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Khim Lal Devkota, PhD, is an expert in fiscal federalism, specializing in public finance, fiscal decentralization, intergovernmental fiscal relations, and legislation. In May 2021, Devkota made a transition into political leadership, winning a seat in the National Assembly (NA). His tenure ended in March 2024. Devkota’s legislative initiatives, including drafting the Legislative Management Bill, 2024, emphasize provincial and local government participation. During Nepal’s transition to a federal republic, he held the esteemed position of the first Vice-chairperson of the Policy and Planning Commission of Bagmati Province from 2018 to 2019. His major task in parliament was the introduction of the ‘Federalism Implementation Resolution Proposal’ and recommendations related to federalism implementation from the ‘Federalism Implementation Monitoring and Parliamentary Special Committee’, of which he was the chairperson. The Prime Minister has repeatedly taken recommendations from this committee. Devkota presents a 10-point blueprint, addressing various federal issues.

Action plan

According to a Cabinet approved action plan to implement federalism, the Inter Province Council meeting should take place every year in March-April. Yet, as of today, there has been no progress in scheduling the meeting. The action plan included a schedule to collaborate with the ‘Policy Research Institute’ to ensure consistency in policy making and law formulation across all three tiers of government. Regrettably, this initiative has not commenced as of yet. Furthermore, the decision was made not to allocate small schemes and programs under the name of conditional grants starting from the current fiscal year 2023-24. However, many small plans and programs have been distributed through the budget speech. The action plan outlined the adjustment of the provincial police force within a year, which has also not seen any progress. It also promised to resolve the issues faced by subnational-level employees by the end of the second week of July 2023, but there has been no visible improvement in their situation.

Committee’s recommendations

The report from ‘Federalism Implementation Study and Monitoring Parliamentary Special Committee’, formed by the NA, if executed sincerely, has the potential to resolve citizen concerns and enhance the governance and federalism system. Recommendations include drafting laws to ensure inclusive representation in state organs and women’s participation in the electoral system, both at federal and provincial levels. The creation of a joint parliamentary committee for federalism, the development and implementation of an action plan based on parliamentary committee recommendations, and the establishment of a decentralization plan to delegate responsibilities to subnational levels are highlighted.

Moreover, the report suggests organizing training and public awareness programs on federalism, democracy, and the rule of law from the central to local levels. It also emphasizes the need for equal and easy access to state services, the safeguarding of the rights of marginalized communities, and the creation of a trustworthy environment to combat violence, abuse, and discrimination against vulnerable groups. Implementing fundamental rights, including social security, dignified living conditions for senior citizens, and the guarantee of human rights, is considered essential. To maintain consistency within the administrative system and the spirit of the federal democratic republican governance, the report suggests forming a high-level administration reform commission chaired by the prime minister. It advocates for a legal and policy framework to ensure that the chief executive officer of the local level is not below the undersecretary level. Discussing matters in sectoral thematic committees before presenting bills in parliament is recommended to maintain consistency in laws across different government tiers.

Reform in electoral system

It is crucial to change the electoral system, including the numbers. For this, the number of members of the House of Representatives (HoR) should be reduced from 275 to 165. The proportional electoral system should be abolished. Issues of inclusiveness should be included in the first past the post-electoral system. For this, constituencies should be determined based on rotation by determining the number of seats for women-women, Dalit-Dalit, etc. to other disadvantaged and marginalized sections and communities. It is necessary to follow the same tools as the HoR in the provincial assembly. This reduced the number of provincial assemblies from 550 to 330 only. The reduction in the number of members of HoR and the provincial Assembly will bring great relief to the government system, which is said to have become expensive.

There is another tool to make the parliament more precise. Those elected from the proportional electoral system in the HoR need to move to the NA. In such a situation, the 165 members’ HoR should be based on a first past the post electoral basis and 110 numbers NA in the proportional electoral system. But the procedure of electing the members of the NA from the provincial assembly and local-level representatives should be kept as it is. Both the methods discussed here will establish political stability in the country. Due to the mixed electoral system, no matter how popular the party is, it has been proven that no party will gain a majority in the HoR. Therefore, under any condition, reforming the electoral system is an urgent need of the country.

