<strong>Proposal</strong> <strong>for</strong> a municipal grant allocati<strong>on</strong> <strong>for</strong>mula 12<strong>Proposal</strong> <strong>for</strong> a future grant allocati<strong>on</strong> scheme <strong>for</strong> municipalities in a federal <strong>Nepal</strong>local governments. There<strong>for</strong>e, the gross fund deoiniti<strong>on</strong> <strong>for</strong> funds to be allocated to local governments – here municipalities – should be a fund that should be oilled by the federal government and should be open <strong>for</strong> regi<strong>on</strong>al governments <strong>for</strong> funding, too. There are two opti<strong>on</strong>s• First, all regi<strong>on</strong>s could use the total gross fund as an equalisati<strong>on</strong> element: All regi<strong>on</strong>s pay in accord-ing to a <strong>for</strong>mula to be agreed up<strong>on</strong>, and the funds are distributed across the nati<strong>on</strong>. The funding to a gross fund is an equalisati<strong>on</strong> element, as there might be regi<strong>on</strong>s that pay more in the fund than the municipalities are receiving in that regi<strong>on</strong>. However, this is depending <strong>on</strong> the revenue assignment to the regi<strong>on</strong>s. • Sec<strong>on</strong>d, if regi<strong>on</strong>s are not willing to use the gross fund as an equalisati<strong>on</strong> element, they could top up the federal grant anticipated <strong>for</strong> the municipalities within their regi<strong>on</strong>. What should be avoided and what should be limited by law is a multitude of different funding schemes, different grant allocati<strong>on</strong> schemes that would encourage imbalances in local government funding rather than to create a fair and equal funding opti<strong>on</strong>s <strong>for</strong> all urban areas in <strong>Nepal</strong>.3.2 Preference <strong>for</strong> unc<strong>on</strong>diti<strong>on</strong>al grants instead of c<strong>on</strong>diti<strong>on</strong>al grantsOne key questi<strong>on</strong> is designing local government oinance system is the need <strong>for</strong> federal or regi<strong>on</strong>al fund-ing of local governments in general, and thereafter the questi<strong>on</strong>, whether this federal or regi<strong>on</strong>al fund-ing should be unc<strong>on</strong>diti<strong>on</strong>al or c<strong>on</strong>diti<strong>on</strong>al.In principle, the local government oinance system in a federal state with str<strong>on</strong>g local governments in terms of legal aut<strong>on</strong>omy, oiscal aut<strong>on</strong>omy and relevance <strong>for</strong> the service delivery, should always seek to ensure sufoicient funding from own sources of revenue. As explained above, own sources of revenue are unlikely to be enough to fund <strong>for</strong> all functi<strong>on</strong>s assigned to local governments, there<strong>for</strong>e tax sharing agreements are essential in <strong>Nepal</strong>. However, even with the combinati<strong>on</strong> of own source revenues and shared taxes, oiscal imbalances might occur. Fiscal imbalances are typical <strong>for</strong> those state systems which grant local government oiscal aut<strong>on</strong>omy. The more income of local government is dependent <strong>on</strong> own source revenues, the more likely are imbalances in terms of per capita income, especially in a country with large differences between municipalities in terms of geographical setting and ec<strong>on</strong>omic activity such as <strong>Nepal</strong>.Unc<strong>on</strong>diti<strong>on</strong>al grants do have the functi<strong>on</strong> to guarantee the functi<strong>on</strong> of local government regardless where the local government is located and regardless the socio-‐ec<strong>on</strong>omic c<strong>on</strong>diti<strong>on</strong>. However, unc<strong>on</strong>di-ti<strong>on</strong>al grants may c<strong>on</strong>tain equalizati<strong>on</strong> elements to reduce vertical oiscal imbalances.C<strong>on</strong>diti<strong>on</strong>al grants should be small in number and small in amounts allocated. The main reas<strong>on</strong> is that c<strong>on</strong>diti<strong>on</strong>al grants are designed by deoiniti<strong>on</strong> to support specioic policy objectives of the Government. The Government has – through the instrument of c<strong>on</strong>diti<strong>on</strong>al grants – large opportunities to guide loc-al council decisi<strong>on</strong>s, as c<strong>on</strong>diti<strong>on</strong>al grants reduce the cost of service delivery or capital investments. There is no problem in having c<strong>on</strong>diti<strong>on</strong>al grants, however, there share of unc<strong>on</strong>diti<strong>on</strong>al grants should be much larger to enable local councils to fund local services according to the needs of the local people, while the share of c<strong>on</strong>diti<strong>on</strong>al grants should be much smaller to offer incentives <strong>for</strong> local councils to fund local services according to the political programme of the Government.Dr Alexander Wegener interpublic c<strong>on</strong>sultancywww.interpublic-‐berlin.de
<strong>Proposal</strong> <strong>for</strong> a municipal grant allocati<strong>on</strong> <strong>for</strong>mula 13<strong>Proposal</strong> <strong>for</strong> a future grant allocati<strong>on</strong> scheme <strong>for</strong> municipalities in a federal <strong>Nepal</strong>3.3 The proposed grantsUnc<strong>on</strong>diti<strong>on</strong>al grants should ensure the operati<strong>on</strong> of local government tasks and functi<strong>on</strong>s assigned, if local sources of income are too small or too volatile.C<strong>on</strong>diti<strong>on</strong>al grants should be kept small in number, and may be used to promote federal or regi<strong>on</strong>al policy objectives.3.3.1 Unc<strong>on</strong>diti<strong>on</strong>al grantsThere should be <strong>on</strong>ly <strong>on</strong>e unc<strong>on</strong>diti<strong>on</strong>al grant to be allocated to local government units based <strong>on</strong> com-m<strong>on</strong> criteria, which are available to the Government and ensure an equal distributi<strong>on</strong> according to populati<strong>on</strong>, socio-‐ec<strong>on</strong>omic c<strong>on</strong>diti<strong>on</strong> and should be altered by local government per<strong>for</strong>mance in key areas.3.3.2 C<strong>on</strong>diti<strong>on</strong>al grantsThere may be some selected c<strong>on</strong>diti<strong>on</strong>al grants available to local government. The c<strong>on</strong>diti<strong>on</strong>al grants• must be limited in amount,• must be limited in relati<strong>on</strong> to the amount of the unc<strong>on</strong>diti<strong>on</strong>al grants, not exceeding 20% of the total funds available to local governments,• should not given through the various line ministeries, but• should be channelled through the Ministry of Local Development, the Ministry of Physical Planning or the Town Development Fund.Dr Alexander Wegener interpublic c<strong>on</strong>sultancywww.interpublic-‐berlin.de