Policy Note for the

Federalism
Transition in Nepal
AUGUST 2019

Empowered lives.
Resilient nations.
Abbreviations and Acronyms

CIP Capital Investment Plan

FCNA Federalism Capacity Needs Assessment

HEZ Himalayan Ecological Zone

GDP Gross Domestic Product

GRB Gender Responsive Budgeting

GESI Gender Equality and Social Inclusion

GoN Government of Nepal

IPC Inter-Provincial Council

LDTA Local Development Training Academy

LGCDP Local Governance and Community Development Program

LMBIS Line Ministry Budget Information System

MOFAGA Ministry of Federal Affairs and General Administration

NPSAS National Public Sector Accounting Standards

NNRFC National Natural Resource and Fiscal Commission

O&M Organization and Management

OPMCM Office of the Prime Minister and Council of Ministers

PEFA Public Expenditure and Financial Accountability

PFM Public Financial Management

PIFIP Physical Infrastructure and Facility Improvement Plan

PPSC Provincial Public Service Commission

PLGs Provincial and Local Governments

SUTRA Sub-National Treasury Regulatory Application

TEZ Terai Ecological Zone

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 Table of Contents
Abbreviations and Acronyms ........................................................................................................................ i
Table of Contents .......................................................................................................................................... ii
Foreword ..................................................................................................................................................... iv
Executive Summary ...................................................................................................................................... v
Managing the Transition to Federalism .................................................................................................... v
Capacity for Implementation of Federalism ............................................................................................ vi
Legal Framework for Federalism ............................................................................................................ vii
Monitoring and Evaluation for Federalism ............................................................................................. vii
Institutional Framework of Federalism.................................................................................................. viii
Implementation Plan/Roadmap ............................................................................................................ viii
Section I: Introduction ............................................................................................................................... 1
Section II: Discussions on Federal Government Capacity Needs Assessment ...................................... 2
Federalism Implementation Progress and Issues since 2017 .................................................................... 2
Devolution of Government Employment .................................................................................................. 3
Provision of Legal Framework for Federalism ......................................................................................... 6
Institutional and Organizational Arrangements ........................................................................................ 7
Capacity Building and Training ................................................................................................................ 8
Public Financial Management................................................................................................................... 9
Gender Equality and Social Inclusion ....................................................................................................... 9
Fiscal Capacity ........................................................................................................................................ 10
Discussions on Provincial Governments Capacity Needs Assessment ................................................. 13
Physical Infrastructure ............................................................................................................................ 13
Human Resource Management ............................................................................................................... 14
Public Financial Management................................................................................................................. 14
Gender Equality and Social Inclusion ..................................................................................................... 15
Accountability and Transparency ........................................................................................................... 15
Discussions on Local Governments Capacity Needs Assessment ......................................................... 15
Physical Infrastructure and Connectivity ................................................................................................ 15
Human Resource Management ............................................................................................................... 17
Planning and Public Financial Management ........................................................................................... 20
Political Governance and Administration ............................................................................................... 22

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 Sector Administrative Capacity .............................................................................................................. 22
Gender Equality and Social Inclusion ..................................................................................................... 26
Accountability & Transparency .............................................................................................................. 26
SECTION III: Recommendations—Blueprints for a Roadmap .......................................................... 28
Annex: Significant and Recent Achievements in the implementation of Federalism ......................... 37
Legal Framework for Federalism............................................................................................................ 37
Institutional Framework of Federalism ................................................................................................... 38
Public Financial Management, Accountability & Transparency ............................................................ 39
Political Governance and Administration ............................................................................................... 40
Gender Equality and Social Inclusion (GESI) ........................................................................................ 43
Fiscal Capacity and Local Government Revenues Mobilization ............................................................ 44
Monitoring and Evaluation ..................................................................................................................... 44
Institutional Capacity Building ............................................................................................................... 45
List of Best Practices in the Implementation of Federalism in Nepal .................................................. 46

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Foreword

This policy note is based on the findings and report of the Federalism Capacity Needs Assessment (FCNA)
carried out by the Georgia State University for the Government of Nepal. The assessment was conducted
between September 2018 and July 2019. It aimed at identifying the gaps between the needs and the
capacity of all three levels of government to implement fiscal federalism in Nepal. The Government of
Nepal is rolling out federalism, by quickly and effectively setting up the basic structures and processes to
support the operation of both the federal as well as provincial and local governments (PLGs). Nonetheless,
the Government acknowledges that the reform is nothing short of a long-drawn out process, requiring
strong capacity to manage new functions at all levels of government. The Government has asked the
World Bank for assistance to assess capacity needs for effective implementation of federalism. The World
Bank has facilitated the production of the FCNA in coordination with government counterparts and
development partners (DPs), particularly with the United Nation Development Programme (UNDP). The
FCNA was jointly implemented by the World Bank and UNDP, with technical inputs from the United
Kingdom’s Department for International Development (DFID), Embassy of Norway and Swiss Agency for
Development Cooperation (SDC). The study’s methodology, selection of samples, and technical reviews
of the final output were coordinated with the Ministry of Finance (MOF), Ministry of Federal Affairs and
General Administration (MoFAGA), the National Natural Resources and Fiscal Commission (NNRFC) and
the Financial Comptroller General Office (FCGO). The Steering Committee consisting of the MOF, MoFAGA
and NNRFC provided overall guidance and oversight in carrying out the FCNA on behalf of the Government
of Nepal. Saurav Shamsher J.B. Rana, Hubert Nii-Aponsah, Gabriel Dedu, Syed Khaled Ahsan and Serdar
Yilmaz have prepared the policy note under the guidance of Faris H. Hadad-Zervos (Country Manager,
SACNP), Ayshanie Medagangoda-Labé (Resident Representative, UNDP) and George A. Larbi (Practice
Manager, ESAG2). The team has also benefited from inputs from the United Nations Development
Programme (UNDP) team, Yam Nath Sharma and Anil Chandrika.

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Executive Summary

1. With the adoption of federalism through the 2015 Constitution, seven newly created provincial
and 753 local governments are now placed at the frontline, tasked to manage substantial amount of
public resources and deliver critical services to citizens. As result, Nepal is now in the middle of the
transition to federalism, and it is understandable that the process will be a drawn-out one, which could
take decades. As envisioned in the Constitution, PLGs have accounted for about 34% of national
expenditure in the fiscal years 2018 and 2019, significantly boosting the fiscal resources available to the
PLGss. Albeit, Nepal faces longer term hurdles in managing the transition to federalism and consolidating
its operationalization. While progress has been achieved in terms of, setting up of key institutional
structures, and strengthening the regulatory environment for federalism, to some extent staff
deployment, significant gaps still exist between the needs and existing capacity at all levels of government.
The immediate issue is that capacity deficits exist at all levels of Government to manage new functions,
with adverse implications for efficient management of assignments and public finances, coupled with
challenges posed to the provision of public services. Moreover, setting up functioning regulatory and
institutional arrangements for fiscal federalism represents a monumental challenge, which may impact
the reform process. The challenge is exacerbated by lack of experience and clarity on division of powers
for governance and responsibilities between subnational and federal governments in Nepal. The PLGs
are awaiting actions by the federal government to expedite implementation of federalism to augment
service delivery to citizens.

2. This Policy Note has been prepared based on the findings, analyses and recommendations of
the Federalism Capacity Needs Assessment (FCNA) study. The FCNA was conducted by the Georgia State
University in 2018-19 for the Government of Nepal (GoN) with the joint support of the World Bank and
UNDP. It has identified the gaps between the needs and the capacity in different levels of government.
The study used a broad definition of capacity, including organizational (physical and human) and
institutional (laws and regulations) elements. The FCNA covered the federal government, all seven
provincial governments, and 115 (out of the 753) local governments in Nepal. This note provides a
synthesis of the FCNA findings as well as its forward-looking recommendations in terms of actions the
Government could take in the immediate, medium and long-terms towards a full realization of the
benefits of federalism implementation in Nepal.

Key Recommendations of the FCNA

Managing the Transition to Federalism
3. Roadmap for implementation of federalism. Global experience has shown that the transition to
federalism is a profound transformation that requires years, decades and sometimes longer to unfold.
Nepal has begun its transformation, with important initial gains. Moving forward, yet, the complexity of
the country’s transition to federalism, coupled with the relatively slow progress in delivering the required
regulatory and institutional framework remains a source of concern among PLGs. The general expectation
is that full transition to federalism could be cumbersome and may take a reasonable amount of time. To
deliver on common objectives and improve coherence and coordination among the three levels of

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Government, a federalism roadmap is necessary. This would also be beneficial to the GoN and
development partners in harmonizing their contributions to the process. The roadmap will articulate
reform priorities and sequencing of actions, and ultimately help to improve implementation of the reform
process. It will also enhance the confidence of citizens in the implementation of federalism. Finalization
of the roadmap and its implementation plan has to follow a participatory process with different
stakeholders both within the federal level (among key ministries and institutions) and across the three
tiers of Government, to ensure ownership and commitments to its implementation. The preparation of
roadmap could be anchored in the Office of the Prime Minister and Council of Ministers, and coordinated
jointly with MoFAGA and the National Planning Commission. These institutions have mandates relating to
implementation of federalism across all levels of government and are currently collaborating to develop
an M&E system for federalism.

4. Development of a Communications strategy for the implementation of federalism. Nepal is new

to federalism: provincial governments did not previously exist, and local governments existed in a very
different form. Within the federalism context, the responsibility for issues that affect various aspects of
federalism is not only shared among government actors at all levels, but also shared by citizens, the
ultimate beneficiaries of the reform outcomes. Development of a communications strategy is critical for
the implementation of federalism. The effectiveness of the reform process could be ensured through
improved coordination, by engaging key beneficiaries and stakeholders at all levels of Government. The
communications strategy, developed using appropriate approaches and instruments, would support
dissemination of information to: (i) promote shared understanding of the reform process, its purposes
and benefits; (ii) provide opportunities for citizens to appreciate the benefits of the reform, as well as its
implementation challenges; and (iii) meet the growing need for transparency in the implementation of
the federalism.

Capacity for Implementation of Federalism

5. Development of a capacity improvement strategy to support long-term capacity enhancement
and training for elected officials and civil servants. This would focus on: (i) deepening the understanding
of the elected officials on the principles and mechanisms of federalisms; (ii) ensuring that PLGs have
necessary staff with the required skills in areas such as public financial management, procurement, public
investment management, and citizen engagement; (ii) supporting national training institutes to provide
formal training for public officials on federalism; and (iii) developing mechanisms and processes to boost
coordination between and/or among PLGs and the federal government.

6. Development of Physical Infrastructure and Facility Improvement Plan (PIFIP) to boost capacity
of PLGs. A major challenge most PLGs continue to face during the transition to federalism relates to limited
physical administrative facilities, including office buildings and assembly halls, as well as administrative
equipment. The severity of infrastructural deficits varies according to PLGs. The issue pertains also to
limited funding for the purchase of adequate quality facilities. The PIFIP would identify government
priorities for improving the infrastructure capacities of PLGs, aimed at ensuring that PLGs have adequate
funding to secure administrative facilities with required quality and quantity in a timely manner. Since this
will require both a long-term strategy and large-scale investment, a well thought out and phased PIFIP
plan would address this gap in a more systematic and realistic manner.

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7. Strengthening capacity for effective transition to federalism to manage the implementation of
federalism with devolution of authority to Nepal’s seven provincial and 753 local governments. A
comprehensive capacity building program would help the implementation process, by enhancing
knowledge and delivery capacity of the core teams of government officials and technocrats managing the
transition to federalism. The program will help build shared understanding of: (i) the design and
implementation experiences of various models and aspects of the federalism; (ii) the political, economic,
social, and cultural considerations underpinning choices pertaining to federalism; (iii) real and potential
impacts of fiscal decentralization on development outcomes; (v) success factors of fiscal decentralization
in the target countries; (vi) instruments and value addition of citizen engagement and participation, as
well as mechanisms for transparency and downward accountability in the federalism context.

Legal Framework for Federalism

8. The Constitution underscores the importance of compatible framework legislations upon which
the federal system is to be made operational. A significant amount of framework legislation is required
to complete the transition process to federalism. It is appreciated that the federal government has started
the process of formulating framework legislations. The framework legislations would enable the PLGs to
develop legislations at their levels to adequately deliver and manage public services. Considering the
efforts made so far by the federal government, this note further endorses and recommends prioritized
enactment of the following primary and secondary legislations as well as guidelines, to create the enabling
environment for effective roll-out of federalism at different levels of the government:

• Passing the enabling legislation for provincial public service commissions (PPSC) to operate;
• Passing the sectoral laws required to enable subnational government service delivery programs,
by clarifying the division of responsibilities among these levels of government and defining service
delivery norms and standards for the PLGs;
• Issuing sectoral guidelines based on the standards of the laws to be followed by the PLGs, and
providing support to them on how to integrate these guidelines into their plans and policies;
• Clarifying the objectives of each of the intergovernmental transfers, and advising on their use;

• Passing of laws related to the concurrent responsibilities (Schedules 7 and 9) and clarifying the
responsibilities of each level of government following the principle of subsidiary and the
intergovernmental coordination mechanism (Art. 235);
• Identifying regulations, ordinances and laws that are necessary to implement various provisions
in the Constitution and to provide for smooth operations of the PLGs.

Monitoring and Evaluation for Federalism

9. While the Constitution seems to call for the federal, provincial, and local governments to
operate mostly as spheres of governance, with defined powers and responsibilities, federal
government’s overall oversight over implementation of federalism remains paramount. Such a federal
oversight role is necessary to ensure the proper transition to federalism and should/does not come at the
expense of subnational authority. The diversity of Nepal’s local governments in terms of size, as well as
fiscal, physical and human resource capacity, requires coordinated and sustained federal oversight. The
Constitution calls for monitoring the implementation of the directive principles, policies and

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responsibilities by all levels of governments. A solid and modernized Monitoring and Evaluation (M&E)
system is needed to support systematic assessment of the performance of federalism against targets. This
needs to include the establishment of a federalization cell and development of a system to evaluate the
fiscal performance of PLGs. A restructuring of the overall system for data collection and dissemination is
needed to support decision making at all levels of government. Ultimately, a means must be created to
actively engage citizens. Experience from other contexts suggests that implementation of feedback
tracking system could be helpful to systematically gauge citizens’ perceptions about implementation of
federalism. It is a tool that will offer opportunity for continuous federal, provincial and local governments
oversight, based on the principles of cooperative federalism, while promoting citizen engagement and
helping to close the feedback loop. The ensuing report from the proposed M&E system should be jointly
reviewed at the Intergovernmental coordination meetings held at both the federal and provincial levels.

Institutional Framework of Federalism

10. The roll-out of federalism must be supported by the existence of an adequate institutional
framework to attain optimal results. Setting up the required institutional structures for federalism has
proven difficult, partly because of delays in enacting the relevant laws, and partly due to political economy
constraints. The Inter-Provincial Council and Inter-Governmental Fiscal Council are the only two
institutional coordination mechanisms established so far. To address this critical issue, the Government’s
roadmap for federalism needs to include a plan on how key institutional frameworks envisioned in the
constitution would be implemented (See Annex 1). The FCNA recommends setting-up a federalization cell
to support implementation of the federalism reform. The cell could also be mandated to do continuous
evaluation of the intergovernmental system for the Government in strong coordination with subnational
governments. The Office of the Prime Minister and Council of Ministers (OPMCM) could be the
institutional home for this with direct involvement of subnational governments.

Implementation Plan/Roadmap
11. An implementation plan or roadmap is proposed to be developed though a consultative process
with all stakeholders under the leadership of the government. The table below could help consultations
on a roadmap for the implementation of the federalism in Nepal.

