In countries practicing federalism, commissions related to natural resources and fiscal issues play pivotal roles in making the federal setup work equitably, through rational distribution of natural and financial resources. In some countries, there are separate advisory bodies to handle natural and fiscal resources. The 2015 constitution of Nepal established a single National Natural Resources and Fiscal Commission (NNRFC).
The commission’s role is crucial in transforming the old unitary state into a functional federal one. “Only effective implementation of fiscal federalism can sustain our political federalism,” says Jhapat Bahadur Bohara, Minister for Economic Affairs and Planning, Sudur Paschim province. “Yet, there seems to be no serious effort to get the fiscal side of federalism right.”
An effective commission could significantly reduce chances of disputes among the three tiers of government—federal, provincial and local. Most such disputes are over natural resources and revenue distribution. The commission is mandated to make recommendations on revenue distribution, equalization grants, conditional grants, internal borrowing, and sharing of natural resources among the three tiers.
Currently, there are clear fiscal gaps at the provincial and local levels, as they are being asked to spend more than what they can collect in revenues. As such, the central government has to make fiscal transfers to the provincial and local levels to bridge the gaps. Although the local governments under the new constitution have been running for three years, the commission, mandated to facilitate their functions, is itself mired in problems.
Late, incomplete, understaffed
Soon after the enactment of the new constitution, the formation of a commission should have been the first priority of political parties. Yet, it wasn’t until two years later, in 2017, that the National Natural Resources and Fiscal Commission Act was finalized, with the commission coming into existence on the 28 December 2017. A year after the commission’s formation, the federal government, on 21 March 2019 appointed Balananda Poudel as its chairman. But four other members of the commission are yet to be appointed. “We have time and again urged the government to appoint remaining commission members at their earliest, for it is difficult to work without them,” says chairman Poudel.
The long delay in the appointment of commissioners can largely be attributed to disputes within the ruling Nepal Communist Party, as well as between the NCP and the Nepali Congress, the main opposition. All their senior leaders want those close to them appointed as commissioners.
Other personnel are also in short supply in the commission. According to Poudel, frequent staff turnover is not helping either. “On one hand, we have insufficient staff members, and on the other they are frequently being replaced”. Then there is the mismatch between the nature of the work, and knowledge and capacity of the staff. “Our staff are not trained to handle the specialized tasks the commission needs to handle,” Poudel adds.
Then there are the legal hurdles. The constitution has given some exclusive powers to federal, provincial, and local governments, while, at the same time, there are some concurrent powers they share. But, there are no laws that clearly define exclusive and concurrent rights. Similarly, provinces and local governments can both collect house and land registration fees, motor vehicle tax, entertainment tax, and advertisement tax. Yet again, no existing laws clearly define what each is entitled to.
Likewise, there are legal ambiguities in collecting fees and royalties through mobilization of natural resources. According to experts, several laws that were being applied, before the country adopted the federal structure, are still in place. The laws related to natural resources, for instance, need to be amended to make it compatible with the new federal structure. Moreover, there are no mechanisms to ensure local governments are correctly using their resources, with the purpose of improving people’s lives and enhancing service delivery. The Commission for Investigation of Abuse of Authority (CIAA) and the Office of Auditor General are mandated to curtail abuse of authority and check corruption. But, once again, there are no clear accountability mechanisms to ensure local and provincial governments are not misusing their constitutional rights.
Shadow of Finance Ministry
The NNRFC was envisioned as an autonomous constitutional commission, yet the federal government, and particularly the Ministry of Finance, continues to exert heavy influence over it. According to Section 20 of the National Natural Resources and Fiscal Commission Act, 2074: “The Government of Nepal, Ministry of Finance, shall liaison the commission with the Government of Nepal.” As the ministry is responsible for preparing the federal government’s annual budget, it is improper to make it a liaison for the commission, say fiscal federalism experts.
Commission sources speak of the ministry’s undue influence and tussles on issues related to revenue distribution. Hinting at it, commission chair Poudel speaks of the need to “enhance understanding with the Ministry of Finance”. Experts say the commission should ideally be under the prime minister’s office. That way, it can better collaborate with other government ministries and departments. On the other hand, the commission, an autonomous constitutional body, is not answerable to any certain government ministry.
Former National Planning Commission (NPC) vice-chairman Jagadish Chandra Pokharel says the fiscal commission chair could be more assertive in exercising the body’s constitutional rights. According to Pokharel, the domination of a single party from the federal to local levels is another reason behind the undue meddling with the commission’s work.
Furthermore, the federal government doesn’t seem committed to implementing the commission’s recommendations on fiscal transfers to provincial and local governments. After the chair’s appointment, the commission had submitted its first report on the distribution of fiscal resources—a report that was completely ignored by the federal government. An official at the finance ministry says the problem was that the commission made recommendations without consulting the ministry.
