Barely six months into the implementation of the federal structure, the first signs of conflict between the three tiers of government are visible. State governments are openly criticizing the federal government for what they see as the Cen­tre’s attempt to ‘hoard resourc­es’. While not unexpected or unnatural, these early manifesta­tions of conflict require a careful handling if our federal journey is to be smooth. There are two primary sources of conflict: resource and respon­sibility. Instinctively, all tiers of government want to have as much of both as possible. But the principle is clear: federalism is both a self-rule and a shared-rule—with downward delegation of basic services. As such the fed­eral government bears as much responsibility as subnational gov­ernments to ensure that there is adequate resource.

 

As both the federal and provin­cial governments begin prepa­rations for the next fiscal year’s budget, the Ministry of Finance’s ceiling of Rs 15 billion budget to each provincial government is being challenged. The current formula for sharing revenues between the federal and subna­tional governments is also being contested. Under the Intergov­ernmental Fiscal Arrangement Act, the federal government keeps about 70 percent of the revenue from taxes and 50 percent of the royalty from natural resources.

 

Four types of transfer

 

As experiences from other federal countries show, about two-thirds of all spending takes place at the subnational level. Even in Nepal’s context—as the functional analysis carried out by a UNDP-supported project sug­gests—out of the 1,796 services that the Nepal government provides, more than half are functions of the subnational governments. The four different types of transfer that the Intergovernmental Fiscal Arrangement Act has provisioned will provide additional resources to the lower levels of government to meet their responsibilities: equalization, matching, condi­tional and special grants.

 

While the first three grants are aimed mostly at delivering basic services and maintaining certain national standards set by the center, the last grant seems to be aimed at supporting the sub­national governments for infra­structure development. It is obvi­ous there aren’t enough public funds to meet the infrastructural requirement of all states. This is what seems to worry the state governments the most.

 

PPP model

 

As the states are in formative stages, building infrastructures is a key priority for them. This is where private capital—both foreign and domestic—can come into play. Bridges, highways, drinking water projects and sewage plants can all be construct­ed under a public private partner­ship (PPP) model. This requires a strong legal framework and the capacity to design projects and provide regulatory oversight at both the federal and state levels. There are many variations of the PPP model that have been tried and tested by other countries. And there are several multilat­eral organizations that can help bring in the expertise initially to build our national capacity to design and execute these PPPs. The private sector can not only fill the funding gap, but can also create a virtuous cycle of employ­ment creation and revenue base expansion for the state govern­ments—which in turn can be used for funding additional services and infrastructure.

 

While the state governments are within their rights to press the fed­eral government for more funds, they may also want to explore alternatives. Instead of merely tweaking the revenue distribution formula, the Intergovernmental Fiscal Council should also look into other emerging approach­es to development finance. The shortage of public finance is also an opportunity to engage the pri­vate sector more effectively in national development.