Issue Description Method in Mitigating Measure

Implementation Plan
Functions
Concurrent Clarify concurrent expenditure Review unbundling Capacity of PLGs to
responsibilities assignments exercise for concurrent assume service delivery
assignments responsibilities is
essential
Recommendations:
• Review all the relevant sectoral legislations to make sure that functional assignment is clear
• Design a capacity improvement plan for PLGs in these areas
Devolution of How exactly will devolved Plan for a slower phased Will the establishment of
service delivery functions and functionaries be in transition a contingency fund be
responsibility handed off from line ministries? Clarify the shift of necessary?
What flow of resources will take management An assessment of
place? provincial capacity and

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 Will there be a breakdown in responsibility and needs to assume service
service delivery for essential reporting lines delivery from line
functions? Design capacity building ministry must be
What budget and management interventions undertaken before
autonomy will be given to local services are devolved
governments? Clarity on assignment of
responsibility for
management of health
and education personnel
must be put in place
before devolution
Recommendations:
• Establish systems and tools to implement the Local Government Operations Act of 2017 (Act 2704)
• Establish communication channels between sector ministries and PLGs to address service delivery issues
• Review all the relevant sectoral legislations to make sure that functional complies with the constitutional
mandate, for example:
o Review Town Development Act of 1988
o Revise Public Procurement Act
o Review the Forestry Act
o Review Water Resource Act 1992
• Transfer five regional emergency centers to provincial governments
Monitoring and Where will responsibility for Design development Systems for monitoring
evaluation (M&E) M&E of service delivery and local interventions for M&E and evaluation are not
government performance in Clarify lines of yet in place
general be placed? responsibility and Database adequate to
reporting support M&E not in
Allocate adequate funding place
for M&E function Training programs for
M&E not yet established
Recommendations:
• Establish a federalization cell to do continuous evaluation of the intergovernmental systems
• Design a capacity building program for federal ministries on M&E
• Design self-assessment evaluation tools for PLGs
Institution- Identification of institutional and There are existing tools, Make sure LISA
alization of self- organizational weaknesses for such as LISA, to identify assessment is available
assessment for service delivery at the local level service delivery weakness, to all local governments
service delivery which can be deployed
immediately
Recommendation: Make sure that local governments’ reports of LISA assessments are uniform
Funds
NNRFC and inter- Dispute over how the duties and Clarity on the binding Commission is not fully
governmental responsibilities of NNRFC will be nature of staffed
fiscal transfers interpreted recommendations Initial review of the
Technical training of the intergovernmental
secretariat staff transfer system has not
yet been done
Need for stronger
oversight of the NNRFC
by the Parliament
Recommendations:
• Appointment of commissioners

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 • Staffing the NNRFC secretariat
• Design study tours to other federal countries to improve the technical capacity of the NNRFC
• Begin to develop an adequate data base to support the work of the NNRFC
• Establish an ongoing training program for NNRFC secretariat
Sub-federal PLGs adopt distortive taxes Capacity building and Capacity building and
government PLGs need to be encouraged to training training program not yet
revenue adopt new taxes Build incentives into grant in place
mobilization PLGs need to improve local tax programs Strong incentives in the
and revenue administration Technical assistance in legislation to promote
drafting new legislation increased local revenue
including model laws mobilization are not in
place
No monitoring in place
Recommendations:
• Review the use of intergovernmental transfers to incentivize own source revenue collection
• Improve the capacities of subnational governments to administer tax bases, establish databases, and
collect taxes
• Establish monitoring system for revenue collection
• Clarify tax assignment for shared taxes
• Establish divisible fund to share the natural resource royalties
Funds for Underdeveloped domestic Capitalization of domestic Improve financial
investments capital market limits subnational intermediaries (such as management capacities
governments’ ability to raise Town Development Fund) of subnational
financing for investments. governments before
promoting access to
capital markets
Recommendations:
• Improve the capacity of subnational governments across public investment management cycle
• Improve transparency of subnational finances
• Strengthen the legal and institutional framework for PPPs
• Review Town Development Act (1988) and update it based on the provisions of the Constitution
Public Financial Time delays in extending PFM Design technical Capacity building and
Management programs to the subnational assistance, capacity training plan not yet in
sector building and training place
Limited capacity to absorb PFM programs for PLGs
improvements
Recommendations:
• Strengthen the PFM capacity of subnational governments
• Identify projects and programs to be transferred to PLGs
• Prepare a plan to transfer them
• Preparation and implementation of an expenditure reporting system for PLGs by OAG
Accounting and Ensure comparability and Design capacity building Capacity building and
reporting accuracy in financial reporting and training programs for training program not in
Periodicity of external audits PLGs place
Provide incentives for
compliance
Recommendation: Strengthen the capacity of subnational governments
Alignment of The linkages between various Annual plans prepared by Medium-term plans
plans planning instruments are very subnational governments prepared with the
weak. are not aligned with involvement of
medium term plans subnational first, then,

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 prepared by sector annual plans prepared by
ministries. PLGs.
Recommendations:
• Promote citizen engagement and participation in medium term plans
• Involve subnational governments in the preparation of medium-term plans
Standardization of Proliferation of PFM software Identification of the best Familiarization of local
PFM software (SUTRA, EazyTech, Shangrila); software in terms of governments with the
Proliferation of PFM software at coverage (planning, selected software
the provincial level (NPSAS, budgeting, accounting
LMBIS) etc.) and user-friendliness
to roll out across local
governments
Recommendations:
• Training of local government finance officials on the selected software
• Ensure the Budgeting and Accounting Software used by all governments are interlinked between
budgeting and reporting and across all three tiers
Procurement Current system promotes The quality of public The informal nature of
fragmentation of large contracts; works is low as projects procurement coupled
most projects procured by user less than $100K are with the absence of
committees without a formal managed by user monitoring system
tendering process committees undermines
transparency and
accountability across the
procurement cycle.
Recommendations:
• Establish standard procurement documents (contract, tender documents, etc.)
• Make sure that user committees comply with procurement guidelines and use official procurement
documents
• Revise Public Procurement Act
• Prepare sample Public Procurement Rules for PLGs
Functionaries
Devolution of Needs at each level not properly Understand incentives Provincial Civil Service
functionaries estimated structures for Commission legislation is
Unfilled gap at PLG levels readjustment not complete
Design a program for
redeploying federal staff
at subnational levels by
addressing incentives
Create enabling
environment for
provincial governments to
recruit through Provincial
Public Service
Commissions
Recommendations:
• Finalize current staff profile assessments and development of model organizational structures for local
governments as mandated by the Local Government Operations Act of 2017 (Act 2704)
• Establish an institutional framework for making deputed staff (federal staff adjusted to subnational
levels) accountable to subnational governments
• Review the financing system for recurrent expenditures: there is a need for a financing plan for the
sustainability of subnational wage bill

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 • Draft the Civil Service Act that sets the basis for the formation of the Province Civil Service
• Provide provinces with a model Province Civil Service Law
• Draft laws that set the criteria for the formation and terms of service for Local Service
Identification of The PLGs have the legal Work with subnational Finalization of
human capacity authority to carry out their own governments to design an organizational structures
needs at the O&M surveys to determine their O&M survey similar to the for subnational
subnational level staffing needs. However, they one conducted by governments
don’t have the capacity to do so. MOFAGA
Recommendations:
• Help PLGs to carry out their own O&M surveys
• Draft law for that forms the basis of establishing the Provincial Public Service Commission
• Draft the Federal Civil Service Act that sets the basis for the formation of the Provincial Civil Service
• Provide provinces with a model Province Civil Service Law
• Draft laws that set the criteria for the formation and terms of service for Local Service
Misalignment Sector ministries’ institutional Sector ministries are Improve the capacity of
employment inheritance is out-of-sync with under-capacitated with sector ministries vis-à-vis
profile at the their new federal mandate. respect to their federal their new federal
federal level mandate (policy-setting & mandates
monitoring and
evaluation) and over-
capacitated with respect
to implementation
functions for which they
are no longer responsible.
Recommendation: Equip sector ministries to undertake their new federal mandates on policy-setting &
monitoring and evaluation
Organizational and Institutional
Gender Equality Many PLGs do not have a GESI Improve GESI budget PCSCs management rules
and Social plan practices and authorization for
Inclusion (GESI) M&E on progress is not Establish Provincial Civil hiring is not in place
adequate Service Commission and External monitoring of
Training and monitoring of GESI hiring/management rules GESI outcomes not yet in
budget practices is limited place
Clarify GESI extensions to new
hiring
Recommendations:
• Promote local civil society for the engagement with socially excluded groups and to disseminate
information on rights
• Establish a monitoring system with local civil society on GESI plan
• Put in place legislation to enable PCSC hiring and management practices
Investment Capital expenditures are too Conditional grants to Structure of
accountability heavily biased in favor of small stimulate investments intergovernmental
projects with neighborhood with areawide benefits transfers to stimulate
benefits Adopt local government capital spending
Borrowing practices not yet revenue mobilization Incentives to increase
established improvements user charges
Institute formal
borrowing practices
Recommendations:
• Promote local associations

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 • Use social mobilizers (drawing from Local Governance and Community Development Programme
LGCDP experience)
• Use Citizen Awareness Centers effectively
• Amend domestic debt law to allow PLGs to raise domestic debt
Institutional Confusion over roles and Need clarity in No arrangement for a
framework for responsibilities of federal, responsibility for certain phased in responsibility
inter- provincial, and local services and autonomy is in place
governmental governments in certain areas Consider a more phased- No provision for
coordination Monitoring of subnational in assumption of monitoring performance
governments’ performance responsibilities for PLGs is in place
Recommendation: Inter-Provincial Council (mandated by the Constitution) and Inter-Governmental Fiscal
Council (mandated by the Intergovernmental Fiscal Arrangement Act) are the only two institutional
coordination mechanisms established so far. There is a need for inter-ministerial coordination mechanisms with
respect to the development of policy and the administration of the subnational systems. In the absence of
intergovernmental coordination mechanisms, different administration tools and systems (in case of PFM, for
example, SUTRA and MARS systems) are being promoted. There is a bill in the Parliament on intergovernmental
coordination (Bill on Inter-governmental Coordination 2019) which is subject to discussions and criticism. It
needs to be enacted as soon as possible after reaching a consensus among all stakeholders to ensure
cooperation and coexistence in concurrent power-sharing among the federal, provincial and local levels.
User committees Confused continued role for user Redefine capital The role of civil society
and civil society committees investment planning has not been addressed
involvement Who will represent the interests in detail
of municipal governments?
Recommendation: Use local civil society effectively as a stakeholder.
Database Inadequate accurate data to Develop a data base that A plan to do this at the
track fiscal performance of PLGs integrates fiscal and national level does not
Inadequate data to populate and socioeconomic data appear to be developing
evaluate intergovernmental Produce the data on a quickly
transfer programs timely basis
Recommendation: Appoint a Committee of experts to prepare a proposal for the content of a data base that
could serve the goals of monitoring the performance and entitlements of PLGs.
Local government FCNA survey produced a Action plan for follow up No mechanism for follow
preparedness significant list of needs for PLGs on these up is in place
to effectively implement
federalism
Recommendations:
• Empower a task force to put an action plan in place
• Consider a more phased in implementation of federalism, based on readiness
Legislative Actions Important pieces of legislation Enact all required Key issues are PPSC
for implementing federalism are legislation for legislation, bill of rights,
not in place implementing Federalism some sectoral laws;
others

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Recommendations: Review Parliament’s priorities and timeline for new legislation regarding:
• Draft a new law for private firm registration and commercial enterprise regulations
• Prepare a sample inter-provincial trade management law for the provinces
• Prepare a sample law for consumer protection and market monitoring for PLGs
• Draft a new law for the operation of stone, sand collection & crusher industries
• Draft new laws for land use and management
• Review the Land Acquisition Act 2034 (1977) and Immovable Property Requisition Act 2013 (1956) in
the context of federalism
• Draft a new law relating to management of squatters and unmanaged settlers
• Draft laws relating to Nepal police - their functions, supervision and coordination with provincial police
• Draft the province police integration law
• Draft a new law setting criteria for recruitment, training, uniform and security of provincial police
• Draft a domestic security law that also defines the CDO’s roles at the federal and province levels
• Review acts relating to prisons
• Review laws regulating license issuance for FM radio and TV stations
• Review the Forestry Act
• Review Water Resources Act

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Section I: Introduction

1. Federalism is taking roots in Nepal. Since the adoption of the federal constitution in 2015,
coupled with the sharing of power and functions among Nepal’s federal government, seven provinces and
753 local governments, the GoN has adopted legislations and put in place institutional structures, intended
to roll-out federalism. Within the first two years of their operation, PLGs have accounted for about 34% of
national budget, significantly boosting their fiscal capacity. However, Nepal faces longer term challenges
in managing the transition to federalism. Despite the increased flow of transfers to PLGs, budget execution
by PLGs remains low, averaging 61% in 2018, with adverse consequences for delivery of public services
and quality of spending. In addition, while progress was achieved in terms of the deployment of staff, setting
up of key institutional structures, and strengthening of the regulatory environment for federalism,
significant gaps still exist between the needs and existing capacity at all levels of government. The legal
and regulatory frameworks envisioned in the constitution are yet to be fully implemented. More
importantly, like all new federal governments, Nepal is confronted by capacity deficits to manage new
functions. There are also confusions related to the delegation of functions, where more clarity is required
on the exact roles of the functional assignments devolved to PLGs.
2. Building on the core study; that is, Federalism Capacity Needs Assessment (FCNA), carried
out by Georgia State University for the Government of Nepal (GoN), this policy note offers a succinct
and strategic guidance to help GoN to develop strategies and programs for accelerated and effective
implementation of fiscal federalism. The FCNA, conducted in 2019, was intended to, “...identify the gap
between the needs and the capacity...” of all levels of government to manage their assigned service
responsibilities under the new system. The FCNA assessed the capacity of the federal government to
regulate and manage the way the federalism transition is rolled out, and its capacity to manage the
intergovernmental system thereafter. The study used a broad definition of capacity, including organizational
(physical and human) and institutional (laws and regulations) elements. The FCNA generated a wealth of
relevant information on the capacity needs of federalism. The FCNA surveyed PLGs, targeting 115 of the
753 municipalities and all seven provincial governments in Nepal. It also conducted desk review and
informant interviews of public officers.
3. This Policy Note is prepared as an abridged version of the FCNA. It provides a synthesis of the
FCNA findings as well as forward looking recommendations in terms of actions Government could take in
the immediate, medium and long-terms towards a full realization of the benefits of federalism
implementation in Nepal. The note outlines measures and opportunities for consideration, which are
outlined in the executive summary and discussed in detail in section two while the annotated roadmap of
federalism is documented in section three of the note. Therefore, the note offers critical inputs for the
Government’s potential roadmap for the implementation of the federalism.
Outline of the Policy Note
4. This Policy Note is structured as follows: Following the executive summary, which outlines
immediate-to short-and long-term measures for transition to federalism, Section 1 introduces the
background and purposes of the policy note. Section 2 discusses the findings of the FCNA while
highlighting progress and main constraints, including existing gaps between the needs and capacity at all
levels of government. The note concludes with Section 3, which details out relevant recommendations to
smoothen Nepal’s transition to federalism.

1
Section II: Discussions on Federal Government Capacity Needs
Assessment

Federalism Implementation Progress and Issues since 2017

5. Nepal has achieved noteworthy progress so far on the transition to federalism. Elections in
2017 have essentially established Nepal’s seven provinces and 753 local governments. Municipal
assemblies are meeting regularly, laws and regulations are being developed, budgets are being passed, and
financials continue to be audited. There seems to be a feeling in the general population that things are
moving in the right direction. In addition, much of the important framework for transition to federalism is
in place. A basic system of intergovernmental transfers has been set up, expenditure assignments (defined
by the Constitution) are being elaborated, and the transfer of staff from the federal to PLGs levels is almost
complete.
6. While the progress is commendable, slow actions on measures necessary to effectively
empower PLGs have contributed to limited performance of PLGs. Service delivery and local
government management have been slower to develop than some had hoped, in part because PLGs have
not yet received their full quota of relocated federal employees, important civil service legislation has not
yet been passed, and the capacity of local governments to manage functions is still at a low level. In addition,
there is some confusion about the powers and functions of levels of government. The result is that many
PLGs officials, and many in the political leadership of federal government, are either not in place or not
very far along in performing their new jobs.
7. It is also probably fair to say that the difficulties that might arise from putting a new federal
structure in place were underestimated. Provincial governments did not previously exist, municipal
governments existed in a very different form, and neither level had adequate capacity to manage the delivery
of local services. Nor did the federal government have experience with guiding the implementation of a
fiscal decentralization or with monitoring the performance of the PLGs. The expectations on the part of
some PLGs officials and some citizen groups were likely high, especially given the weak capacity of local
governments to deliver services or manage their responsibilities. Three sets of short-term measures would
be needed to advance the transition to federalism.
8. First, the Federal Government would have to develop a federalism implementation roadmap,
to address the obstacles associated with confusion about sequencing of reform activities. While
political commitment to federalism is strong, Nepal’s lack of a roadmap for the roll-out has exacerbated the
complexity of the reform process and contributed to slow transition to federalism. The roadmap could help
control expectations and clarify sequencing of policies and administrative procedures that are needed to be
put in place.
9. Second, the federal government would need to develop and implement a communication
strategy, to support effective change-management and to tackle the growing burden of political
economy issues. The FCNA and the policy note have not assessed political economy factors of the reform.
However, like all types of reforms, the transition to federalism in Nepal is not extricated from producing
“winners” and “losers”. The explanation for the much slower progress of devolution of powers to
subnational governments goes beyond technical factors. There is a potential that reformers are proceeding
cautiously, given the enormous and complex nature of the reforms process, but clearly, there has been some
foot-dragging because not all actors (elected leaders and bureaucrats) interpret the required devolution in

2
the same way, or agree with it. Consequently, the transition process has required time-consuming
manoeuvring at different stages.
10. Third, the Federal Government would need to develop a capacity improvement program to
support effective transition to federalism. Managing a “big bang” reform, such as the dramatic
transformation from unitary to federal government, involving devolution of authority to seven provincial
and 753 local governments, needs to be supported by a well-thought out capacity support plan for the
transition. Limited knowledge about the risks and unintended consequences of reform choices are among
factors contributing to the slow pace of the transition. To improve knowledge and capacity of the drivers
of the reforms (government officials and technocrats managing the transition to federalism), a capacity
building program would need to be developed as a short-to-medium terms reform measure. The short term
capacity building program would be instrumental in establishing shared understanding of: (i) the design
and implementation experiences of various models and aspects of the federalism; (ii) the political,
economic, social, and cultural considerations underpinning choices pertaining to federalism; (iii) real and
potential impacts of fiscal decentralization on development outcomes; (v) success factors of fiscal
decentralization in the target countries; (vi) instruments and valued addition of citizen engagement and
participation, as well as mechanisms for transparency and downward accountability in the federalism
context. In the medium term, capacity development programs would need to include support to public
training institutions to develop curriculum, programs, improved facilities and staffing to deliver both short
term, continuous professional development courses and tailored courses for different staffing needed at all
three levels of government for federalism implementation

Devolution of Government Employment

11. The Constitution of Nepal specifies a new and more decentralized assignment of expenditure
responsibilities to each sphere of government, which in turn requires a significant redistribution of
government employment from the federal to the PLGs levels. This is a major and difficult task that only
a few middle- and lower-income countries have even attempted (see Box 1 on Indonesia’s experience).
Box 1: Indonesia’s Big Bang Decentralization Reform

In 2001, Indonesia implemented a major fiscal decentralization program that led to an increase in the
expenditure share of subnational governments, from a pre-reform level of 15 percent of total government
expenditures to a post-reform level of about 40 percent. This was accomplished by transferring over two
million central government civil servants (almost two thirds of the central government workforce) to the
regional governments. In addition, provincial and local level offices of the central government and more than
16,000 schools, hospitals, health centers, etc. were transferred to the regions. Most functions of government
were decentralized, with the exception of national defense, international relations, justice, police, national
development planning, religion, and finance, which remained with the central government. Local governments
were not given any significant tax-levying powers but were financed mostly by unconditional grants from a 26
percent share of domestic tax revenue collections.

