Fiscal Decentralization and Local Resource Mobilization in Nepal : The Case of District Development Committees and Village Development Committees

Abstract: 
Resource mobilization refers to the collection and utilization of resources in an organized way to produce results according to the given system of governance. It is based on a flow concept in which the inflow and outflow of resources are the concerns of "who gets what and how much from whom". Basically, the flow of local resource is the concern of fiscal issue of the local government which focuses on how the local government generates the revenue measured in monetary unit to meet the level of expenditure incurred to provide services for the benefit of the local people. Therefore, the fiscal decentralization in relation to the local government is considered as an important means of the system of governance. The critical issues of governance in the context of local resource mobilization are: Who controls? Who decides? And how optimally resources are collected and distributed to use? and so on. Fiscal decentralization refers to the process of granting autonomy to the local self government to mobilize financial resources which shows how much central government cedes fiscal impact to sub-national governments. It is a bottom up planning approach with the aim of converging the people's participation. Nepal is a country rich in diverse resources. Considering the eminent role to be played by local institution to mobilize these resources, Nepal has adopted the principle of decentralization since 1960 and various acts and laws were enacted since then to strengthen the efforts. According to the present Local-Self Governance Act (LSGA)-1999, local resources consisting of the grants provided by the central government (matching and non-matching grant), local revenue (tax and non-tax) and loan (internal and external) could have been implemented by the respective local bodies. This paper, therefore, has attempted to analyze the present status of revenue collection and expenditure practices as well as its scope and challenges of Village Development Committees (VDCs) and District Development Committees (DDCs).
Main Article: 

 

1. Introduction

Resource mobilization refers to the collection and utilization of resources in an organized way to produce results according to the given system of governance. It is a sociological theory that has emerged out from the part of the study of social movements. According to this theory, it is a core group of sophisticated strategists that works towards harnessing the disaffected energies, attracting money and supporters, capturing the media’s attention, forging alliances with those in power, and creating an organizational structure (Kendall, 2006). This indicates the collection and utilization of resources through any system of governance are prerequisites to achieve the desired goals of the society. Resources are the input that the organization can either convert into products or services, or into increasing its own capabilities (Axin, 1978, p158). Resources, if considered as an isolated factor, don't result in productivity, hence, coordination of resources is important in order to produce the outcome. Therefore, the organization plays a significant role to coordinate the given state of art or technology with the available resources to produce a stipulated output in an economically efficient manner to achieve the desired goal. The size and quality of the resources are also important in determining how effective the organization is going to be. It is known that mobilization refers to organizing the resources for a particular task or to produce output.  Thus, it can be said that resources and mobilization are like two sides of the same coin which can not possess value without two sides. Resource mobilization is, therefore, the scheme of collecting funds for financing a plan for the socio-economic development of the country.

Resource mobilization is a flow concept which concerns with "who gets what and how much from whom", which is mostly determined by the governance system and institutions responsible to implement. There may be various resource mobilization systems of governance and mobilizing institutions like the central government, local government, private organizations and others. The problem of the institution-builder is to mobilize, that is to attract these resources to the organization and to mount programs of action consistent with the capabilities of these resources at any point of time (Axin, 1978, p158). In this context, local government is an important institution to mobilize the local resources. More and more local government units carry out new roles in mobilizing resources for development. Basically, local resource mobilization is the concern of fiscal issue determined by the degree of fiscal decentralization, a system of governance relating to fiscal power which focuses on how the local government generates the revenue measured in monetary unit to meet the local level of expenditure incurred to provide services to the local people.

In the democratic society, decentralization is considered as a tool to develop partner institution in-between the local communities and the central institution known as local government which is closer to the people than central government. The World Bank distinguishes the conceptual and empirical distinction of decentralization in three dimensions: fiscal, administrative and political. Conceptually, fiscal decentralization refers to the process of granting autonomy to the local self-government to mobilize financial resources (Rajkarinkar, 2001, p15). It also signifies how much central government cedes fiscal impact to sub-national governments. The impacts of intergovernmental finances on the main economic objectives of government -equity, efficiency, and macroeconomic stability-depend on the system rather than any one component (WBI, 2000, p9). The system of governance is an important aspect in operational process that seeks to steer collection and utilization of resources in an efficient and effective manner. It is characterized by the participation, rule of law, transparency, responsiveness, equity, accountability, effectiveness, efficiency and strategic vision. The critical issues of governance in the context of local resource mobilization are: Who controls? Who decides? And, how optimally resources are collected and distribute to use? And so on, this could maintain supply of and demand for resources through rational choice. The efficient and effective collection and expenditure processes and practices play greater role to uplift the quality of life of the local people. The system of governance may vary from country to country, place to place, and culture to culture. In the context of Nepal, how the local government is been practice of collecting and mobilizing the local resources is the main concern of this paper.

