In Nepal, the provincial governments formulate and implement their budgets and programmes, and execute the federal government’s programmes under conditional grants, special grants and matching grants to advance the national objectives. Thus, the expenditure performance of intergovernmental transfers should be significant in the provinces to achieve these objectives, and the sub-national governments should satisfy technical conditions sufficient to ensure that the transfers are appropriately spent. Financial matters are handled under standard procedures and audited regularly and publicly.

Nepal’s constitution has made provisions for intergovernmental fiscal transfers to provincial and local level governments to bridge the gap between revenue rights and expenditure needs. Regarding such fiscal transfers, the sub-national governments receive fiscal equalisation grants, conditional grants, special grants and matching grants from the federal government.

According to data from the Sudur Pashchim Province Financial Comptroller's Office, the province received Rs23,953.9 million in fiscal equalisation grants, Rs1,622.77 million in special grants, Rs14,644.20 million in conditional grants, and Rs2,629.00 million in matching grants from the federal government to implement provincial and national programmes and projects from fiscal years 2018-19 to 2020-21. According to these statistics, intergovernmental fiscal transfers account for a significant portion of the province’s finances. However, its expenditure performance on intergovernmental transfers is very weak.

From fiscal years 2018-19 to 2020-21, the total expenditure of fiscal equalisation grants, conditional grants, special grants and matching grants amounted to Rs11,639.43 million, Rs10,426.28 million, Rs812.80 million and Rs948.15 million respectively, representing 48.60 percent, 71.20 percent, 50.10 percent and 36.10 percent of the total received amounts of these grants. This scenario reveals that the expenditure side of sub-national finance in Sudur Pashchim province is significantly low.

Causes for low spending

The constitution has given many responsibilities to the sub-federal governments, but their revenue generating rights are nominal. It is the polar opposite of the fiscal federalism theory, which holds that finance follows function. It means that the Sudur Pashchim government has been receiving fewer fiscal transfers from the federal government to execute its functional responsibilities. The programmes and projects funded under conditional grants from the federal government, on the other hand, are minor, numerous and have small budgets. Many such programmes are transferred to the region in the last month of the fiscal year, which makes it difficult to complete them on time. Correspondingly, new programmes and projects are being added each year, not meeting the running projects regarding complementary and special grants. Also, the budget assurance for such projects is not predictable from the federal government. This is why the provincial government is obliged to accomplish such projects with its own finances.

Moreover, lack of technical and non-technical human resources (civil personnel); lack of institutional capacity; lack of effective management and administrative leadership, regular training and motivation of civil servants; lack of coordination among provincial ministries and agencies, as well as federal and local governments; and ineffective supervision, monitoring and evaluation of the province’s development works are all factors contributing to low expenditure performance.

Furthermore, the province has not yet made all the required policies and laws, and has not established the necessary offices to execute its given functional responsibilities. At the same time, the provincial ministries and agencies seem to be unenthusiastic in implementing the budget expenditure guidelines provided by the Ministry of Economic Affairs and the prevailing laws and procedures. The tendency to demand budget allocations for unapproved programmes and propose budgets even for petty projects to make them multi-year projects, and frequent programme revisions and virements have also become a terrible headache. It has created an extra financial burden on the province’s consolidated funds.

The way forward

The issues mentioned above must be addressed as soon as possible. First and most important, the prevalent budget formulation process in the province must be reformed. Allocation efficiency should be considered while formulating the budget and programmes. After that, the line ministries, their related agencies and expenditure units should prepare budget implementation action plans and strategies, and strictly implement them with no excuses. Similarly, the provincial ministries and agencies must follow the budget implementation guidelines issued by the Ministry of Economic Affairs and other regional and federal laws, policies, directives and procedures. Besides, the monitoring and evaluation system should be reformed, and monitoring and evaluation of the running projects and programmes should be done regularly; the reporting system should be changed and made real.

Secondly, regarding fiscal equalisation grants, the federal government should allocate them as per the actual expenditure need of the province; and the National Natural Resource and Finance Commission should reconsider the current grant distribution basis and formula for a more equitable distribution of national finance to the sub-national governments. In the case of conditional grants, the federal government should stop allocating budgets for petty programmes and projects, and break the tendency of transferring the funding and programmes at the end of the fiscal year.

Duplication in the agenda must be ended. In terms of unique and complementary grants, the provincial government should continue to propose funding for ongoing (multi-year) programmes and projects under such grants until they are completed. The federal government should also ensure that such programmes have adequate funding. Third, the provincial government should immediately approve the Organisation and Management Survey and allow the Province Public Service Commission to advertise for vacant positions to address the province’s current human resource shortage to run programmes and provide adequate public services.

Finally, good political ties are necessary for seamless implementation of the budget and programmes. Political officers should not interfere with the working style of the administrative team. And project governance must be followed, as well as fiscal discipline and integrity at all levels of the government and administration. Only then will the province be able to use the federal government’s fiscal transfers, which will improve the province’s expenditure performance, resulting in better service delivery and economic growth and development.