The transition to a decentralized system in Indonesia was not perfectly smooth. The assignment of
expenditure responsibilities in the new Constitution was murky, with the role of provinces being especially
unclear, and there was significant dissention coming from the natural-resource-rich regions. However, the
transition was somewhat easier in Indonesia than in Nepal because: (a) provincial and local governments
already existed: so, local government service delivery was handed over more easily; and (b) significant
deconcentration of national government employment was already in place, which meant that there was less
reliance on forced relocation of central employees from the national capital.
Sources: Hofman and Kaiser (2004); Directorate of Fiscal Balance (2012)

3
12. Currently, the Government of Nepal’s civil service employs 89,8251 individuals, 25 percent of
whom are female. However, total government employment is much broader, including for example,
teachers, police, and permanent employees of local governments; but they are not classified as civil service
employees. So, when all employees (excluding teachers) are considered, it is estimated that total
government employment is 126,852 (about one government worker for every 230 population in Nepal).
13. The transition to the new federal system requires the “adjustment” of these 89,825 civil
service employees. Some of these employees are being physically relocated to become employees of either
provincial governments or local governments while some will remain with the federal government. The
wages and salaries of those assigned to the subnational level will be paid by their respective PLGs, but their
benefits will continue to be paid by the federal government.
14. The number of employees to be devolved from the federal level has been determined in two
steps. The first, which follows the new assignments of expenditure responsibility, was for the federal
government to wind up certain offices and transfer all employees in those departments to the PLGs. Most
of these are service delivery workers, many of whom are already working at the PLGs level on a secondment
basis. This is the largest component of “adjusted” employees. The second step was to reduce the number of
the remaining federal civil service employees to address weaknesses in the management structures of PLGs.
To do this, the Ministry of Federal Affairs and General Administration (MOFAGA) conducted an
organization and management (O&M) survey of each federal government ministry to establish federal
employment needs.2 The difference between the number “needed” by the federal ministry and the number
of present employees is the redundant employees who needed to be “adjusted” to the PLGs level. Those
employees were the special concern in the FCNA.
15. These two approaches to employment devolution have led to a proposed reduction in civil
servant employment of the federal government by 41,335 or about 46 percent of total civil service
employment. For those departments to be retained by the federal government, the O&M survey for civil
servants led to a proposal for the retention of 48,490 civil service positions. As compared to the 51,420
existing positions in the departments to be retained by the federal government, this was a decrease of 2,930
positions.3 In other words, 2,930 public administration/public management employees could be potentially
reallocated to PLGs posts in addition to those that were already serving in a seconded capacity at various
subnational government offices and service centers.
16. There is no objective way of judging whether a total reduction of 46 percent of the federal
civil servants (or one third of the total government workforce, excluding teachers) is ideal, too much
or too little. A possible yardstick or international comparison is not very helpful in this regard because the
assignment of expenditure responsibilities and the classification of employees differ across countries.

1 This civil service number is as of February 5, 2019 and includes health personnel but excludes teachers.
2 The O&M survey method used for the federal government relied on a request for needed employment from each Ministry,
accompanied by “expert judgement” by MOFAGA officials. At the subnational level, the approach was similar but relied more
heavily on expert judgement by MOFAGA officials.
3 It is equivalent to a 6-percent reduction in the number of civil service positions that the federal government will retain in their

ministries.

4
17. Interim O&M surveys were conducted by the federal government for the PLGs.4 The proposal
based on these surveys is for 21,399 employees across the seven provincial governments.5 For rural local
governments, O&M surveys were carried out on the basis of local government size classifications (rural,
municipality, metropolitan, etc.) rather than individual O&Ms, as were carried out for each provincial
government. The total employment needs of all local governments were calculated by multiplying the needs
for each local government category by the number of local governments in that category. Across the 753
local (municipal and rural) governments, 33,262 civil servants are proposed, based on these interim O&M
analyses. This number includes positions at the municipal offices (local government headquarters) and all
associated ward offices. However, it does not include sectoral delivery units in agriculture, livestock and
health positions etc. With these, the total proposed positions for local governments (including for sectoral
service delivery) are 66,750.6
18. To fill these positions and assist with the adjustment of civil service across the three levels of
government, the GoN fielded a questionnaire asking civil servants to identify and rank their
preferred level of service. Based on the response to this questionnaire, staff were assigned to either the
federal, province or local government, considering the individual’s experiences, skills and the needs at
vacant positions.7 One level of adjustment exercise across the three levels of government was completed
on March 28, 2019.
19. Individual employees have been assigned their new posts, and their physical relocation is now
underway. Based on the survey, a total of 39,960 individuals have been assigned to the federal government,
13,821 have been assigned to provincial governments, and 31,710 to the local governments.8 In the case of
local governments, 12,097 legacy staff9 have also been assigned to new positions. Thus, the total adjusted
staff at the local government level is 43,807. An additional 2,443 civil service employees have been in a
reserve pool10 and have not yet been assigned positions. Thus, the unfilled employment gap as of March
2019 is 39,051 (Table 1). If the reserve pool is assigned to PLGs, the net employment deficit across the
three levels of government would be 36,608, and it is largest at the provincial level when measured relative
to the total number of proposed positions. This gap includes both service delivery personnel and public
administration/public management personnel.

4 The PLGs also have the authority to carry out their own O&M surveys to determine their staffing needs. However, without
provincial public service commissions in place, they would have to rely on the federal civil service commission to carry out
recruitment.
5 The MOFAGA O&M for Province Governments is as of July 17th, 2018. At the subnational level, the approach used was based on

expert judgement by MOFAGA officials.

6 Teachers are excluded.
7 MOFAGA requested civil servants to submit their preferred level of government service. Of the approximately 77,000 civil

servants who responded, 46 percent chose federal, 18 percent province, and 36 percent local.
8 The federal and subnational governments also hire workers on a contractual basis to perform operational tasks. Such individuals

are hired directly by ministries at the federal level, and they are not a part of the civil service. MOFAGA estimates that there are
about 10,000 contractual workers on the federal government payroll, and about 10, 000 at the PLGs level. (The FCNA survey
estimates are that there are about 20,000 positions filled with contractual employees at the local level). However, these
employees are unlikely to meet the qualifications to fill civil service management positions since many (most) are drivers,
messengers, cleaners, computer operator etc.
9 Legacy staff at the local governments are permanent employees hired directly by previous Village Development Committees

and nagar palikas but have been retained by and adjusted to successor local governments.
10 The reserve pool of civil service employees is those who have not been assigned to any position during the adjustment process.

They will also be assigned positions to fill the remaining gaps taking into account their skills, expertise, and other non-professional
attributes.

5
Table 1: Interim Post Adjustment Human Resource Gap at Three Levels of Government
Proposed Adjustment Post-Adjustment Gap Reserve Pool Final Gap
Local 66,750 43,807 -22,943
Province 21,399 13,821 -7,578
Federal 48,490 39,960 -8,530
Total 136,639 97,588 -39,051 2,443 -36,608
Source: Compiled from the data provided by MOFAGA, Government of Nepal, and team calculations.

20. Even with the employee adjustment underway, there are issues that still need to be resolved.
How will the subnational governments fill the estimated gap of 36,000 in public administration/public
management positions and service delivery position? Although PLGs can carry out their own O&M surveys
and recruit additional employees through the provincial public service commissions, these commissions
have not been established yet. The PLGs are waiting for the federal government to enact a framework
legislation for the establishment of provincial public service commission. Therefore, it is urgent for the
framework legislation to be enacted and province civil service/local service legislations to be passed to
enable the PLGs to hire new employees.
21. Secondly, will the skills of the relocated federal bureaucrats and the legacy employees of the
local governments fit the needs of the subnational governments? It is not clear what recourse the PLGs
have to address skill mismatches. According to federal government officials, the expectation is that local
governments will do their own O&M survey after the initial round of relocations are in place.11 But it is not
clear whether PLGs will have funds and proper institutional set up to attract new employees with the right
skill sets.

22. Thirdly, it is not clear whether there is a financing plan in place to ensure that the budget
supports these employment increases. Funding for the adjusted federal bureaucrats and any new hires
will primarily come from federal grants, with vertical shares that are mostly decided as part of the annual
budget process. A financing plan would require analysis of the match between revenues from the present
formula-based conditional and unconditional grant allocations (and locally-raised revenues) and the cost
requirements for all new employees.
23. Finally, since the new civil service legislations at all levels are not in place, it is not yet clear
how gender balance and representation of disadvantaged groups will be addressed in the new
employment structure at the subnational government level. To the extent that women and minorities
will be given special consideration, this will likely come from the hiring rules that accompany the new
Federal Civil Service Act hiring rules, and from the Provincial Civil Service Commission hiring rules.

Provision of Legal Framework for Federalism

24. For federalism to be implemented successfully and governed by the rule of law in Nepal, a
significant amount of framework legislation is required. This includes laws to assign expenditure,
revenue, and public administration responsibilities to the three spheres of government and to enable the
issuance of necessary laws at the PLGs. These laws will give clarity on the division of responsibilities and
operating procedures between the different levels of government. While the GoN is in the process of

11 Meetings of World Bank team and MOFAGA officials on December 7, 2018, and during the January-March period of 2019.

6
preparing some of these legislations, there is a need to map out and sequence these legislations based on
priorities.
25. The government has a challenging task ahead with about 200 laws that require amendments
or redrafting. Nevertheless, it should be noted there is some progress and the key pieces of legislation
have already been enacted, including the: (i) Local Government Operations Act, 2017 (Act 2704); (ii)
Intergovernmental Fiscal Arrangement Act, 2017; (iii) National Natural Resources and Fiscal Commission
Act, 2017; and (iv) Staff Adjustment Act 2019. These provide the legal basis for establishing the needed
management infrastructure for PLGs. The Ministry of Law, Justice and Parliamentary Affairs is also
working with the Office of the Prime Minister and Council of Ministers (OPMCM) to draft a law on
coordination among the three-tiers of government.12 The draft law also has a provision to establish a
secretariat of the Inter-Provincial Council at the OPMCM.
26. However, there are several other key legislations that are yet to be enacted. Among the most
important is the Federal Civil Service Bill which is under consideration in the House of Representatives at
the time of this report. This bill has completed a significant amount of the parliamentary processes, and the
deadline for proposals for revisions and modification has passed. Besides, the Provincial Public Service
Commission Bill is under discussion in the Parliament. It is a framework law for the provincial governments
to draft Provincial Public Service Commission Act for the respective provinces, not merely a model or
sample law for the provinces. The Parliament, by making this framework law, will determine the basis and
criteria to guide the provincial governments on issues such as meritocracy, fairness, and impartiality in
human resource (HR) management.
27. Potentially of great importance to the full implementation of federalism are 16 laws that form
a kind of Bill of Rights for Nepalis.13 They include, for example, rights to environmental protection, safe
motherhood, health care, and housing, as well as rights of children and disabled people, social security,
employment, and more. The Constitution guarantees these rights, which means that all three levels of
government are accountable for protecting these rights. However, in some cases there may not be proper
mechanisms or resources to guarantee these rights. For example, all Nepalis have a right to health care,
with eligible services defined by law. The law explicitly states that the cost burdens will be borne by the
governments involved. In the case of primary health care services, the burden will fall heavily on municipal
and rural local governments. The responsibilities of inspection and regulation of health care institutions
also fall on the governments providing the service, but there is no mention made of an additional
compensating federal grant for these expenditures.
28. The Justice system will adjudicate the practice of federalism in Nepal to ensure that it stays
the course set by the Constitution. While the Constitution of Nepal frames the new responsibilities of
provincial and local governments, it provides significant autonomy to PLGs in deciding how they will
govern themselves, subject to agreement with the Constitution. In cases of dispute over Constitutional
interpretation, the exact channel for settlement is unclear although this is a role that can be played in some
cases by the Constitutional Bench of the Supreme Court.14

Institutional and Organizational Arrangements

29. The Constitution calls on the federal government to establish some new institutions and
organizations. These institutions are to ensure that federalism functions efficiently. They also provide

12 It has already been drafted by the OPMCM and is now being reviewed by the concerned Parliamentary Standing Committee.
13 Art. 18-48, Constitution of Nepal
14 Art. 137 Constitution of Nepal

7
additional check on the powers of government to ensure the adoption of policies intended to deliver services
that are in line with the goals expressed in the Constitution. These institutions include:
✓ Inter-Provincial Council (IPC): As specified by Article 234 of the Constitution, an Inter-
Provincial Council is to settle disputes of political nature between the federal government and
provincial governments, and among the provincial governments. Its members include the Prime
Minister, the Ministers of Home Affairs, and Finance, and the Chief Ministers of respective
Provinces. At its first formal meeting, the Council agreed to 29 actions that the federal government
needed to take to allow for a smooth transition to the federal governance structure.15
✓ Provincial Public Service Commissions: Article 244 of the Constitution calls for the formation
of a Public Service Commission in each province. The degree of autonomy is vested in provincial
governments to hire, fire and promote its employees. Once the fiscal federal system is fully
implemented, the employee compensation share at the subnational government level will likely be
larger. If hiring, firing, promoting, and the wage bill are not within the control of the PLGs, their
budget autonomy will be greatly limited.
✓ National Natural Resources and Fiscal Commission (NNRFC): The NNRFC is charged with
recommending/determining the distribution of revenues to subnational governments from the
federal consolidated fund (Art. 251 and NNRFC Act, 2017). The NNRFC is a key actor of the
intergovernmental fiscal system in Nepal. Its formation is meant to give GoN a permanent and
objective body for managing the distribution of intergovernmental transfers, guiding local revenue
mobilization, and generally tracking the performance of the intergovernmental fiscal system. If
NNRFC chooses to mandate the level and distribution of intergovernmental transfers to subnational
governments, it dramatically limits the authority of Parliament to make decisions about the level at
which local governments will be financed and about the degree of equalization among PLGs. It
also limits the overall ability of the Ministry of Finance to shape the national budget envelope. On
the other hand, if the NNRFC chooses to view its mandate as one of making recommendations
about vertical and horizontal sharing, then the federal government and the Parliament will have a
more direct voice, but the final outcomes could be more politicized.
30. The Constitution also mandates the federal government to establish other commissions to
facilitate inter-governmental coordination and to enhance equity and social inclusion.16 The
Commission for the Abuse of Authority has broad powers to investigate corruption by public officials.
Other commissions are: Inclusive Commission, (Art. 258), the Madheshi Commission (Art. 262), the Tharu
Commission (Art. 263), the Muslim Commission (Art. 264), the Women’s Commission (Art., 252), the
National Dalit Commission (Art. 255), and the Adibasi Janajati/Indigenous Commission (Art. 261). At the
provincial level, Provincial Policy and Planning Commissions have been set up. It is critical that all
commissions become operational soon.

Capacity Building and Training

31. The transition to a federal structure significantly increases the need to provide training for
government officials and civil servants at all levels. It would require a suitable institutional arrangement
to deliver the necessary capacity building and training to PLGs. The PLGs in the new federal system have

15There was a meeting between the Prime Minister and Chief Ministers in May 2019, but it is was not a formal IPC meeting.
16 Article 232 (1)
of the Constitution of Nepal stipulates that the interrelations among the local, provincial and federal units would
be based on the principle of co-existence, coordination and collaboration. There are deliberations in the Parliament on the ‘Bill
on Inter-governmental Coordination 2019’. This will be Inter-governmental Coordination Act after enactment.

8
significant control over how they deliver their services and manage their systems. The responsibility for
capacity development has been placed at the provincial level. The Local Development Training Academy
(LDTA) Act has been amended to allow the federal government to transfer LDTA assets and properties to
the provincial governments to establish the provincial-level training centers.
32. Aside the absence of a capacity development plan, there is also no estimate of how much such
a plan would cost. Given the scale of capacity development needs across Nepal, the overall cost may be
high, should federalism be appropriately implemented with full capacity and adequate training to employees
and elected officials. However, these costs may pale against the gains from getting governance close to the
people.
33. Another important area of capacity and institutional enhancement is the need for a
comprehensive database for tracking the fiscal and service delivery performance of PLGs in Nepal.
A good database on subnational government finance and the economic-population structure can be used to
track the fiscal performance of PLGs, measure disparities, and provide guidance for adjusting the system
of intergovernmental fiscal transfers. The database will be necessary for the subnational governments to
manage their borrowing from financial markets and assess their respective creditworthiness. This will also
help evaluate formulae developed by the NNRFC. While designing a comprehensive database, the
government needs to be mindful of two needs. The first important aspect is to ensure uniformity in gathering
and reporting data and the second is the need for a local government census. This census would record and
update the fiscal statistics of all 760 subnational governments.

Public Financial Management

34. Nepal has made significant strides in modernizing its national PFM system. It has established
a PFM steering committee, set up a Public Expenditure and Financial Accountability (PEFA) Secretariat
and carried out a PEFA assessment. There has been a successful implementation of the treasury single
account, a transparent expenditure reporting system, a revenue management information system and an
upgraded audit system.
35. However, the extension of PFM practices to subnational governments is a high priority now.
The PLGs are responsible for one-third of all government expenditures and have borrowing and tax-levying
powers. Yet, the PLGs lack capacity to implement a PFM system strong enough to provide confidence in
the use of public resources. The federal government with assistance from development partners, is
continuing a process of developing a financial management system to modernize practices related to budget
formulation and control, budget execution and financial reporting. However, this modernization and
extension of PFM practices to PLGs will take time and require significant capacity building and training.