Nepal is a country rich in diverse resources such as geographical (Hill, Mountain, Terai), social (more than 100 ethnic groups lives together here in harmony), cultural (different castes and ethnic groups of people celebrate their own culture), natural (forest, water, mines etc.) and human capabilities as well. From the very beginning, various efforts have been made to mobilize such local resources. The central planning authority, the National Planning Commission (NPC) has practiced top down planning approach since its inception in 1957 AD. After the tenth plan period, it has adopted participatory or relatively bottom up approach. However, since 1960 (MLD, 2006)Nepal has adopted the principle of decentralization as a means of governance system by forming the local government and publishing a decentralization plan in 1965 with a fundamental goal/objectives of mobilization of local resources for economic development (Shrestha, 1997, p36). Currently, District Development Committee (DDC) is functioning as an umbrella organization of Village Development Committees (VDCs) and Municipalities considered as an important government structure for resource mobilization in Nepal. For these institutions to be functional, the LSGA-1999 has been enacted with financial provisions, devolving fiscal autonomy with jurisdiction power and functions, which has enhanced the scope of these local institutions to identify and determine the resource base and selection of projects to mobilize local resources through people's participation. According to this act, local resources consist of the grants provided by the central government (matching and non-matching grants), local revenue (tax and non-tax) and loans (internal and external). An amount of such resource collection and its mobilization practices and performance can play an important role for the economic development of the country. However, economic indicators such as per capita income, production per capita, availability of infrastructural services per capita like road, electricity etc. of the country are found to be very poor in Nepal.

This paper, therefore, has attempted to analyze the local resource mobilization practices (i.e. revenue collection and expenditure practices) and key issues of its scope and challenges based on present LSGA-1999 and financial regulation 2000. For this, the author has selected Kathmandu (comparative dominance of urban fiscal character) and Gorkha (comparative dominance of rural fiscal character) districts representing valley and hilly region of Nepal and respective VDCs of these districts with an attempt to show the urban and rural fiscal characteristics as regards to the local resource mobilization practices.

 

Objectives of the Study

The objectives of this paper are

a)To identify the current local resource mobilization practices of District Development Committees (DDCs) and Village Development Committees (VDCs) of Nepal. 

b)To elucidate the scope and challenges of local bodies as regards to the local resource mobilization at the local level.

 

Methodology

This paper has analyzed resource mobilization practices of local bodies based on primary data. The two districts of Kathmandu and Gorkha, out of 75 districts, and the two respective VDCs Syuchatar and Bungkot out of 3915 VDCs of Nepal were selected purposively from the central and western development regions of Nepal. The municipalities were excluded in the selection process for the analysis. Primary data in terms of extracting the records from the concerned institutions for the sources of revenue and expenditure practices of the fiscal year 2064/65 have been collected. Very short demographic and other relevant statistics have been collected as a secondary data from different sources such as reports, articles, books etc. Discussion with two functionaries and former elected representatives of selected DDCs and VDCs were conducted individually to identify the scope and challenges as regards to the local resource mobilization.

 

2. Conceptual Issues on Local Resources Mobilization

Local resources are the physical or virtual entity available at the local level that to be utilized in optimal proportion for economic development which otherwise remains idle. On the other hand, use of any resources beyond its capacity can result in its rapid depletion and deterioration which may cause damage to the sustainability of local resources. Therefore, the optimum use of local resources is critical.

Conceptually, it is believed that rural development cannot be delivered only from outside (Axin, 1978, p16). It needs to be evolved within any particular social system. Thus, it can be said that local resources play a vital role in socio-economic development of local people and local government being close to local community is an important organization for bringing desired change through developing the feeling of convergence. The desired change is a result of increased power in rural social system and power refers to both authority and influence (Axin, 1978, p108).  In this concern, who has authority and who can influence to mobilize local resources is a great issue. In fact, the flow of relation mentioned such as Local people ® bare economic needs + local common social needs ® common local problems ® problem solving needs ® local government (Muttalib and Ali Khan, 1982) is pertinent. This indicates that local people have few common economic needs that can be solved by mobilizing the local resources through the local government. The local government is a representative body, representing a particular set of local views, conditions, needs and problems, depending on the characteristics of population and the economic elements (Muttalib and Ali Khan, 1982, p6). But they have meager resources to meet their local needs, while development programs involve heavy expenditure and sophisticated technical know-how (Muttalib and Ali Khan, 1982, p5). This means that resources are limited at the local level for the desired economic change with the desired speed. Therefore, local resource mobilization is considered a critical issue.

