Overview
Demographic trends
Before the reform, half of the local governments had less than 2,000 inhabitants, and more than 80% had less than 5,000 inhabitants. Demographic trends, including the ageing of the population, progressively increased the need to provide social services. In contrast, the share of the working-age population decreased, especially in smaller and rural municipalities. By 2030, according to the statistical forecast of Estonia’s population, the number of inhabitants in some remote areas, or local governments at risk of becoming remote areas, would have decreased by 38%. The share of the elderly would have increased from 22% to 28% (Statistics Estonia, Estonian population forecast 2040).
Ability to perform tasks
The capacity of local governments to provide an adequate level of public services was uneven and often insufficient. According to the Chancellor of Justice, many smaller municipalities failed to protect people’s fundamental rights, especially in the provision of social assistance. Several audits and reviews from the National Audit Office emphasised that small local governments cannot perform all their tasks. Smaller local governments also had problems with organising tasks independently in upper secondary or basic education. They often depended on other local governments and could not give their input regarding service provision to their residents.
International organisations also highlighted this issue. In a report on Estonia prepared in 2011, the OECD noted that the small number of inhabitants is the most important problem in the local government when considering the range of tasks to be performed. Since 2012, the European Commission has regularly delineated in the country-specific recommendations that Estonian local governments appear to be too small to fulfil their obligations imposed by law.
Economies of scale
International experience has shown that the merger of local governments can achieve economies of scale – a reduction in the cost of public services as the volume of service provision increases. Based on the analysis carried out by the Ministry of Finance, there were several negative tendencies in Estonian local governments, which indicated the potential for economies of scale upon accession, which includes the following.
- A local government with a small population must also be prepared to perform all tasks arising from the law. This means a higher share of rural municipality or city government employees per 1000 inhabitants than in rural municipalities or cities with a larger number of inhabitants. For example, in small local governments (up to 1000 inhabitants), the number of administration employees per 1,000 inhabitants was more than twice as high as in a municipality with 5,000 inhabitants.
- Due to the high ratio of the number of employees in a small local government per 1,000 inhabitants, it is impossible to pay a competitive salary to its employees. For example, the difference between the monthly salary of a local government employee with 1,000 inhabitants was up to 1.5 times less than a local government employee with 5,000 inhabitants doing the same work. To compare a small local government to a local government with a population of 5,000, then a person doing the same job in a small local government had a half-time position and was paid three-quarters of the salary corresponding to the workload of the place.
- In small municipalities, the share of management and support services costs in operating expenses was high, which meant less money for providing services and investments (to the population). For instance, in a local government with 1,000 inhabitants, the share of labour costs for support services in the operating costs was 4.2% on average, falling to 2.7% on average in local governments with 5,000 inhabitants.
- The obligation of small municipal employees to perform a wide range of tasks and the small number of cases do not allow for specialisation and adequate competence to perform the tasks.
- The investment capacity of small municipalities is insufficient for the continuous maintenance of infrastructure.
Local democracy
The results of local elections in municipalities of different sizes showed that in cities and rural municipalities with a smaller population, the diversity of lists for the council election is generally limited. There is a risk of long-term monopoly power of a narrow group without serious opposition. The effective functioning of the proportional electoral system and the council-government balance inherent in Estonian local government require at least 3,000-3,500 inhabitants.
Administrative reform aimed to increase the capacity of local governments to provide high-quality public services, use the preconditions for regional development, increase competitiveness, and ensure more balanced regional development.
By way of explanation, this legitimate aim set out in the Administrative Reform Act meant that the reform would result in local governments with sufficient capacity to perform all tasks assigned to them by law and to ensure quality in the provision of public services directly related to the protection of people’s fundamental rights.
The objectives of the administrative reform were also formulated by the Administrative Reform Expert Committee, more broadly than provided for in the Administrative Reform Act. The main objectives were the following.
- Greater role by local government in organising community life, which refers to their the right to make decisions and assume responsibility in organising local life independently and effectively. It also refers to increased strategic management and capacity to adopt local development preconditions and balanced regional development, and compete globally.
- To take advantage of economies of scale, increase the competence and capacity of local governments to ensure high-quality public services for the population, their Spatio-temporal availability, and cost-effective organisation.
- To encourage stronger local representative and participatory democracy.
- To promote a local government that forms a territorial whole that considers the specifics of the region and is in line with the settlement system.
To carry out the reform, the Administrative Reform Act was adopted in June 2016. The law established a minimum size of 5,000 inhabitants as a criterion for the size of a local government, with 11,000 inhabitants as the recommended size.
In addition, the law provided for possible exceptions to the minimum size criterion. To obtain an exemption, the local government had to provide justifications, and the Government of the Republic considered the justification for granting the exemption.
The law provided for the reform to be carried out in two stages.
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First, a merger initiated by local governments. By 1st of January 2017, local governments had to submit to the state a council decision to apply for a merger in order to meet the criterion of 5,000 inhabitants.
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Second, a merger initiated by the Government of the Republic – the law obliged the government to submit a merger proposal to local governments that do not meet the minimum criteria.
As with all mergers, a survey of local government residents was mandatory, but the result was not binding on decision-makers. In the instance of a voluntary merger, the merging parties had to conclude a merger agreement. In the case of a merger initiated by the government, a less voluminous merger agreement had to be drawn up.
Regional commissions of officials and experts proposed to the government how it would be sensible to submit merger proposals to meet the 5,000-population limit. Upon receipt of the merger proposal from the government, the relevant councils had to submit their position within three months, that is, by May 2017. Reasons had to be given for rejecting the proposal or requesting an exemption. The government had the discretion not to make a merger decision if there are compelling arguments (the so-called termination of the process).
