GTZ Report on Proposal for Nepal Grant Formula - LGCDP

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Proposal for a municipal grant allocation formula 2Preconditions for and assumptions on a local government system in a federal Nepalconditional and unconditional grants.gtz/udle hopes to support the discussion process on a new local government oinance system in a feder-al Nepal and welcomes comments on this paper.1.1 Principle of subsidiarity and congruenceIt may be regarded as success of decentralisation efforts that publications not only refer to local gov-ernment structure and functions as in the 1970s and 1980s (for example Stamp 1986), but also on loc-al government oinance since the 1990s, and that local governments are much more important in ser-vice delivery than they were until the 1990s (for example Tordorff and Young 1994, Wunsch 2000). Local governments in a federal state may have very different constitutional, legal and oinancial rights, and often, their position in a federal state is threatened (Gboyega 1991).The oirst assumption of this paper is that within a future federal Nepal, there is local self-‐governance for local communities. Although the precise structure of local units has not been decided yet, the as-sumption is made that there is a unioied legislation on local government that addresses both the cur-rent municipalities and rural communities. The assumption is that there will be no district councils in the future.Local self-‐governance is the corner stone of a new local governance oinance system:“It is quite plausible to argue that in the matter of service deliveries as well as in local busi-ness development, control rights in governance structures should be assigned to people who have the requisite information and incentives and at the same time will bear respons-ibility for the (political and economic) consequences of their decisions. In many situations, this insight calls for more devolution of power to local authorities and communities” (Bardhan 2002, 202). The principle of subsidiarity encourages local self-‐governance for all local affairs.“Until the late 1980s, decentralisation experiments in sub-‐Saharan Africa tended in the majority of states to reinforce central control rather than enhance local autonomy” (Tor-dorff 1994, 555). Key lesson from decentralisation reform in Commonwealth Sub-‐Saharan Africa is “that if representative authorities are to have more than a symbolic development role, they must be strengthened in both stafoing and oinancial resources” (Tordorff 1994, 579). And this is deoinitely true for all decentralisation efforts in any country, regardless whether industrial-ised, developing, or in transition.“After all, the logic behind decentralization is not just about weakening the central author-ity, nor is it about preferring local elites to central authority, but it is fundamentally about making governance at the local level more responsive to the felt needs of the large majority of the population” (Bardhan 2002, 202). The principle of subsidiarity indicates that only those services and public functions should be operated by higher levels of government if the regulation, production and delivery of these services on the local level would result in either very low efoiciency of effectiveness. The principle of congruence demands Dr Alexander Wegener interpublic consultancywww.interpublic-‐berlin.de
Proposal for a municipal grant allocation formula 3Preconditions for and assumptions on a local government system in a federal Nepalthat a local government body should be responsible for those tasks which are used by or beneoit mostly the local residents in its administrative boundaries. There should be a spatial identity between de-cision-‐makers and user or beneoiciaries.Together, the principle of subsidiarity embedded within idea of local self-governance and the principle of congruence should form one key design criterion for a future local government [inance system in Nepal.1.2 Principle of equivalenceThere is a vast amount of literature on public oinance theory, whereby the underlying principles of tax-ation and spending are assumed to be same for unitary and federal states (Bhargava 1953).This principle of equivalence demands, that the beneoiciaries of locally produced services should also pay for these services. In consequence, this principle demands that local services should be funded by the local community. This community is set up by natural and legal persons. By that principle, it be-comes evident, that funding for local government should be balanced between all beneoiciaries of the local government, citizens and businesses.Therefore, a sound local government oinance system must allow and give legal authority to local gov-ernment bodies to have, set and change taxes, whereby the taxes should comply with the principle of equivalence, and where necessary, to group-‐related equivalence.In a developing country context, local taxation should also take into account the ability to pay espe-cially of the poor or potentially marginalised groups. One larger attempt to tax all individuals within a local government unit was undertaken in the late 1980s in the United Kingdom. The so-‐called “poll tax” would have meant that every citizen regardless of income would have to fund the local government services. Strong opposition, and the apparent inequalities created if no other funding sources are avail-able not only led that the Government gave up the plan, but also ended the political career of Prime Minister Margaret Thatcher. In most countries, group-‐related equivalence is used to legitimate taxes such as• local taxes on land and buildings, and• local taxes on businesses.It is important that local taxes have broader tax bases covering all most of potential and active users of local government infrastructure and services. Local government tax bases should comprise natural and legal persons (citizens and businesses) that actually or potentially bene[it from local government infrastructure and services.1.3 Principle of connectivityThis principle demands, that decision-‐makers that decide on an issue that affects budgets should also be responsible to fund this decision by their own means. For example, a federal government should not decide on a law which incurs costs on sub-‐national governments without accompanying funding.Dr Alexander Wegener interpublic consultancywww.interpublic-‐berlin.de
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GTZ Report on Proposal for Nepal Grant Formula - LGCDP

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