expenditure assignment study - prad...

REPORT

On

EXPENDITURE ASSIGNMENT STUDY

Submitted to

Local Body Fiscal Commission Secretariat/

Decentralization Advisory Support Unit (DASU/DANIDA)

Submitted by:

Study Team

April, 2004

Expenditure Assignment Study Team

Mr. Prithivi Raj Ligal Senior Consultant Team Leader

Dr. Devendra P. Shrestha Consultant Member

Mr. Kumar Keshar Bista Consultant Member

Mr. Yadab Chapagain Consultant Member

Mr. Parshuram Upadhyay Consultant Member

Ms. Jyoti Sharma Research Associate Member

Table of Contents

Acknowledgement

Acronyms

Executive Summary

CHAPTER I _______________________________________________________________ 1

INTRODUCTION ___________________________________________________________ 1

1.1 Background ........................................................................................................... 1

1.2 Rationale of the study ............................................................................................ 2

1.3 Study Objectives .................................................................................................... 2

1.4 Scope of the Work ................................................................................................. 2

1.5 Methodology .......................................................................................................... 3

1.5.1 Basis of Selection ......................................................................................... 4

1.5.2 Field Instruments .......................................................................................... 6

1.6 Field Planning and Management ........................................................................... 6

1.7 Field Performance ................................................................................................. 6

1.8 Study Limitations ................................................................................................... 7

1.9 Organization of the Report ..................................................................................... 8

CHAPTER II ______________________________________________________________ 9

Expenditure Assignment: Theory and Practices ___________________________________ 9

2.1 Meaning of Expenditure Assignment ...................................................................... 9

2.2 The Role of Private Sector ..................................................................................... 9

2.3 Role of Non-Governmental and Community Organizations .................................. 10

2.4 Role of Central and Sub-National Government .................................................... 10

2.5 Approaches in Expenditure Assignments ............................................................. 11

2.6 Principles of Expenditure Assignment .................................................................. 11

2.7 Common Problems with Expenditure Assignment ................................................ 13

2.8 Conditions for Successful Expenditure Assignment ............................................. 14

2.9 Delineating functional responsibility and tasks ..................................................... 16

2.10 Types of Devolution ............................................................................................. 16

2.11 Practice of Expenditure Assignment .................................................................... 16

Chapter III _______________________________________________________________ 21

Decentralization Practices and Expenditure Assignment in Nepal ____________________ 21

3.1 Legislative and Regulatory Framework For Expenditure Assignment ................... 21

3.2 Functional Arrangement: Autonomy, Authority and Responsibility ....................... 21

3.3 Functions and Institutional set up of Central Government and Local Bodies ........ 23

3.4 Key Issues Relating to Legislative Framework on Expenditure Assignment ......... 36

CHAPTER IV _____________________________________________________________ 49

Status and Issues in Sector Devolution _________________________________________ 49

4.1 Selection of Sectors for Devolution ....................................................................... 49

4.2 Remarks on the Steps Followed in Sector Devolution .......................................... 53

4.3 Review of Sector Devolution Guidelines ............................................................... 54

4.4 Institutional Set-up, Implementation Mechanism and Linkages ............................ 56

4.4.1 Agriculture and Livestock Extension Services ............................................. 56

4.4.2 Primary Education ...................................................................................... 56

4.4.3 Sub-health Posts ........................................................................................ 57

4.5 Autonomy and Responsibility ............................................................................... 57

4.6 Legislative and Regulatory Framework ................................................................ 58

4.7 Planning and Selection of Programs ................................................................... 58

4.8 Flow of Fund ........................................................................................................ 58

4.9 Accounting and Auditing ....................................................................................... 59

4.10 Mechanism of Monitoring and Evaluation ............................................................ 59

4.11 Reporting Requirements ....................................................................................... 60

4.12 Human Resource and Service Issues .................................................................. 60

4.13 Role of Central Government, Regional and District Offices, DDC and Municipality/VDC in the Implementation ............................................................... 60

