GTZ Report on Proposal for Nepal Grant Formula - LGCDP

Proposal for a municipal grant allocation formula 1Preconditions for and assumptions on a local government system in a federal Nepal1 Preconditions for and assumptions on a local government system in a federal NepalThis report on behalf of gtz/udle aims to open the discussion on a future local government oinance sys-­tem. The current system of local government oinance has to be changed for a number of reasons:• First, Nepal's accession to the World Trade Organisation requires the abolishment of taxes that dis-­criminate imports. The main source of income for municipalities in Nepal is the Local Development Fee, which needs to be replaced until 2011.• Second, Nepal'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 on a high share of federal support. However, a decentralised system would require strong local governments – not only legally, but also oinancially – to balance the idea of local self-­‐governance (legal autonomy) with oiscal autonomy.The design of a local revenue system includes three central dimensions: the assignment of revenue sources among types of government, the degree of autonomy with which subnational governments can exercise their assigned authority, and the efoiciency of the revenue administration system (Taliercio 2006, 107). This paper describes the design of a system of local government oinance in a future federal Nepal considering the legal authority and the assignment of revenues. • First, this chapter outlines key preconditions and assumptions of state structuring and the import-­ance of the local level within a federal structure. Key assumptions are the further deepening of local self-governance of local communities, the principle of subsidiarity and the principle of congruence (chapter 1.1 hereafter), and the principle of equivalence (chapter 1.2 on page 3f.) in oinan-­cing local services. The principle of connectivity relates to oiscal relations between levels of govern-­ment, federal, regional and local (chapter 1.3 on page 3f.). Altogether, these assumptions favor strong local governments within a federal structure. Key reason for proposing strong 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 relation to the federal and regional level.• Second, the chapter titled Proposal for a new local government taxation system in a federal Nepal on page 5f. describes the future funding sources of local government in a federal Nepal, taking into ac-­count the undisputed end of the Local Development Fee, a centrally collected import tax redistrib-­uted to municipalities based on a historical municipal revenue source, the octroi. There is currently no single tax source that may replace the yields from the Local Development Fee, therefore new sources have to be identioied which should empower local government, but also guide them to en-­hanced responsiveness and accountability to the local communities. Shared taxes and supplements to existing non-­‐local taxes may fulloil this requirement. Based on three principles presented in chapter 1 an optimal set of local government taxes and user charges is presented.• Third, the chapter titled Proposal for a future grant allocation scheme for municipalities in a federalNepal on page 11f. outlines the fund olows between levels of government.• Finally, the forth and oifth chapter specioically address design question on allocation formulae for Dr Alexander Wegener interpublic consultancywww.interpublic-­‐berlin.de