Strengthen NA

In order to simplify this governance system, it is also necessary to have a provision that the NA will do the work of the HoR in the absence of the HoR. If such a provision was written in the constitution, the 27 bills that became inactive due to the expiration of the term of the HoR would not have fallen to zero. 22 bills pending in the HoR, and five bills approved and sent by the NA became inactive due to the end of the term of the HoR. The bills will never be inactive. The accountability and responsibility of the government towards the Parliament also increased. Through the multiplier channel, there will also be improvements in the overall service delivery provision as well.

The role of the district coordination committee has not been effective. Although the constitution gives the role of monitoring and coordination, this committee has not been able to be effective due to a lack of financial resources and working staff. In the situation where the officials of this committee are also questioning its justification, it is better for the country to go for the cancellation of this committee. It also helps in the credibility of the governance system. Federalism, which is said to be expensive, is also relieved.

Many other parts of the governance system need to be reviewed and improved. Like, the constitution has given the right of state power to the sub-national levels. But leave the matter of state power. Even the rights related to the police force included in the exclusive list in the constitution have not been transferred to the province. The federal government has intervened in the jurisdiction of the subnational level. Important laws including the civil service bill have not been enacted yet. In fact, the subnational levels have not been able to feel the government.

Fine-tuning fiscal federalism

In Nepal’s federal system, the revenue part is highly centralized. This problem may have occurred due to the customs-based revenue system. But something more could be done regarding the revenue rights of the provinces. The sub-national levels have made no effort to increase internal revenue. The constitution stipulates that the volume of fiscal transfers received by the sub-national level shall be in accordance with the recommendations of the National Natural Resources and Fiscal Commission. But the commission does not have much of a role in other grants except fiscal equalization grants. Laws designed to weaken the commission must be amended. But more importantly, the commission must move forward in accordance with its rights.

As per the basic principles of grant distribution, the share of fiscal equalization grants should be increased in proportion to the gross domestic product (GDP) or budget side. But the ratio of fiscal equalization grants being distributed to the sub-national levels has been declining while the ratio of conditional grants has been increasing unexpectedly. Meanwhile, in the name of conditional grants, small programs and projects have been sent to the sub-national levels, creating an unnecessary burden for them.

Activating intergovernmental bodies

Nepal has adopted a unique approach to address issues related to federalism implementation by creating various intergovernmental coordinating bodies, such as the ‘Inter-province Council’, ‘National Coordination Council’ chaired by the prime minister, ‘Intergovernmental Fiscal Council’ led by the finance minister, ‘Province Coordination Council’ led by the chief minister, and ‘Sectoral Committees’ led by sectoral ministers. However, these bodies have not operated as smoothly as envisioned, with the Inter-province Council, for instance, not convening for five years. These intergovernmental coordinating bodies were established to ensure policy consistency, prevent conflicts, and resolve disputes through mutual agreement.

Nepal has witnessed numerous people’s movements for democracy, development, peace, and stability, resulting in frequent changes in the governance system and seven different constitutions in a short period. In contrast, countries like the United States, Switzerland, and India have maintained stable governance systems with their respective constitutions for many years. The instability in Nepal’s governance system hampers the country’s development and stability, making the activation of the inter-governmental relations mechanism crucial for achieving development, prosperity, and good governance.

Fine-tuning administrative federalism

According to the constitution, more than half of the workload is designated for local and provincial governments, yet many organizational structures remain unnecessarily centralized. The federal level has a high number of employees, with approximately 49,000 positions created and 40,000 retained. Despite an estimated need for 68,000 local-level employees, only 24,000 have been adjusted. During the adjustment, it was conveyed that there was a shortage of 24,000 employees at the local level. The law stipulated self-arrangement for the shortage. Provinces were tasked with managing a minimum of 9,000 employees independently.