4.14 Standardization of Services .................................................................................. 61

4.15 Issues and Performance in the Devolved Sectors ................................................. 62

Chapter V _______________________________________________________________ 65

Functions, Capacity and Management Practice of Local Bodies ______________________ 65

5. 1 Functions undertaken by the LBs ......................................................................... 65

5.2 System and processes of executing tasks undertaken by LBs ............................. 67

5.3 Roles and responsibilities assumed by LBs for service provided through central agencies............................................................................................................... 70

5.4 Capacity of Local Bodies ...................................................................................... 71

Chapter VI _______________________________________________________________ 81

Recommendations: Design of Expenditure Assignment and Institutional Set Up _________ 81

6.1 Public services and their expenditure assignment ................................................ 81

6.1.1 Determinants of expenditure assignment .................................................... 81

6.1.2 Identification of public services and the level of governments for assignment ................................................................................................. 83

6.1.3 Delineation of expenditure assignments ..................................................... 84

6.2 Institutional set-up and linkages ........................................................................... 92

6.2.1 Design considerations in proposing the institutional set-up ......................... 92

6.2.3 Roles and functioning of local level agencies .............................................. 97

6.2.4 Linkages among central government, local bodies, community organizations and private sector ................................................................. 98

6.3 System and processes for service delivery .......................................................... 99

6.3.1 Planning, prioritization and allocation of resources ..................................... 99

6.3.2 Planning, Budgeting, Fund Flow and Accountability ................................. 100

6.3.3 Auditing and Financial Control .................................................................. 101

6.3.4 Standard of services ................................................................................. 101

6.3.5 Human resource deployment ................................................................... 101

6.3.6 Monitoring, supervision and evaluation ..................................................... 102

6.3.7 Links with citizen and downward accountability ........................................ 102

6.4 Implementation of expenditure assignment and service devolution .................... 102

6.4.1 Responsible agency to take up the devolution plan .................................. 102

6.4.2 Developing phasing plan .......................................................................... 103

6.4.3 Systematizing devolution of sectoral services ........................................... 107

6.4.4 Required changes in the legislation .......................................................... 107

6.5 Capacity enhancement of local bodies ............................................................... 108

6.6 Other arrangements ........................................................................................... 109

6.7 Conclusion ......................................................................................................... 109

References

Expenditure Assignment Study Management Team

Annexures

Acknowledgements

The Study Team is highly privileged to have the opportunity to undertake this timely exercise on "Expenditure Assignment in Nepal". The Team, therefore, wishes to place on record its sincere gratitude to Local Bodies Fiscal Commission (LBFC) and Decentralization Advisory Support Unit (DASU)/DANIDA for entrusting us this important assignment. We strongly believe that the results and the suggestions made in the study will be very helpful in moving ahead on the path of fiscal decentralization in Nepal. The study team wishes to express sincere thanks to Dr. Hikmat Bista and Mr. Hendrik Westerby of DASU/DANIDA for their proffessional guidence and suggestions. Members of the LBFC particularly Mr. Som Lal Subedi, Joint Secretary, Mr. Purosottam Nepal and Mr. Anand R. Dhakal, Under Secretary, and Mr. Krishna Prasad Bhandari, Account Officer of MLD for their valuable suggestions and professional inputs at various stages of the study. Similarly, we also want to thank all the DASU staff members for extending valuable support.