Gender Equality and Social Inclusion

36. The commitment to Gender Equality and Social Inclusion (GESI) is enshrined in the
Constitution. The modalities to address the GESI issues through policies and their implementation may
vary in different contexts. The success of the implementation is conditional on local preferences and
availability of resources.
37. The Constitution calls for legislation to achieve the goal of inclusion in governance system by
earmarking some legislative seats by gender and ethnicity. The spirit of the Constitution was carried
forward by the Election Commission in administering elections in 2017, based on the Constitution and
Local Level Election Act. Some have argued that this representation of minorities is fair because it has
given women and minorities a formal participation in the governance, but others argued that it may not yet

9
be a meaningful involvement. Post-election analyses suggest that few would have won offices had there
not been the mandate about a representation.17 The women or ethnic minorities should have a larger
participation in the civil service. At present, the women are only 25 percent of total civil service, and 12
percent are in gazetted positions.
38. Gender Responsive Budgeting (GRB) has been active in Nepal since 2007, but there is little
evidence of significant positive results. The weightage of factors for gender-responsive programs is
subjective and may reflect the extent to which officials want to present a good picture, as well as their
understanding of gender.18 The international experience shows that gender budgeting is a step towards
increasing awareness of budgetary effects on gender equality. However, the effectiveness of gender budgets
in achieving desired outcomes in low income countries is limited and remains a challenge.19 To achieve its
objective, implementation of GRB should be supported by expenditure-tracking to ensure that allocated
budgets are spent accordingly.

Fiscal Capacity
39. Fiscal capacity is an important component of PLGs’ delivery capacity. To meet their
constitutionally mandated responsibilities, PLGs require adequate discretion to shape expenditure budgets
to fit local preferences. The Constitution makes room for locally raised revenues as well as borrowing.
However, for the foreseeable future, the bulk of financing of PLGs expenditures is most likely to come
from intergovernmental transfers (Figure 1).
Figure 1: Composition of Revenue of Local Governments by Category of Municipality (2018)

100%
90%
80% Other
70%
% of total revenues

60%
Inter-
50% governmental
40%
30% Own-source
20% 36%
10%
11% 6% 1%
0%
Metro Submetro Municipalities Rural
Category of municipality
Source : FCNA report

40. In FY2019, the federal government budgeted for an amount equivalent to 53 percent of all
national tax collections to PLGs as transfers through the grant system and tax sharing. By

17 Democracy Resource Center. (2017, November). Nepal’s local elections, 2017: Final observation report. Kathmandu
18 Budlender, D. (2008). Integrating gender-responsive budgeting into the aid effectiveness agenda: Ten Country Overview Report.

Capetown: UM Development Fund for Women.

19 Chakraborty, L. (2016). Asia: A survey of gender budgeting efforts. IMF Working paper, Strategy, Policy, and Review and

Research Departments. Washington DC: International Monetary Fund.

10
international standards, this is a large share. Revenue mobilization has been buoyant, deficits have been
manageable, and GDP has been rising, so the level of transfers in the first two years of federalism was
affordable. However, the fiscal space will be constrained as costs rise from the following:

a. Wage bill of PLGs. This will arise from PLGs hiring more staff to complement federal staff
transferred to the PLGs, which appear to be less than the MOFAGA’s estimates. The civil servants
who have been adjusted and relocated to PLGs would be paid a premium.
b. Training budget of PLGs. There are about 80,000 employees and about 37,550 elected officials
at the PLGs levels. Training and capacity development for PLGs employees and elected leadership
will require significant resources. The FCNA survey responses indicated that over 8,000 local staff
have not attended any relevant training since the local level elections. This represents one fifth of
all staff currently present in public administration positions at local governments.
c. Cost of service delivery. The continued pressure to improve the quality and coverage of services
and to initiate public works projects will require more funds. For example, one study has estimated
that the national government is providing local governments with only between 30 to 50 percent
of the funds needed to provide elementary/secondary education according to the quality standards
that the government has in place, thereby creating a large liability.20
41. Ultimately, unless effectively managed, PLGs could be pressured into hard budget
constraints, limiting the fiscal space, with adverse implications for development and capital
investments. As a result, the Federal Government could prioritize policies on PLGs-own resource
mobilization, including borrowing, as an instrument for development financing. As part of fostering fiscal
discipline by PLGs, the federal government can promote development of improved public investment
management, including development of Capital Investment Plans (CAPs) by PLGs.
42. The Intergovernmental Fiscal Arrangement Act in Nepal provides for 30 percent of the
federal government tax collection from excise tax and Value Added Tax (VAT) on domestic goods is
to be shared 50:50 with the relevant PLG.21 In addition, the federal government allocates additional funds
for financing the intergovernmental grants; namely, equalization grant, conditional grant, special grant and
complementary grant. Table 2 provides the total amount of grant resources—vertical shares—going to
subnational governments for FY2018 and FY2019.
Table 2: Intergovernmental Transfers: Vertical Shares
Amount (in NPR mn)a Percent Distribution Percent of GDP
Local 245,556 98.2 6.8
2018
Provincial 4,412 1.8 4.1
(estimates)
Total 249,968 100 10.9
Local 262,173 59.2 7.6
2019
Provincial 180,554 40.8 5.3
(budget)
Total 442,727 100 12.9
a. Includes tax sharing grants of Rs114 240 million for 2019, distributed in equal amounts to provinces and local governments.

20 Louis Berger (2018). Grant systems for subnational governments – some basics and issues for Nepal. Preliminary estimates
presented to the NNRFC during a workshop conducted by Ron Hackett, PFMSP PFM Advisor, Dec. 13, Kathmandu.
21 This tax sharing entitlement was allocated for the first time in FY 2018/2019. As used in Nepal, it is a direct claim against national

tax collections rather than a transfer from the consolidated fund. It is not explicitly provided for in the Constitution. Note also
that because of this feature, the national budget does not classify the tax sharing grant as an intergovernmental transfer to
subnational governments.

11
Source: Government of Nepal, Budget Speech FY 2018/2019

43. The distribution arrangements vary by grant type. Tax sharing and equalization grants are
distributed by two different formulae, but both are based on indicators of expenditure needs and are
unconditional transfers. The formulae were developed by the NNRFC.22

44. Conditional grants, on the other hand, are more in the form of cost reimbursement grants
because they are used mostly to guarantee the cost of salaries of transferred central government
employees (mostly education and health) and to cover the costs of legacy projects from the former
centralized regime. Less important in the present system are special and matching grants that are
distributed to defray part of the cost of local implementation of special projects of the federal government.
Table 3 provides the shares of each transfer type for FY2018 and FY2019.
Table 3: Intergovernmental Transfers, 2018 and 2019, by Percent Distribution
Description FY 2018 (estimates)23 FY 2019 (budget)a
Equalization Grants 61.3 32.5
Conditional grants 38.7 41.9
Local Complimentary Grants 1.9
Governments Special Grants 1.9
Tax Sharing Grants 21.8
Total 100 100
Equalization grants 100 27.9
Conditional grants 35.0
Provincial Complimentary grants 2.8
Governments Special Grants 2.8
Tax Sharing grants 31.6
Total 100 100
Equalization grants 61.9 30.6
Conditional grants 38.1 39.1
Complimentary grants 2.3
All Governments
Special grants 2.3
Tax Sharing Grants 25.8
Total 100 100
Exhibit: Total Grants to PLG as A Percent of
GDP 10.9 12.9
a. Includes tax sharing grants of Rs114 240 million for 2019, distributed in equal amounts to provinces and local governments.
Source: Government of Nepal, Budget Speech FY 2018/2019
45. There is no such thing as a “best” intergovernmental transfer system. It all depends on what a
country is trying to accomplish with its transfer system. Therefore, a fundamental question is what goals
the intergovernmental transfer system is meant to achieve. In Nepal, a key question for the NNRFC to ask
and answer is whether the intergovernmental transfer system is in line with the provisions of the
Constitution that urge fiscal autonomy for subnational governments. Among the issues to be investigated

22 Since the NNRFC Committee members are not appointed yet, so far it was only the NNRFC Secretariat who decided on the
formulae. But after the appointment of the Committee member, the formulas need to be approved by the Committee.
23 The first fiscal year for the provincial governments.

12
are: (i) the extent to which local government expenditures are mandated; (ii) how much discretion
subnational governments have under the current system;24 (iii) what kind of fiscal disparities have emerged
in the first two years of operation; (iv) whether the present formula-based system is unduly complicated
and whether it gives biased results with regards to its objectives; and (v) what implicit incentives are
imbedded in the present system.
46. To maintain or expand the fiscal space, there is a place for local government taxation in
Nepal, particularly for urban local governments as well as the provincial governments. It is estimated
that urban areas account for about 62 percent of Gross Domestic Product (GDP). Urban economies are
growing faster than rural ones, and the incidence of poverty in urban areas has decreased significantly
during the last decade.25 As GDP and economic activity increases, so too will the potential tax bases.
47. The Constitution and the Intergovernmental Fiscal Arrangement Act provide the legal basis
and define the exclusive and concurrent lists of revenue instruments available to PLGs. It is not
unusual for PLGs in low-income countries to be given only limited taxing powers and for the right to tax
more broad-based consumption, income and international trade taxes to be reserved for the central
governments, as is the case in Nepal. However, unlike many other low-income countries, in Nepal, PLGs
have some powers to pass their own tax laws and have some rate-setting discretion.26 Further, some of the
local tax sources that have been assigned to PLGs have good revenue potential. These include taxes on real
property and real property transfers, taxes on motor vehicles, and certain user charges.
48. Under the present intergovernmental fiscal structure, there are no significant incentives to
induce PLGs’ revenue collection efforts. In fact, there are notable disincentives, including the hesitance
of elected local officials to impose taxes on their constituents. Therefore, it might be a good idea to introduce
incentives for increased use of local taxing and user charge powers. The intergovernmental transfers
formula could include allocation of certain types of grants based on the fiscal efforts of PLGs. Capacity
development of PLGs could prioritize improvement in revenue administration.

Discussions on Provincial Governments Capacity Needs Assessment

Physical Infrastructure
49. Most provincial governments are in the process of selecting the location of their capitals. As
such, the adequacy of existing infrastructure was assessed in terms of the provincial governments’ ability
to discharge their functions from their temporary offices.
50. With a few exceptions, most provincial governments do not own their office space. In most
cases, they can use existing federal (or in some cases municipal) buildings without having to pay rent. Given
the current vacancy levels (which range between one quarter and one half of approved positions), the
existing office space is generally adequate for the existing staff. On average, there are less than two
employees per room. However, in Provinces 5 and 6, half of the ministries have office space below the
required size or quality. The availability or size of meeting rooms is an issue in some ministries in Provinces

24 For example, local government fiscal autonomy can be limited by conditional grants, civil service rules that limit discretion of
subnational governments to hire and fire their employees, and central government-determined compensation rates and work
rules for local government employees.
25 Muzzini and Aparicio, 2013 as reported in World Bank, 2018, Managing the federal transfer to support sustainable urbanization.
26 Subnational governments can pass tax laws as long as their laws do not conflict with tax jurisdiction provisions, exclusive and

concurrent list as defined in the Constitution and the Intergovernmental Fiscal Arrangement Act.

13
2, 3 and 5. More importantly, more than half of the provinces do not have adequate space to accommodate
meetings of provincial assemblies or cabinets.
51. Each province has between 30-50 four-wheel vehicles (sedans, vans, jeeps) and 50-90 two-
wheel vehicles (motorcycles and scooters), with (Karnali) Province 6 having the least and Province 5
having the most. This translates into roughly one car and two motorcycles/scooters per seven existing
employees. Generally, ministerial offices in all provinces have access to electricity, telephone and internet.
Gandaki (Province 4) experiences frequent blackouts though. The provincial governments have supply of
computers for their essential staff, while they are not connected through a network that would allow staff
to access and manage integrated data systems.
52. At present, provincial governments do not practice a long-term (life-cycle) approach on
management, maintenance, renewal, and development of assets. They do not have ownership titles for
the buildings that they are currently occupying. They have only a paper-based asset inventory system. There
are no procedures in place to collect data on operating and maintenance costs for major asset items. There
is no system in place for monitoring and recording maintenance work performed and needed.

Human Resource Management

53. Provincial administrations were introduced in 2017, and they have been following a uniform
interim organizational structure developed by the federal administration. No province has yet
conducted its own Organization and Management (O&M) survey to develop its organizational structure.
Even with a uniform interim organisation structure in the provinces, there are differences in vacancy rates,
ranging from a quarter of approved positions in Gandaki (Province 4) to half in Sudur-Pashchim (Province
7). For all provinces, this adds up to about 1,000 vacant positions in public administration (that is, excluding
service centers, such as veterinary clinics). On average, 15 percent of existing staff are contracted, primarily
for support functions, such as office assistants and drivers. But a few are more skilled employees, such as
computer operators.
54. The HR policies and guidelines have not been developed for managing approval of leave,
performance appraisal etc. in the provincial administrations. All provincial administrations are now
staffed with civil servants seconded from the federal government, and the federal policies are being
followed in managing them. Some provinces have developed their own policies for managing contractual
staff (e.g., Province 5). Only Province 1 has developed job descriptions for all positions in all provincial
ministries. Most provinces have descriptions of roles and responsibilities for various sections within
provincial ministries but not by positions. However, many provinces are planning or are in the process of
developing job descriptions for individual positions and already have it done for at least one ministry in
each province, except Gandaki (Province 4).

Public Financial Management

55. No province had a multi-year development plan at the time of the FCNA survey. However,
most provinces had begun the process to develop a plan by forming a dedicated commission. There were
some public consultations at the district level. In all cases, the planning horizon is for five years. Except for
Province 3, provinces do not have any sector-specific plans either. All provinces have annual investment
plans, which are broken down by ministry. While Sub-National Treasury Regulatory Application (SUTRA)
was used by most local governments to prepare the 2018/19 budget, at the time of the interviews, provinces
were uncertain as to which software and budget format to use for FY 2019/20. Province 1 was transitioning
to the Nepal Public Sector Accounting Standards (NPSAS) software. Province 3 was planning to use Line

14
Ministry Budget Information System (LMBIS). Provinces 5 and 6 were waiting for guidelines from the
federal government.
56. While most provinces have a section dedicated to revenue collection, it is often understaffed
and busy dealing with other tasks. Furthermore, district land revenue offices collect the land transfer fee,
and there appears to be dual subordination of these offices to both federal and provincial authorities. Most
provinces do not have their own arrangements (regulations, manuals, guidelines) in place for internal audits,
and they rely on federal legislation and guidelines. All provinces adopted their own procurement guidelines
and standards. However, some seconded civil servants are more comfortable with the federal procedures.
Half of the provinces acknowledge having limited capacity for procurement. Most provinces lack
mechanisms to assess suppliers and their performance. There are no mechanisms for appeals against
decisions made in relation to procurement other than the general grievance redress systems.

Gender Equality and Social Inclusion

57. No province has a comprehensive Gender Equality and Social Inclusion (GESI) policy. No
province has a GESI strategy either. They don’t have a framework for promoting women’s leadership in
provincial governments. No GESI audit has been conducted yet by any provincial government. However,
some provinces have programs that target specific social groups, such as children, senior citizens, and
differently-abled individuals.

Accountability and Transparency

58. To share the decisions of provincial assemblies with the citizens, provinces use a variety of
methods. The websites and press releases are the most commonly used methods. There are also designated
information officers in each of the ministries. No province has prepared a Provincial Government Citizens’
Charter to inform citizens on how to access provincial services. While expenditure statements are published
on the provincial government websites at least quarterly, not all provinces report revenues. No province
publicizes its budget in a layman version (i.e., provincial government citizens’ budget). The officials who
were interviewed do not appear to be familiar with this concept. Most provinces have some mechanism for
responding to citizen grievances, while its utilizations and response rates vary.

Discussions on Local Governments Capacity Needs Assessment

Physical Infrastructure and Connectivity

59. More than half (54 percent) of the local governments owned at least some of their buildings.
Among those local governments that owned their own buildings, 17 percent also rented additional space
and 4 percent were also temporarily using other public buildings. Out of the 46 percent who did not own
any buildings, over 80 percent had to rent at least some of the office space and the remaining local
governments temporarily using other public buildings only. Differences in ownership are most evident by
type of municipality, with all cities owning buildings, while only 38 percent of rural municipalities owned
buildings (Table 4).
60. Construction of office building is underway for almost half; that is, 47 percent of the local
governments. This is a proportion that is approximated across most comparisons, except in the Himalayan
ecological zone (HEZ) where only 24 percent of local governments had construction projects and Province
6, which has only 10 percent of local governments reporting construction. Surprisingly, construction takes

15
place in less than one half of the local governments without any building but in more than half of those that
already own some building(s).
Table 4: Owned vs Rented Local Government Buildings & Average Rooms
Buildings Owned Buildings Rented Average Number of Rooms
Metro 100% 18% 63
Urban 61% 56% 17
Rural 38% 64% 14
All 54% 54% 22
Source: Estimated by the study team based on a representative survey of local governments.
61. Some 82 percent of local governments are connected to the national grid, but in Province 6
this figure is only 20 percent.27 In the HEZ, there is a greater reliance on solar power, with 82 percent of
HEZ local governments utilizing it, and a lower national grid connectivity, with only 35 percent connected
to the national grid. Nationally, 89 percent of all local governments have a back-up electrical system.
62. Local governments averaged 44 desktop computers and 17 laptops, with metropolitan
municipalities, Terai Ecological Zones (TEZ) and Province 2 having more than their counterparts.
Metro municipalities averaged 47 laptops and 199 desktops, compared to 14 and 24 respectively in urban
local governments, as well as 11 and 12 respectively in rural local governments. Substantial differences
were noted by ecological zone as well: TEZ local governments averaged 16 laptops and 68 desktops,
compared to 14 and 13 for HEZ, and 20 and 31 for the Hilly zone. Thus, unlike office space, the number of
computers seems to be more aligned with the staff count, at least when compared across different types of
municipalities in terms of urbanization. Province 2 local governments averaged 103 desktops, about twice
the next highest province’s number.
63. Internet connectivity was high across Provinces 1 through 5, with at least 75 percent of local
governments reporting a “functioning internet connection” (Table 5). However, only half of the local
governments in Provinces 6 and 7 were connected to internet, and only 41 percent of HEZ local
governments, compared to 80 percent for Hilly and 90 percent for Terai regions. Nearly all (98 percent)
local governments have access to cellular telephone networks, with 68 percent calling it reliable and another
25 percent calling it “somewhat reliable.” Only 10 percent of Province 6 local governments called their
cellular connection reliable, while HEZ had 24 percent with reliable cellular connections and 51 percent of
rural local governments. Most local governments (60 percent) reported that their ward offices do not have
landlines and 10 percent reported wards not having access to a mobile network. Metropolitan local
governments were most likely to have one or the other for their wards and rural local governments were the
least likely.

