Nepal | November 13, 2019

We plan to develop a common understanding for grant distribution


Umesh Poudel

Though implementation of federalism is expected to expedite development works, distribution of natural resources among three layers of government in the federal system has become difficult. Along with this, different governments are at odds over ownership of projects and distribution of revenue and pace of development. In this context, Umesh Poudel of The Himalayan Times met Chairman of National Natural Resources and Fiscal Commission Balananda Paudel to discuss the details of distribution formula for natural resources. Excerpts:

The government is making preparations for next fiscal budget. How is National Natural Resources and Fiscal Commission coordinating and cooperating with the Ministry of Finance?

Prior to the budget announcement, NNRFC has to suggest modalities of grant distribution and benefit sharing of natural resources to the finance ministry after coordinating with three layers of the government. So, right now, we are in the process of coordinating with the layers of the government to determine their needs. Even though the NNRFC secretariat was established last year, I was appointed to this post just one month ago. However, even as the top post in the commission remained vacant for months, it was doing its regular duties. Hence, recommendations were made from NNRFC last year on some fundamental matters to the federal finance ministry, and provincial and local governments. The formula for calculating equalisation grant had been derived before my appointment. In the last one month, we have revised the criteria and developed another formula to calculate conditional grants for provincial and local governments.

How do you ensure that all three layers of government follow the set formula and take ownership of the given budget?

As per our Constitution, we have to suggest the federal finance ministry to provide equal level of resources to the provincial and local governments. And the provincial and local governments have to utilise the allocated budget and resources as per our recommendation. So, currently we are working closely with the finance ministry to give the best output through the upcoming budget. After determining the division of work in different layers of the government, we allocate expenses for the set tasks. We are doing the homework and assessing the works of federal, provincial and local governments. After this, we will decide the limits related to budget and grant along with the spending capacity of provincial and local governments. We will also examine the capacity of local and provincial governments to collect revenue under different headings. At present, the local governments are only utilising the budget allocated by the federal government. At the same time, the central government is collecting all the major taxes, but this should be decentralised as well. In this regard, we are trying to bridge the fiscal gap between local, provincial and federal governments through the upcoming budget to an extent. We plan to provide some of the grants as per the Intergovernmental Fiscal Transfer Policy and Act. We forwarded the formula for conditional grants to the finance ministry last week. The federal government holds the right to set the criteria and develop the framework to provide special and matching grants. While Section 60, Subsections 3 of the Constitution has mentioned that the NN- RFC will fix grant amount for federal, provincial and local governments, the federal government has been doing so till date.

Some local and provincial governments are collecting taxes and revenues for natural resources, but not sharing it with other layers of the government. How will NNRFC handle this situation?

The Constitution has given the right to the local and provincial governments to collect taxes, but if there is duplication in every tier, the taxpayers suffer. So, we have already suggested the central, provincial and local governments to manage a one-widow system for tax and revenue collection. At present, vehicle tax is not shared. We have created a formula whereby the revenue is shared in the ratio of 60:40 between the central government and provincial and local governments. However, it has not been implemented properly yet. Moreover, we need to suggest the proper framework and formula for sharing resources, including rivers basin benefits, sand and aggregates, mines, minerals and forests, among other.

Among others, the local and provincial governments seem to be having problems in sharing the benefits of river basins. What is your take on this?

First of all, natural resources can be managed based on various principles. In case of disputes, we examine and assess spill over effects and benefits of resources including rivers, forests, or others. We then study the existing practices in sharing of natural resources both within the country and abroad. After that, we look into the provisions in the Constitution and laws formulated for natural resources and benefit sharing. Then we hold discussions with the provincial government, local government and the locals of the affected area for their feedback regarding benefit sharing. Through all these exercises, we try to find an amicable solution. But due to time limit, we won’t be able to go through the entire process this year.

You mentioned earlier that NNRFC is responsible for facilitating equalisation and conditional grants to the provincial and local governments. But, matching and special grants are provided by the federal government. In this context, how can you ensure fair and unbiased resource distribution?

While the Constitution has said that the commission will suggest the threshold of all types of grants to the provincial and local governments, it has not cleared mentioned anything related to the matching and special grants. If we look at international practices, there are many incidences of matching and special grants being provided to pork barrel projects. We are very much aware about such practices and are trying to discourage them. To ensure fair distribution of the resources, we work in close coordination with all three layers of governments. Also, we regularly hold discussions with experts and study international practices so that we can provide a clear vision and the way out. I think if we are able to finalise the objectives of all types of grants, it would ensure proper implementation of the grants. We plan to develop a common understanding for grant distribution, especially for matching and special grants. When making a formula of grant distribution, we must focus on two types of inequalities. First is vertical imbalance. Say, we give the responsibility to collect revenue to one layer of government, but it lacks the capacity, while another layer is able to conduct the task smoothly. The mismatch results in vertical imbalance in fiscal transfer. Second is horizontal imbalance. For example, there is huge development gap between Province 3 and Karnali Province in terms of capacity, revenue generation, development, among others. We need to equalise such things in each and every provincial and local level government. From next fiscal year, we will make a formula that will ensure resource distribution and fiscal transfers based on the system rather than political power and influence.

A version of this article appears in print on April 23, 2019 of The Himalayan Times.

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