According to Nepal’s new constitution, there will be three tiers of government—federal, provincial and local. It provides five spheres of competences: (a) Federal functions (b) Provincial functions (c) Local functions (d) Concurrent functions of federal and provincial governments and (e) Concurrent functions of federal, provincial and local governments. In order to avoid confusion, overlapping and duplication between federal, provincial and local governments, each function needs to be fixed in detail. In order to follow the principle of ‘finance follow the function’, the respective roles of concurrent functions need to be clarified. ‘Who will do what’ is the essence of functional assignment. A clear assignment of functional responsibilities among different levels of government is highly essential.

Not yet clear

For example, education, health, drinking water, irrigation and agriculture are included in the concurrent list of federal, provincial and local governments. With regard to primary education, which government will design the curriculum, which government will pay the salaries of the teachers, which government will provide scholarships to students and training and other exposure capacity development to teachers, which government will regulate and monitor the teachers and which government will design school buildings have to be determined. However, in our case, local governments will not be able to assume the responsibility of regulating and financing. The tasks of designing policy, developing capacity and financing should be given to the federal government. Monitoring and evaluation, examination and quality control related functions should be given to provincial governments. Based on this example from the education sector, all the sub-functional services should be analysed minutely.

To take another example of taxation, some revenue sources like land registration fee, vehicle tax and tourism fee have been assigned to two or three spheres of government. Royalties from natural resources have been assigned to all the governments. In the division of income from natural resources, the government can take the basis of the existing allocation practices. For example, the government shares 50 percent of hydroelectricity royalties with the district development committee. In the same way, the federal government can distribute 50 percent of the royalties to lower governments and the rest to provincial and local governments. Therefore, functional and revenue assignment is the first and fundamental task that must be done to ensure that the new constitution is implemented properly.

The second important function of the government is designing a mechanism to equitably distribute revenues among federal, provincial and local governments. As per Article 60 of the constitution, the government should make fiscal transfers to sub-national governments under a transparent system. The article also states that fiscal equalisation grants should be provided to poor and remote sub-national governments. It would be in order to study the resource distribution practices in India and South Africa to help establish a proper and equitable resource distribution mechanism.

India and South Africa

In India, center-state transfers take place mainly through two channels—the Finance Commission and the Planning Commission. However, India scrapped its 65-year-old Planning Commission in 2015 and replaced it with the National Institution for Transforming India (NITI Aayog) which is more like a think tank. The best practice in resource allocation in India is that it has reserved 30 percent of the total divisible pool for 11 special category states—Arunachal Pradesh, Assam, Himachal Pradesh, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand. They have been designated as special category states due to their (i) Hilly and difficult terrain (ii) Low population density and a sizeable tribal population (iii) Strategic location along borders with neighbouring countries (iv) Economic and infrastructural backwardness and (v) Non-viable nature of state finances. The remaining 70 percent of the pool is distributed among other states based on their population, geographical area and income.

Further, India has established a standard divisible pool for vertical budget allocation which has jumped from 30.5 percent in 2005-10 to 32 percent in 2010-15. Last year, the government increased this pool to 42 percent for the next five year period 2015-20. In principle, the resource distribution system in India is transparent and promotes equity for remote and poor states.

South Africa, with a population of 54 million and an area of 1.2 million sq km, has a three-tiered governance system—central, provincial and local. The constitution requires that every year a Division of Revenue Act determine the equitable division of nationally raised revenue between the central, provincial and local governments. Furthermore, the Intergovernmental Fiscal Relations Act prescribes the process for determining the equitable sharing and allocation of nationally raised revenue. The act requires the Finance Minister to table a Division of Revenue Bill with the annual budget in the National Assembly. The bill must be accompanied by an Explanatory Memorandum setting out how government has taken into account the Financial and Fiscal Commission’s recommendations when determining the division of revenue.

South Africa too follows a transparent formula-based allocation for both vertical and horizontal allocations. For the year 2015-17, South Africa has reserved 31 percent of the tax revenue for the provincial governments and four percent for the local governments.

Time to consider

The government has been designing various laws related to the constitution. The provision of “who does what” cannot be included properly in the laws unless a detailed functional assignment is in place. Therefore, based on subsidiarity and other principles such as policy, regulation, financing, provision and production of goods and services, all the functional responsibilities listed in the Constitution should be clarified within the spheres of governments.

The government is likely to present the first federal budget in a month’s time. It is advisable to adopt resource distribution provisions like those in India and South Africa. The transparent and equitable formula system will create an environment for balanced socio-economic development across provinces and districts. It has been found that the existing resource distribution practice is unscientific and often influenced by politics. Like in India, a certain fixed percent of the budget should be reserved for poor and remote regions like the mountains and hills of the Mid- and Far West and the central Tarai. The government’s decision to form a high-level federalism implementation and restructuring committee and federalism implementation and administration restructuring committee is very appreciable. Let’s hope that all the constitutional hurdles will be resolved by these committees and the essence of federalism implemented effectively.

Devkota holds a PhD in fiscal decentralisation and is a former member of the Local Bodies Fiscal Commission