GTZ Report on Proposal for Nepal Grant Formula - LGCDP

Proposal for a municipal grant allocation formula 15Formulae deoinition for unconditional grants4 Formulae de[inition for unconditional grantsThis chapter outlines the proposed formula deoinition for unconditional grants, while chapter 5 on page 19f. describes the formula to be used for conditional grants. This chapter is structured as follows:• section 4.1 discusses the Basic grant formula deoinition, and• section 4.2 shows the relations to the Minimum Conditions and Performance Measurement formuladeoinition (page 17f.).4.1 Basic grant formula de[initionThis section shortly describes the criteria to be used:• Population• Own Source Revenue• Socio-­‐economic condition4.1.1 PopulationThe basic grant formula deoinition is kept simple and is mainly based on population data. Population data is available and reliable, and all basic grant formulae in the world rely on population as a key in-­dicator for grant allocation. The general assumption in using population data is that population also re-­olects the costs of delivering a service to the public. However, some problems have to be addressed:• smaller local governments in terms of population may require a minimum amount allocated, as there are minimum per unit costs for service delivery.• The more densely populated an area is, the less are the per unit costs of service delivery (i.e. water supply, sewerage, and others), while the demand for infrastructure may be higher in more densely populated local governments compared to sparsly populated local governments (i.e., less demand for piped sewerage systems in sparsly populated local governments as open ditch systems may already satisfy the need, thus meaning that service infrastructure costs may be much lower in sparsely populated local governments compared to agglomerations).While population is widely used in the design of intergovernmental oiscal relations, the design of a pop-­ulation based criterion must be more complex if there is a large difference in population between local government units. This is the case in Nepal, where the local governments in the Kathmandu Valley are largest in terms in population, and they are in addition very close and open further efoiciency gains in service delivery through joint service production. Thus, the criterion on population should take into account• unit cost considerations• demand for service is often not linear, but starts with a crucial number of inhabitantsDr Alexander Wegener interpublic consultancywww.interpublic-­‐berlin.de