However, avenues to address the staff shortage were obstructed, with no federal civil service law enacted for seven years, hindering provincial legislation. Although Provincial Public Service Commissions were established, they failed to deliver anticipated outcomes. Restructuring the entire bureaucratic system, including institutions, is imperative, as the principle of functional allocation is not being effectively implemented.

At the federal level, there is currently an excessive number of departments, with more than half of them being redundant. These unnecessary departments, along with unreasonable commissions and institutions, should be abolished to streamline and optimize the government’s functioning. Addressing personnel concerns, the federal level is burdened with an excessive number of staff, with over half of them being unemployed. Proper procedures should be implemented to either remove the unemployed personnel or redistribute them to subnational levels where their skills and expertise can be utilized effectively.

Revisit provincial structure

Central politics heavily influences provincial governance, leading to instability mirrored from the central power coalition. This situation not only undermines the autonomy envisioned in the constitution but also fuels public dissatisfaction, questioning the legitimacy of the provincial structure. Addressing this issue requires a comprehensive overhaul of the provincial system. Two potential models for ensuring stability have been proposed. The first model, akin to the German system, advocates distributing government leadership based on election results to ensure consensus and stability. The second model, similar to the Swiss cantonal system, suggests direct election of the chief minister by the people, holding them accountable to the Provincial Assembly.

Regardless of the model chosen, it is imperative to streamline the number of provincial ministers, reduce the excessively large provincial assembly, and transition to a direct electoral system for better representation. Ultimately, stabilizing the provincial government is crucial for fostering public trust and ensuring effective governance.

International practice

Nepal can take examples from many nations following federalism like India and US but here are two examples. When examining Switzerland’s parliamentary structure in comparison to Nepal, both countries have a bicameral system. In terms of rights and authority, both chambers in Switzerland hold equal standing, whether it’s related to government formation or legislative matters. In contrast, Nepal’s Upper House has no role in government formation. In the legislative procedure, its role has also been neglected. Switzerland’s local governments have full autonomy. They are responsible for local economic and infrastructure development and service delivery. The mentality of Nepal’s federal government is so poor that it wants to handle local tasks itself.

Germany operates on a bottom-to-top federalism model, unlike Nepal’s top-to-bottom approach. Even with the German population being three times larger than Nepal’s, the country operates with just 15 ministries whereas it runs into dozens in Nepal. There has been a nice separation of power. We need not look far to witness federalism in action; Switzerland and Germany provide a valuable example.

Conclusion

The effective implementation of federalism hinges on several key factors like constitutional stability, oversight mechanisms, inter-provincial coordination, electoral system reform, and limitations on prime ministerial tenure are essential for aligning governance with citizen expectations and fostering political stability. Strengthening the role of the NA, optimizing administrative and fiscal federalism, human resource management, and revisiting provincial structures are vital for efficient governance and resource utilization. Moreover, public awareness and participation, along with continuous review and improvement mechanisms, are crucial for ensuring transparency, inclusivity, and accountability in the federal system. By addressing these aspects comprehensively, the nation can embark on a path of sustainable development, prosperity, and social justice, fulfilling the aspirations of its citizens while adapting to evolving needs and expectations.

There is a flawed understanding that fis­cal federalism is applicable only in a federal set up. It can be practiced even in a unitary system. In our context, we had exercised a good deal of fiscal federalism in the past. There are mainly four pillars of fiscal federalism.

The first is function analysis or expenditure assignment. This means allocation of specific responsibilities to federal, provincial and local level governments. Even in the past, we had decentralized some rights and duties through legal arrangements. Our constitution has provided 35 exclusive rights to federal govern­ment, 21 to provincial governments, and 22 to local governments.

There are concerns about different areas related to expenditure assignment. The pro­vision of fiscal transfers and grants is clearly mentioned in the new constitution, paving the way for its immediate implementation. The government has done a praiseworthy job on the management and transfers of civil servant.