It is proved that rolling of a ball requires pumping of adequate air for it from outside. Considering the economy as a ball the collection of productive resources is necessary condition and mobilization of the resources is sufficient condition like a pumping of air. Like the ball needs to be rolled to score a goal, the resources need to be channelized and mobilized to get desired results. The local resource mobilization should reflect the process such as rainfall in normal climatic environment from which all the people would be benefited without giving heavy burden to the resource givers (i.e. tax or non-tax payers). For example, according to science, in a normal climatic environment, the water becomes vapor after heating to certain degree temperature where it is available on the surface of the earth, and then it further becomes water over the sky due to the decreasing temperature and falls as rainfall on the earth without any partiality. This is a contextual issue of fiscal system. The impoverished state of the finances of most local authorities in the less developed countries is a severe handicap to responsible local government, since the back bone of local government is financial autonomy (Muttalib and Ali Khan, 1982). The financial autonomy refers to the degree of devolution of power to the local bodies in order to collect and mobilize local resources. The local fiscal structure comprises of local revenue and expenditure as reflected in the local budget, adopted and executed in accordance with the local government act.

The local government may have various revenue sources such as internal and external. The internal revenue sources determine the extent and limit of financial independence of the local government. The internal revenue consists of tax and non-tax sources. It is said that a local tax should-like any other-be convenient and certain, fair between persons in like circumstances and be economical in collection (Muttalib and Ali Khan, 1982, p573). But, the core problem is that the tax base and tax power given to local government in rural areas of less developed countries is usually inherently weak - the base being narrow, stagnant and both costly and politically hard to collect and local collection and enforcement power being often undercut by central interference or apathy . In this regard, Ragnar Nurkse, a well-known economist says: "I believe that public finance assumes a new significance in the face of the problem of capital accumulation in underdeveloped countries"(Singh, 1991, p17).

Tax is an important source of local resources. The tax theory is divided into ability to pay and benefit principles. The benefit principle of taxation is suitable for local taxation whereas ability to pay principle is suitable for central government taxation. But, in developing countries, like Nepal, in general, there are only a few available tax bases. Therefore, the local government has been weak to levy the tax. In fact, taxes are paid as a price for the benefits received from public services. Therefore, benefit principle becomes workable only when benefit from local services can be approximately identified. This is a critical issue to identify tax base in order to collect more amount of local resource. In the modern economic world, the economic reform processes have cutbacks in state spending. But yet, in developing countries, the local authorities have to rely for their revenues on government grants (Singh, 1991, p571). It is a challenge of local government.  So, the policy issue in this context is still debatable.

The subject matter of the theory of public expenditure is the optimum allocation of national resources between the satisfaction of private and public wants. The importance of the theory considered as canon of economy, benefit, surplus, elasticity, productivity and equitable distribution. The developing countries face the challenges of containing deficits without falling into recession or harming longer-term development prospects. This indicates that the demand for investment is more than the revenue. Therefore, the government compelled to make deficit budget. The basic rule of optimum resource allocation is the equality of marginal social costs and benefits. The marginal social benefit refers to the gains to the society from public expenditure and cost refers to the benefits from private sector productions which are foregone due to the transfer of resources to the public use. Hence, the benefit to the society from the last rupee spent on education, for instance, must be the same as those from the last rupee spent on defense. For the expenditure purpose, the Central Government provides a broad base for local finance through Local Government Act in respect of sources of revenue, nature of expenditure mode of formation, adoption and execution of budgetary proposals, the need for government sanction, local audit etc. (Muttalib and Ali Khan, 1982, p182).

In this context, fiscal decentralization should be considered as intergovernmental fiscal relations that show how different level of governments acts and interacts with each other on fiscal issues i.e. revenue collection and expenditure with reference to their functions and responsibilities. There are four key elements of fiscal decentralisation usually called "four pillars" or "building blocks" of fiscal decentralization. They are expenditure responsibilities, revenue assignment, inter-governmental fiscal transfer and sub-national borrowing (borrowing authority only for pre-specified objectives). It is a process of devolving fiscal decision making power and management responsibilities to the local government. The process or governmental system assumes that local governments have a certain degree of fiscal discretion and autonomy in resource planning and its mobilization.  

Local fiscal allocations must include a bias to efficient rather than to fair and equitable allocation of resources, a shift from the tendency to allow equal shares for all (Shotton, 1999, p9). The term efficient refers to doing things right. This is the concern of fiscal decentralization planning for efficient and effective operation of local resources. The decentralized planning generates additional resources and encourages more efficient use of existing resources. It makes the local authorities more accountable and efficient for local level planning in the use of local resources.