We would also extend our sincere thanks to NPC, ministries and departments for having spared their valuable time to interact with the study team members and providing their useful insights in several dimensions of the study. Vice-Chairman Dr. Shankar Sharma and members Mr. Sambhu Saran Kayastha, Dr. Hari Krishna Upadhayay and Dr. Puspa Shrestha deserve special thanks for their support and professional inputs. Secretary Mr. Bhanu Prasad Acharya, and Mr. Rameshwor Prasad Khanal of Ministry of Finance, Secretary Mr. Poorna Prasad Manandhar, Mr. Tirtha Raj Sharma, Mr. Tika Dutta Niraula, Mr. Lok Man Singh Karki, Mr. Vidhyadhar Mallik, Mr. Chandi Shrestha, Mr. Lava Devcota, Mr. Shashikant Mainali and Mr. Khem Raj Nepal and the Joint-Secretaries of different ministries deserves special thanks for thier cooperation and frank suggestions. The team members also like to thank Auditor General Mr. Gehendra Adhikary, Mr Prachandra Lal Jha and Financial Comptroller General Mr. Bal Gopal Sigdel and Dr. Mohan Man Sainju, Vice-chairman, PAF for their cooperation and valuable input. We also extend our sincere thanks to the officials of UNCDF, DFID, USAID, GTZ, JICA with whom we had very valuable interaction. All the local bodies associations ADDCN, MuAN, and NAVIN deserve appreciation for their useful suggestions. We would also like to express our special thanks and appreciation to every member of the Study Management Team for their guidance, advices and suggestions during various stages of the performance of our work. We are indebted to all DDC Presidents and LDOs of the surveyed districts for their cordiality and hospitality extended to the study team. We are also very much thankful to all of them for extending their support in organizing the group interaction meetings with all the stakeholders in the district headquarters. Mayors of all the surveyed municipalities/sub-metropolitan including the Mayor of Kathmandu Metropolitan deserve appreciation for sharing their experiences and insights. The team is also thankful to the ex-DDC Presidents and ex-mayors of the districts and Municipalities visited who shared their experiences and provided valuable insights. Thanks are also due to all the government line agencies of the districts for sharing their views and concern in the fiscal decentralization exercise perused in the country. Finally we express our sincere thanks to all VDCs Secretaries, HP/SHP Incharges, SHPI&MC and SMC office bearers and teachers of the primary schools for sparing their time in responding to our questions, participating in the group discussions and contributing towards making the study a success. April 27, 2004 STUDY TEAM

i

Acronyms

ADB Asian Development Bank, Manila

ADDCN Association of District Development Communities of Nepal

AEPC Alternative Energy Promotion Center

AESC Agricultural Extension Service Center

AGO Auditor General's Office

AIC Agriculture Input Corporation

CAAN Civil Aviation Authority Nepal

CBO Community Based Organization

CBS Central Bureau of Statistics

CDO Chief District Officer

CFUG Community Forest Users Group

CG Central Government

CIDB Cottage Industries Development Board

CMS Community Managed School

COs Community Organizations

DAGs Disadvantaged Groups

DANIDA Danish International Development Assistance

DAO District Agricultural Office

DASU Decentralization Advisory Support Unit

DDA District Development Advisor

DDC District Development Committee

DDF District Development Fund

DEC District Education Committee

DEO District Education Office

DFDP Decentralized Financing and Development Program

DFID Department for International Development (UK)

DHO District Health Office

DIMC Decentralization Implementation and Monitoring Committee

DIP Decentralization Implementation Plan

DIRC District Information and Record Center

DMC District Management Committee

DMI Development Management Institution

DOLIDAR Department of Rural and Agricultural Roads

DRDD Decentralization and Rural Development Division

DT District Treasury

DTCO District

DTO District Technical Office

DW Drinking Water

EC Executive Committee

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EDP External Development Partners

