The National Natural Resources and Fiscal Commission (NNRFC) has been given the responsibility to determine the fiscal transfer to lower levels of

administration, revenue sharing and distribution of natural resources among various administrations.

The constitutional body set up under the provision of National Natural Resources and Fiscal Commission Act has yet to get the final shape as the members and chairman of the commission need to be appointed. However, the commission has started its works as defined by the law and is gearing up to recommend the fiscal transfer and revenue sharing to the government for budget of next fiscal. Pushpa Raj Acharya of The Himalayan Times caught up with Baikuntha Aryal, secretary of the NNRFC, to learn how the commission will fix the amount of grant and give the revenue sharing modality to the lower layers of administration. Excerpts:

In the context of budget being prepared for next fiscal 2018-19, how is the NNRFC planning revenue sharing and fiscal transfer to lower levels of administration?

The commission has yet to get the final shape. But as the commission is a multi-disciplinary organisation, the secretariat has started its works from the bureaucratic level. Only three months remain before the budget for next fiscal is presented at the Parliament. We have to provide base and recommendations to the government on three major issues. First, we have to finalise the quantum of grant — conditional and equalisation — that needs to be transferred to the lower layers of administration. We have to develop a formula for the equalisation grant based on various parameters, namely, human development index, status of balanced development, requirement of resources, status of socio-economic discrimination, among others. But we don’t have disaggregated data of each local unit and province, which is why we are trying to disaggregate the available data.

For this, our staff have been deployed to the local levels for information collection and the commission has corresponded with few administrations to gather adequate information and data to ensure impartial fiscal transfer. Secondly, we have been developing revenue sharing modality based on the provisions of the Intergovernmental Fiscal Management Act, which has said that the value added tax (VAT) and internal excise will be shared with the lower levels of administration. We can roughly assume that 30 per cent of total revenue will be shared with the lower layers of administration and 15 per cent would be shared with provinces and 15 per cent with local units. If we target 20 per cent revenue growth in next fiscal, revenue mobilisation will be Rs 876 billion and roughly Rs 150 billion could be shared with the provincial and local administrations. The Constitution (Article 61) has clearly mentioned on what basis the revenue will be shared. I don’t claim that we will be able to share the revenue as explained by the Constitution and laws because we don’t have a robust database, but we will try to match the given basis.

Thirdly, distribution of natural resources is a tough job for the commission. The Intergovernmental Fiscal Management Act has stated that 50 per cent of the royalty would go to federal (central) government and 25 per cent each to the affected locals and concerned local units. Natural resources that are under the purview of two or more local administrations, and pattern of investment should be carefully handled as per the provision of the Constitution. We have been developing inventory for natural resources. After that, we have to develop the standards for sharing royalty based on investment, returns and affected locals.

As the secretary of NNRFC, you are also invited to the resource committee led by the vice chairman of National Planning Commission, which determines the availability of resources for the budget. As the resource committee has to provide ceiling to the ministries of the federal government as early as possible, by when will NNRFC be able to finalise the grant transfer to provinces and local units?

We are under pressure to finalise the equalisation grant because we have to provide it to the government by mid-March. Though the ceiling can be slightly changed during budget formulation, we have to conclude this exercise within next few weeks. On the other hand, the NNRFC is yet to get a complete shape. As it is a constitutional commission, the chairman and members will be appointed only after the parliamentary hearings and that may take some time. We will recommend the ceiling of the grant transfer from the technical level by mid-march.

Majority of local bodies seem to be relying on grant transfers of the federal government instead of seeking alternatives to boost their capacity to generate resources. Can you share your observation about how many local bodies have the capacity to mobilise the required resources?

I don’t think they are entirely dependent on the federal government. The lower layers of administration have yet to explore their revenue mobilisation capacity. Some are able to generate the resources, while some have less potential of mobilising revenue. They have recently started framing laws. They have to pass the laws to mobilise their own resources because they have to follow the norms and processes required to mobilise their own resources. They are in a starting phase and maturity will be developed gradually. Fiscal transfer is to compensate the resource gap in the lower layers of administration. We will recommend the fiscal transfer in an equitable manner based on the resource envelope of the federal government.

The local units have been criticised for spending money without abiding by the given norms. Who will regulate the expenditure made by the lower layers of administration?

I don’t see any problem with the conditional grant because the lower layers of administration have to spend the grant as earmarked under the different headings, like health, education, drinking water, among others. Under the equalisation grant, provinces have to follow the Annex-6 and local bodies have to follow the Annex-8 of the Constitution. The lower layers of administration are independent to formulate their own plans and budget, and pass it through their assemblies as per their development requirements and the Constitutional provisions. No one can impose or instruct local and provincial governments on how they spend their budget, but they will have to follow the provisions of the Constitution.

As per the principle of the federal system, the lower layers of administration are more close and responsible towards the people, which would ensure better and effective service delivery. But the federal government seems reluctant to unbundle the works citing capacity constraints of the lower layers of administration. What is your take on it?

This is true to some extent. The federal government has developed its capacity through the exercise of 70 years since the emergence of democracy. The capacity developed by the central government is to provide services to the grassroots. If there are capacity constraints at the local levels, then it is the responsibility of the federal government to enhance the capacity of the provincial and local governments for effective and efficient service delivery. Resources (human and capital), programmes and capacity should go together. The federal government should be leaner in federal system and the works of the central government need to be unbundled to the provinces and local governments. Otherwise, there will be duplication of works and resource allocation.

The lower layers of administration can also get some other complementary grants, like matching and special grants. What is the process for seeking such grants?

We can’t recommend such grants. The concerned local government or provincial government can directly propose for the matching grant to the finance ministry, if they have to develop a particular project that has multiplier benefits and if one local unit has service providing entity — like a hospital or a school — which has been providing service to the people of adjacent local bodies as well. In this case, they can seek the matching grant. Special grant is provided in the cases of emergency, like during disasters or other specific purposes like if the literacy rate is low or child and maternal mortality is high in some particular local level. The Ministry of Finance has been developing the related guidelines for such grants.