WB questions govt’s royalty distribution mechanismPOST REPORT

- Post Report, Kathmandu

Sep 28, 2017-

The government’s proposal to share royalties generated from the use of natural resource only among local bodies and provinces where the resources, like hydropower or mines, are located may widen resource gap, leaving some of the local bodies and provinces grappling for funds, the World Bank has warned.

The government has proposed to share royalties obtained from use of natural resources, namely mountains, hydropower, forests, and mines and minerals, among local bodies and provinces. The move is being made as per the vision envisaged by the new constitution to shift from a unitary to a federal government system.

The draft of the Intergovernmental Fiscal Transfer Bill, which has been tabled in Parliament, says 5 percent of the royalty generated from use of natural resources would be distributed among local bodies, 10 percent among provinces and 85 percent among the central government.

If the same natural resource has been used by more than one province or local body, the royalty will be distributed based on impact on affected areas, says the draft bill.

International experience shows that the distribution of resource revenues among regional and local governments is one of the most disruptive factors negatively affecting the achievement of the equalising objectives of transfer systems, as they are usually distributed based on origin or derivation principles, says the Special Report on ‘Fiscal Architecture for Federal Nepal’ published in WB’s latest edition of the Nepal Development Update.

So, Nepal needs to be careful in the sharing of natural resource royalties, because they can exacerbate horizontal imbalances if the distribution criteria give excessive weight to the location in which the natural resource is placed, adds the report.

The horizontal fiscal imbalances are already expected to be high among local bodies and provinces in the country because of large disparities in socioeconomic development. Currently, per capita revenue generated by Kathmandu district through its own sources is 10 times higher than in Darchula district. This will continue in the federal context too, creating horizontal fiscal gap, says the WB report.

“Hence, it will be important to design equalising distribution criteria for all or a large part of the fiscal revenues related to the exploitation of natural resource royalties,” adds the report. “Having a transparent, evidence-based formula for equalisation among provinces is critical to design an effective depoliticised process.”

Along with equalising transfer formulas, it is important to prevent natural-resource-rich regions or localities that receive substantial amounts of royalties from receiving equalising transfers, further says the report, as this will play a role in normalising horizontal imbalances.

To bridge the horizontal, as well as vertical, fiscal gap, the government has proposed to extend 15 percent of the income generated from VAT and excise duties imposed on domestic products to local bodies. Of the remaining 85 percent, 7 percent will go to provinces and 78 percent to the federal government.

Also, the government has also proposed to extend four grants-fiscal equalisation, conditional, matching and special-to local bodies.If these financial resources are not adequate, provinces and local bodies can float instruments to raise public debt. But central government’s permission will be mandatory to raise the debt from the domestic market. Also, the government has proposed to allow provinces and local bodies to borrow money from the central government to bridge budget deficits.

Published: 28-09-2017 09:56

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