The law provided accession support for voluntary mergers. Local government leaders who resigned after the voluntary merger received compensation of up to one year’s salary, which in financial terms, was part of the merger support received by the local government. No merger support was paid upon the merger initiated by the Government of the Republic. The state compensated these local governments for the direct and unavoidable running costs related to the merger.
In determining the minimum size criterion, a balance had to be established between economic and local democracy arguments. The economic argument means that a larger municipality has better opportunities to provide better services to people. Conversely, in a small local government, the distance between persons and power is smaller, making leaders more directly responsible for their actions.
The criterion had to be objectively justified and entirely unambiguous. First, municipalities needed to understand what exactly needed to be done. Secondly, the criterion had to be clear for possible litigation.
Concerning the capacity to perform local government tasks, the so-called optimal size of the municipality depends on the functions to be performed. There is no strong justification for demanding more inhabitants due to the reform than is necessary to perform the functions. In addition, it must be decided whether to proceed based on the functions assigned to local governments at the time of the reform or to take into account any additional tasks that may be transferred in the future. After the administrative reform, the starting point was assumed that the local government could independently perform the tasks assigned by law at that time. To this end, it was assessed whether the number of inhabitants corresponded to the size of the service areas related to the tasks, using various surveys. The aim was that the minimum size should be such that the number of inhabitants corresponds to the size of the largest service area of the existing tasks, as this ensures the local government’s ability to perform all tasks independently if it so wishes.
In terms of the effect of economies of scale, the analyses showed that economies of scale improved dramatically up to 5,000 inhabitants. As the number of local government residents increased to more than 5,000, the changes were significantly smaller.
For the final decision in the criterion of minimum size, the committee of experts had a choice between three options: 3,500 inhabitants, 5,000 inhabitants and 11,000 inhabitants. The requirement of 5,000 inhabitants was supported the most as a minimum criterion. According to experts, the minimum criterion of 5,000 inhabitants is a generalisation or a broad-based agreement, which, according to experts, shows, based on various studies, the municipality’s potential to have sufficient capacity to perform its tasks. In each case, some local governments with less than 5,000 inhabitants may organise the services very well, and some local governments with more than 5,000 inhabitants may cope poorly.
The recommended size of local governments is 11,000 inhabitants. The estimated population of 11,000 was based on the original proposal that the municipality should have the capacity to run an upper secondary school with three parallel classes. As the state had already started to establish state gymnasiums in each county, there was no reason to expect local governments, as a result of the administrative reform, to have an obligation to maintain and have the capacity to offer upper secondary education. The criterion based on this would not necessarily have prevailed in the dispute of the Supreme Court.
As one of the government parties emphasised that the municipalities with 5,000 inhabitants emerging after the reform are not ambitious enough, the goal must be at least 11,000 inhabitants, which was included in the law as a recommendation.
There are exceptions to the minimum size criterion, and Estonian regions are different. Therefore, some options for exceptions were proposed.
- Local governments could apply for a sparsely populated exemption if they formed a merger group with an area of at least 900 km2 and a population of at least 3,500. The population of 3,500 was considered a limit below which the municipality’s ability to provide quality services independently was questionable.
- As an exception, the criterion of 3,500 inhabitants was also allowed for the merger of border local governments. These have historical, cultural and geographical cohesion based primarily on ensuring a unified identity (e.g., Setomaa).
- The municipalities of the smaller maritime islands were able to apply for an exemption due to their special situation and geographical isolation.
- An exemption could be applied for by a local government with a population of over 5,000 at the beginning of 2016. Still, at the beginning of 2017, it would have remained just under 5,000 (except for a declining population, but no such example occurred in practice).
- To apply for the exemption, local governments had to substantiate how they could provide high-quality public services to the population without merging.
As a result of the administrative reform, the total number of local governments has decreased from 213 to 79. The average number of inhabitants and the average area of local governments have almost tripled.
After the reform, the share of small municipalities with less than 5,000 inhabitants decreased from 79% (169 pre-reform local governments) to only one-fifth (15). Forty-seven cases of voluntary mergers were approved, in which 160 local governments participated. Thus, the vast majority of mergers (86%) were initiated by the councils themselves and were conducted based on on-site agreements.
Under the Administrative Reform Act, the Government of the Republic initiated merger proceedings for local municipalities with less than 5,000 inhabitants, that is, local governments that did not meet the minimum size criteria (26 local governments did not meet the minimum size criteria and did not submit a merger application, and ten mergers for municipalities below the minimum size criteria).
Considering the feedback provided by the municipalities and the recommendations of the regional commissions, the government withdrew its proposals, either partially or entirely, for ten municipalities. Other initiated mergers were completed. An exception for insularity was granted to the four small maritime islands of Kihnu, Ruhnu, Vormsi, and Muhu.
Comparison of the size of local governments before and after the administrative reform (number of inhabitants according to the population register)
It is necessary for the newly formed rural municipalities and cities to function for a longer period to assess the effects of the reform on the availability, quality and organisation of local government services. A more in-depth analysis of these issues will be addressed in the future.
Collection of articles: Administrative Reform 2017 in Estonia
Te aim of the collection is to provide a comprehensive overview of the central choices and processes of administrative reform. It can serve as the basis for further analysis of the results and impact of the administrative reform and it could be used as a learning resource for planning and implementing complex reforms in the future, even outside of Estonia.
The articles are analytical accounts of the main features of the recent reform process, written by experts familiar with the implementation of the administrative reform.
Last updated: 01.08.2023
