing models for funding shared municipal service provision

Context for recommendation

See recommendations in 4.2.2 and examples provided there. To fund shared municipal services, member municipalities need reliable cost information from robust accounting tools. While the optimal cost-sharing method depends on the service type and collaboration intensity, and should be decided by the participating municipalities, it is recommended that Lithuania considers the following methods and principles.

Actions

First, develop a standardised method to define and present costs of municipal services, to enable well-informed and transparent shared services provision and fair cost-sharing (recommendations in section 4.3.2 and 4.3.3). Second, using the cost data, calculate and take into account all direct and indirect service costs of shared municipal service provision (i.e. the full cost method) as a basis for cost sharing. Thirdly, select a model to share costs of shared services provision depending on service type and collaboration intensity (see Table 4.1 and Box 4.1): Matching principle: Costs are covered based on service use by residents, ideally aligning costs with benefits. Population-based cost sharing: Costs are shared based on each municipality's population, offering simplicity but potentially reducing cost control motivation.12 In specific cases, consider applying the following cost sharing methods: Equal share contribution: Each municipality pays an equal share. Suitable for evenly distributed benefits. Ability-to-pay contributions: Based on each municipality's fiscal capacity, with wealthier municipalities paying more. Hybrid model: Combines methods to suit specific shared services provision circumstances, allowing flexibility to meet diverse needs.

Actors

Central government and municipalities.

 

Foster shared services provision through financial incentives by central government

Context for Action

See recommendations in section 4.2.2 and examples provided there. Central government can use various methods to incentivise shared municipal services provision. Lithuania currently lacks such financial incentives for shared services.

Actions

In case of most demanding municipal services, establish central government grants that are targeted directly to shared services provision bodies, instead of municipalities. Modify the budget law accordingly (example in Annex D). Introduce a specific grant that is conditional on the collaboration and on the impact of the project. Combine funding and other support with strict impact evaluation (example in Annex D). Modify the Law on Methodology of Determination of Municipal Budget Revenue and LLSG accordingly. Develop clear guidelines and criteria for collaboration-based funding to ensure fair and transparent allocation. Create a support framework for small municipalities to ensure they are able to find partners for shared municipal service provision.

Actors

Central government

 

Improve access to external financing to better enable joint municipal investments

Context for Action

See recommendations in section 4.2.3 and examples provided there. Creating an agency specialised in municipal and joint municipal borrowing could reduce municipal borrowing costs and interest rates after revising the fiscal rules to allow LGs to borrow more.

Actions

Implement the recommendations on the use of public investment funds in Lithuania presented in the OECD report “Raising Local Public Investment in Lithuania” (slightly modified for this report´s purpose): Establish a mechanism for joint municipal borrowing (Annex D): Create an agency for pooled municipal borrowing, either owned by the municipalities or by the central government (Annex D). Create a guarantee mechanism for municipal and joint municipal loans, using example for such arrangements in other countries (Annex D). Avoid explicit or implicit central government guarantees on individual municipal loans. Clarify and establish legal provisions in budget law (fiscal rules) to better allow for municipal and joint municipal borrowing by municipalities for cooperative projects, enabling them to take advantage of economies of scale and shared risk. The central government could also re-lend funds to municipalities or joint municipal bodies to finance public investment. This could be processed through institutions such as VIPA, which was merged into INVEGA (National promotional Institution) taking up VIPA’s functions.

Actors

Central government.

 

Ensure clear fiscal rules for shared municipal service provision

Context for recommendation

See recommendations in section 4.2.4 and examples provided there. If Lithuania decides to establish more shared municipal service provision, there's a need for clear fiscal regulation for municipal collaboration to avoid a situation where joint municipal bodies would be regulated with a very different rules than the member municipalities.

Actions

Make changes and amendment in the budget law to ensure that joint municipal bodies are regulated with same rules as municipalities. In the budget law, make legal provisions that allow the joint municipal bodies, when they are separate legal bodies (see recommendation for joint municipal authorities in section 4), to borrow for investments. Establish a protocol in LLSG for treating collaborative bodies that are in severe fiscal distress (Annex D). In the LLSG, mandate active involvement of member municipalities in the fiscal oversight of collaborative bodies, through structured monitoring and early intervention strategies to prevent financial instability.

Actors

Central government.

4.4.3. Institutional framework

 

Strengthening the role of CPMA in fostering shared municipal service provision

Context for Action

See recommendations and examples in section 4.3.1. Municipalities will need technical support and consultation to better establish shared services provision in the new frameworks. CPMA would be well positioned to act as an expert organisation to provide such support.

Actions

Empower CPMA legally and financially to offer support to municipalities embarking on shared services provision projects. This support should include: Assistance in financial matters: how to seek funding to kick-start shared services provision projects. Administrative assistance: guidance on administrative procedures and regulatory compliance. Technical assistance: expertise in project design, implementation, and evaluation. Assign CPMA to organise nationwide and local shared municipal services provision dialogue forums: Facilitate dialogue and exchange of ideas and good practices among municipalities on topics related to shared municipal service provision. Enable CPMA to assist municipalities in planning and negotiating the specifics of founding charters or basic agreements for shared services provision projects. Service cost determination and the establishment of cost-sharing mechanisms. Providing templates or model agreements for founding agreements (joint municipal authorities and joint municipal companies) and contracts (host municipality arrangements, shared HR resources). Authorise CPMA to hire or designate project managers whose primary responsibility is to ensure that municipal collaborations are effectively transformed from concept to practice. Empower CPMA to actively seek and facilitate collaborations with other central government agencies, ALAL and the municipalities, enabling shared vision on utilising shared municipal services provision.

Actors

Central government.