 

3. Local Planning Process in Nepal

In Nepal, there is a two tier system of development planning i.e. Central Level Planning and Decentralized or Local Level Planning system. Local level planning includes district, village and municipal level planning. In the context of local resource mobilization, Nepal has initiated the principle of fiscal decentralization, as a strategy, which is known as participatory governance approach involving multi-stakeholders in planning process for their affairs. For this, National Planning Commission (NPC) provides the budget estimates (ceiling) to the local government. Development planning system is, therefore, a complex power relationship between centralized and decentralized actors.

National Development Council (NDC) is an apex central planning authority under the chair of Prime Minister, and NPC is exclusively an advisory body for formulating development plans and policies under the directives of the NDC. NPC, as a central planning authority, formulates national development plan with the help of line ministries and development projects, and facilitates the local bodies in the planning process and implementation by linking local level plans with national level plans. NPC is, therefore, responsible for balancing, verifying and coordinating with local bodies and line ministries to mobilize the local resources including the planning process, whereas local planning authority has authority to identify and select the projects to implement themselves and to refer upper level institutions.  The involvement of central planning authority and local authority in the planning process based on NPC's and LSGA's planning process is briefly constructed in the following figure.

 
 

 

 

 

 

 

 

 

 

 

 

4. Local Resource Mobilization Practices in Nepal

The government of Nepal has been practiced different forms of decentralization ranging from delegation, de-concentration and devolution of authority (MLD, 2006:8). In the Panchayat (non-party system of government) period, various laws were enacted including financial regulation. However, the promulgated law and rule could not stand for a long time which was changed from time to time. There are various laws concerning decentralization such as Village Panchayat Act 1962, District Panchayat Act 1962, Local Administration Arrangements Act 1666, Decentralization Act 1979, etc. The working approaches of these laws were characterized by top down approach. Generally, in the context of financial regulation, the central government mobilized almost all of the resources through the district office line ministries. After the restoration of democracy in 1990, at first, three laws were enacted with regard to local bodies named as Village Development Committee Act 1992, Municipality Act 1992, and District Development Committee Act 1992. Due to contradiction between the central and local governments as well as in between the local governments ( DDC and VDC) with regards to power and sharing of resources and duplication of role and responsibilities, the government of Nepal has enacted “Local Self-Governance Act-1999” and "Financial Regulations 2000" by integrating the then three Acts as mentioned above. Promulgation of  Act and Regulations is a landmark decision of the government of Nepal to  practice the fiscal decentralization principle democratically. The major aim of present financial regulations is to clarify the functions, duties and responsibilities of the local bodies to collect and mobilize resources and making them accountable and responsible.

This paper seeks to analyze the practices of Kathmandu and Gorkha DDCs as well as Syuchatar and Bungkot VDCs of respective districts. Kathmandu is a centrally located district of Nepal in which the capital city lies, with a population of 1,081,845 within 2739 per sq. km.; and Gorkaha, a hill district situated Western part of the country, where a population of 288134 live within 80 per sq. km. (CBS, 2001). The financial resource mobilization (revenue and expenditure) practices of the districts and VDCs, on the basis of primary data, are explained below.

3.1 Revenue Assignment

Revenue assignment model may differ in different countries such as collection by the center and allocation to the local, collection by the local and distribution to the center, and collection by one local government and allocation to other local government also can be found in practice. However, all these models are practiced in Nepal. But, in practice, it is found that central government has provided resources to local institutions. In addition to it, the local institutions could generate own resources and there is also a practice of sharing local resources among local governments basically between DDC and VDC. The following headings could make this clear in this regard.

Power and Source of Revenue of DDCs

In Nepal, according to LSGA-1999, internal sources of revenue of DDC are taxes, service charge, fees and sales. The sources of tax revenue of local bodies are categorized by fixing the tax rate (for herbs, by product, forest based and mine based, license and so on), limiting (maximum .and minimum) the tax rate (such as for natural resources and recommendation fee) and providing the authority to council to determine the tax rate (such as unrestricted animal bones and horn exports, guest houses, library, inns, etc to DDCs and service charge to VDCs).  DDC can also earn income from natural jurisdiction such as from the sale of sand, stone, and wood drifting on rivers. In practice, the subsequent table shows the internal revenue position of Kathmandu and Gorkha districts, which was taken from the DDCs' records.

Table 1: Description of sources of internal revenue by districts. FY 2064/65.