GTZ German Technical Cooperation

HAN Hotel Association of Nepal

HLDCC High-Level Decentralization Coordination Committee

HMGN His Majesty's Government of Nepal

HoR House of Representatives

HRD Human Resource Development

IEDI Industrial Enterprises Development Institute

IEPNA Indigenous/Ethnic Promotion National Academy

IGA Income Generating Activities

ITDG Intermediate Technology Development Group

JT Junior Technician

JTA Junior Technical Assistant

KMTNC King Mahendra Trust for Nature Conservation

KUMS KU Medical School

LAFC Local Authorities Fiscal Commission

LBFAR Local Bodies (financial Administration) Regulation

LBFC Local Bodies Fiscal Commission

LBs Local Bodies

LDF Local Development Fund

LDO Local Development Officer

LDTA Local Development Training Academy

LG Local Governments

LGFC Local Government Finance Commission

LGP Local Governance Program

LMs Line Ministries

LO Livestock Office

LSGA Local Self Governance Act,1999

LSSC Live Stock Service Centre

MDF Municipality Development Fund

MEDEP Micro Enterprises Development Program

MFSC Ministry of Forest and Soil Conservation

MLD Ministry of Local Development

MoES Ministry of Education and Sports

MoF Ministry of Finance

MOFR Ministry of Forestry

MOH Ministry of Health

MOHPP Ministry of Housing and Physical Planning

MoIC Ministry of Information and Communication

MOICS Ministry of Industry, Commerce and supplies.

MOTC Ministry of Tourism and Culture

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MP Member of Parliament

MuAN Municipality Association of Nepal

NALAD National Association of Local Authorities in Denmark

NARC National Agricultural Resource Council

NAVIN National Association of VDCs in Nepal

NDWC Nepal Drinking Water Corporation

NEWAH Nepal Water for Health

NGO Non-Governmental Organizations

NHDR Nepal Human Development Report

NORAD Norwegian Agency for Development Cooperation

NPC National Planning Commission

NTA Nepal Telecom Authority

NTB Nepal Tourism Board

NTC Nepal Telecommunication Corporation

O&M Operation and Management

PAF Poverty Alleviation Fund

PMC Project Management Committee

PO Program Officer

PRSP Poverty Reduction Strategy Paper

REDP Rural Energy Development Program

SDC Switzerland's Development Organization

SHP Sub-Health Post

SHPI&MC Sub-Health Post Implementation and Monitoring Committee

SHPMC Sub-Health Post Management Committee

SIP School Improvement Plan

SMC School Management Committee

SNG Sub-National Governments (in Nepal=DDCs, VDCs, Municipalities)

SNV Netherlands Development Organization

SWPFC Subject Wise Plan Formulation Committee

TAN Trekking Association of Nepal

TF Task Force (for this review)

TPR Tripartite Program Review

UC User's Committee

UDLE Urban Development through Local Efforts

UNCDF United Nations Capital Development Fund

UNDP United Nations Development Fund

UNOPS United Nations Office for Project Support

VDC Village Development Committee

VDP Village Development Program

VEC Village Education Committee

WB World Bank

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Executive Summary

Introduction and Methodology

The expenditure assignment refers to the functions and responsibilities assigned to each level of

government. Unclear division of tasks, overlapping functions, unclear institutional framework,

contradictions in legal framework, and inadequacies in the guidelines, unclear expenditure needs

and resources of local bodies are some of the major problems of expenditure assignment in

Nepal. Overcoming these problems in a sequential way is the key to success of expenditure

assignment and devolution of services to LBs.

The objectives of the present study are: (i) To document existing functions, roles and

responsibilities across levels of government and identify contradictions, inconsistencies and

overlapping in the existing laws; (ii) To clearly delineate and define the specific tasks and

responsibilities of all tiers of local bodies and central government and clarify the linkages

between them; (iii) To review the existing fund flow mechanism and identify the major problems

associated with the financial management in the devolution processes; (iv)To examine the status

of sectoral devolution and also to review and identify the gaps in the guidelines and manuals

developed for the devolution of services; and (v) To identify the problems and challenges in the

expenditure assignment and sector devolution and recommend appropriate measures for their

successful implementation.

The present study has adopted combination of various study approaches. Major approaches

include desk study, consultation meetings, interviews, group interactions, workshop and

roundtable discussion. Series of consultation meetings were held with constitutional bodies,

NPC, ministries, departments and external development partners including LBs associations.

Workshop and roundtable discussions were also organized with policy makers and implementers

to share the key study recommendations and future action plan. The present study selected 9

districts for obtaining field insights. In the surveyed districts stake holders were interacted and

interviewed in-depth to seek their reaction on various aspect of devolution of selected services

including the modality of devolution, formation and composition of management committee,

clarity on the guidelines, provision of service standard and other issues associated with

expenditure assignment. Community people were also interviewed to seek their views on the

functioning of the primary schools and sub-health post and the post devolution changes they

have experienced in the quality of services.