 

Establish standardised descriptions of municipal public services

Context for Action

See recommendations in section 4.3.2 and examples provided there. In order to improve the comparability of municipal service costs and service usage, Lithuania should start a reform to develop a standardised classification and description of the municipal services.

Actions

Initiate project Form steering committee: representatives from municipalities, ALAL, Statistics Lithuania, key ministries, CPMA, and other key stakeholders. Make research Research existing classifications: Example: Finnish “JHS 200” model (see Annex F). Define service categories: Specify what constitutes municipal services. Group into sectors using COFOG classification. Feedback collection Collect feedback through workshops, forums, public consultations, and written comments. Adjust development based on feedback: refine classification categories and structures. Pilot testing Execute pilot project: Select municipalities for testing. Implement pilot classification system. Evaluate pilot results: Analyze feedback and practical challenges. Make necessary adjustments: Refine classification system based on pilot outcomes. Implementation Finalise classification system: Establish a comprehensive classification system. Set implementation timeline: Determine national rollout schedule. Train and resource municipalities: Provide necessary training and resources for implementation. Maintenance Regular updates: Create a procedure for annual reviews or dedicated team for updates.

Actors

Central government and municipalities.

 

Improving the quality of data and reporting/accounting methods concerning municipal costs and service use to better enable shared municipal service provision

Context for Action

See recommendations in section 4.3.3. Lithuania could markedly enhance its database on municipal service costs, inputs, outputs, and service usage. Comparable and reliable data on municipal service costs and use are critical for well-informed decision-making on public services at municipal and central government levels.

Actions

Establish guidelines for municipalities regarding the calculation of costs associated with municipal services and enforce mandatory compliance to these regulations (see an example in Annex G). Develop a platform for collecting, storing, and analysing municipal service costs and usage data, ensuring standardised formats and indicators for consistency across municipalities and shared service provision units (see example in Annex F). Develop uniform accounting practices and mandate in the LLSG and the Accounting Law that all municipalities and joint municipal authorities adhere to these standardised practices. Train municipal officials and service providers on data collection, reporting and accounting standards, and data utilisation for service planning and improvement. Continuously evaluate and improve data collection and reporting processes, including regular reviews of data relevance, collection methods, and analysis quality, using feedback for system enhancements. Utilise modern IT solutions for efficient data collection, storage, and analysis, including developing or adapting software and platforms for municipal data needs.

Actors

Central government and municipalities.

References

[1] OECD (2021), Raising Local Public Investment in Lithuania Ensuring quality while maintaining financial sustainability, https://issuu.com/oecd.publishing/docs/raising-local-public-investment-in-lithuania-repor (accessed on 16 April 2024).

[2] REPUBLIC OF LITHUANIA (2012), LAW ON THE METHODOLOGY OF DETERMINATION OF MUNICIPAL BUDGETARY REVENUES, https://e-seimas.lrs.lt/portal/legalAct/lt/TAD/TAIS.417425?jfwid=-taeoueoi0 (accessed on 10 May 2024).

Notes

← 1.  The recommendations and actions presented below are also presented in the matrix with respective challenges and benefits for all recommendations (Annex C).

← 2.  An example is the Law on Regional Development which currently includes regulations governing the formation and management of the RDCs. Ideally, such general regulations on establishing shared service provision should be included in the Local Self-Government Law, leaving the Law on Regional Development to focus only on what is specific concerning the establishment of Regional Development Councils (RDCs).

← 3.  For instance, in Finland, sectoral legal regulation has provisions for shared service provision only if it is compulsory. This approach is recommended also for Lithuania. Sector specific legal regulation is not needed for voluntary collaboration.

← 4.  Joint public staff posts are job positions filled jointly by two or more municipalities.

← 5.  Joint agreements on the management of official duties can establish joint posts which would take care of the most demanding municipal tasks that require demanding official decision-making by law. In other words, this is a special case of joint public post (or, in more general, a specific example of “shared HR resources”).

← 6.  Under this there can be different types of shared human resources between municipalities. Typically, this is a contract-based collaboration between municipalities.

← 7.  In Lithuania, according to the Law on Methodology of Determination of Municipal Budget Revenue, central government grants to municipalities consist of general purpose grant (municipal share of income tax revenue allocated using an equalisation formula) and earmarked grants (the state subsidies for delegated functions) (REPUBLIC OF LITHUANIA, 2012[2]). Hereafter, this report will use the term “state subsidies for delegated functions” when discussing Lithuanian central government grants to municipalities for delegated functions, to align with terminology familiar in Lithuania. However, the term “central government grants” will also be used when discussing overall central government funding to municipalities. Additionally, the term “intergovernmental grants” will be used when discussing international practices. The OECD Taxonomy of Grants is provided in Annex B.

← 8.  In some cases, matching and population-based cost sharing can be used also in combination.

← 9.  In Finnish hospital services (obligatory municipal collaboration), the Finnish Health Care Act guided municipalities to equalise the exceptionally high patient-specific costs. If the cost of a patient exceeded from EUR 50 000 to EUR 100 000, then the rest of the cost was shared between the member municipalities on a per capita basis. This mechanism served as an effective risk management strategy, particularly beneficial for smaller municipalities, safeguarding against unforeseen or unplanned financial burdens.

← 10.  Depending on the service, and availability of data, also other types of metrics/quantifiable data can be used (such as number of pupils, patients etc).

← 11.  In Finland, the accounting of municipalities is governed by the Accounting Act and the Municipal Act. This law applies to municipalities and joint municipal authorities. According to the Municipal Act, a municipality and a joint municipal authority are subject to accounting obligations.

← 12.  Depending on the service, and availability of data, also other types of metrics/quantifiable data can be used (such as number of pupils, patients etc).