It is mandatory though for the government to abide by the commission’s recommendations. Article 60(3) of constitution says: “The amount of fiscal transfer receivable by the State and Local level shall be as recommended by the National Natural Resources and Fiscal Commission. Therefore, the government will have to implement the recommendations made by the commission.”
Fiscal federalism expert Khim Lal Devkota avers that more than a constitutional obligation, it’s a matter of “our commitment to federalism.” Yes, he adds, the commission and the ministry can coordinate, but, at the end of the day, “the ministry is obliged to implement the commission’s recommendations.”
Working without expertise
The job of this commission is highly technical, and as such it requires specific expertise. Yet, instead of experts related to the field being appointed to fill the remaining vacancies in the commission, chances are that the vacancies will, eventually, be filled with political appointees. Meanwhile, in the absence of these specialists, civil servants are being forced to work as their substitutes.
“We are generalists rather than experts,” says a commission staffer requesting anonymity. “Yet we have been functioning as experts for the past two years. It does not seem to have occurred to the government that we can only support the experts, not replace them.”
Commission chair Poudel says he immediately needs a natural resources specialist as well as senior economists. Without such experts, he adds, the commission cannot conduct reliable research.
As per its mandate, the commission has to work extensively with federal, provincial, and local governments. For this purpose, it needs both experts and expertise, both of which the commission lacks. The representatives of provincial governments blame the commission of failing to carry out its duty of persuading the federal government to delegate more power and resources to the provinces.
“The financial resources we get are insufficient for effective service delivery. What has the commission done to improve things?” asks Kailash Prasad Dhungel, Minister for Economic Affairs and Planning of Bagmati province. According to him, there is also a need for an in-depth study on the problems faced by local governments. “Population and geography are being used as the only criteria for distribution of financial resources. This is wrong”. Provincial and local government representatives say resources should rather be allocated based on performance and necessity.
Bohara, the Minister for Economic Affairs and Planning of Sudur Paschim province, also disagrees with the commission’s recommendation on the distribution of revenues to the provinces. He asks the commission to start using the Human Development Index—in addition to population and geography—as a gauge for resource allocation.
Even though there has been some consultation between the commission and the provincial governments, such consultation with local governments is largely missing. Not that it is only the commission’s fault. Dozens of local governments have failed to bring timely budgets, nor are they submitting their expenditure reports. This has made it difficult for the commission to collect data from local governments, and, on top of that, other ministries are not cooperating.
Learning by doing
Nepal was still a unitary state when the commission was proposed. Now, three years since the country embraced federalism, the new setup has brought to the fore many unimagined issues. Pokharel suggests revisiting the commission’s function after the completion of an election cycle. “When the commission was formed we had just started on the federal road. Many new issues have cropped up, which in turn make it important to revisit the commission’s function on a timely basis.”
According to experts, the recent past has also shown how local governments lack expertise to handle natural resources and revenue distribution related issues. Pokharel says local governments were never oriented with a federal setup in mind.
One of the commission’s major responsibilities is to make recommendations on the equalization of grants to be provided to the provincial and local governments out of the federal consolidated fund. The commission has been more successful in this than in some of its other responsibilities. For instance, it has largely failed to carry out research on likely disputes between and within the three tiers of government, and to suggest ways to prevent them. With intensive and timely research, it would be easier to resolve possible disputes. “The commission has been able to carry out only some of its responsibilities mandated in the constitution,” says fiscal federalism expert Devkota.
Unless the NNRFC starts functioning effectively, it won’t be possible to implement fiscal federalism in the true sense of the term. But the federal government, which has been charged with reluctance to delegate rights and resources to provincial and local governments, seems to be in no hurry to adequately empower the commission.
Major functions of the National Natural Resources and Fiscal Commission:
• To make recommendations on equalization grants to be provided to the provincial and local governments out of the federal consolidated fund.
• To carry out research and define parameters for conditional grants to be provided to the provincial and local governments in accordance with national policies and programs, norms, standards, and the state of infrastructures.
• To determine a detailed basis and modality for the distribution of revenue between the provincial and local governments out of the state consolidated fund.
• To recommend measures to meet expenditures of the federal, provincial and local governments, and to reform revenue collection mechanisms.
• To analyze macro-economic indicators and recommend ceilings on internal loans that the federal, provincial and local governments can take out.
• To review the basis for revenue distribution between the federal and provincial governments and recommend revisions.
• To set bases for the determination of shares of the federal, provincial and local governments in investments and returns and in the mobilization of natural resources.
• To conduct research on possible disputes between the federation and the provinces, between provinces, between a province and a local level, and between local levels, and make suggestions on ways to prevent such disputes.
• To carry out environmental impact assessment required in the course of distribution of natural resources, and make recommendations to the government.