The federal government has been increasing conditional grants to local governments while reducing fiscal equalisation grants, giving little freedom to local units to invest the financial resources in the projects they prioritise.

Fiscal equalisation grants are allocations to the provincial and local governments for implementing the programmes and projects that the sub-national governments have chosen for themselves whereas conditional grants fund the implementation of the federal government’s specific programmes and projects.

The federal government increased conditional grants to the local governments to Rs191.89 billion for the next fiscal year 2023-24 from Rs183 billion in the current fiscal year 2022-23, according to the finance ministry.

In fact, the conditional grants have been on the upward trajectory since fiscal year 2018-19 when Rs110 billion was allocated under the heading.

On the other hand, the fiscal equalisation grants were reduced to Rs87.35 billion for the next fiscal from Rs100.23 billion in the current fiscal year 2022-23, the finance ministry said.

In fact, such grants had been steadily increasing until the current fiscal year, from Rs84.7 billion in the fiscal 2018-19.

Local governments are heavily reliant on fiscal transfers from federal and provincial governments with such transfers making for two-thirds of total financial resources of the local units in the fiscal year 2021-22, according to the 60th annual report of the Office of the Auditor General.

Experts said the rapid rise in conditional grants compared to equalisation grants suggest that the federal government, going against the spirit of federalism, wants to dictate what projects to implement at the local level.

“The spirit is to strengthen local governments to make their own decisions on development projects,” said Khim Lal Devkota, a lawmaker and an expert on fiscal federalism. “Reducing fiscal equalisation grants while increasing conditional grants means forcing local governments to carry the burden of the federal government while giving them little room to implement the projects of their choice.”

Besides fiscal equalisation and conditional grants, special and complementary grants are other types of grants that local governments get.

Even though the constitution has given provincial and local governments much power, experts and stakeholders say the tendency of centralising institutions and resources has continued. “Reducing the share of conditional grants to be provided to local governments is vital to strengthening them,” said Devkota.

“Reduction of conditional grants for provinces and local governments means handing over office, staff and budget to sub-national governments and strengthening their roles in national development.”

The provincial and local governments have long been complaining about the centralisation of financial and human resources. When the government staff adjustment process began, most human resources were retained at the centre contrary to earlier promises. Even though overall fiscal transfers to local governments are rising, the share of conditional grants where the local governments have little say, is growing rapidly.

Conditional grants are provided to achieve certain national goals and to achieve certain standards and quality of the public services in the countries where the federal rules prevail. But local governments complain that the grants were recklessly doled out as per the wishes of certain politicians and interest groups.

“Our demand is that there should be no allocation under conditional grants,” said Bhim Prasad Dhungana, president of the Municipal Association of Nepal. “Even if conditional grants are to be provided, they should be based on the needs of local people and the decisions of local governments.”

He said besides allocating more in conditional grants compared to equalisation grants, the federal government also decided to set aside a budget for federal lawmaker-directed projects, which is also a type of conditional grant. Local governments are usually responsible for implementing the projects chosen by the lawmakers.

The government allocated Rs50 million for each constituency under the Constituency Infrastructure Development Programme, which was revived after a gap of two years amid strong pressure from lawmakers.

“Increasing the budget for programmes that certain politicians sign off on while decreasing the amount for programmes based on local needs is a blatant violation of the spirit of federalism,” said Dhungana, who is also the mayor of Neelkantha Municipality, Dhading.

He said that there are many instances of conditional grants being allocated for programmes that are not necessary for local governments.

Besides reduction in budgetary allocation under the fiscal equalisation grants, the federal government has continued to implement small-budget projects.

In the budget for the fiscal year 2022-23, the federal government announced that projects that cost up to Rs5 million and related to water supply, tourism and urban development had been handed over to local governments.

“The promise was never realised as the budget allocated for these projects were returned to Kathmandu purportedly due to resource crunch faced by the central government,” said Khim Bahadur Thapa, general secretary of Nepal Association of Rural Municipalities in Nepal.

As much as Rs22 billion had been allocated for provincial and local governments along with handover of these smaller projects. “All the budget meant for provincial and local governments was returned to the federal government,” said Thapa.

Elected local representatives that the central government failed to send even the budget allocated under conditional grants in the current fiscal.

“The local governments have been denied as much as Rs13 billion that was supposed to be sent in the fourth quarter of this fiscal,” said Thapa, who is also chairperson of Kaligandaki Rural Municipality, Syangja “Local governments have been unable to pay contractors and user group who have completed their works.”