SN Particulars Internal Revenue of Districts Remarks
Kathmandu Gorkha
1 Sand and Stone 12,288,693 87,270* *Slate stone
2 Kabadi goods 8,500,000 231,102  
3 Bone, Skin and Feathers 1,782,735 99,400* *Agri-Income
4 Licensing and renew 1,237,000 112,500  
5 Application and Examination 51,765 24,540  
6 Certificate of Mine Operation 183,066 41,450* *water resource
7 Recommendation Fee 627,700 19,500  
8 Sand and Stone Selling 269,034 63,555  
9 Fine 157,500 25,000  
10 Mine Royalty Charge 380,601    
11 Land tax from VDC/Metro. 1,082,454.71 56,687.81  
12 Rent 1,365,385 9,000  
13 Deposit seized and Return 50,552 373,140.34* *Sadarsyaha
14 Returns of Advances 500,000    
15 Dues Receipt 24,901    
16 Tender Form 1,336,425 96,200  
17 Herbs   64,437  
18 Accountancy Charge   4,300  
19 Export Goods   22,951  
20 Book Selling   8,300  
21 Road Charge   116,800  
22 Cable Car Fee   1,069,371.54  
23 Gorakhkali Rubber Factory   0  
24 Contingency   1,415,599.50  
  Grand Total 29,837,811.71 3,941,104.19  
  Population 29,837,811.7 3,941,104  
  Per capita 27.58 13.67  

The above table shows that resource base varies between these two districts. In practice, Kathmandu district has identified 16 internal revenue sources whereas Gorkha district has identified 21 sources. Kathmandu district has not collected the revenue from herbs, accountancy charge, export goods, book selling, road charge, and other industrial sectors as collected by Gorkha. However, total revenue collection from those sources in Gorkha is found less than that of Kathmandu. In terms of per capita local resource generation, per capita of Kathmandu district is Rs. 27.58 more than double fold of Gorkha district ( rs 13.67). Sadarsyaha (deposit seized and return) is not a regular revenue source. Sources of contingency amount previously two percent now it is determines 1.5% as service charge of VDC grant has not included in the revenue of Kathmandu. It was found that during the last three years, Gorkha district was not able to collect revenue from Gorakhkali Rubber Factory. This scenario shows potential resources are still subject to trace out.

Power and Source of Revenue of VDCs

The VDCs in Nepal are excessively dependent on external resources. The provision internal resources base, according to the present LSGA and its financial Regulation, and mobilization practices is explained below

Table 2: VDC's Resources by Financial Resource Base, according to LSGA 1999.

Resource Financial resource base
Tax House and land, land tax, haat bazaar, vehicle, entertainment, bahal bitauri (rent), advertisement, professional, commercial video, natural resource utilization and others.
Service Charge Sanitation, tourist site entrance, park, garden, view tower, entertainment (like magic circus etc.), for recovering dues for others
Fee Television, video and other equipment license fee, approval fee, recommendation fee
Sales Soil from fallow govt. land, product from public pond, VDC property, dry wood, fire wood, branches, roots, khar grass.
Loan Loans from bank or other institution with approval from council, with or without collateral and on government guarantee.

Source: Syuchatar VDC

The above table shows the VDC’s financial revenue base according to LSGA, 1999 and financial regulation in which the rate and range of rate for different sources is determined. The income and expenditure practices of Syuchatar and Bungkot VDCs are as follows:

Syuchatar VDC lies in the western part of the Kathmandu district and linked with Kathmandu metropolitan city. The local resource mobilization position of the VDC is given in the following table, which was taken from the VDC's records.

Table 3: Description of Income and Expenditure of Syuchatar VDC, FY 2064/65

SN Income Statement Rs. In NPR Expenditure Statement Rs. NPR
1 Government Grant 980,000 (37.33) Salary 287,056 (10.84)
2 Recommendation Fee 597,688 (22.76) Meeting Allowances 32,720 (1.24)
3 Land Tax 139,889 (5.33) Economic Assistance 35,300 (1.33)
4 House and Land Tax 5,000 (0.19) Service Sector 79,674 (3.00)
5 DDC Grant 842,000 (32.07) Miscellaneous 50,853 (1.92)
6 Others (Tel, Electric) 61,000 (2.32) Total Capital Expenditure 2,162,444 (81.67)
7 Total 2,625,577 (100)   Total 2,648,047 (100)

 

Figure in parenthesis represents the percentage.

The above table shows that 69.4 percent of the VDC's sources of revenue are grant provided by the central government (37.34%) and DDC (32.07%). The internal income sources of VDC are recommendation fee 22.76 percent (Rs. 597688.000), land tax 5.33 percent (Rs. 139889.00), negligible percent of house and land tax (Rs. 5000.00) and others 2.32 percent (Rs. 61000.00) such as electricity office, telecommunication office etc. This shows that the resource base, which is given in Table 2, has not been properly implemented by the VDC in practice according to LSGA. This indicates the inefficiency of VDC to collect revenue from the internal sources. From the VDC’s records, it was found that the VDC spent 81.67 percent of the total income on capital expenditure in different sectors such as Rs. 500,000.00 for drinking water, Rs. 350,000.00 for road, Rs. 300,000.00 for building construction, Rs. 250,000.00 for school teachers, Rs.150, 000.00 for training provided to women and Dalits.

