Nepal: Strengthening Subnational Public Management

Public sector management / Decentralization - Public administration - Public expenditure and fiscal management

The Constitution of Nepal has introduced fiscal federalism, giving powers to all three levels of government to enact laws, prepare budgets, impose taxes, and collect own-source revenues. A critical aspect of fiscal decentralization is that the provincial and local governments have revenue-raising powers through taxation. To improve the subnational revenue mobilization, the government needs to undertake a thorough assessment of (i) the revenue generation potential of subnational governments; (ii) appropriate tax policies, including the design of acts, codes, and procedural manuals for local government taxes based on the ability to pay the principle; and (iii) requirements to expand tax administration systems that are based on information and communication technology (such as a municipal administration and revenue system) to streamline tax administration and collection, and link such systems with broader governance, PFM, and anticorruption objectives.

The new Constitution also recognizes the need to address the vertical and horizontal imbalances among federal, provincial, and local levels of government. A permanent constitutional body, the National Natural Resources and Fiscal Commission, has been proposed to determine the appropriate levels of fiscal transfers and revenue distribution among the three government tiers, and recommend equalization grants. It is critical to assist the government to (i) establish the commission with a clear institutional structure, function, and mandate; and (ii) provide the necessary technical and capacity building support, specifically in relation to principles of intergovernmental fiscal transfers, including the design of a devolution formula.

Another important dimension of fiscal decentralization is the establishment of a suitable framework and mechanism for onlending to subnational governments. To maintain overall fiscal discipline, the framework must have clear terms and conditions; enforceable rules, regulations, and procedures for onlending to subnational governments and repayment; and obligations and responsibilities between the central and subnational governments.

For improving transparency in PFM and reducing fiduciary risks at the subnational level, there is a need to strengthen (i) integrated financial management; (ii) accounting and reporting systems; (iii) electronic government procurement (e-GP) system, including the nationwide roll-out; and (iv) internal, external, and technical audit systems by building on and deepening the reforms of SPMP I.

Policy options for improving revenue mobilization assessed and identified

Policy options for revenue sharing among different tiers of the government assessed and identified

Policy options for establishing borrowing arrangements for the provincial governments assessed and identified

Policy options for improving expenditure allocations assessed and identified

Policy options for improving transparency in PFM and reducing fiduciary risks assessed and identified

The consulting firm, Ernst & Young LLP (India) commenced work on 6 Jan 2017 and were mobilized on January 30. The inception mission was conducted during 30 January-3 February 2017. The inception work of the firm on mapping of govenrment and donor programs and rescoping of PATA design was presented on 23 March 2017 to key government agencies and donor partners along with a workshop held on 30 March 2017. The draft final report on assessments for key building blocks of fiscal federalism and PFM and governance framework in the context of federal system was presented to the Government through a dissemination seminar on 30 October 2017 and revised version of the report for submitted in January 2018, waiting for final comments and confirmation.

A minor change in implementation arrangements was approved for the recruitment of a national senior federal fiscal system expert - the consultant, Mr. Khadka commenced work on 3 March 2017. He provided support for two key legislations on intergovernmental fiscal arrangements and model tax laws.

Additional national PFM expert was recruited in January 2018 to develop a PFM manual for local governments.

Final set of capacity building activities are planned for GON officials in March 2018. Two day training will be provided by Ernst and Young experts to GON officials in Kathmandu during 9-11 March 2018 on PATA recommendations and international best practices. This will be followed by an international study visit for 21 GON officials to National Institute of Public Finance and Policy (NIPFP) in India during 20-24 March 2018 to study international experiences in fiscal federalism and decentralization.