Is federalism prohibitively expen­sive for Nepal? Even though the federal system is an irreversible truth after the promulgation of the new constitution and holding of all three constitutionally-mandated elections, the old debate over the cost of the new system refuses to die down. To make their ends meet, the new constitution allows “the federation, province and the local level entity… to impose tax on subjects within their fiscal jurisdiction and collect revenue from such sources”. If rev­enues collected at provincial and local levels are inadequate, “the Government of Nepal shall make necessary arrangements to equita­bly distribute the revenue generated by it from its sources, between the federation, province and the local level entities.” But is the economic pie big enough for all three layers of government?

“For a rough estimate, multiply the costs under the old unitary system by three,” says Ram Saran Mahat, the multiple-time finance minister. “I have always maintained that a federal system is inherently costly and complex. The early signs of implementation of federalism only adds to my suspicion.”

The signs Mahat hints at are the disputes over the designation of pro­vincial capitals. He believes these challenges will get more and more complicated.

 

820 bn—and counting

 

According to the Ministry of Finance, Nepal will need Rs 820 billion over the next three years on federal infrastructure alone. To put this into perspective, in the first six months of the current fiscal, Rs 336 billion has been collected in revenues, two billions more than the target of Rs 334 billion. The gov­ernment thus seems to be on course for the yearly revenue target of Rs 730 billion. But a year’s worth of revenues will still be inadequate to meet the added costs.

“All this money for federal infrastructure and administrative tasks will be at the cost of the all-im­portant development expenditure,” says Mahat.

Economist Biswo Poudel is not very sanguine either. He cites the recently introduced voluntary retirement scheme for civil servants, which is expected to cost the exche­quer Rs 50 billion, as an example of the new profligacy under the federal setup. “A civil servant should be ready to go to any part of Nepal that he or she is deputed to. The gov­ernment is setting a troubling, and expensive, precedent for federal Nepal by giving civil servants who don’t want to go to certain places golden handshakes.”

Poudel is also unhappy with what he deems unnecessary expansion of government. The country will now have as many as 825 MPs and 110 ministers. “Even if we assume a low-end salary of Rs 60,000 for each of them, their monthly bill will amount to Rs 49.5 million. This is not factoring in other associat­ed costs like vehicle and secretariat costs.”

But there are also those who believe the initial invest­ment in the federal setup, however big, is worth it. “For those who say federalism is expensive, I would like to ask, ‘On what basis?’” says Uma Shankar Prasad, a professor of eco­nomics at Tribhuvan University. “I don’t know of any systemat­ic study on the financial viability of federalism in Nepal.”

 

Apples and oranges

 

Nor does Prasad buy that the sev­en provinces, as proposed, are unvi­able. “People say that Province 2 is unviable as it does not have natural resources. But there are other ways to make money. For instance, there are hardly any good hospitals across the border in Bihar. If we can build good hospitals in Province 2, hun­dreds of thousands of patients from Bihar will come to the province for their check-up every year.”

Likewise, “the apples of Jumla and oranges of Ramechhap” can be processed, packaged and exported profitably. There are many such innovative ways to make the federal system work, Prasad says. Perhaps the reason so many people in Nepal are skeptical about the federal setup, he muses, is that they focus on failed examples of federal­ism: “If the tiny Switzerland, which is much smaller compared to Nepal both in terms of area and popula­tion, can thrive with 26 cantons, why can’t Nepal prosper with its seven provinces?”

Fiscal federalism expert Khim Lal Devkota believes it’s a question of whether to see the glass as half-full or half-empty. “Ever since the first Con­stituent Assembly stated debating Nepal’s federal contours, I had been saying that the federal provinces should be demarcated based on their fiscal viability rather than group identity,” Devkota says. (According to the new constitution, the provin­cial demarcations will be based both on ‘identity’ and ‘viability’).

“Most of the revenues will be gen­erated in areas with high popula­tions. In fact, already, 96 percent of our revenues comes from just 15 districts. So equita­ble distribution of revenues across federal provinces will not be easy,” he said.

But Devkota is optimistic. “Yes, federalism may be a little costly, and complicated as well, but what you cannot deny is that for the first time the power and resources that was centralized in Singhadurbar have been passed down the line. This is something to be celebrated.”

Moreover, federalism is based on a sharing model. Devkota expects the federal model to start functioning smoothly after, in the course of time, a viable revenue-sharing model is worked out. It is true that many new posts and offices have been created, adding to the administrative costs, Devkota adds, but then, to offset these expenses, the number of min­istries have also been reduced, considerably reducing the costs.

 

Power to people

 

There are also tangible, if hard to compute, econom­ic benefits of federalism. “Factor in the savings of all those who do not now have to come to Kathmandu for the most minor of things,” Devkota says.

Economist Poudel agrees. “There is also a way to do feder­alism cheaply. But for this the role of the central government in a fed­eral setup should be largely advi­sory”. Core functions like defense, monetary system and foreign affairs remains with the federal govern­ment, Poudel advises, everything else should be delegated.

Even Mahat, the ex-finance min­ister, reckons that federalism can succeed if our leaders show more ‘fiscal discipline’—by learning to live within their means, controlling corruption, maintaining uniformity in taxation and pruning the size of government. “But all this is easier said than done,” he adds.

In the end, it all boils down to the will of our major political actors to make the new system work. For the federal experiment to succeed they must learn to rein in their profli­gate ways and remain true to their electoral promise of meaningful decentralization. Done right, feder­alism can empower each and every Nepali, politically as well as econom­ically—not that we have the luxury to get it wrong.

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