Bungkot VDC

Bungkot VDC lies in the eastern part of Gorkha district nearly 10 km. from the district headquarter. The income and expenditure status of Bungkot VDC during 2064/65 as per the record of concerned VDC is given in the following table.

Table 4: Description of Income and Expenditure of Bungkot  VDC, FY 2064/65

SN Income Statement Rs. In NPR Expenditure Statement Rs. NPR
1 Last Year Saving 14,700 (1.46) Electrification 791,000 (75)
2 Government Grant 980,000 (97.39) Dalit Promotion 22,000 (2.09)
3 Recommendation Fee 7,075 (0.70) Women Development 54,000 (5.12)
4 Land Tax 4,528 (0.45) Health Post Development 13,000 (1.23)
5     HRD for School Teacher 94,000(8.92)
6     Economic Support 17,900 (1.70)
7     Miscellaneous (Administration) 62,403 (5.92)
  Total 1,006,303   Total 1,054,303

The above table shows that 97.39 percent VDC's sources of revenue are central government's grant. The internal income sources of VDC are recommendation fee 0.70 percent (Rs. 7075.000), land tax 0.45 percent (Rs. 4528.00). This shows that resource base, which is given in Table 2, has not been properly implemented by the VDC in

practice according to LSGA. This indicates the inefficiency of VDC to collect revenue from the internal sources. Generally, central grants spent for the school teachers are under the title of human resource development (HRD). According to the VDC records, it was found that almost all the current fiscal year’s budget was spent on electrification in the VDC.

From the above tables, it is found that the DDCs and VDCs have collected very limited revenues from the internal sources.

3.2 Inter Governmental Fiscal Transfer

Inter Governmental Fiscal Transfer is the heart of sub-national finance which is popular in Nepal as a block grant, conditional grant and royalty. It has a relation with allocation efficiency, distributional equity, macro economic stability, and political sustainability as a sharing of revenue. The revenue sharing practices of Kathmandu and Gorkha districts is explained in the following table.

Table 6: Description of Revenue Allocation from the Centre in FY 2064/65

SN Area Kathmandu Gorkha
1 Registration fee of land and land tax 97,913,676.10 4,448,300
2 Royalties of electricity 3,807,041.80 10,389,660.30
3 Royalties of forest --- 82,602.50
4 Royalties of tourism --- 3,348,008.40
5 Royalties of mine --- 19,999.61
    101,720,717.9 18,288,570.81

Source: DDCs record from Kathmandu and Gorkha districts.

The above table shows that share of registration fee of land and land tax is higher (Rs. 97913676.10) in Kathmandu district in comparison with Gorkha (Rs. 4448300.00) whereas royalties of electricity is higher in Gorkha because of the share taken from Marshyangdi Hydroelectricity Project. The royalties from forest, tourism, and mine has not been collected revenue by the Kathmandu district.

Expenditure Assignment

Expenditure is all cash outlays made by a given level of government. A larger proportion of the expenditure by local government indicates decentralized fiscal impact. Expenditure assignment is a fundamental step in the design of fiscal decentralization. It specifies the functions and expenditure responsibilities for each level of government, central as well as local. Deciding who will do what is the essence of expenditure assignment. The given assignments to the DDC and VDC in Nepal as spelled out in LSGA- 1999. The functions related to DDCs are agriculture, rural drinking water, hydro electricity, agriculture road and transport, land reform and land management, women and children, forest and environment, education and sports, wage for labor, irrigation, soil erosion and river control, information and communications, language and culture, cottage industry, health service, tourism, miscellaneous. However, there is a great role ambiguity among the various levels of government.

Expenditure Assignment of Gorkha District

The following table 5 shows the income and expenditure of DDC’s fund of Gorkha, FY 2064/65.

Table 5: Description of Income and Expenditure of Gorkha District.   FY 2064/65.

SN Income Statement Rs. (in NPR) Expenditure statement Rs. (in NPR)
1 Last year transfer 31,711,104.01

(20.60)

Nepal Government's Grant 90,115,851.06

(58.54)

  District Council 2,607,418.00 DDC Grant current 12,756,578.06
  Public Revenue Sharing 19,425,557.98 DDC Grant Capital 11,359,273.00
  Deposit 2,561,485.90 VDC Grant current 13,200,000.00
  DDC fund 1,747,558.84 VDC Grant Capital 52,800,000.00
  Personnel Welfare Fund 590,398.67 Other Expenditure 28,509,785.17

(18.52)

  Personnel Welfare Fund 1,500,000.00 District Council 3,014,064.41
  Maintenance Fund 1,050,000.00 Public Expenditure 17,802,764.00
  Gumba Manakamana (HR) 2,228,684.82 Road Board Nepal 856,265.99
2 Government’s Grant 90,115,851.06