27 In Province 6 all local governments have solar power.

16
Table 5: Portion of Local Governments with Internet Connections and Reliable Cellular Connections, by
Province
Province Able to Connect to Internet Reliable Cellular Access
Province 1 86% 71%
Province 2 90% 81%
Province 3 80% 75%
Province 4 75% 83%
Province 5 89% 78%
Province 6 50% 10%
Province 7 50% 50%
Source: Estimated by the study team based on a representative survey of local governments.
64. Nearly all local government centers were accessible by road. Only in provinces 6 and 7 did 10
percent or fewer local governments reported that they were not connected by road. Overall, half of local
governments have blacktopped roads to their centers, but only about a quarter of HEZ local governments
and rural local governments have blacktopped roads. Provinces 2 and 6 have the lowest portion of local
governments with blacktopped roads: 26 percent and 20 percent, respectively.

Human Resource Management

65. Local governments across the country have a shortage of human resources as illustrated in
Table 6. Overall, there is a shortage of 5500 individuals compared to the number of positions envisioned
in local government structures (approved positions).28 However, the magnitude of the shortage is somewhat
masked by the surplus of 3,300 positions in the “miscellaneous” category, which mostly consists unskilled
workers like cleaners, office assistants, and drivers. Two thirds of them are contract staff rather than
permanent employees.
66. The shortage of high-skill staff is even more striking as shown in Table 7, which indicates the
percentage of vacancies by service group and type of municipality. One can see a particularly high
vacancy rate for engineers: almost one half nationwide and over two thirds in sub-metropolitan
municipalities. Surprisingly, vacancy rates increase with the level of urbanization. While small in absolute
numbers, there is a surplus of health and livestock professionals, especially in metropolitan municipalities.

28Nationwide counts were derived from the sample using proportions of different strata in the total universe of all local
governments.

17
Table 6: Approved and Filled Positions Across 753 Local Governments
Total
General Revenue/ w/o
Admin. Account Engin Agric Educ Law Health Livestk Misc. Total Misc.
Approved
positions 20,043 2,714 8,338 1,890 1,777 307 4,680 2,021 9,004 50,774 41,770
Filled
positions 16,232 1,880 4,650 1,750 1,263 190 5,038 1,967 12,268 45,237 32,970
Out of
which
Adjusted 145 5 16 3 6 0 5 7 21 208 187
Deputed 7,746 1,443 1,062 796 964 29 3,448 953 1,777 18,217 16,441
Contract 4,825 139 2,653 839 248 112 1,400 855 7,980 19,052 11,072
LB Staff 3,517 293 919 111 45 49 185 151 2,490 7,760 5,270
Gap 3,811 834 3,688 140 514 117 -358 55 -3,263 5,537 8,800
Source: Estimated by the study team based on a representative survey of local governments.

Engin = Engineering, Agric = Agriculture, Educ = Education, Livestk = Livestock and Misc. =
Miscellaneous

Table 7: Vacancy (+) or Redundancy (-) Rate for Approved Positions, by Local Government Type
Total
General Revenue/ w/o
Admin. Account Engin Agric Educ Law Health Livestk Misc. Total Misc.
Metro-
politan 21% 57% 64% 20% 59% 30% -24% -43% -27% 14% 55%
Sub-
Metro-
politan 42% 50% 74% 39% 40% 45% -81% 7% -101% 34% 92%
Urban
Muni-
cipality 21% 18% 40% 11% 30% 58% 4% -2% -24% 14% 29%
Rural
Muni-
cipality 12% 34% 35% 5% 26% 13% -12% 5% -53% 4% 16%
Total 19% 31% 44% 7% 29% 38% -8% 3% -36% 11% 27%
Source: Estimated by the study team based on a representative survey of local governments.
One should note that these numbers capture present staff, whether inherited from the previous
local bodies, seconded from the national civil service or (still very rare at the time of the survey)
adjusted from the federal into subnational civil service. The shortage of technically skilled human
resources will impact specific sectors. As illustrated in
Table 8, forestry and law are the two sectors that suffer the most from the lack of technically skilled staff.
In addition, there are shortages of technical expertise specific to different types of municipalities. Rural
municipalities have more acute challenges in the education and infrastructure sectors. By contrast, for
metropolitan municipalities, more pressing needs are in IT, land/building, planning, and waste management.

18
Table 8: Proportion of Local Governments that See Services Disrupted/Lacking Due to Insufficient Staff,
by Function
Metro- Sub-Metro- Urban Muni- Rural Muni- All Local
politan politan cipality cipality Governments
Administration 33% 91% 81% 71% 74%
Plan 67% 91% 72% 76% 76%
Information &
technology 67% 73% 44% 53% 53%
Account 33% 64% 61% 61% 60%
Land/Building 67% 64% 61% 66% 64%
Forest 50% 100% 100% 93% 93%
Education 33% 73% 58% 81% 70%
Health 33% 73% 47% 45% 48%
Agriculture 17% 73% 61% 65% 62%
Infrastructure
Development 50% 73% 58% 77% 70%
Law 67% 82% 83% 89% 85%
Environment 50% 73% 72% 66% 68%
Waste
Management 67% 64% 61% 61% 62%
Other 0% 9% 17% 11% 12%
Source: Estimated by the study team based on a representative survey of local governments.
67. Less than a third of the local governments report having their own laws/policies for managing
their staff, in terms of leave approval, performance appraisal reporting relations etc. There is a direct
relationship between the level of urbanization and the likelihood that a local government will have its own
laws/policies on staff management; so, metropolitan municipalities are more likely to have such laws as
compared to rural municipalities.
68. Over 8,000 local staff have not attended any training since the local elections in 2017. This
represents almost one fifth of all staff present in local governments, but for sub-metropolitan municipalities,
this represents over one third of their existing staff (Table 9). However, only half of the local governments
have prepared capacity building plans for either employees or elected officials.

19
Table 9: Estimated Number of Staff Not Participated in Any Training on a Relevant Subject After
Formation of Local Government
Sub- Urban Rural
Metropolitan metropolitan Municipality Municipality Grand Total
Province 1 0 0 981 499 1,480
Province 2 12 36 562 229 839
Province 3 320 140 649 1,021 2,130
Province 4 40 0 321 210 571
Province 5 0 309 328 394 1,031
Province 6 0 0 342 964 1,306
Province 7 0 170 520 332 1,021
Total 372 655 3,695 3,621 8,343
Percent of
present staff 8.37% 35.85% 19.63% 17.97% 18.44%
Source: Estimated by the study team based on a representative survey of local governments.

Planning and Public Financial Management

69. The survey results show vast differences between local governments and provinces in the area
of planning and PFM. Only a quarter of Nepali local governments have multi-year development plans and
this proportion ranges from 10 percent in Provinces 4 and 6 to 50 percent in Province 7. Where such a plan
exists, planning almost always involved public consultations. Local governments receiving training on
Medium Term Expenditure Framework (MTEF) greatly differ among provinces. Overall, less than a fifth
of the local governments have received any training on MTEF, with the proportion ranging from zero in
Provinces 4 and 6 to a quarter in Provinces 2 and 7. In terms of municipality type, a higher proportion of
metropolitan municipalities received some MTEF training than others.
70. At the ward level, 58 percent of local governments reported that wards were able to do ward-
level planning and the same proportion were able to do monitoring work. Only 38 percent of local
governments reported that their wards could do ward-level data management. However, 93 percent of local
governments reported that wards are involved in monitoring local government services.
71. The local governments are developing their Public Financial Management practices. Different
software packages are being used by the local governments to prepare budget estimates. Less than 44
percent of local governments us the SUTRA to prepare budget estimate, while 68 percent use Excel. Only
6 percent of HEZ local governments use SUTRA while the rest rely on Excel. Of those that did not use
SUTRA, the most commonly cited reason (42 percent) was the lack of trained staff. Out of those who did
not use SUTRA last year, 60 percent are ready to use SUTRA for next budget estimates. In just under half
of local governments (49 percent), budget estimates followed the SUTRA format, while 30 percent
followed the federal format and 5 percent followed FMIS.
72. In terms of budget execution, two thirds of local governments reported using Excel while only
fifty percent used SUTRA. Nearly all local governments reconciled their accounts periodically since only
three local governments never did it. 58 percent of local governments reconciled their accounts monthly,
while 21 percent did it quarterly, 10 percent semi-annually, and 9 percent annually. Seventy-nine percent
of local governments have studied local revenue sources, with the proportion being lower for rural (less
than 75 percent) and higher for urban municipalities (more than 85 percent). Revenue improvement action
plans existed in only 25 percent of local governments, but for metropolitan municipalities this proportion

20
was 50 percent. On average, local governments collected 72 percent of estimated revenue. However,
between provinces, this ranged from 40 percent in Province 2 to 95 percent in Province 4. In 57 percent of
local governments, actual revenue collection was off by more than 25 percent. In these cases, the most
common reasons cited were unrealistic estimations (62 percent of cases) and limited personnel (51 percent
of cases). Excel was the most common revenue management system utilized, with 37 percent of local
governments using it, followed by government developed software (23 percent) and the rest using
development partners’ or their own software.
73. Revenue collection was in cash in 66 percent of local governments. Although 93 percent of
local governments reported having a branch of commercial bank there. In addition, only about half of
the local government that collect revenue in cash deposit the funds daily into bank accounts. On the
expenditure side, the average burn-rate of local governments’ recurrent budgets was 80 percent and 75
percent for capital budgets. Surprisingly, the burn-rate was lower than the average in metropolitan
municipalities with burn rates of 76 percent and 61 percent for recurrent and capital respectively. Those
local governments with less than 60 percent capital budget burn-rates identified absence of technical staff
(29 percent), default by contractor (29 percent) and low procurement capacity (24 percent) as the main
reason for low capital budget execution.
74. Less than one half of local governments (46 percent) have prepared procurement regulations,
though most (83 percent) have a unit in their organizational structure designated to handle
procurement. The highest proportion of local governments with procurement regulations at 82 percent is
among metropolitan and sub-metropolitan cities, but only 42 percent of urban municipalities and 38 percent
of rural municipalities have them. Province 4 has the smallest portion of local governments with
procurement regulations, at 17 percent, while Provinces 1 and 2 have the lowest portion of their local
governments with a designated unit, at 67 percent and 68 percent respectively (Table 10).
Table 10: Portion of Local Governments with Procurement Regulations and Functional Procurement
Unit in Place, by Province
Regulations Functional Units
Province 1 33% 67%
Province 2 73% 68%
Province 3 55% 95%
Province 4 17% 83%
Province 5 39% 94%
Province 6 60% 90%
Province 7 33% 92%
All Provinces 46% 83%
Source: Estimated by the study team based on a representative survey of local governments.
75. The capacity to conduct international bidding is very low amongst local governments, with
only 14 percent stating that they have such capacity. On the other hand, at least 94 percent have capacity
for national bidding, sealed quotations, direct procurement and through a user’s committee. By far, the most
commonly used procurement type is the users’ committee. However, only 30 percent of local governments
have a mechanism to avoid conflict of interest in forming their user committees. In Province 7, no local
governments have such a mechanism.

21
Political Governance and Administration
76. Mayors/Chairs are male in 97 percent of local governments and deputy mayors/vice chairs
are female in 92 percent of local governments. Over one third, 41 percent of assembly members are
female while 21 percent are Dalits. There is little variation in these proportions across provinces, ecological
zones and municipality type. Some 88 percent of local assemblies have judicial, legislation, resource
projection, revenue and budget committees. Local governments in Province 5 have created the fewest
committees, 50 percent have created account and revenue committees and 61 percent have created
legislation, social affairs, administration, resource projection, and budget committees.
77. Almost half, 48 percent of assembly committees have never received status reports from their
respective thematic local government sections. Some 27 percent have received them only “sometimes”
at an irregular basis. Table 11 provides the proportion of local governments never receiving thematic section
status reports by municipality type and ecological zone.
Table 11: Portion of Local Governments "Never" Receiving Thematic Section Status Reports.
Metro 12% HEZ 76%
Urban 53% Hilly Zone 47%
Rural 56% TEZ 40%
Source: Estimated by the study team based on a representative survey of local governments.
78. At least 88 percent of local governments have created units for education, health, agriculture,
environment, vital registration, and development and planning. On the other hand, less than one quarter
of local governments have created governmental units for FM radio, alternative energies,
forest/biodiversity, language/culture, and transportation.
79. On relationships between local governments and wards, only one local government reported
that there was no clear allocation of authority between the local government and the wards. In 82
percent of local governments, ward chairs were clear about their roles, but the figure was only 65 percent
in metropolitan local governments. More than half (57 percent) of local governments reported no disputes
between ward chairs and mayors; though Karnali has more disputes than other provinces, particularly
around the devolution of authority and office location. 88 percent of local governments reported that their
wards meet at least monthly. Sudur Pashchim had the fewest local governments with wards that held
monthly meetings (58 percent).

Sector Administrative Capacity

80. Sectoral administrative capacity amongst local governments varies across sectors, ecological
zones and provinces. To manage and conduct sector level policies and work, at the minimum, local
governments need to incorporate sectors into their organizational structures. To that extent, the
incorporation rate of sectors into organization structure of individual local governments are above fifty
percent for most sectors. Some sectors like education, basic health, social welfare related sectors,
agriculture and local roads have been incorporated by over 90 percent of local governments (Table 12).
81. Sectors related to economic development, except for cooperative sectors (89 percent) have
modest incorporation rates. Micro enterprise and economic data collection are incorporated by 56 percent
and 55 percent of local governments respectively, but only 6 percent of local governments have
unemployment records. Similarly, sectors related to the environment also have only modest incorporation
rates amongst local governments. Bio-diversity and watershed sectors have been incorporated by 52 percent

22
of local governments while wildlife and mines & minerals sectors have only been incorporated by 37
percent and 27 percent respectively.
Table 12: Portion of Local Governments That Have Incorporated Sectors into Their Organizational
Structures
Disaster Risk Management 77% Fisheries 35%
Education 98% Agriculture Extension 62%
Basic Health Services 97% Horticulture 62%
Social Welfare 95% Irrigation 71%
Vital Registration 95% Forest 66%
Women 95% Bio-diversity 52%
Children 95% Watershed 52%
Youth 81% Wildlife 37%
Senior Citizens 95% Mines & Minerals 27%
Sports 84% Soil Conservation 60%
Unemployment Records 6% Waste Management 77%
Cooperative 89% Community Parks 49%
Local Market Management Environmental
70 % 76%
Management
Micro Enterprise 56% Drinking Water 83%
Economic Data Collection 55% Sanitation 87%
Local Economic Development Local Roads
63% 97%
Plan
Agriculture 95% Rural Roads 85%
Agriculture Production 72% Agricultural Roads 63%
Livestock 72%
Source: Estimated by the study team based on a representative survey of local governments.
82. As noted above, there are regional disparities in capacities amongst local governments. While
the FCNA dataset has rich information on all sectors about regional variances, this note will illustrate this
with reference to two sectors.
83. Local governments across the country have an overall incorporation rate of 83 percent and
87 percent for drinking water and sanitation respectively. However, compared amongst provinces, the
incorporation rate varies from 90 percent (Province 1 and Province 6) to 75 percent (Province 4). Similarly,
all Province 2 local governments have incorporated sanitation into their organizational structures but only
60 percent of local government have done so in Karnali (Province 6) (Table 13).

23
Table 13: Drinking Water and Sanitation Functions Incorporated into Local Governments, by Province
Drinking Water Sanitation
Province 1 90% 90%
Province 2 77% 100%
Province 3 80 % 85%
Province 4 75% 83%
Province 5 83% 94%
Province 6 90% 60%
Province 7 83% 75%
Total 83% 87%
Source: Estimated by the study team based on a representative survey of local governments.
84. There is variance in the development and incorporation of settlement/urban master plans
and land use plans across ecological regions. Across the country, only 17 percent of local governments
have settlement masterplans and 60 percent have land use plans. However, there is also difference across
the ecological zones as illustrated by Table 14. More local governments in the TEZ have settlement master
plans than in the Himalayan Ecological Zone (HEZ) or Hilly Zone. Similarly, more TEZ local governments
have land use plans than HEZ or Hilly Zone local governments.
Table 14: Portion of Local Governments with No Master Plan and No Land Use Plan, by Ecological
Zone and Municipality Type
No Master Plan No Land Use Plan
HEZ 88% 53%
Hilly Zone 88% 39%
TEZ 76% 37%

Metro 76% 29%

Urban 83% 25%
Rural 85% 43%
All Local Governments 83% 40%
Source: Estimated by the study team based on a representative survey of local governments.
85. Sources of sector funding at local governments vary across sectors. The results from the local
government survey illustrating the sources of funds utilized by local governments by sector are presented
in Table 15 below. Most local governments use revenue sharing funds for economic development (79
percent). Similarly, most local governments prioritize their own source revenue for economic development
(78 percent) as well. Own source revenue is also used by many local governments in all other sectors apart
from basic health service. No local government uses own source revenue for basic health services.
86. Nearly all local governments (99 percent) use conditional grants for basic health services. In
addition to basic health service, most local governments use conditional grants for education (97 percent),
economic development (90 percent) and agriculture (83 percent). Social development is the only sector
where no local governments use conditional grants as a funding source.
87. Equalization grants are the most favored funding source for social development, with 79
percent of local governments using it. Other sectors where equalization grants are commonly used are

24
agriculture (76 percent), environment (76 percent) and basic health services (65 percent). However, no local
government uses equalization grants for drinking water and sanitation and road sectors.
88. Complementary grants are mostly used by local governments for economic development (90
percent), roads (86 percent) and drinking water and sanitation (71 percent). While there is at least one
local government utilizing complementary grants in each of the other sectors, the use is much lower. For
example, the next most common uses of complementary grants are for the environment and social
development sectors, with only 17 percent and 16 percent of local governments utilizing it respectively.