The second pillar is revenue assignment. Even in the erstwhile unitary state, munici­palities and rural municipalities were granted some revenue-related rights. The new consti­tution has not provided much revenue-related rights to provinces.

The third pillar is related to grants, which falls under inter-governmental fiscal transfer. In terms of federalism, we are highly decen­tralized. But that applies only to works and duties. Most of the rights are given to pro­vincial and local governments. For instance, local governments have the right to decide on educational matters from primary to the higher secondary levels.

Similarly, provinces have the right to decide on tertiary institutions of education, or univer­sities. Moreover, all functions related to drink­ing water, agriculture and livestock, and 80 percent of the functions related to rural roads are with local governments. But institutions are the same. Expenditure assignment is con­stitutionally highly devolved but the revenue system is highly centralized. Only the roles and responsibilities are given to local levels, but no rights related to revenues.

There could be certain reasons behind centralizing the revenue system. More than 80 percent of the rights related to revenue is retained by the central government, whereas 60 percent work is devolved to the local governments. In principle, there should be a balance between allocation of responsibilities and revenues. Here, it is relevant to discuss the third pillar: inter-governmental transfer of funds.

Though we have centralized the revenue sys­tem, we have decentralized the distributions of revenue through laws. Revenue collection is decentralized as around 96 percent of it is collected from 15 districts. But we have 77 dis­tricts, and the government has a responsibility of looking after all districts and provinces. Again, 50 percent revenue is collected from customs points, which is the major source. Revenue control is centralized, and funds are transferred to the local levels as grants. This forms the third pillar.

Now, provinces and local governments get four types of grants—fiscal equalization, con­ditional, complementary, and special grants. Around 30 percent of the total budget is trans­ferred to local government units. In terms of revenue, we transfer 48 percent revenue to provincial and local governments.

Canada transfers highest amount of fiscal money to its local levels (49 percent), while the US transfers about 35 percent. Compared to those countries that embraced federalism two to three centuries ago, the condition of our fiscal transfer is better.

In our country, 15 districts collect 96 per­cent revenue. The Karnali and Sudur Paschim provinces collect less than one percent. Over 60 percent revenue is collected from Bagmati Province, most of which is sent to provinces as grant. We have a constitutional body called the National Resources and Fiscal Commission which recommends the distribution of reve­nues to all three tiers of government. There is also a constitutional provision that provinces have to transfer fiscal resources to local units.

The fourth pillar of fiscal federalism is the right to take loans. Local and provin­cial governments can take loans from the federal government based on the recom­mendation of the National Resources and Fiscal Commission.

Confusions related to expenditure assign­ment need to be cleared, and calls for our immediate attention. There is an overlap in the functions of the three tiers of government. For instance, all three tiers are involved in road construction. There should be clarity about who does what. The federal govern­ment should remain within constitutional boundaries, which is the biggest challenge of federalism. Local governments say they face obstacles from the provincial and federal gov­ernments. The provincial governments blame the federal government of interfering in its jurisdiction.

Another issue that needs our attention is that institutions have not gone to local levels with due responsibilities and rights. Although the constitution has given them rights related to education and agriculture, local govern­ments complain the federal government is building parallel institutions to interfere with these rights. This is like a parallel government, which should not be there. In terms of reve­nue, provincial and local governments have similar rights, creating confusion over distri­bution of resources.

We could have done much better. The fiscal commission has not been effective. Institutions related to federalism should work smarter. But despite everything, we have made good prog­ress on fiscal management. The bureaucracy has done well even in the absence of political leadership. We have allocated common and separate rights to the three tiers of govern­ment, but it has been the bureaucracy that has carried out most of the work.

Over 60 percent expenditure of sub-national organizations is managed through grants. But the transfer system is opaque. There have been complaints that more budget is allocated to electoral constituencies of political leaders. We also need to look after Karnali and Sudur Paschim provinces. For that purpose, we have to develop a scientific framework and ensure equal distribution of funds 

The author is a fiscal federalism expert

(Based on a discussion with Kamal Dev Bhattarai)