Concepts and Practices in Expenditure Assignments

The assignment of functions and resulting expenditure responsibilities has been considered as

the first and fundamental step in the design of fiscal decentralization. The advocates of the

decentralized governance system argue that the assignment of expenditure responsibilities

should follow "subsidiary" principle. This principal implies that responsibility for the provision of

services should be at the lowest level of government compatible with the size of "benefit area"

associated with those services.

Theoretically, expenditure assignment should adopt the principles of allocative efficiency,

redistributive justice, economic stability and growth. However, there is no single model of

expenditure assignment, which could be treated as "best". Expenditure assignment is multi-

dimensional in nature having the components of production, provision, financing and regulation.

Often times these functions do not all fall within the jurisdiction of a single level of government

creating some confusion among LBs.

vi

Devolution implies shifting of responsibilities to sub national government in which sub national

governments are granted substantive decision-making authority. The basic premise is that LBs

could perform many activities in a more efficient way. Studies have documented various

devolution approaches, which are tested across the countries of the world. Some common

approaches that are widely in practice are: cold turkey (big bang approach); sector by sector

approach; approach of gradual devolution within each sector; approach of qualifying districts

only; and status quo (i.e., no devolution).

The practice of almost all the countries reviewed in the literature, expenditure assignment

pertaining to defense, foreign affairs, currency and banking, immigration and international trade

are exclusively assigned to central government. While the provision of air and rail services is

mostly assigned to central government, tasks concerning to environment have been jointly

assigned to central and state government. Interestingly, significant variation in expenditure

assignment has been observed across the countries especially in the social services sectors like,

health and education. Within the sectors the assignments are generally provisioned by functions

such as provisioning, production, regulation and supervision.

Status and Issues in Sector Devolution

In Nepal sector-by-sector approach together with phase-wise approach seems to have been

followed. Devolution process of some essential services (education, health, and agriculture)

started since 2002/03. So far 724 community primary schools and 960 sub-health posts of 26

districts across the country have been handed over to local community. Likewise, agriculture and

livestock extension services are devolved to all DDCs. Hand-over guidelines/manuals were

formulated, reformulated and updated in all the three services.

Lack of clear government commitment, unclear devolution guidelines in several aspects of

service provision, poor advocacy, dual accountability of civil servants, cumbersome handover

procedure, inadequate authority to Management Committee, indiscriminate incentive scheme

(primary school), faulty fund flow mechanism and lack of clear mechanism for conflict resolution

are some of the major issues of devolution.

Each ministry has set its own service standards with respect to coverage, location, types of

services to be provided, provision of manpower and their specific tasks, logistics and physical

facilities. However, no standards have been set for SHP in respect of equipments and

instruments required to operate the SHP. For primary education the standard for physical

structure (building) and physical facilities (rooms and furniture) have not been set properly as this

is not expressed in quantitative terms. Standards in agriculture lack clarity in terms of

quantification of other support services required to render the services.

HMG has gained both positive as well as negative experience in the sphere of devolution of

services. On the whole the move is considered to be in the right direction. However the tempo of

service devolution has been significantly affected due to uncoordinated activities and variations

in the understanding of the decentralized system of governance among different ministries

resulting to variations in the implementation modalities and roles and responsibilities of various

partners. Such a situation would significantly slowdown the pace limiting in the attainment of the

goal envisaged in the decentralization implementation plan (DIP).

vii

Practice of Decentralization, Expenditure Assignment and Local Bodies in Nepal

The Constitution of the Kingdom of Nepal has considered decentralization as one of its guiding

principles. Different laws have set out the functions of central government (CG) and local bodies

(LBs). HMG Work Division Regulation provides broader framework for allocation of functions

among different ministries. Functions of LBs are provisioned by Local Self-Governance Act 1999.

