7-13 July 2017 #866

Function without finance

Khim Lal Devkota
The overarching principle of fiscal federalisation is that finance follows function. But just when power hitherto centralised in Singha Darbar is being devolved to local governments, a draft bill in Parliament seeks to reverse that.

Federalism aims at enabling people to easily access government services at their doorsteps. For this, locally-elected municipal, village and ward councils need to be not just powerful but also adequately resourced, financially speaking.


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The federal constitution has empowered local levels with various sectoral functional areas, giving them 22 exclusive rights. These include local tax collection to provide economic and social services like education, health, drinking water, roads, agriculture, irrigation, livestock, cooperatives, environment, hydroelectricity, wildlife, minerals, language, culture, energy, disaster management, etc. In addition, there are dozens of functional rights delegated to the local levels, around 30-40% of functional roles.

In terms of revenue/rights, 85-90% is assigned to the federal government, and nominal rights to provincial and local levels. Theory and international practice reveal that this gap should be filled via fiscal transfers. However, the bill tabled in Parliament, titled Inter-governmental Fiscal Management, proposes that local levels receive only a few financial rights (fiscal transfers). Without resources, the powers devolved to local bodies in the new constitution will be meaningless.

For example, the bill proposes that 85% of revenues generated from hydropower, tourism, forests, mines and minerals go to the Centre and 10% be set aside for provincial governments, leaving only 5% for local governments. This is regressive because even the Local Self Governance Act (LSGA) provides a bigger slice of revenue from natural resources to local levels, including 50% of royalties from hydroelectricity and mines and 30% from mountaineering.

The bill seeks to choke newly elected local representatives and goes against the spirit of the Constitution. Starved of revenue, local levels will be dependent on handouts from Kathmandu. The bill also purposes that 78% of VAT and excise go to the Centre, 7% to provinces and 15% to local councils. So, what then is the role of the Natural Resources and Fiscal Commission that is proposed in the Constitution to decide on distribution of revenue?

If passed, the bill will defeat the purpose of federalisation. Without fiscal freedom, local governments will fail to deliver, and the current centralisation of power in Kathmandu, which is holding Nepal back, will persist.

Khim Lal Devkota, PhD is an expert on fiscal federalisation and local governance.

Read also:

Natural resource rights

Federalising Nepal, Damakant Jayasi

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