The current public finance system and territorial organization of Croatia emerged during early 1990s when country gained its independence. Croatian public finances and multilevel governance are centralized and are accompanied with fragmented three-tier territorial organization. In the Croatian context this is concretely reflected in three distinctive facts: firstly, 90% of all financial resources are located at the central government level; secondly, public functions are mostly in the hands of central government and thirdly, there are 577 subnational units in Croatia, of which 71% are smaller than 5000 inhabitants (the number which is considered to be the lower limit for providing minimum public services at minimum quality). Additionally, there is an obviously weak fiscal autonomy of subnational units in Croatia and that is exemplified in the fact that the Croatian subnational units have no authority in the taxbase and tax-rate determination except in the area of one tax: rate on the use of public surface (which is less than 1% of subnational revenues). Th e causes of this problematic situation are numerous, but most usually entioned causes are: Croatian War for Independence 1991–1995, inherited centralistic elements from Yugoslavia and political calculations of Croatian political elites. Due to the centralization in Croatia, problems in public service provision and problems of debt and deficit caused by the recession that started in 2008 are mainly on the central government level and not on the subnational level. This fiscally centralized and territorially inefficient structure was addressed through the decentralization policy since 2001, but as the situation largely remained the same, the policy is considered a failure. Previous literature has widely acknowledged this failure, however the question of why and how this policy failed remained mainly unanswered. In order to also answer this important question, this paper uses qualitative methods and demonstrates that the sources of policy failure were twofold: 1. flaws in the formulation stage of the policy, and 2. structural-underlying effects of local political clientelism and centralism present in the system.