Other Nepal Acts also assigned some functions to CG and LBs.

It has been documented that various Acts contradicts with LSGA, 1999. 10 such contradicting

Acts are in the process of amendment. The problem of ambiguity and overlapping of certain

assignments to LBs has continued due to non addressal of the issue on time.

The LSGA has provisioned a long list of public functions for LBs and no function is out of their

scope. Most frequent functions undertaken by LBs include school support, roads, solid waste

management, urban facilities, drinking water, primary health and sanitation, and women and

children development. LBs are also bestowed with the authority to perform many other tasks

such as electricity generation and distribution, deep water preservation, control of natural

calamities, and environment protection. LBs strongly feel that many of the functions provisioned

in LSGA are unfunded.

Expenditure assignment in Nepal suffers from many bottlenecks. Some of the important issues

associated with this are lack of formal assignment, inefficient assignment, ambiguity in certain

assignment, shared responsibilities, lack of mechanism for co-ordination, unclear private sectors

role, lack of correspondence between expenditure responsibilities and fiscal and human resource

available, equal treatment of all LBs irrespective of their size, potentiality and capacity, too large

LBs to perform the task efficiently, inadequate arrangement for conflict resolution and

assignment of various agency functions to LBs.

DDC follows participatory planning process in preparing periodic plans. Such periodic plans are

not prepared by municipalities and VDCs. The participatory planning process, however, suffers

from the problem of inadequate deliberations made amongst different partners and insufficient

rational given in project selection, planning and budgeting. More recently, many community

organizations, NGOs and private sectors are being involved at various stages of plan formulation

and implementation

The organizational system of many LBs seems to be at the development stage. Many are still

dependent on the provisions prescribed in the laws but few have taken initiative to make their

own by-laws and procedures. Administrative capacity of the LBs varies between levels and

among the ones in the same level. Human resource competency of LBs is considered generally

weak. Low staff skills, fewer staff, inappropriate staffing, and weak HR management system are

noted factors for low capacity of LBs.

LBs linkages with citizens are essential in the decentralized system of governance. Three broad

mechanisms are traced to establish linkages – structural, procedural, and deliberate. The

structural mechanisms include those related to the very formation of LB and are related to the

regulatory framework. Procedural mechanisms include those that must be complied within the

process of carrying out mandated functions. Citizen Charter in LBs is a good example Deliberate

are those that the LBs have done in a planned way to improve links with the citizens.

viii

Recommendations: Design of Expenditure Assignment and Institutional Setup

The recommendations of the study are presented in four broad areas: expenditure assignment to

various level of government; institutional set-up and linkages; recommended systems and

processes for service delivery and future steps and actions to implement the recommendations.

They are presented in the following section.

Expenditure assignment to various levels

The scope of public goods and services is so large that the study has confined itself to a small

list of services taken mainly from the LSGA for deliberation. However, the report has given the

determinants used by the study with a view that it can be used for assignment of any other

service in question. Levels of government used in this study are: central government (CG),

district development committee (DDC), Municipality (Mun), village development committee

(VDC), community organization (CO) and private sector (Pvt). The functions and responsibilities

assigned are policy formulation, priority setting and planning (PP); service standard/quality

setting (SQ); financing full costs (FF), co-financing (CF); provisioning/administrative arrangement

(PA); service delivery or production (SP); implementation monitoring/supervision (MS);

monitoring of service quality or standards (MQ); and enforcing policy (EP). The study has taken

responsibility for provisioning and administrative arrangement (PA) as the main and rest of others

as part of the institutional linkages among various actors. The delineation of the functions and

tasks avoids overlaps of responsibilities between different levels of government.

The present study recommends following expenditure assignments. It is important to note that

the table below shows only the main responsibility (or the PA function) assigned for each service.

The recommendation on the detailed assignment of responsibility for different other functions

(FF, CF, SP, MS, PP, EP, MQ) are provided in the main text (chapter 6), which warrant

coordinated action among the different agencies.