(58.54)

DDC Fund Expenditure 3,003,000.00
  DDC Grant current 12,756,578.06 Schedule Caste 324,500.00
  DDC Grant Capital 11,359,273.00 Manakamana drk. water 1,187,602.00
  VDC Grant current 13,200,000.00 Human Resource 147,050.00
  VDC Grant Capital 52,800,000.00 Gumba Maintenance 50,000.00
3 Internal Income 22,229,675.00

(14.44)

Manakamana H. Post 71,795.00
  Service Charge and Rent 3,941,104.19 Mahalaxmi Sec.School 121,010.00
  Public Revenue Sharing 18,288,570.81 Deposit Expenditure 1,931,733.77
4 Other Income 9,880,195.25

(6.42)

Stock Amount 35,311,189.09

(22.94)

  R. D. Maintenance Fund 500,000.00 Gumba, Manakamana HP, HRD, Mahalaxmi 3,824,293.62
  Road Board Nepal 1,931,985.87 Maintenance R.B.N. 2,625,719.88
  Rural Development Fund 1,831,000.00 Personnel Welfare Fund 390,398.67
  Human Resource Fund 116,000.00 Personnel Welfare Fund 2,000,000.00
  Gumba Management 50,000.00 DDC fund 251,058.84
  Mankamana Health Post (I) 1,684,107.00 Internal Revenue 3,534,457.78
  Mahalaxmi Secondary (I) 1,322,959.00 Public Revenue Sharing 19,911,364.79
  Deposit 2,144,143.38 Deposit Accout 2,773,895.51
  Personnel Welfare Fund 300,000.00    
  Total 153,936,825.32 Total 153,936,825.32

Source: Annual Report of Gorkha district.

Figure in parenthesis represents percentage. I in parenthesis represents India.

Table 5 shows that the internal source of income is only 14.44 percent (Rs. 22,229,675.00), which is nominal in comparison to the total budget. Last year's budget which was not spent is 20.60 percent (Rs. 31,733,304.01) which indicates that the DDC could not spend a large amount of allocated budget in the selected project. Grants provided by the Indian Government for the selected projects  i.e. Manakamana health post and Mahalaxmi Secondary School was Rs. 3,007,066.00 included in the DDC's income. On the expenditure side, current expenditure is higher than capital expenditure; however, it is higher in capital expenditure than current expenditure VDC level. The VDCs budget is also included in the DDC's budget, which is transferred to the VDC as per the rule. DDC supports to other local institutions that were included in the other expenditure section which shares 18.52 percent of the total budget

Expenditure Assignment of Kathmandu District

Table 5: Description of Income and Expenditure of Kathmandu FY 2064/65. (in Rs. 000)

SN Program Real Income Real Expenditure Remarks
A DDCs Internal Source 131559

(25.17)

117189

(23.98)

 
B Nepal’s Govt. Grant 391055

(74.83)

371383

(76.02)

 
1 Agriculture and Rural Road 30735 28216  
2 Rural Road Maintenance Fund 1450 1450  
3 Public Development Grant 19200    2676  
4 Suspension Bridge Works 2700 2525  
5 Constituency Development 16200    16200     
6 Rural Drinking Water and Sanitation 7120 6666  
7 DDC Grant 13527 13527  
8 Social Security 16905    16905     
9 VDC Grant 57000    57000     
10 Agriculture Communication 7410 7410  
11 Primary Education 211117 211117  
12 Livestock Service 7691 7691  
  Grant Total 522614 488572  

Source: Annual Report of Kathmandu district. The figure in parenthesis represents the percentage.

The above table shows that internal source of income is 25.17 percent (Rs. 131,559,000.00) of the total DDC's budget, which is nominal in comparison with the central government's grant. On the expenditure side, the DDC's real expenditure was too low in comparison to the total revenue within the fiscal year which indicates the poor resource mobilization practices in district.

4. Scope and Challenges of Local Resource Mobilization

To identify scope and challenges of local resource mobilization, various discussions were held with the DDC and VDC personnel as well as former local representatives. The findings of the discussions are explained under the following bullets.

Scope

Central resources have been increased to local bodies significantly, especially in the VDC, from Rs. 50 to Rs. 300 to Rs. 500 to Rs. 1000 thousands, which has added a new dimension in the domain of decentralization.

Nepal is rich in human, cultural, social, geographical resource diversities, if it can be identified and collected as a productive capital and utilized appropriately, the economic development speed can take place.

The increasing trend of development infrastructure such as higher literacy rate, increasing communication and transportation facilities etc. has enhanced the awareness of the local people, which may lead in raising the demand for public utilities, and ultimately their participation in development endeavor and economy may rise.

