<strong>Proposal</strong> <strong>for</strong> a municipal grant allocati<strong>on</strong> <strong>for</strong>mulaiiList of [igures and tablesFigure 1: Instituti<strong>on</strong>al symmetry in local government oinance...................................................................................4Figure 2: The importance of LDF in the past oiscal years <strong>for</strong> municipalities in <strong>Nepal</strong>.......................................6Figure 3: Revenue types and design criteria......................................................................................................................7Figure 4: The grant allocati<strong>on</strong> scheme...............................................................................................................................14Figure 5: Unit cost of service delivery in dependency to populati<strong>on</strong>.....................................................................16
<strong>Proposal</strong> <strong>for</strong> a municipal grant allocati<strong>on</strong> <strong>for</strong>mula 1Prec<strong>on</strong>diti<strong>on</strong>s <strong>for</strong> and assumpti<strong>on</strong>s <strong>on</strong> a local government system in a federal <strong>Nepal</strong>1 Prec<strong>on</strong>diti<strong>on</strong>s <strong>for</strong> and assumpti<strong>on</strong>s <strong>on</strong> a local government system in a federal <strong>Nepal</strong>This report <strong>on</strong> behalf of gtz/udle aims to open the discussi<strong>on</strong> <strong>on</strong> a future local government oinance sys-tem. The current system of local government oinance has to be changed <strong>for</strong> a number of reas<strong>on</strong>s:• First, <strong>Nepal</strong>'s accessi<strong>on</strong> to the World Trade Organisati<strong>on</strong> requires the abolishment of taxes that dis-criminate imports. The main source of income <strong>for</strong> municipalities in <strong>Nepal</strong> is the Local Development Fee, which needs to be replaced until 2011.• Sec<strong>on</strong>d, <strong>Nepal</strong>'s development towards a federal system will create a new level between local govern-ment and the federal government, and thus, the local government oinance system will have to reolect the new state restructuring.• Third, the current system of local government funding is based predominantly <strong>on</strong> a high share of federal support. However, a decentralised system would require str<strong>on</strong>g local governments – not <strong>on</strong>ly legally, but also oinancially – to balance the idea of local self-‐governance (legal aut<strong>on</strong>omy) with oiscal aut<strong>on</strong>omy.The design of a local revenue system includes three central dimensi<strong>on</strong>s: the assignment of revenue sources am<strong>on</strong>g types of government, the degree of aut<strong>on</strong>omy with which subnati<strong>on</strong>al governments can exercise their assigned authority, and the efoiciency of the revenue administrati<strong>on</strong> system (Taliercio 2006, 107). This paper describes the design of a system of local government oinance in a future federal <strong>Nepal</strong> c<strong>on</strong>sidering the legal authority and the assignment of revenues. • First, this chapter outlines key prec<strong>on</strong>diti<strong>on</strong>s and assumpti<strong>on</strong>s of state structuring and the import-ance of the local level within a federal structure. Key assumpti<strong>on</strong>s are the further deepening of local self-governance of local communities, the principle of subsidiarity and the principle of c<strong>on</strong>gruence (chapter 1.1 hereafter), and the principle of equivalence (chapter 1.2 <strong>on</strong> page 3f.) in oinan-cing local services. The principle of c<strong>on</strong>nectivity relates to oiscal relati<strong>on</strong>s between levels of govern-ment, federal, regi<strong>on</strong>al and local (chapter 1.3 <strong>on</strong> page 3f.). Altogether, these assumpti<strong>on</strong>s favor str<strong>on</strong>g local governments within a federal structure. Key reas<strong>on</strong> <strong>for</strong> proposing str<strong>on</strong>g local govern-ments is the empirical evidence from federal states in industrialised and developing countries, in which often the local government level is weakest in relati<strong>on</strong> to the federal and regi<strong>on</strong>al level.• Sec<strong>on</strong>d, the chapter titled <strong>Proposal</strong> <strong>for</strong> a new local government taxati<strong>on</strong> system in a federal <strong>Nepal</strong> <strong>on</strong> page 5f. describes the future funding sources of local government in a federal <strong>Nepal</strong>, taking into ac-count the undisputed end of the Local Development Fee, a centrally collected import tax redistrib-uted to municipalities based <strong>on</strong> a historical municipal revenue source, the octroi. There is currently no single tax source that may replace the yields from the Local Development Fee, there<strong>for</strong>e new sources have to be identioied which should empower local government, but also guide them to en-hanced resp<strong>on</strong>siveness and accountability to the local communities. Shared taxes and supplements to existing n<strong>on</strong>-‐local taxes may fulloil this requirement. Based <strong>on</strong> three principles presented in chapter 1 an optimal set of local government taxes and user charges is presented.• Third, the chapter titled <strong>Proposal</strong> <strong>for</strong> a future grant allocati<strong>on</strong> scheme <strong>for</strong> municipalities in a federal<strong>Nepal</strong> <strong>on</strong> page 11f. outlines the fund olows between levels of government.• Finally, the <strong>for</strong>th and oifth chapter specioically address design questi<strong>on</strong> <strong>on</strong> allocati<strong>on</strong> <strong>for</strong>mulae <strong>for</strong> Dr Alexander Wegener interpublic c<strong>on</strong>sultancywww.interpublic-‐berlin.de