The government has allocated Rs225 billion out of the Rs1,278 billion budget for fiscal 2017-18 to the local level. This comes to 17.60 percent of the total budget, including fiscal equalisation and conditional grants. Local bodies have received Rs32.64 billion in unconditional grants. They should have been granted a larger amount. Even when there were no local levels, local bodies were eligible to receive Rs45 billion in unconditional grants. 

As per the constitution, powers are shared between the federal, provincial and local governments. Further, the constitution clearly spells out the functional rights of all tiers of government. Since 30-40 percent of the functional roles have been delegated to local bodies, sufficient budget should be earmarked for them. However, the budget has ignored this simple functional principle. Moreover, with regard to revenue assignment and rights, 85-90 percent has been assigned to the federal government. Nominal rights have been assigned to provincial and local levels. Theory and international practice reveal that this gap should be fulfilled by fiscal transfers. 

For example, India shares 42 percent of its tax revenue with the provincial governments. Similarly, Canada, Switzerland, US, Germany and Australia share 49 percent, 39 percent, 36 percent, 29 percent and 18 percent tax revenue with the sub-national levels respectively. Based on international practice and functional rules, at least 30 percent of the budget should be allocated to the local level. As everyone knows, the constitution provides nominal revenue rights to the sub-national governments. 

Balancing needs

Article 60 of the constitution includes a provision for a fiscal equalisation grant. The constitutional definition of fiscal equalisation grant is that it should be fully aligned with the expenditure need and revenue capacity of the local bodies. In simple terms, the government has considered the expenditure need, but it has ignored the revenue portion. Further, with regard to expenditure need, the government has not been able to balance regional and provincial needs either. Minimum and additional grants are a necessary condition for the grant allocation principle. It seems that the government was not aware of this simple rule when making the budget for the local level. 

In fact, local bodies were already receiving these two grants (basic entitlement grant and additional grant) under the Local Self-Governance Act. The government initiated the provision of basic grants in 2008. Initially, district development committees (DDCs) in the Tarai, Hill and Mountain regions received Rs1.5 million, Rs2 million and Rs2.5 million respectively. Considering the geographical difficulties in the hills and mountains, the DDCs here received a relatively higher minimum grant. Since 2011, all DDCs have been receiving a flat minimum grant of Rs4 million each. Village development committees and municipalities received Rs1.5 million and Rs3 million in basic grant respectively. The minimum grant was allocated till the current fiscal year. 

For the government, all sub-national governments are equal. As per principle, at least a minimum grant should be allocated on an equal basis. The additional grant is based on expenditure need, revenue capacity and potentiality, remoteness, level of income, status of infrastructure development and fiscal discipline. Almost all countries follow the minimum and additional grant allocation principles. Many countries distribute additional grants on the basis of population and geographical area. What portion should be set aside on the basis of population fully depends on the country’s level of development. As per international practices when calculating the budget, the weight given to population is a maximum of 50 percent. In Nepal, the weight given to the population of local units was 40 to 60 percent—40 percent for DDCs, 50 percent for municipalities and 60 percent for VDCs—when determining the amount of additional grants. 

As per the principle of fiscal equalisation grant, priority should be given to remote and under-developed regions including economically and socially disadvantaged areas. However, giving a greater weight to population means prioritising urban centric regions. With regard to fiscal equalisation grants, rural municipalities have received Rs100 million to Rs390 million each. There are many rural municipalities in Nepal that are larger than the three districts of the Kathmandu Valley combined. Kathmandu, Lalitpur and Bhaktapur districts have a combined area of 899 sq km. 

Some rural municipalities that are larger than them are Namkha in Humla (2,120 sq km), Karmarog in Mugu (2,107 sq km), Faktanlung in Taplejung (1,859 sq km), Chumanubri in Gorkha (1,649 sq km), Khumbhu in Solu (1,539 sq km), Kanda in Bajhang (1,467 sq km), Dalome in Mustang (1,344 sq km), Chankheli in Humla (1,310 sq km) and Dhaulagiri in Myagdi (1,037 sq km). However, these rural municipalities have received only the minimum equalisation grant of Rs100 million to Rs120 million each. A larger geographical area means longer roads, longer irrigation canals, longer electricity lines and many bridges. Further, due to residential areas being widely scattered, more education, health, drinking water, sanitation, agriculture and livestock service centres are required. 

Cost difference

Not only that, officials of the Ministry of Infrastructure Development say that it costs Rs700,000 to Rs1 million to open a new road track in the Tarai. In the Mountains and Hill districts, it costs five times as much. This shows that simply building a road is five times more expensive in remote areas, and the government should make no difference whether there are 5,000 inhabitants or 500,000 inhabitants. Further, prices of construction materials are higher in remote districts. All these aspects have been ignored in the allocation of fiscal equalisation grants.

As per the constitution, most sectoral programmes go directly to the local levels. The deconcentrated offices of line ministries working in the districts should be fully aligned with the local levels. This means that these offices should work under local level representatives. However, the budget states that programmes and projects worth more than Rs5 million in rural municipalities, Rs10 million in municipalities and Rs20 million in sub-metropolitan and metropolitan cities should be implemented by the related sectoral line offices. This means that the government has continued line offices at the district level. Moreover, the budget has continued the Parliamentarian Development Fund, ignoring the constitutional rights of newly elected local representatives. Finally, the budget is also silent on building infrastructure for the local levels. 

Devkota is a fiscal federalisation and local government analyst