Present LSGA focused on aspects of good governance such as transparency, accountability, responsiveness and so on, which may leads to raise the social and trust capital through which people may be inspired to participate in the development activities.

Human resource is also an important factor of production. In Nepal, 54.14 percent (15-59 age group of total population 22,736,934) are economically active population, and if this population can be mobilized properly, the development speed can increase.

Challenges

Resource mobilization is a challenging task for the economic development of a country. It mainly depends upon the system of governance, rule of law, efficiency of authorities, and so on. In this context, discussions were held with local authorities and personnel to collect the information regarding the challenges in local resource mobilization. They are explained in the following bullets.

LSGA-1999 has given the responsibility of protecting and utilizing the fallow land to the local bodies, but it has not transferred the ownership. This provision has created the contradiction to use it. The consequence becomes more problematic because some VDCs have been selling such land, like Bungkot, without authority and plan.

Even having provided the power to the local bodies cutting down from the center in order to collect land tax and housing tax, the amount of tax collection decreases from Rs. 70 million in 1995 to 29.6 million in 2000 (LAFCR, 2000:63).  As the representatives prefer the indirect tax, it has been a challenge to attract the local bodies towards direct taxes.

There is very low participation of the private sector and the NGOs in the local government function in service delivery. It is because of the lack of coordination and cooperation and the assumption has not been established that they are complementary to each other. The different line ministries/departments have selected projects in their own way, so that local bodies are facing the problem of duplication also.

There is a tax overlap horizontally, especially with regard to natural resources such as sand, stone and gravel, and vertically, between the central government and local bodies, in the case of the vehicle tax. This has led to conflict between the local governments as well as central government and local bodies. Thus, the determination of the sharing the proportion of tax is critical.

Local bodies have little flexibility in fixing tax rate. The rate of land tax is so nominal, but the VDC does not have the authority to increase the tax rate. It is mere transfer of power, without organizational capacity and authority.

Internal sources of revenue and expenditure capacity of the local bodies may differ from VDC to VDC and between one DDC and another, which leads to horizontal fiscal imbalance. In this context, to deal individually regarding the local bodies is a difficult task.

The Bungkot VDC does not have its own building because of the damaged VDC building during the period of Maoist revolution. At present, most of the VDCs do not have their own office building. This is also a challenging part to run the offices as well as developmental activities.

Politicization in all aspects of decision making is a challenging issue of the local bodies which has affected local resource mobilization as well.

Resources diverted and/or delayed disbursement because of political as well as administrative pressures is a great challenge in local resource mobilization.

Equipping local bodies with financial, administrative and technical capacity to enhance the factors productivity is a felt need. It is possible, if and only if all stakeholders follow the system of governance according to decentralization principle. This is a challenging task.

Conclusions and Implications

The internal revenue bases and volumes of the DDCs and VDCs are found to be very limited in comparison to the central grants. This proves that the local bodies have not been able to collect the internal revenue adequately as per the rule and regulation. There is vertical and horizontal imbalance in regards to revenue generation. The causes of vertical imbalance between the central and local governments are narrow tax base and limited discretion of local bodies over the tax rate. Moreover, the causes of horizontal imbalance between the local bodies are different economic mandates and opportunities within the jurisdiction of local bodies, differences in the local natural resource conditions, and differing capacity of taxation. This proves that Katmandu district has collected more internal tax resources, even in the limited tax base, than Gorkha district. Both DDCs and VDCs have not been received any borrowings.

From the consultation with local stakeholders and my observation it can be said that, decentralized planning system and bottom up planning approach provided the opportunity to the local people to participate in formulating the various development plans. This system raises the people's expectations at the local level. The implementation gaps rule out the effectiveness and efficiency of resource mobilization at the local level. It is, therefore, the local people are increasingly frustrated over the entire state of affairs so that planner and local authorities have been losing their credibility. Finally, such ineffective implementation practices have been adversely affecting the socio-economic development of local people.

Fiscal decentralization is an important means of system of governance to mobilize the local resources. The suggestions are made in the following bullets in the context of Nepal.

Present nominated local government needs to change into local elected representative, which could have more power for the effective and efficient mobilization of local resources.

The technical manpower at the local level is the felt need of the local government, which has to be fulfilled.

Locally available resources should be monetized to be measure in unit and divisibility of factors, which help enhance the productivity by exchanging the goods and services.

Local resources should integrate as productive unit and determine the distribution mechanism to equalize the marginal social benefit and marginal social cost.

Several alternatives should be explored to make the local bodies self-sufficient in terms of resources by using the given fiscal power.

Current tax base and tax rate provision of LSGA should be reviewed in the changed context.

The local bodies should be made responsible and accountable to the local people to focus in the capacity development to improve the quality service delivery system.

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