According to the draft constitution, Nepal will be a federal country with eight provinces, a parliamentary system, and a 40 percent proportional representation (PR) system that aims to balance all population groups and regions. When negotiations, among the nine governments  in the future on development issues, result in a continuous deadlock, political instability makes institutions even weaker and managing public relations becomes a nightmare, we will realise that we got all three foundations of state restructuring wrong.

It need not have been this way. A federation of five provinces extending north-south, a directly-elected presidential system and a 25 percent PR system reserved for the few most marginalised groups would have established a conducive framework for building an inclusive and prosperous Nepal. The absence of these foundations will haunt us, leading to a new dynamics and a new political equilibrium. Until then, we have to make the most of the proposed constitution by adopting the following changes.

Political framework

Given the large number of political parties and the PR system, the constitution has invited instability by opting for a parliamentary system. It introduces a clause that the prime minister be insulated from a no-confidence motion for the first two years—a perceived solution that is more damaging than the problem itself. Furthermore, by not putting a threshold of votes for a political party to be eligible for proportional seats, the constitution rewards fragmentation and penalises consolidation in a country where there are already 139 registered parties.

At the centre, there will be a bicameral Parliament with a 275-member Representative Assembly (RA) and a 45-member National Assembly. In the Representative Assembly, 60 percent of the members will be elected through the first-past-the-post system, one each from the 165 constituencies, and 40 percent through PR. In the National Assembly, there will be five members from each of the eight provinces and the president will nominate five. As the RA represents equality of individuals and the NA represents equality of the provinces, having equal number of representatives from each province in the National Assembly is democratic. However, the members of the National Assembly should be elected directly, not indirectly as proposed. Furthermore, the provision of nomination by the president should be scrapped as it violates the principle of equality of the provinces. The concept of districts should aslo be completely abandoned.

Fiscal framework

The most fundamental issue in fiscal federalism is the ‘assignment problem’ or the allocation of expenditure and tax functions to various levels of government. The general perception is that finance (tax) should follow function (expenditure), that is, the spending responsibilities should precede that of taxation.

Best practices are such that, on the expenditure side, national public goods are assigned to the federal government, and local public goods are decentralised. Expenditure programmes that affect provincial residents but have some spillover effects (policy of one province affects other provinces either positively or negatively) are better if taken up by the centre or shared with the provinces. In most cases, the proposed constitution follows these practices.

Provinces, as mentioned in the draft, have power with regards to health, education, keeping land records, language and culture. There is a provision of a central university at the federal level, but that should not be the case. The provision of both the centre and the provinces providing university services would create duplication, confusion, standard asymmetry and regional imbalance. The same applies to health services. The federal government must not be directly involved in running hospitals and universities; they must be provincial prerogatives.

On the contrary, the money and banking sector, which has been assigned to the provinces, should remain under federal jurisdiction. First, there are spillover effects of potential bank failures at the provincial levels, requiring a national treatment of the banking sector. Second, they cannot remain in a different jurisdiction from its regulator, the central bank.

On tax assignment, the constitution must distinguish which level of government should define tax bases (the kind of taxes to levy), which should define tax rates and finally, which one should enforce and administer various tax tools. It is all right to follow a separation principle where two governments use different tax bases, or a concurrence principle where both use the same tax bases but different rates, or any combination of them. However, such an arrangement has to be spelled out in clear terms.

The objective of the tax administration is to collect revenues at the lowest possible cost. On this ground, individual and corporate income taxes and VAT are better administered at the central level and shared between governments, as defined. Therefore, the constitution should have a provision to create an independent tax administration agency with oversight by federal and provincial governments. Property taxes, on the other hand, are more efficiently administered at the local level. Here too, it is advisable to have a provision that assigns provincial governments the task of conducting property assessment throughout its jurisdiction and for local units to choose tax rates and administer them.

Looking at the proposed tax assignment and the tax potential of the provinces, there will be two main challenges. First, how does one minimise vertical inequity—the gap between revenue at the federal level and expenditure at the provincial level? Second, how does one address horizontal inequity— citizens in otherwise identical situations receiving different fiscal treatments in different provinces? Intergovernmental finance —federal-provincial transfer—is the tool to address them, and accordingly in the constitution, there is a provision of natural resource and fiscal commission. Given the importance of both natural resources and fiscal transfer, these two must be dealt with by separate institutions. Besides, this federal level institution cannot deal with province-local fiscal transfer, as proposed. Alternatively, each province should have a mechanism under its own jurisdiction.

In the draft, there is a provision of free movement of goods and services across provinces, but that must be extended to labour and capital mobility. Nepal must remain a single unified internal market. To this end, there must be a national standard for all professions that require licences.

The solution

The fact that the polity has transformed from a unitary to a federal unit will not bring substantive changes if we do not alter economic fundamentals, empowering the marginalised groups. This requires enhancing their accessibility to endowment, education and employment. Invoking quotas or a watertight PR system in politics is not a solution. For example, the provision that at least one-third of the political representatives be women may benefit only those at the upper strata rather than helping the downtrodden.

The solution is to have quotas now but with a sunset clause—in the meantime making marginalised groups capable of pursuing their dreams in politics and elsewhere. This paradigm shift does not come simply by promulgating a constitution. It requires a constitution that enshrines democratic provisions and visionary political institutions to implement them verbatim. It is frustrating that the constitution guarantees political representation whose beneficiaries would be a limited number of women, but forbids citizenship rights through the mother whose beneficiaries would be a universe of women.

Acharya is an economist who conducts research on economic policies