89. In the case of special grants, no local government uses it for education, environment or
drinking water and sanitation. The most common use of special grants by local governments is for
economic development (25 percent) followed by roads (17 percent).
Table 15: Percentage of Local Governments Using the Different Funding Sources for Each Sector
Complem
Own Revenue -entary Conditiona Special Equalization
Source Sharing Grant l Grants Grants Grants
Education 47% 23% 10% 97% 0% 56%
Basic Health
Services 0% 16% 10% 99% 4% 65%
Social Development 61% 42% 16% 0% 13% 79%
Economic
Development 78% 79% 90% 90% 25% 43%
Agriculture 61% 25% 9% 83% 13% 76%
Environment 56% 39% 17% 50% 0% 76%
Drinking Water &
Sanitation 62% 45% 71% 58% 0% 0%
Roads 59% 63% 86% 58% 17% 0%
Source: Estimated by the study team based on a representative survey of local governments.
90. Performance monitoring capacity is a major issue across all sectors for many local
governments. Many local governments do not have any personnel, resources, knowledge or physical
infrastructure to monitor sector-level performance and outcomes. Sector-wise, settlement development,
environment, disaster risk management, drinking water and sanitation, and agriculture had the largest
portion of local governments without either any personnel, resources, knowledge or physical infrastructure
to monitor performance (Table 16).
91. Lack of resources was the most commonly identified capacity-related challenge that
constrained performance monitoring in local governments. As much as 30 percent of local governments
do not have any resources to monitor performance of settlement development followed by environment (24
percent) and drinking water and sanitation (23 percent). Roads is the only sector where over 10 percent of
local governments (13 percent) have adequate resources to monitor performance. In the other sectors, less
than 10 percent of local governments have adequate resources.
92. In the case of personnel and skills for monitoring, it was only basic health services (28 percent)
and roads (21 percent) which saw more than 20 percent of local governments having adequate
capacity. Some 34 percent of local governments have no capacity regarding personnel and skills for

25
monitoring environment while 32 percent of local governments do not have it for settlement development.
Only settlement development (25 percent), environment (15 percent) and drinking water and sanitation (10
percent) had more than 10 percent of local governments having no knowledge for monitoring. In contrast
to the other capacities, a higher proportion of local governments had knowledge to monitor performance,
albeit, it is still very low. The sector with the greatest number of local governments having adequate
knowledge was the basic health services sector (38 percent).
Table 16: Portion of Local Governments with "Adequate Capacity" and "No Capacity" for Monitoring
Outcomes and Performance in Each Sector
Personnel/Skills Resources Knowledge Physical Infrastructure
Adequate None Adequate None Adequate None Adequate None
Settlement Development &
Land Administration 6% 32% 5% 30% 17% 25% 10% 34%
Disaster Risk Management 3% 22% 5% 18% 18% 5% 1% 27%
Education 17% 12% 5% 11% 27% 4% 8% 9%
Basic Health Services 28% 3% 6% 8% 38% 3% 8% 10%
Economic Development 14% 8% 7% 10% 23% 4% 10% 9%
Agriculture 11% 14% 7% 17% 29% 7% 5% 19%
Environment 6% 34% 5% 24% 16% 15% 6% 31%
Drinking Water &
Sanitation 11% 17% 7% 23% 19% 10% 6% 16%
Roads 21% 4% 13% 8% 37% 3% 11% 9%
Source: Estimated by the study team based on a representative survey of local governments.

Gender Equality and Social Inclusion

93. At least 80 percent of local governments have Gender Equality and Social Inclusion (GESI)
policies, including those for children, senior citizens, and the differently-abled, as well as for ensuring
women’s participation in local government activities. However, 60 percent of local governments have
never conducted a GESI audit. Nearly all local governments have included GESI in their budgets and
through inclusiveness that encourages the participation of women and senior citizens, as well as ethnic and
disadvantaged groups. To combat gender-based violence, nearly all local governments have awareness
campaigns, four fifths provide counselling services, and two thirds provide monitoring. More than one half
provide legal services and special programs, with 30 percent providing compensation to support victims.
While only 2 percent of local governments reported having none of these programs, 10 percent local
governments in Province 6 have no programs. Provinces 2 and 7 have enacted legislation against gender-
based violence; Provinces 2 and 6 have legal support for victims; and Provinces 2, 4, and 7 have victim
compensation provision.

Accountability & Transparency

94. Local governments use a variety of methods to make their executive decisions public. The
most important tools include: a website (70 percent of local governments), notice boards (59 percent), social
media (59 percent), newspapers (46 percent), public announcements (44 percent), and radio/TV (41
percent). There were some ecological zone differences, such as HEZ local governments being less likely to
use websites (59 percent) and more likely to use notice boards (82 percent). Websites are also the common
method used to inform citizens about services provided by the local government, with 81 percent of local
governments using them. Using the Citizen Charters was the next most common (73 percent), followed by
social media (66 percent), and advertisements (59 percent).

26
95. The frequency of making public income and expenditure statements varied greatly, with 26
percent doing so semi-annually, 23 percent monthly, 18 percent quarterly and 15 percent annually.
17 percent of local governments never make their income and expenditure statements public. While nearly
all local governments use the federal act to implement Right to Information, and only 8 percent receive
requests for information “frequently”, with metropolitan local governments more likely to get frequent
requests. Nearly all local governments (92 percent) have a designated information officer that is made
public.
96. Budgets, plans, assembly decisions, and executive decisions are made public by more than 90
percent of local governments, with 82 percent providing details about activities and performance of
thematic sections. Nearly all local governments have websites that provide the following details: contact
of officials (94 percent); policies, plans, and programs (94 percent); updates of local government activities
(90 percent); laws and regulations (90 percent); and budget information (92 percent).
97. Local governments engage external organizations in budget preparation at generally high but
varying rates, with local business chambers and civil society/NGOs recording the highest (at 83
percent of local governments). Fewer local governments engage community associations or other public
institutions (76 percent and 64 percent, respectively). Province 2 is less likely to engage outside
organizations than other provinces, and Hilly Zone local governments are more likely to do so.
98. Some 83 percent of local governments have a grievance redress mechanism. These local
governments mostly use designated officials and complaint boxes (86 percent and 83 percent respectively),
followed by public hearings (75 percent), social media (64 percent), social audits (61 percent), and
complaint registers (51 percent). In the 96 (out of 115 sampled) local governments that have a grievance
redress system, the average number of complaints registered was 16, with a wide variance (0 to 356); the
average number of complaints addressed was nine. Three quarters of local governments conducted a social
audit for the recent fiscal year. The most common reason for not conducting a social audit was “limited
personnel”, cited by 57 percent of those not conducting the audit.

27
SECTION III: Recommendations—Blueprints for a Roadmap

99. An important ingredient missing in Nepal’s move to fiscal federalism is a sequenced plan or
a detailed timeline for introducing various elements of the fiscal federalism. A reasoned
implementation plan with an implementation calendar that is transparent and is adjusted as the process goes
forward would be useful. If this were to be done, and if it were made widely available, it could form a basis
for grading the progress made with the overall implementation of federalism. It could also be used to better
manage expectations at the subnational government level and to ensure broad-based credibility in this long
process of transformation to federalism. Such a roadmap might not lead to the equitable and inclusive
society that the framers of the Constitution hoped for, nor will it lead to contented politicians, but it might
result in more confidence in government leadership. The responsibility of developing the implementation
plan could be entrusted to a “Roadmap Committee” which is then dissolved once the work is complete. A
natural home for the committee might be the Inter-Provincial Council, or it might be established under the
Intergovernmental Coordination Bill (Art. 235), if this idea could get buy-in from the other important
stakeholders. Once the roadmap is in place and accepted by the Committee, its management and regular
upgrading could be turned over to another body for tracking and updating. Some ideas about how such a
committee might operate could be gained from Box 2, which reports the approach taken in Kenya.
100. Further, international experience suggests that decentralization has benefitted from
monitoring and evaluation. Some successful countries have tracked the progress of decentralization; they
have continuously looked for ways to make their decentralized public sector structure work better and
engaged in incremental reforms until the different pieces of the decentralized system converged on the
overall goals. The government of Nepal can benefit from investing in a decentralization cell with a mandate
to continually evaluate the intergovernmental system.
101. The NNRFC has a broad mandate to lead thinking in this area, including to track the
performance of all local governments in the country, evaluate the success of the equalization grants,
initiate enhancements of the database on local government finances, and generally grade the success
of Nepal’s fiscal federalism.29 The importance of the NNRFC is emphasized in the Constitution by making
its recommendations about intergovernmental transfers binding on government.30 However, the existing
secretariat can benefit from enhancing its staff cohort and research capacity in intergovernmental fiscal
relations and will require richer access to data on which it can draw. Clearly, the NNRFC must have access
to a decentralization cell.
102. However, the Ministry of Finance also needs a fiscal analysis cell since its mandate is to
provide leadership in evaluating fiscal policies that are in the best interest of the country, and its
responsibilities go well beyond the mandate of the NNRFC. These include tax policy and administration,
expenditure and subsidy policy, the debt regime, and evaluation of the impacts of the NNRFC
recommendations. The Inter-Provincial Council also has a stake in monitoring and evaluation, with a focus
on sub-provincial governments. The government of Nepal has much work to do in deciding on the process
by which it will continually monitor and adjust its fiscal system and where it will place the decentralization
cells.

29 Article 251, Constitution of Nepal.

30 Article 60 (3), Constitution of Nepal.

28
Box 2: Source: Prepared by authors based on a review of Kenya’s legislation and press
Like Nepal, Kenya also had substantial amount of power and resources assigned by a new 2010 Constitution to an entirely
new level of government. Thus, Kenya’s previous eight provinces and over 280 districts were replaced by 47 new counties.
However, unlike Nepal's 2015 Constitution, Kenya's Constitution provided that, "…Parliament shall, by legislation, make
provision for the phased transfer, over a period of not more than three years from the date of the first election of county
assemblies, from the national government to county governments of the functions assigned to them." Furthermore, the
transitional clauses of the Constitution explicitly, "…permit the asymmetrical devolution of powers to ensure that functions
are devolved promptly to counties that have the capacity to perform them but that no county is given functions it cannot
perform." Therefore, The Transition to Devolved Government Act (TDGA) of 2012 established a Transition Authority (TA) to
facilitate and co-ordinate the transition to a devolved system of government. While not explicitly called for in the
Constitution, the Authority was created in the implementing legislation as a mechanism to ensure that the Commission for
the Implementation of the Constitution performs its role in monitoring and overseeing the effective implementation of the
devolved system of government effectively. The time-limited nature of the Transition Authority distinguishes it from
permanent constitutional bodies, like the Commission for Revenue Allocation, which is analogous to Nepal's Fiscal
Commission.

The Authority's members were competitively sourced, approved by Parliament and envisioned by TDGA to serve until three
years after the first general election under the new Constitution or upon the full transition to county governments,
whichever is to happen earlier. Then it would be dissolved. This statutory status provided this body some independence
from the executives at both national and subnational levels, who repeatedly tried to get rid of this constraint on their
powers. Thus, the national government eliminated the Transition Authority’s independent budget vote so that the
authority would be treated as a sub-department in the parent Ministry of Devolution. Notwithstanding its limited funding,
the Authority managed to oversee the transition process with the support of donors like UNDP and the World Bank for the
envisioned three-year term. However, when the Authority proposed to extend its terms for an additional three years to
address unfinished business (e.g., inventory of assets and liabilities), the national government was only willing to support a
one year extension while the County Governors strongly opposed any move to extend the Authority’s term, accusing it of
most of the problems facing the Counties. After the one-year extension, all residual matters were handed over to the Inter-
Governmental Relations and Technical Committee (IGRTC).

By having the overall responsibility of overseeing the implementation of devolution under the new Constitution, Kenya's
Transition Authority was leading all aspects of devolution, that is all “three Fs” as they are known in Nepal (functions,
functionaries, and finance). Thus, by law, the Transition Authority was mandated to facilitate the analysis (unbundling and
costing) and the phased transfer of the functions assigned in the Constitution to county governments. In particular, the
Authority was receiving and evaluating requests from each county government to hand over specific functions. Concerning
the second “F” (functionaries), the Transition Authority was mandated to oversee the Assumption of Office procedures of
the Governors, and facilitation for other elected and appointed leaders in taking up their roles and responsibilities. As far as
the third “F” is concerned (finance), the Authority's role included ensuring provision of interim offices, housing, security,
and relevant legislation. Preceding the swearing-in ceremonies for all 47 counties, the TA had already developed
preliminary tools to prepare for county assemblies’ successful initialization, e.g., by developing Interim Standing Orders,
Speaker’s Rules, Oath Books, the Mace, Speakers’ Chairs, permanent County Coordinators, and Interim County Transition
Teams.

Source: Prepared by Georgia State University team based on a review of Kenya’s legislation and press

103. Nepal embarked on federalism without a sequenced plan or a detailed timeline for addressing
various bottleneck points in the implementation of a new system. Nor did it have an action plan to
guide the handoff of responsibilities and assets from the federal to the subnational governments.31 There is
much work to do to get the sequencing right and the timelines reasonable.32
104. A review of the experience in various countries suggests that, success often depends on
whether a coherent implementation strategy has been developed, and whether adequate mechanisms
exist for managing the implementation process. The process often includes multiple reform components,
divergent interests (among central vs. local governments, sectoral ministries vs. central agencies,

31 One version of such an action plan was issued in December 2018 by the Inter-Provincial Council (2018). See Annex A to this
report.
32 For a discussion of the elements of a roadmap for fiscal decentralization, see Bahl and Martinez-Vazquez (2006a).

29
bureaucrats vs. politicians vs. citizens, etc.) and insufficient information. Logically, and as experience
shows, some decentralization measures (e.g., devolution of expenditure responsibilities) may not yield the
desired outcomes without complementary reforms (e.g., providing for budget autonomy by eliminating
mandates).
105. To maximize the chances of reaching the objectives of federalism, the reform process needs
to be strategically sequenced. An appropriate ordering of the reforms process is needed for several
reasons. First, sequencing the reform process will ensure that government maintains focus on pre-defined
goals, undertakes complementary reforms (where necessary), while helping Government to also anticipate
potential opportunities and risks to the successful implementation of federalism. For instance, various areas
which require capacity building might be recognized early, and proactive action could be taken in
anticipation of next steps. Otherwise, the process could be stalled at various stages, and implemented
programs would likely be half-finished. In Mexico, for instance, decentralization reforms stalled as the
Government did not anticipate the capacity deficits of local Governments and their potential impacts.
106. Second, developing a sequenced reform plan, could help identify potential political economy
factors which could affect the reforms’ implementation. The result is the taking of actions, as well as the
formulation of policies and/or the amendment of laws which might cause the process to tilt off the course
critical to meeting the goals set from the outsets. In Indonesia’s case, an unspecified transition period to
phase-in a new formula for resource transfers at the subnational level created an entry point for some
politicians to incline the process in favor of their constituencies without due consideration of the broader
national interest and goal of improving equity.
107. Third, a sequenced plan would also help reduce the adjustment costs associated with the
introduction of federalism. High costs of reforms could arise from lengthy debates over policy choices,
duplication of policy actions and poor coordination, attributable to the absence of a documented sequenced
plan. If relevant provisions are entrenched in the constitution or laws are passed before the objectives and
the framework are well developed, for example, successful execution may be severely constrained since
the provisions or laws may impose unwelcomed rigidities. The process, underscored by the rigid provisions
or laws, would not easily respond, in a timely manner, to developments in the economy such as changes in
population and income/revenue dynamics. Changes in revenue-mobilizing (or expenditure) rules may be
needed, in certain instances, to match the expenditure (or revenue-mobilizing) needs and realities: thus, an
element of flexibility is required in the process. In India, reforms related to indirect taxation at the state
level faced major constraints because the constitution granted states tax-levying powers on goods while the
transaction of service could only be taxed at the federal level. Part of the costs could also stem from policy
missteps, coupled with lengthy debates and digressions, which could arise because of the absence of a
documented sequenced plan. The decentralization structure of industrial nations such as the US has been
forged through several decades of political deliberations while facing democratic bottlenecks as well. This
is luxury which developing countries cannot afford in a world characterized by rapid change and the
propensity to lag advanced countries.
108. Some of the unintended costs of ignoring a well sequenced strategy, such as associated with
weak or no borrowing powers of sub-national entities at the early implementation stages, may yield
mild inefficiency costs regarding suboptimal financing of investments. However, others could have
broader and more devastating ramifications. For instance, granting significant borrowing powers to
subnational governments without context-relevant borrowing and debt rules could place the country’s
economy on an unsustainable debt trajectory: that is, cause macroeconomic instability because of a strong
temptation to indulge in fiscal indiscipline. A closely related and ubiquitous sequencing misstep involves
the assignment of revenue responsibilities before clearly defining the expenditure functions. This could

30
culminate in inefficient allocation of funds and create fiscal deficit difficulties (because investment returns
may be inadequate to recoup investment costs) resulting in macroeconomic instability. In Brazil, for
instance, state governments were granted revenue mobilizing powers and guaranteed transfers under the
1998 Constitution. Yet, expenditure duties were not clearly spelt out. The ambiguity resulted in
misunderstanding of roles and inefficiency of resource allocation. Another issue is the inadvertent social
cost of protracted dependency which might arise when suboptimal sequencing results in a structure in which
subnational governments rely, for too long and almost completely, on the federal government for their
revenues or transfers to perform their service delivery and associated functions.
109. A good approach would be to put an implementation plan in place and allow it to be adjusted
as the process moves forward. If the implementation plan is annotated with an action plan, it could form
a basis for monitoring the progress of the overall federalism process. The responsibility for developing the
implementation plan needs not solely be with one level of government or a single ministry. A “Roadmap
Committee” could be entrusted to design the implementation plan. Ideally, the committee should have
representation from major stakeholders, as well as entail technical staff. For example, it could be a body
chaired by the Prime Minister, with members from MOFAGA, the Inter-Provincial Council, the local
government associations, and a distinguished intergovernmental fiscal expert from outside government. A
natural home for the committee might be the Inter-Provincial Council, or it might be established under the
Intergovernmental Coordination Bill (Art. 235 of the Constitution), if this idea could get buy-in from the
other important stakeholders. Once the roadmap is in place and accepted by the Committee, its management
and regular upgrading could be handed to another body for tracking and updating.
110. Drawing on the discussions in the previous section of the Policy Note and the Federalism
Capacity Needs Assessment Report, the table below provides a blueprint for a roadmap. The roadmap
itself needs to be prepared through a consultative process with all stakeholders and owned by the
government. The table below is intended to stimulate discussions for a federalism implementation roadmap
by proposing ideas around three Fs (Functions, Funds and Functionaries) as well as organizational &
institutional arrangements.

