GTZ Report on Proposal for Nepal Grant Formula - LGCDP

Proposal for a municipal grant allocation formula 17Formulae deoinition for unconditional grants• favour those local governments that exploit best their local tax bases and achieve full cost recovery of services rendered on a fee-­‐basis to citizens.• encourage local governments to invest more in better tax coverage rates and in better tax collection rates. Tax coverage rates show the amount of potential exploitation of a given revenue title, while tax collection rate refers only to the collection of receivables from registered and assessed tax payers.The key problem is to estimate the "tax capacity" within a local government. A report of the Australian Government on Assessing Local Government Revenue Raising Capacity of 2008 stated that “ultimately the observed revenue-­‐raising efforts of local governments are driven by the demands of their com-­munities for local government services. However, there are reasons why it is difoicult to estimate dir-­ectly the extent to which various characteristics of communities ‘explain’ differences in observed rev-­enue-­‐raising efforts. Among other things, this is because of:• the difoiculty in linking the rates paid by local residents to the services they use, which means there is no observable price for each of the services used• the substantial variation in the mixes and levels of goods and services provided by councils• the complexity and variation across councils in the system of rates, and of user fees and charges, levied by councils• the limitations of the data available.”For Nepal, these limitations are valid in principle, yet less important, as the four main issues raised do not apply as such or as much as in industrialised countries. The efforts local councils may take to in-­crease revenue may be limited due to low ability or willingness to pay, whereby willingness can be ad-­dressed politically, and low ability would result into no supplement to the basic amount allocated. The more per capita revenue is raised in selected taxes, which are at the same rate throughout the country, indicates local efforts. However, this holds true for non-­‐volatile taxes only such as land and building taxes. More economically active local governments, or those that are close to the main trade routes in Nepal, may have higher per capita revenues as compared to those with very little economic and taxable activities. Therefore, a systems has to be found that balances the tax capacity and the actual tax per capita income of local governments.4.1.3 Socio-economic conditionIn 2009, the grant allocation formulae used by Government relied on the Human Development Index. There are fundamental critics how the HDI is being used and especially, how the subsequent allocation occurs (see Steffensen 2009). The critics are strongly supported here. For municipalities, there is no HDI data available, and the use of district data instead is not regarded as feasible. As long as there is no consistent and reliable data base, the Government should refrain from using this and similar indicators to avoid severe imbalances or inequalities. 4.2 Minimum Conditions and Performance Measurement formula de[initionThe MCPM grant is unconditional and is oixed to 50% of the available gross funds for unconditional grants. Dr Alexander Wegener interpublic consultancywww.interpublic-­‐berlin.de