All seven provinces of Nepal presented their fiscal bills (budgets) for the next fiscal year beginning mid-July in their respective Provincial Assemblies last Wednesday. The cumulative allocation of Rs305.46 billion is only about 17 percent of the budget of Rs1,794.83 billion that is in the process to be ratified by the federal parliament. All 753 local units have to present their budgets by mid-July, and are set to table their policies and programmes by June 25 in their municipal/rural municipal assemblies. The policies and programmes, in principle, provide the basis for the budgets.

The local units, barring a few large urban municipalities, are almost entirely dependent on formula-based fiscal transfers in the form of grants and revenue sharing, mainly from the federal, and to some extent, from the provincial treasuries. Their own source revenue contributes only marginally to their income. Nevertheless, a local unit receives at least Rs150 million in the upcoming fiscal year from the higher tier of government. The continuation of such a top-heavy allocation practice is a clear revelation that devolution of budgetary power to subnational governments or implementation of fiscal federalism, in the true federal spirit, is severely constricted.

Chronic ailments

The budgetary practice of the provincial and local governments during the last five years of their existence neither captured the federal spirit of fiscal independence nor shook off the chronic malaise of Nepal's budget system. The capital expenditure allocation in Nepal's national budget has barely crossed 25 percent of the total funding over the past two decades. According to the latest economic survey published by the Ministry of Finance, the capital budget allocation, even at the local level, is less than 40 percent of their total budget. It defeats the very objective of federalism with the substantially empowered local government meant to deliver services to the people at their doorsteps by spending most of the funds on developmental, not recurrent, expenditures.

The disconnect between the policies and programmes and the budget allocation has now extended up to the local level. The local government budgets have also become victims of ritualism, cheap populism and pork-barrel disbursement. The most problematic feature in local and provincial fiscal governance is no longer scarcity of financial resources, but rather a stark absence of absorption capacity and lack of accountability wherever major expenditures were made. In the fiscal year 2021-22, the total capital expenditure of the local governments stood at 56.6 percent of the capital allocation, while at the provincial level, it was 64.6 percent. The year before that, it was even less, 46.2 percent, at the local level. Projects to be implemented by local governments are essentially small and in the interest of the direct users. As such, the expenditure of the total capital allocation is an ideal possibility. For the new set of local executives elected for the next five years, an impressively improved level of capital expenditure must be on top of their budget implementation plan.

Undoubtedly, this imperative can be addressed only with adequate political will, the required expertise in budget formulation, and a thorough understanding of the issues surrounding the low capital expenditure. The provincial budgets presented last week blatantly missed taking corrective measures even though it was the fifth and the last budget to be presented by the current set of elected executives as the elections for the Provincial Assemblies are due in less than a year. The newly elected leadership at the local level certainly needs to demonstrate its understanding in finding ways for better fiscal governance in general, and augmenting capital expenditure in particular to address the development needs of their electorates better.

Low spending

At the local level, the challenge of formulating a budget generally in an acceptable format persists. Local governments are almost entirely dependent on the windfall grant amount rather than rooting the budget in own predictable sources. The freedom of budget-making is thus constrained, and it is always possible that even the amount allocated for supply-driven projects is difficult to spend compared to demand-driven projects.

Legally, the deputy chief in each municipality is the coordinator of the local revenue advisory committee. In practice, this is akin to the "finance minister" at the municipal level. However, this arrangement has not been able to deliver the goods in the same spirit and output. The gap between the knowledge of public financial management of the elected deputy mayor (deputy chair in rural municipalities) in particular and the role assigned to them by the Intergovernmental Fiscal Arrangement Act 2017 is glaring.

Another reason for low capital expenditure is the lack of institutionalisation of the process from project identification to budget allocation. The projects are often picked on the basis of political self-interest without any cost-benefit analysis. Other project readiness parameters like a detailed project report (DPR), project implementation, environmental impact assessment (EIA), land acquisition plan and approval to cut down trees are seldom considered before earmarking. The practice of creating a project bank is still a pipe dream even at the centre, let alone at the local level.

Confusion pertaining to public procurement is a critical factor contributing to the low level of capital expenditure by the local government. The law directly related to public procurement, even at the local level, is the Public Procurement Act 2007. It has seen 11 amendments putatively to make it usable even to local levels but has failed to facilitate the process.

The highly centralised mindset of carrying out public procurement under a single federal law proves counterproductive. If the idea of forcibly enforcing this law even at the local level is the effectiveness of resource mobilisation, cost reduction and enhancing transparency, the federal authorities failed to understand that it can be better done by making the provincial and local levels responsible and accountable within their respective jurisdictions according to the laws or mechanisms like public hearings designed and implemented by themselves. It is an appropriate time while visioning and scoping for their next five-year term for local governments to consider these factors in their development plans and budget allocation. The new leaders must dare to depart from the beaten path for the better.