Federalism is a new and evolving practice in Nepal. There has been some notable progress in fiscal federalism. The government has formulated major laws, developed public financial management (PFM) systems for the provincial and local governments, well accounted for and managed intergovernmental fiscal transfers, and established integrated PFM IT and e-procurement systems. In addition, a PFM Steering Committee has been set up. The National Natural Resources and Fiscal Commission (NNRFC) has developed the formula for intergovernmental fiscal transfer, guidelines, and allocation of equalisation grants, among others.

Studies, however, have shown a significant fiscal and PFM capacity deficit at the federal, provincial, and local levels. The Ministry of Finance conducted a federalism capacity needs assessment in 2019. As per the assessment, fiscal federalism was one of the areas with a capacity gap. It also found significant needs for systematically improving the policy and institutional framework, notably for the intergovernmental fiscal system. Likewise, the PEFA secretariat and the government of Nepal conducted a PFM capacity needs assessment, identifying fiscal and PFM capacity deficits and recommending short- and long-term capacity-building measures, including establishing an autonomous PFM institution for capacity building and training of civil servants.

As fiscal federalism is a new undertaking, civil servants and elected officials need improved fiscal and PFM skills and knowledge. There is a lack of systematic processes for enriching fiscal and PMF knowledge at the senior level of civil servants, such as secretaries, joint secretaries, project managers, planners, and officials responsible for fiscal and financial management. It is equally crucial for ministers and parliamentarians at the federal and provincial levels to acquire that knowledge. There is an absence of a specialised body to develop and share the knowledge, institutional arrangements and practices.

Establishing a PFM academy

Now is the time to review current legal and institutional arrangements as well as consider establishing a professional, autonomous and semi-academic fiscal and PFM academy in Nepal to overcome capacity gaps. The current PFM training institutions and courses are insufficient to meet shortages and needs. The academy can i) serve the federal, provincial, and local governments as a centre of excellence in fiscal and PFM matters; ii) consolidate and institutionalise available fiscal and PFM knowledge and best practices; iii) generate and manage knowledge and skills related to fiscal and public finance within the country with internationally accepted standards; and iv) conduct research and studies on practices of fiscal federalism in Nepal and abroad; and v) disseminate findings in a user-friendly way for government officials and parliamentarians at the federal and subnational levels.

The academy should develop tailor-made tools for federal and subnational elected leaders and civil servants to formulate fiscal policies, manage public finance, and build capacity. It should develop and standardise the fiscal and PFM curriculum for different levels of officials. It should also get accredited by the Government of Nepal and reputed international institutions. It should put effort into conducting research/studies on the fiscal and PFM practices and lessons in Nepal and abroad, which will be instrumental for different tiers of government. The knowledge could be helpful for the National Natural Resources and Fiscal Commission (NNRFC) and the Auditor General.

The private sector has enormous needs to better understand fiscal and public finance matters, mainly concerning taxation, public spending, procurement/contract management, etc. As Nepal’s private sector is growing and improving corporate governance, the academy can provide tailor-made fiscal and public finance solutions to enable them to improve public sector accounting and reporting standards, fiscal policies and financial procedures, and compliance with laws. The academy has enormous scope to cooperate and coordinate with development partners engaging in fiscal and PFM work.

Moreover, the academy’s knowledge products could be immensely beneficial for university students. Think tanks and other stakeholders may use the knowledge produced by the academy for their professional and academic work. The academy has high potential to become a fiscal and PFM centre of excellence in South Asia in the long run.

Investment and collaboration

Establishing and strengthening the PFM academy requires a sizable investment. The investment is strategic for the country, which will likely pay eventually. The government might allocate the required resources. Alternatively, the government and development partners may collaborate for initial investment and cover operating costs for the first few years. The sustainability of the institution and knowledge production is crucial. Sustainability is contingent on the political will and commitment of the government. Thus, the government of Nepal needs to make the training and annual refresher mandatory for senior to operational level staff and elected officials (based on the set curriculum). It should ask all public spending units to set aside some funds for fiscal and public finance-related research, training, and other specific technical assistance; develop a policy to acquire fiscal and public finance knowledge and capacity through the academy; and ask development partners to support the three tiers of government through the academy.