Table 17: Blueprints for a Roadmap

Issue Description Method in Implementation Mitigating Measure

Plan
Functions
Concurrent Clarify concurrent expenditure Review unbundling Capacity of PLGs to
responsibilities assignments exercise for concurrent assume service delivery
assignments responsibilities is
essential
Recommendations:
• Review all the relevant sectoral legislations to make sure that functional assignment is clear
• Design a capacity improvement plan for PLGs in these areas
Devolution of How exactly will devolved Plan for a slower phased Will the establishment of
service delivery functions and functionaries be in transition a contingency fund be
responsibility handed off from line ministries? Clarify the shift of necessary?
What flow of resources will take management responsibility An assessment of
place? and reporting lines provincial capacity and
Will there be a breakdown in Design capacity building needs to assume service
service delivery for essential interventions delivery from line
functions? ministry must be

31
 What budget and management undertaken before
autonomy will be given to local services are devolved
governments? Clarity on assignment of
responsibility for
management of health
and education personnel
must be put in place
before devolution
Recommendations:
• Establish systems and tools to implement the Local Government Operations Act of 2017 (Act 2704)
• Establish communication channels between sector ministries and PLGs to address service delivery issues
• Review all the relevant sectoral legislations to make sure that functional complies with the constitutional
mandate, for example:
o Review Town Development Act of 1988
o Revise Public Procurement Act
o Review the Forestry Act
o Review Water Resource Act 1992
• Transfer five regional emergency centers to provincial governments
Monitoring and Where will responsibility for Design development Systems for monitoring
evaluation M&E of service delivery and interventions for M&E and evaluation are not yet
(M&E) local government performance in Clarify lines of in place
general be placed? responsibility and Database adequate to
reporting support M&E not in
Allocate adequate funding place
for M&E function Training programs for
M&E not yet established
Recommendations:
• Establish a federalization cell to do continuous evaluation of the intergovernmental systems
• Design a capacity building program for federal ministries on M&E
• Design self-assessment evaluation tools for PLGs
Institution- Identification of institutional and There are existing tools, Make sure LISA
alization of self- organizational weaknesses for such as LISA, to identify assessment is available to
assessment for service delivery at the local level service delivery weakness, all local governments
service delivery which can be deployed
immediately
Recommendation: Make sure that local governments’ reports of LISA assessments are uniform
Funds
NNRFC and Dispute over how the duties and Clarity on the binding Commission is not fully
inter- responsibilities of NNRFC will nature of staffed
governmental be interpreted recommendations Initial review of the
fiscal transfers Technical training of the intergovernmental
secretariat staff transfer system has not
yet been done
Need for stronger
oversight of the NNRFC
by the Parliament
Recommendations:
• Appointment of commissioners
• Staffing the NNRFC secretariat
• Design study tours to other federal countries to improve the technical capacity of the NNRFC
• Begin to develop an adequate data base to support the work of the NNRFC
• Establish an ongoing training program for NNRFC secretariat

32
PLGs PLGs adopt distortive taxes Capacity building and Capacity building and
government PLGs need to be encouraged to training training program not yet
revenue adopt new taxes Build incentives into grant in place
mobilization PLGs need to improve local tax programs Strong incentives in the
and revenue administration Technical assistance in legislation to promote
drafting new legislation increased local revenue
including model laws mobilization are not in
place
No monitoring in place
Recommendations:
• Review the use of intergovernmental transfers to incentivize own source revenue collection
• Improve the capacities of subnational governments to administer tax bases, establish databases, and
collect taxes
• Establish monitoring system for revenue collection
• Clarify tax assignment for shared taxes
• Establish divisible fund to share the natural resource royalties
Funds for Underdeveloped domestic capital Capitalization of domestic Improve financial
investments market limits subnational intermediaries (such as management capacities
governments’ ability to raise Town Development Fund) of subnational
financing for investments. governments before
promoting access to
capital markets
Recommendations:
• Improve the capacity of subnational governments across public investment management cycle
• Improve transparency of subnational finances
• Strengthen the legal and institutional framework for PPPs
• Review Town Development Act (1988) and update it based on the provisions of the Constitution
Public Financial Time delays in extending PFM Design technical Capacity building and
Management programs to the subnational assistance, capacity training plan not yet in
sector building and training place
Limited capacity to absorb PFM programs for PLGs
improvements
Recommendations:
• Strengthen the PFM capacity of subnational governments
• Identify projects and programs to be transferred to PLGs
• Prepare a plan to transfer them
• Preparation and implementation of an expenditure reporting system for PLGs by OAG
Accounting and Ensure comparability and Design capacity building Capacity building and
reporting accuracy in financial reporting and training programs for training program not in
Periodicity of external audits PLGs place
Provide incentives for
compliance
Recommendation: Strengthen the capacity of subnational governments
Alignment of The linkages between various Annual plans prepared by Medium-term plans
plans planning instruments are very subnational governments prepared with the
weak. are not aligned with involvement of
medium term plans subnational first, then,
prepared by sector annual plans prepared by
ministries. PLGs.
Recommendations:
• Promote citizen engagement and participation in medium term plans
• Involve subnational governments in the preparation of medium-term plans

33
Standardization Proliferation of PFM software Identification of the best Familiarization of local
of PFM software (SUTRA, EazyTech, Shangrila); software in terms of governments with the
Proliferation of PFM software at coverage (planning, selected software
the provincial level (NPSAS, budgeting, accounting
LMBIS) etc.) and user-friendliness
to roll out across local
governments
Recommendations:
• Training of local government finance officials on the selected software
• Ensure the Budgeting and Accounting Software used by all governments are interlinked between
budgeting and reporting and across all three tiers
Procurement Current system promotes The quality of public The informal nature of
fragmentation of large contracts; works is low as projects procurement coupled
Most projects procured by user less than $100K are with the absence of
committees without a formal managed by user monitoring system
tendering process committees undermines transparency
and accountability across
the procurement cycle.
Recommendations:
• Establish standard procurement documents (contract, tender documents, etc.)
• Make sure that user committees comply with procurement guidelines and use official procurement
documents
• Revise Public Procurement Act
• Prepare sample Public Procurement Rules for PLGs
Functionaries
Devolution of Needs at each level not properly Understand incentives Provincial Civil Service
functionaries estimated structures for readjustment Commission legislation
Unfilled gap at subnational levels Design a program for is not complete
redeploying federal staff at
subnational levels by
addressing incentives
Create enabling
environment for provincial
governments to recruit
through Provincial Public
Service Commissions
Recommendations:
• Finalize current staff profile assessments and development of model organizational structures for local
governments as mandated by the Local Government Operations Act of 2017 (Act 2704)
• Establish an institutional framework for making deputed staff (federal staff adjusted to subnational
levels) accountable to subnational governments
• Review the financing system for recurrent expenditures: there is a need for a financing plan for the
sustainability of subnational wage bill
• Draft the Civil Service Act that sets the basis for the formation of the Province Civil Service
• Provide provinces with a model Province Civil Service Law
• Draft laws that set the criteria for the formation and terms of service for Local Service
Identification of The PLGs have the legal Work with subnational Finalization of
human capacity authority to carry out their own governments to design an organizational structures
needs at the O&M surveys to determine their O&M survey similar to the for subnational
subnational level staffing needs. However, they one conducted by governments
don’t have the capacity to do so. MOFAGA
Recommendations:
• Help PLGs to carry out their own O&M surveys
• Draft law for that forms the basis of establishing the Provincial Public Service Commission

34
 • Draft the Federal Civil Service Act that sets the basis for the formation of the Provincial Civil Service
• Provide provinces with a model Province Civil Service Law
• Draft laws that set the criteria for the formation and terms of service for Local Service
Misalignment Sector ministries’ institutional Sector ministries are Improve the capacity of
employment inheritance is out-of-sync with under-capacitated with sector ministries vis-à-vis
profile at the their new federal mandate. respect to their federal their new federal
federal level mandate (policy-setting & mandates
monitoring and
evaluation) and over-
capacitated with respect to
implementation functions
for which they are no
longer responsible.
Recommendation: Equip sector ministries to undertake their new federal mandates on policy-setting &
monitoring and evaluation
Organizational and Institutional
Gender Equality Many PLGs do not have a GESI Improve GESI budget PCSCs management
and Social plan practices rules and authorization
Inclusion (GESI) M&E on progress is not adequate Establish Provincial Civil for hiring is not in place
Training and monitoring of GESI Service Commission and External monitoring of
budget practices is limited hiring/management rules GESI outcomes not yet in
Clarify GESI extensions to new place
hiring
Recommendations:
• Promote local civil society for the engagement with socially excluded groups and to disseminate
information on rights
• Establish a monitoring system with local civil society on GESI plan
• Put in place legislation to enable PCSC hiring and management practices
Investment Capital expenditures are too Conditional grants to Structure of
accountability heavily biased in favor of small stimulate investments with intergovernmental
projects with neighborhood areawide benefits transfers to stimulate
benefits Adopt local government capital spending
Borrowing practices not yet revenue mobilization Incentives to increase
established improvements user charges
Institute formal
borrowing practices
Recommendations:
• Promote local associations
• Use social mobilizers (drawing from Local Governance and Community Development Programme
LGCDP experience)
• Use Citizen Awareness Centers effectively
• Amend domestic debt law to allow PLGs to raise domestic debt
Institutional Confusion over roles and Need clarity in No arrangement for a
framework for responsibilities of federal, responsibility for certain phased in responsibility
inter- provincial, and local services and autonomy is in place
governmental governments in certain areas Consider a more phased-in No provision for
coordination Monitoring of subnational assumption of monitoring performance
governments’ performance responsibilities for PLGs is in place
Recommendation: Inter-Provincial Council (mandated by the Constitution) and Inter-Governmental Fiscal
Council (mandated by the Intergovernmental Fiscal Arrangement Act) are the only two institutional coordination
mechanisms established so far. There is a need for inter-ministerial coordination mechanisms with respect to the
development of policy and the administration of the subnational systems. In the absence of intergovernmental
coordination mechanisms, different administration tools and systems (in case of PFM, for example, SUTRA and
MARS systems) are being promoted. There is a bill in the Parliament on intergovernmental coordination (Bill on

35
Inter-governmental Coordination 2019) which is subject to discussions and criticism. It needs to be enacted as
soon as possible after reaching a consensus among all stakeholders to ensure cooperation and coexistence in
concurrent power-sharing among the federal, provincial and local levels.
User committees Confused continued role for user Redefine capital The role of civil society
and civil society committees investment planning has not been addressed in
involvement Who will represent the interests detail
of municipal governments?
Recommendation: Use local civil society effectively as a stakeholder.
Database Inadequate accurate data to track Develop a data base that A plan to do this at the
fiscal performance of PLGs integrates fiscal and national level does not
Inadequate data to populate and socioeconomic data appear to be developing
evaluate intergovernmental Produce the data on a quickly
transfer programs timely basis
Recommendation: Appoint a Committee of experts to prepare a proposal for the content of a data base that could
serve the goals of monitoring the performance and entitlements of PLGs.
Local FCNA survey produced a Action plan for follow up No mechanism for follow
government significant list of needs for PLGs on these up is in place
preparedness to effectively implement
federalism
Recommendations:
• Empower a task force to put an action plan in place
• Consider a more phased in implementation of federalism, based on readiness
Legislative Important pieces of legislation Enact all required Key issues are PPSC
Actions for implementing federalism are legislation for legislation, bill of rights,
not in place implementing Federalism some sectoral laws;
others
Recommendations: Review Parliament’s priorities and timeline for new legislation regarding:
• Draft a new law for private firm registration and commercial enterprise regulations
• Prepare a sample inter-provincial trade management law for the provinces
• Prepare a sample law for consumer protection and market monitoring for PLGs
• Draft a new law for the operation of stone, sand collection & crusher industries
• Draft new laws for land use and management
• Review the Land Acquisition Act 2034 (1977) and Immovable Property Requisition Act 2013 (1956) in
the context of federalism
• Draft a new law relating to management of squatters and unmanaged settlers
• Draft laws relating to Nepal police - their functions, supervision and coordination with provincial police
• Draft the province police integration law
• Draft a new law setting criteria for recruitment, training, uniform and security of provincial police
• Draft a domestic security law that also defines the CDO’s roles at the federal and province levels
• Review acts relating to prisons
• Review laws regulating license issuance for FM radio and TV stations
• Review the Forestry Act
• Review Water Resources Act

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Annex: Significant and Recent Achievements in the implementation of Federalism

Implementation of Federalism in Nepal

Significant Achievements to date
September 2019

Legal Framework for Federalism

Successful transition to federalism in Nepal requires significant amount of framework legislation.

To-date, substantial progress has been made in setting up the legal framework needed for effective
transition to federalism in Nepal, although additional improvements are needed in key areas.
1. Key pieces of legislation have been enacted, notably: (i) the Local Government Operations
Act, 2017; (ii) the Intergovernmental Fiscal Arrangement Act, 2017; (iii) the National Natural
Resource and Fiscal Commission Act, 2017; (iv) Staff Adjustment Act; and (v) an Act
determining the bases and criteria on roles and responsibilities of the provincial public service
commission (PPSC). The latter has paved way for the provincial governments to prepare their
legislations to establish PPSCs within the framework given by the federal law.

2. Numerous existing laws have been reviewed and have been either amended or replaced
to reflect federalism requirements. The Constitution guarantees fundamental citizen rights.
The Civil Code Procedure Act 2074 and Criminal Code Act 2074 revised, replacing the Civil
Code Act 2020. All 339 existing Acts of Parliament have been reviewed. The Staff Adjustment
Act has been passed, replacing the December 2018 Ordinance. Significant progress has been
made in drafting amendments to the Local Government Operations Act, the Public
Procurement Act, 2007, and the sectoral Laws. As cooperatives has been taken as one of the
pillars for economic development, Cooperative Act also has been amended.

3. Several drafts of laws/bills are tabled in Parliament (House of Representative and national
assembly). Intergovernmental Coordination Bill (ICB), as per the Article 235, among others.
The ICB represents an important milestone in outlining the process, aimed at providing
mechanism for the implementation of concurring powers, that will ultimately contribute to
strengthening inter-governmental relations and smooth implementation of federalism. Several
other bills such as The Police Adjustment Bill and Financial Procedure and Fiscal
Responsibility Bill, Federal Civil Service Bill are under review in Parliament.

4. Model laws and guidelines. Several ministries have issued model laws and guidelines to guide
local governments and provinces in enacting their own laws and regulations. Approximately

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 34 model laws/guidelines have been issued by MoFAGA. The MOF has issued 7 model laws33.
Most LGs have adopted these model laws and guidelines, with some modifications.

Institutional Framework of Federalism

The roll-out of federalism must be supported by adequate institutional framework to attain optimal
results. The federal government is called on by the Constitution to establish or develop several
institutions and organizations. Several are commissions with appointed members whose mandate
is to support in making federal system functioning more efficiently. In other cases, the entities will
function as an additional check on the powers of government. In yet other cases, these
organizational arrangements have to do with provisions on how the government should be
managed. To date, significant progress has been achieved in this area of the reform since 2017.

5. Provincial Public Service Commission (PPSC). Provincial governments have started

establishing their PPSC. Province 2 and 5 have formed their commissions and appointed
chairperson. The Federal Civil Service Act is still under discussion in the Parliament. Along
with the Federal Civil Service Act, and framework and standards for provincial civil service
and local service, the provinces and LGs, will be able to enact their own civil service act, which
will empower the PPSC to hire, fire and promote their employees. As PPSCs are either not
established or not fully functional, the Federal Government has tasked the Public Service
Commission to process the recruitment of about 10,000 staffs for local governments.

6. Inter-Provincial Council (IPC). The IPC has been created and is operational. Its mandate
includes settlement of political disputes between the federal and provincial governments or
between provincial governments. The IPC convened its inaugural meeting in December 2018,
which provided a platform for the Prime Minister and Chief Ministers to discuss immediate
challenges affecting implementation of federalism. The meeting resulted in the formation of a
task force to propose measures for addressing federalism implementation issues raised by the
chief ministers. The task force is headed by the Federal Home Minister, and consists of federal
ministers of MOF, MoFAGA, and chief ministers of Provinces 2 and 5 as members, and the
Chief secretary of the federal government its secretary. The Council has met three times as of
date. At its second meeting, the Council laid out a “federalism implementation Action Plan,”
which identified 29 actions that the federal government needed to take to allow a smooth
transition to the federal governance structure. The federal government agreed to cooperate with
the Inter-Provincial Council and to expedite the passage of necessary laws.

