Due to an absence of transparency in public procurement and oversight, coupled with over-enthusiasm of the elected officials in increasing the budget expenditure, federalism seems to have localised corruption to a significant extent Nepal adopted a federal system of governance and multilingual harmony when the new constitution was promulgated on September 20, 2015. But instituting federalism has become a grueling process, and is taking place in a more structural way, with the behavioural aspect on the sidelines, resulting in a lack of federalist spirit. Although the sub-national governments (SNGs) have already been established, they are short staffed and unable to reach capacity. The federal government seems reluctant to delegate powers to the provinces, lacks regular dialogue with them, and is allegedly indifferent towards solving the SNGs’ problems related to laws, organisational arrangements, staff recruitment and role clarity. SNG units are struggling to carry out service delivery and development works due to lack of a clear organisational set-up, inadequate laws, and limited staff and resources. Provincial governments are not able to utilise and spend the allocated development expenditure budget. Additionally, the technical capacity of the provincial governments to draft their own laws is also problematic, and has deprived the provinces of using exclusive powers in the context of establishing provincial police administrations and recruiting staff through the provincial Public Service Commission (PSC). The functions of the provincial PSCs will largely be decided by the provincial laws, which may vary across provinces. Hence, the civil service administration at the local level is feared to be heavily politicised. The problem lies not only in the lack of the SNGs’ capacity but also in their design, as no effort was made at ensuring that each provincial and local government is economically viable for service delivery. The constitution mandates 22 exclusive powers, and an additional 15 concurrent powers, to the local governments. The Local Level Restructuring Commission identified 753 local government units across the country. The objectives of the restructured local governments is to institute a democratic and functioning government at the local level; deliver public services to the local communities in an efficient, effective and responsive way; carry out social and economic development to uplift the living standards of the people; and develop local democratic leadership at the grassroots level. The corresponding constitutional objectives are to foster a mechanism that deepens and widens local democracy, enhance and strengthen participatory democratic institutions, and promote self-governance through devolution of power. It has already been two years since all three layers of elections took place. However, uncertainty and lack of clarity still prevail among the local governments. Majority of the local governments are not able to spend their budget in the absence of effective policy and lack of coordination with the federal government. Majority of the elected officials are first time incumbents and, thus, do not have the managerial and leadership experience to adequately manage their newly entrusted responsibilities. Politics tends to be reduced to a ‘business’ instead of ‘service’ to earn money quickly by capturing the state’s coffers and authority. Due to an absence of public procurement disclosure, transparency and oversight, coupled with over-enthusiasm of the elected representatives in increasing the budget expenditure, federalism seems to have localised corruption to a significant extent. The centralised mindset of the Centre has been often cited as a challenge for the transition towards federalism in Nepal. Local governments have a huge responsibility to act independently, but majority of them are not able to due to limited capacity. The Ministry of Federal Affairs and General Administration has been providing model laws to guide the process. Local governments are to deliberate on these models before adopting them, for which they require support. Strong local governments rejected such bills while weaker ones adopted the bill with some modifications, which may not be relevant. Furthermore, rigorous legislation drafting processes were not followed, which questions the credibility and utility of such laws. It was basically an ad hoc initiative to avert the current budget spending crisis. Likewise, lack of coordination between the provincial and local governments in making policy is also evident. Provincial governments are not enthusiastic about taking the lead while local levels are not taking the directives of provincial governments very seriously. The local levels say themselves independent entities which are to be free from outside interference. The slow policy formulation process has impacted the service delivery of most local governments, despite having the constitutional mandate to perform several functions. Because of this tendency, ad hoc management practices have become the norm for many local levels in a bid to implement activities and disburse the budget. Policy formulation and implementation in a federal set-up encourages people’s participation through a bottom-up approach. It gives people a sense of ownership over plans and policies. Likewise, participation of local levels in governance will make them accountable for their performance and will give rise to a sense of freedom and independence. Dhital is research consultant, Foundation for Development Management