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Service sectors, Functions and Responsibilities

Existing assignment Recommended assignment

CG DDC Mun VDC CO Pvt CG DDC Mun VDC CO Pvt

Road, Transport and physical Planning

Highways, national roads (including Bridges) √ √

Interdistrict Roads including bridges √ √

Intra-District roads (rural and agricultureal) including Bridges √ √

Urban roads construction, maintenance and rehabilitation √ √ √

Trail improvement /maintenance (including local/suspended bridges) √ √ √

Suspension Bridge (construction/maintenance) on the main trail √ √ √

Vehicle parking √ √ √ √ √ √

Motor vehicle registration and license √ √

Pull carts, Ricksaws registation and license √ √ √

Issue, renewal and cancelation of A,B and C class contractor license √ √

Issue, renewal and cancellation of D class contractor license √ √

settlement plan, development √ √ √ √ √

Haat bazar development and management √ √ √ √ √

Building Code development enforcement √ √ √

Irrigation

Construction and rehabilitation of large surface irrigation schemes √ √ √

Operation and management of surface irrigation schemes √ √ √ √ √

Construction and rehabilitation of groundwater irrigation schemes √ √

Construction, maintenance and rehabilitation of small irrigation schemes √ √ √ √ √ √

Operation and management of groundwater irrigation schemes √ √

Development of alternative irrigation technologies √ √

Promotion of alternative irrigation technologies √ √ √ √

Education and Sports

x




Pre-primary education √ √ √ √ √ √

Primary education √ √ √ √ √ √ √

Non-formal education √ √ √ √ √ √ √

Secondary education √ √ √ √ √

Ten plus two √ √ √ √

Special education (education for blind, deaf and other physically challenged) √ √

Technical and vocational education √ √ √ √

Higher (and higher technical) education √ √ √

Schoolarship/incentive programs (including mid-day meal) √ √ √ √ √

Text Book and Curriculum √ √

Examination/Certification √ √

Library √ √ √ √ √ √

Health and Population

Primary health care (Sub-Health Post) √ √ √ √ √

Health Posts/Centers √ √ √ √ √

District Hospital √

Regional/Zonal Hospital √ √

Specialized Hospital √ √ √

Preventive health care programs √ √ √ √ √ √ √

Ayurvedic, unani, homeopathic, natural and traditional medical care services √ √ √ √

Epidemics control √ √ √ √ √ √

HIV-AIDS control √ √ √ √ √

Family planning services √ √ √ √ √ √

Nutrititon, sanitation, safe motherhood √ √ √ √ √ √

Drinking water and sanitation

Large Drinking Water Project √ √ √ √ √

Small DW schemes construction √ √ √ √ √ √

DW supply management √ √ √ √ √ √

Toilet consturction and promotion √ √ √

Local (urban or local bazar) Services

Sewerage √ √ √ √ √

Fire Brigade √ √ √

Street light √ √ √ √

Urban beautification √ √ √

Forest and soil conservation

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Forest management – community forestry, religious forest, leasehold forests, timber products, private forest √ √ √ √

Non-timber forest products (herbs, identification, promotion, marketing, commercialization √ √