7. National Natural Resources and Fiscal Commission (NNRFC). The NNRFC is operational
under the leadership of a constitutionally-appointed Chair. Its mandate includes
recommending/determining the distribution of revenues to PLGs from the national

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(1) Provincial Finance Procedure Model Act; (2) Local Government Financial Procedure Model Act; (3) Provincial Tax and Non-Tax Revenue
Collection Model Act; (4) Local Government Tax and Non-Tax Revenue Collection Model Act; (5) Provincial Revenue Distribution Model Act; (6)
Appropriation Model Bill and (7) Provincial Finance Model Bill

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 consolidated fund. The NNRFC is a key component of the intergovernmental fiscal system in
Nepal. Its formation is meant to give the government of Nepal a permanent and professional
body for managing the distribution of intergovernmental transfers, guiding local revenue
mobilization, and generally tracking the performance of the intergovernmental fiscal system.

8. Significant progress has been made in setting up key other Commissions. The Constitution
provides for creation of the following commissions: (i) Commission for the Investigation of
the Abuse of Authority, (ii) National Inclusive Commission, (iii) Commission for Indigenous
Nationalities (iv) Madheshi Commission; (v); Tharu Commission, (vi) Muslim Commission,
(vii) National Women’s Commission, (vii) National Dalit Commission. All the new
commissions have established and four of the commissions, namely, Tharu, Muslim, Madhesi
and National Inclusive commission have chair or a member in the Commission.

9. Intergovernmental Fiscal Council (IFC) has been established. The IFC convened 4 times
since its creation. Chaired by the Finance Minister and attended by Finance ministers of all
seven provinces. The IFC provides important platform to discuss emerging issues such as
revenue mobilization at PLGs levels; budget formulation and endorsement; fiscal authority;
and bookkeeping, and human resource management; budget implementation, resource
management, and problems in project implementation at PLGs levels.

Public Financial Management, Accountability & Transparency

The Government of Nepal has made significant strides in developing its national government PFM
system. It has set up a Public Expenditure and Financial Accountability (PEFA) Secretariat,
carried out PEFA assessment, and established a PFM steering committee. There has been a
successful implementation of the treasury single account, a transparent expenditure reporting
system, a revenue management information system and an upgraded audit system. The extension
of PFM practices to PLGs is a high priority for the country.

10. Treasury Regulatory Application (SUTRA). The roll-out of SUTRA since 2017 has now
reached LGs. SUTRA is a planning, budgeting and accounting software developed under the
leadership of PEFA Secretariat based on the decision of MOF. The tool supports
implementation of a structured financial management procedure for PLGs based on the Unified
Charts of Accounts. The Financial Controller General’s Office (FCGO) was able to generate
reports from SUTRA for all LGs. For reporting on financial information, Provinces use a
combination of tools, including Revenue Management Information System (RMIS); Treasury
Single Account System (TAS); and Computerize Government Accounting System (CGAS)

11. Consolidated Accounts. Provincial Consolidated fund has been established in each Province
and Local Consolidated Fund has been established in all LGs in accordance with the
Constitution. The federal Government only disburses into these consolidated funds.
12. Fiscal discipline and control.

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 (a) Most LGs have tabled their budget in their assembly and approved on time and
executed the 2018 fiscal year budget.
(b) All accounts of the LGs and Provinces are audited in a timely manner.
(c) Single treasury account is under implementation at PLGs level.
(d) There is more transparent expenditure reporting system of PLGs.
(e) Revenue management information system is in place at PLGs, but not used by all PLGs
(f) Audit methodology has been upgraded.
(g) The FCGO has developed a software to capture LGs revenue and expenditure data.
District treasury controller’s office enters the financial information in the software.
(h) The federal Government has manded trimestral reporting by PLGs as a condition for
the disbursement of federal transfers to PLGs.
(i) The MOF has integrated all its PFM systems into the PFM Information System
(PFMIS) and provided access for all its federal ministries to the PFMIS.
(j) The MOF has issued guidance to the federal ministries to guide their preparation of the
draft three-year MTEFs for the Fiscal Year 2019 budget cycle.
(k) NNRFC and MOF has issued circulars to LGs to guide their preparation of the annual
budgets, to be part of the Local Government Development Plan.
(l) MOF has implemented measures to improve its budget execution, such as: (a) the
issuance of a decree requiring all new externally-funded and national priority projects
to have secured project filter clearance to obtain budgetary funds; (b) the adoption of
the System for Automatic Spending Authorization and Program Approval; and (c) the
adoption of a system of payments by account payee only. MOF has established the
Revenue Management Information System at the federal level.

13. Risk-based auditing. The Auditor General Office has started risk-based auditing. Citizen
Participatory Auditing- Nepal is the first pilot country to implement this tool, which is
increasingly important in the federal context.

14. Procurement. Nearly all LGs have a functional procurement unit and have the capacity to
conduct all forms of procurement, except international bidding in some local governments.
Overall, 57% of LGs can use e-bidding, with usage more common in cities (76%) than
municipalities (58%) or rural municipalities (49%. Almost all LGs (97 percent) have a list of
vendors. All provinces adopted their own procurement guidelines and standards.

Political Governance and Administration

15. The Functioning of Local Governments. The creation of political and administrative
structure of subnational governments have been essentially completed. LG Assemblies and
executives were elected. Nepalis are now represented and empowered. Approximately 36,639
representatives including chairperson, vice-chair person and ward chair persons and council
members were elected in the 753 LGs. Women and disadvantaged people are now represented.
Every Mayor / Deputy Mayor; every local assembly has women. Every LG has representation
for disadvantaged communities. The FCNA survey results show that provincial and LGs are
40
 settling in and taking up their responsibilities. Elected leadership is in place with significant
and legally mandated representation of women and Dalits on the councils at both the PLGs
levels. Many LGs are dispatching their duties in a competent manner. Nearly all assemblies
(96%) have passed regulations on the operation of the assembly and attendance at the most
recent LG assembly meetings was about 90% across the board. About 89% of LGs reported
the assembly meetings always had an agenda circulated prior to the meeting.

16. The Executive Council. The LG executive council has met in all LGs, with an average of 14.5
meetings per LG. More 70% of LGs “always” prepared and shared agendas in advance of the
meetings. Most assemblies have created the eight committee types surveyed, with at least 88%
having created judicial, legislation, resource projection, revenue, and budget committees.

17. Local Assembly. The assembly meetings are taking place with about the same frequency in
all LGs, and the meetings are reported to be well attended. Provincial governments have been
passing thematic laws (mostly concerned with social development) and issuing regulations
(mostly concerned with land management, agriculture, and cooperatives). The literacy rate of
assembly members is over 90 percent. Female and Dalit members are reported to participate
in the assembly deliberations. Most SGNs have a capital budget that lists projects by sector
and wards, and budgets were approved on time.

18. Judicial Committee. Almost LGs have formed a Judicial Committee and more than three
quarters (77 %) of LGs have prepared manuals or guidelines for the committee. About 71 %
of deputy mayors have had training on judicial affairs.

19. Sectoral Committee. Almost all LGs have formed the sectoral committee with responsibilities
allocated among Ward Chairs. These Committees have taken responsibilities of major social,
economic and infrastructure sectors at local level.

20. Planning and Budgeting. At least 80% of LGs have sector-specific plans for education,
health, agriculture, roads, drinking water and disaster preparedness. At least 90% of LGs
completed all seven steps in the planning process and given budget ceilings to wards. Nearly
all (88%) of LG included both federal and provincial Conditional Grants in their budget plans.
Around 90% of LGs did not have to make any changes to the approved budgets because of
changes to Conditional Grants. About 77 % of local governments distinguish tax and non-tax
sources of revenue in their budget estimates. Nearly all (96%) of LGs have an annual
investment plan. For those local governments that have a multi-year development plan, in 80%
of cases it is the basis for their annual capital budget. In about 90% of LGs capital investment
plans are broken down by sectors and wards.

21. Ward Administration. Almost all LGs reported there was a clear allocation of authority
between the LGs and the wards. The ward chairs were clear about their roles in 82% of all
LGs, and 93% of LGs reported that wards are involved with monitoring LG services.

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22. Disaster risks management (DRM). Many LGs (77%) have incorporated DRM into their
organizational structures. In Provinces 1 and 5, 67% and 72% of LGs respectively have
established written cooperative agreements with other LGs to address common DRM issues.

23. Education. Nearly all (98%) LGs have incorporated education into their organizational
structure and 95% have teacher/staff salaries and wages in their budgets, while 70% have a
capital investment plan in place. Nearly all LGs (92%) have schools in their annual operation
and maintenance plan and have a capital investment plan for the education sector (95%).

24. Basic Health Services. Nearly all (97%) of LGs have the health services function incorporated
into their organizational structure. Almost all LGs (91%) own the health services
infrastructure. Overall, 71% of LGs include health-related infrastructure in their asset records,
though it is much more likely in cities (94 %) and the HEZ (88%). Almost all LGs (93%)
include salaries and wages of health workers in their budgets, and 84% include health centers
in their O&M plans. About 82% of LGs have a capital investment plan for health services,
while 84% monitor the performance of their health services sector.

25. Social Development. At least 95% of LGs have incorporated the governmental functions
regarding vital registration, women, children, senior citizens, and social welfare into their
organizational structures. Sports have been incorporated by 84% of LGs and 81% of youth.
Most (89%) LGs include spending for social development in their budgets.

26. Economic Development. At least 85% of LGs incorporated cooperatives into their
organizational structure, 70% have incorporated local market management, 56% micro-
enterprises, and 55% economic data collection. Economic development plans were in place in
63% of LGs. Most LGs partner with the federal government and provinces on economic
development in a variety of ways, with most (89%) doing so through budget allocations and a
large portion (71%) sharing information. At least 76% LGs work with federal and provinces
on economic growth, poverty alleviation, and SDG localization through the national plan,
while 61% work through the provincial plan and 74% have their own plan.

27. Agriculture. A large proportion of LGs indicated that key agricultural functions/offices were
transferred to them and incorporated into their organizational structure. LGs are more likely to
work with federal and provincial governments through allocations in the federal government,
with 77% using this method, while 68% used information sharing.

28. Roads. Nearly all (97%) of LGs have incorporated local roads into their organizational
structure, and 85% have incorporated rural roads. Most LGs (82%) work with the federal and
provinces through the federal budget allocation, while 78% use provincial budget allocations,
66 percent joint partnerships, and 62 percent information sharing. Although 70% of LGs have
prepared a road inventory, 81% have road maintenance in their O&M plans and 73% have
prepared an annual maintenance plan.

42
29. Gender Equality and Social Inclusion (GESI). At least 80% of LGs have GESI policies,
including those for children, senior citizens, and the differently-abled, and for ensuring
women’s participation in LG activities. Nearly all LGs have included GESI in their budgets
and through inclusiveness that encourages the participation of women, senior citizens, and
ethnic and disadvantage groups.

30. Engaging citizens and non-government actors. Local governments engage outside
organizations in budget preparation at generally high but varying rates, with local business
chambers and civil society/NGOs the highest at 83% of LGs. Fewer LGs engage community
associations or other public institutions (76% and 64%, respectively). Most LGs (83%) have a
grievance redress mechanism. These LGs use designated officials and complaint boxes most
often (86% and 83%, respectively), followed by public hearings (75%), social media (64%),
social audits (61%), and complaint registers (51%). Nearly 70% of LGs conducted a social
audit for the recent fiscal year.

31. Capacity building for federalism is also strongly supported by Local Government Associations
(Association of District Coordination Committees of Nepal (ADCCN), Municipal Association
Nepal (MuAN) and National Association of Rural Municipalities (NARMIN). This involves
orientation for elected representatives on their role and responsibility.

Gender Equality and Social Inclusion (GESI)

32. Legislative backing and implementation of GESI. The Constitution calls for legislation to
promote equal voice in government by guaranteeing a prescribed number of legislative seats
according to gender and ethnic background. In the 2017 elections, 38% of Assembly seats were
won by women and 21% by Dalits. This has given women and minorities significant formal
involvement in governance. Women won 91% of the deputy positions (deputy mayors and vice
chairpersons) in municipalities and wards, while men won 98% of the chief positions. At
present 25% of civil service employment is female compared to 11% in 1993.

33. Executive actions on GESI. The Government called for “mainstreaming” gender equality and
social inclusion by including it in all decisions about governance and government operations,
systems and their operations. For the 2017/2018 budget speech, about 36% of the total budget
was classified as directly gender responsive and about 30 percent was classified as gender
neutral. The very fact that it is part of the annual budget address of the Minister of Finance
gives gender budgeting some creditability. The guidelines for gender budgeting have been
introduced and provides a set of indicators to guide implementation of GESI policy. There
have been training programs for government officers on gender-responsive budgeting.

34. National Women Commission. The National Women Commission has established an
integrated platform for a comprehensive response system to coordinate expansion of access to
services for gender-based violence prevention and response.

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Fiscal Capacity and Local Government Revenues Mobilization

35. The FCNA survey results highlight that: (i) most LGs distinguish between tax and non-tax
sources of revenues in their accounting for revenues, and most have studied their revenue
structure, though rural municipalities have lagged in this area; (ii) the rate of collections of
own-source revenues against the budget estimates, for all municipalities, is about 72 percent;
and (iii) 79% of LGs have studied local revenue sources.

Administrative Infrastructure and Connectivity

36. Measurable progress was made in building the administrative infrastructure and connectivity
at PLGs level. Most PLGs are in the process of building their administrative infrastructure and
connectivity. According to the FNCA results, generally, most ministries in all provinces have
access to electricity, telephone and internet. Nearly 54% of LGs owned at least some of their
buildings and about 70% of cities felt that their building could accommodate an assembly
meeting. Most LGs (82%) are connected to the national grid and all LGs have solar power in
that province. Nearly all LGs centers were accessible by road and about 47% of LG have office
building construction going on. Provinces have enough computers (one per essential staff).

Human Resource Management and Development

37. A major “win” in the transition to federalism was the staffing of LGs by devolving all front-
line staff in education, health, agriculture and administration. The Government reorganized the
civil service, by re-allocating, adjusting, and transferring civil servants under public services
into the federal and PLGs levels. Although the process is still incomplete, it has allowed LGs
to have key officials and staff in place to support implementation of federalism.

38. Organizational structures have been uniformed across provincial administrations. Some
provinces have updated their organizational structures, and some are in the process of updating.
Recruitment of deficit staff at LG has started by the FPSC. Recent deployment of senior level
Joint Secretaries from the federal government to provinces as Secretaries was intended to
further strengthen human resources capacity and effective implementation of federalism at sub-
national level. Majority of sub-national staff have received training on federal affairs.

Monitoring and Evaluation

39. Constitution has made specific provision for Monitoring and facilitation of developmental
activities, coordination for balance development of the district. According to constitutional
provisions in Article 220 there will be district council and will constitute among the elected

44
 Mayors and deputy of all Rural/Municipality with the district. The role and functions are also
provision (Article 220(7). The Local Government Operation Act 2074 (clause 92-96) also has
stipulated activities of District Council through the district Coordination Committee.

Institutional Capacity Building

Building capacity for federalism has been a priority of the Government. The transition to a
federal structure significantly increases the need to provide training for government officials at
all levels, because the assignment of responsibility for service delivery and PFM has changed
dramatically. It also may require a different institutional arrangement to deliver this training and
capacity building, because PLGs in the new federal regime have significant control over how they
deliver their services and manage their systems.

40. Provincial and Local Governance Support Program (PLGSP). In August 2019, the
Government of Nepal announced the four-year national flagship program, namely PLGSP with
the budget of US$130 million on institutional capacity development of all spheres of
governments, more specifically the sub national governments. It is expected to be the main
vehicle through which capacity gaps will be addressed. During the program period, PLGSP is
expected to provide various levels of training to elected representatives and staffs and support
to address the capacity gap areas. It is envisaged that the program will strengthen PLGs
systems, procedures and intergovernmental relationships, to maximize benefits in terms of
cooperative federalism and enhance the capacity of provincial and LGs to deliver services and
effectively manage development processes.

41. Local Development Training Academy (LDTA). The Government has amended the LDTA
Act to allow transfer of LDTA assets and properties to the provinces to establish the provincial
level training units under the leadership of provincial government. Gandaki Province has
already passed an act to establish a provincial level training academy. At present, the LDTA is
mandated to train elected and staff members of LGs and to ensure quality control of capacity
development efforts across the country.

42. Framework for monitoring the progress of fiscal federalism. The Government and USAID
are collaborating to establish a framework for monitoring the progress of fiscal federalism in
Nepal. This work previously concentrated at the federal level. Now, it focuses on the
implementation of SUTRA and training of LGs on the preparation of financial reports. FCGO
is providing PFM training support to LGs. PPMO is providing training to LGs on procurement.
NPC has initiated capacity building for PLGs on preparation of MTEF. The NPC has issued
MTEF guidelines to PLGs. MTEF guidelines are already being used at federal level.

43. Provincial Coordination Council (PCC). All provinces have created their PCCs to improve
provincial and LGs coordination. Each province held at least two council meetings so far.

45
44. Nepal Administrative Staff College (NASC) and other Sectoral Training Academy. The
NASC ACT has been amended to address the need for capacity building at all level of
government. NASC has revised its training curriculum and training plan to accommodate the
training needs of federal and PLGs staff. NASC is working towards establishing ‘Center for
Federalism Studies at NASC to enhance capacity building for civil servants and elected
representatives at all levels of government. Different training institutes in forestry, agriculture,
revenue management, cooperatives and other sectors are providing various levels of general
and specific training to government officials.

List of Best Practices in the Implementation of Federalism in Nepal

1. Judicial committees -settling disputes through mediation or regular judicial process

2. Participatory planning – providing an inclusive process in local planning and budgeting
3. Local revenue mobilization – providing flexibility and innovations in local resource mobilization
4. Model laws and regulations for PLGs levels
5. Consolidated accounts at PLGs levels
6. Online application to capture revenue and expenditure information from local governments
7. Implementation of System for Automatic Spending Authorization and Program Approval
8. Revenue Management Information System at federal level
9. Guidelines for MTEF at PLGs levels
10. Citizen participatory auditing
11. Grievance redress system at local government level
12. National Natural Resources and Fiscal Commission

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