<strong>Proposal</strong> <strong>for</strong> a municipal grant allocati<strong>on</strong> <strong>for</strong>mula 2Prec<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>c<strong>on</strong>diti<strong>on</strong>al and unc<strong>on</strong>diti<strong>on</strong>al grants.gtz/udle hopes to support the discussi<strong>on</strong> process <strong>on</strong> a new local government oinance system in a feder-al <strong>Nepal</strong> and welcomes comments <strong>on</strong> this paper.1.1 Principle of subsidiarity and c<strong>on</strong>gruenceIt may be regarded as success of decentralisati<strong>on</strong> ef<strong>for</strong>ts that publicati<strong>on</strong>s not <strong>on</strong>ly refer to local gov-ernment structure and functi<strong>on</strong>s as in the 1970s and 1980s (<strong>for</strong> example Stamp 1986), but also <strong>on</strong> 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 (<strong>for</strong> example Tordorff and Young 1994, Wunsch 2000). Local governments in a federal state may have very different c<strong>on</strong>stituti<strong>on</strong>al, legal and oinancial rights, and often, their positi<strong>on</strong> in a federal state is threatened (Gboyega 1991).The oirst assumpti<strong>on</strong> of this paper is that within a future federal <strong>Nepal</strong>, there is local self-‐governance <strong>for</strong> local communities. Although the precise structure of local units has not been decided yet, the as-sumpti<strong>on</strong> is made that there is a unioied legislati<strong>on</strong> <strong>on</strong> local government that addresses both the cur-rent municipalities and rural communities. The assumpti<strong>on</strong> is that there will be no district councils in the future.Local self-‐governance is the corner st<strong>on</strong>e 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, c<strong>on</strong>trol rights in governance structures should be assigned to people who have the requisite in<strong>for</strong>mati<strong>on</strong> and incentives and at the same time will bear resp<strong>on</strong>s-ibility <strong>for</strong> the (political and ec<strong>on</strong>omic) c<strong>on</strong>sequences of their decisi<strong>on</strong>s. In many situati<strong>on</strong>s, this insight calls <strong>for</strong> more devoluti<strong>on</strong> of power to local authorities and communities” (Bardhan 2002, 202). The principle of subsidiarity encourages local self-‐governance <strong>for</strong> all local affairs.“Until the late 1980s, decentralisati<strong>on</strong> experiments in sub-‐Saharan Africa tended in the majority of states to rein<strong>for</strong>ce central c<strong>on</strong>trol rather than enhance local aut<strong>on</strong>omy” (Tor-dorff 1994, 555). Key less<strong>on</strong> from decentralisati<strong>on</strong> re<strong>for</strong>m in Comm<strong>on</strong>wealth 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 <strong>for</strong> all decentralisati<strong>on</strong> ef<strong>for</strong>ts in any country, regardless whether industrial-ised, developing, or in transiti<strong>on</strong>.“After all, the logic behind decentralizati<strong>on</strong> 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 resp<strong>on</strong>sive to the felt needs of the large majority of the populati<strong>on</strong>” (Bardhan 2002, 202). The principle of subsidiarity indicates that <strong>on</strong>ly those services and public functi<strong>on</strong>s should be operated by higher levels of government if the regulati<strong>on</strong>, producti<strong>on</strong> and delivery of these services <strong>on</strong> the local level would result in either very low efoiciency of effectiveness. The principle of c<strong>on</strong>gruence demands Dr Alexander Wegener interpublic c<strong>on</strong>sultancywww.interpublic-‐berlin.de
<strong>Proposal</strong> <strong>for</strong> a municipal grant allocati<strong>on</strong> <strong>for</strong>mula 3Prec<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>that a local government body should be resp<strong>on</strong>sible <strong>for</strong> those tasks which are used by or beneoit mostly the local residents in its administrative boundaries. There should be a spatial identity between de-cisi<strong>on</strong>-‐makers and user or beneoiciaries.Together, the principle of subsidiarity embedded within idea of local self-governance and the principle of c<strong>on</strong>gruence should <strong>for</strong>m <strong>on</strong>e key design criteri<strong>on</strong> <strong>for</strong> a future local government [inance system in <strong>Nepal</strong>.1.2 Principle of equivalenceThere is a vast amount of literature <strong>on</strong> public oinance theory, whereby the underlying principles of tax-ati<strong>on</strong> and spending are assumed to be same <strong>for</strong> unitary and federal states (Bhargava 1953).This principle of equivalence demands, that the beneoiciaries of locally produced services should also pay <strong>for</strong> these services. In c<strong>on</strong>sequence, this principle demands that local services should be funded by the local community. This community is set up by natural and legal pers<strong>on</strong>s. By that principle, it be-comes evident, that funding <strong>for</strong> local government should be balanced between all beneoiciaries of the local government, citizens and businesses.There<strong>for</strong>e, 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 c<strong>on</strong>text, local taxati<strong>on</strong> 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. Str<strong>on</strong>g oppositi<strong>on</strong>, and the apparent inequalities created if no other funding sources are avail-able not <strong>on</strong>ly 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 <strong>on</strong> land and buildings, and• local taxes <strong>on</strong> 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 pers<strong>on</strong>s (citizens and businesses) that actually or potentially bene[it from local government infrastructure and services.1.3 Principle of c<strong>on</strong>nectivityThis principle demands, that decisi<strong>on</strong>-‐makers that decide <strong>on</strong> an issue that affects budgets should also be resp<strong>on</strong>sible to fund this decisi<strong>on</strong> by their own means. For example, a federal government should not decide <strong>on</strong> a law which incurs costs <strong>on</strong> sub-‐nati<strong>on</strong>al governments without accompanying funding.Dr Alexander Wegener interpublic c<strong>on</strong>sultancywww.interpublic-‐berlin.de