Bio-diversity conservation √ √ √ √ √

soil conservation and landslide control √ √ √ √ √ √

River training √ √ √

protected area (Wildlife/Park/National Forestry) √ √

watershed management √ √ √ √

Water resources and Electricity

Large/medium hydropower plants √ √

Small and mini-hydro plants √ √ √

Micro-hydro plants √ √ √

Electricity line extension √ √ √ √ √

Electricity distribution √ √ √

Renewable energy

Research and development of technologies √ √ √

Technology promotion and dissemination √ √ √ √ √ √

Biogas √ √ √ √ √ √

Solar/Other Energy √ √ √ √ √ √

Environment

Solid waste management √ √ √ √

Environment protection and Management √ √ √ √ √

Environment Guidelines/Evaluation/Act √ √ √ √ √

Environment Assessment √ √ √ √ √

Agriculture, livestock and Cooperatives

Research √ √

Agriculture and livestock extension √ √ √

Inputs: fertilizers and pesticides. √ √ √ √

Agro-vet technical services √ √ √ √ √

Market collection centers, market information √ √ √ √

Processing and post harvest services (including storage) √ √ √ √ √

Registration of cooperatives √ √

Promotion and support relating √ √ √ √ √

xii




to cooperatives

Culture, heritage and tourism

Tourist product and destination development √ √

Promotion and publicity √ √ √ √ √

Language and culture preservation and promotion √ √ √ √ √

Religious heritage sites conservation and development √ √ √ √ √

Trekking/Mountaineering √ √

Non Star Hotel Licensing √ √

Social Development, welfare / security

Disaster mitigation √ √ √

Disaster rescue and relief program √ √ √ √ √

Social security allowance (old-age and widow) √ √ √ √ √ √

Women, children, youth, disabled program √ √ √ √

Rehabilitation of displaced people √ √ √ √ √

Old age people care √ √ √ √ √ √

Ethnic/backward communities √ √ √ √ √

Skill Development √ √ √ √ √ √

Promotion, preservation and development of arts and crafts √ √ √ √ √

Consumer protection (food quality standards, market regulations) √ √ √ √ √ √

Sports √ √ √ √ √

Economic Activities (Business and Industry)

Industrial Policy Development √ √ √ √ √

Small Enterprises development √ √ √ √ √

Judicial and administrative

Vital registration √ √ √ √ √

Recommendation/certification √ √

Mediation √ √ √ √

Institutional set-up and actions for implementation

The following are the specific recommendations relating to the institutional set-up and linkages;

systems and processes and the necessary steps and actions to implement the

recommendations.

xiii

Institutional set-up

Establish a formal assignment of expenditure responsibilities. The LBs should be given with clear

and formal assignment of expenditure responsibilities in a formal way through appropriate legal

instrument. Since the assignment of responsibilities might be adjusted according to development

in the social and technical arena the legal base should not be too rigid and difficult to revise.

Streamline MLD as a lead central agency for decentralization. The MLD should discontinue

programs implementation role. It should rather concentrate its activities on central level

coordination and facilitation and monitoring and capacity building of LBs‟.

Redefine the role of central agencies. The role of central agencies should be redefined and their

structure reorganized in harmony with the spirit of devolution. All redundant offices should be

scrapped.

Restructure line ministry administrative structure. The central government offices should be

limited to sub-regional level, and focus on implementing programs of central responsibilities and

provide technical and capacity building support to the LBs. The district and sub-district level units

of the central line ministries should be merged with LBs. This will accelerate the pace of

decentralization.

Stop program modalities inconsistent with spirit of decentralization. The program modalities that

tend to by-pass LBs should be discontinued, as such modalities do not contribute to speed up

the process of implementation of decentralization as committed by HMGN.

Provide support of financial and human resources along with expenditure responsibility.

Experience of devolution of responsibility should be fully backed by resources. The LBs should

be supported with financial and human resources justified by the expenditure needs. The LBs

should also be allowed to hire and manage their staffs. Until the Local Service Act is enforced,

the existing staff of the HMGN line agencies should be deputed to the local bodies.

Define responsibility of central agencies for capacity building of LBs. The central agencies should

built capacity of LBs. Inadequate capacity of LBs should not be used as mere excuse for not

achieving the stated goal of fiscal decentralization.

Develop capacity of the MOF and AGO. Institutionalize separate units in MOF and AGO to look

after budgeting and auditing of LBs.

Restructure the DDC and VDC administration. The DDC and VDC administrative structure

should be revised to suit their organizational units, system and processes to the functions and

responsibilities they undertake. Particularly the planning and programming, implementation,

accounting and auditing, and monitoring and evaluation structure should be given special focus.

Develop DDCs as the agency responsible to manage information. The DDC should be developed

as focal points for poverty monitoring and information management pertaining their territory.

System and Processes

Provide a comprehensive budget ceiling to LBs on time. The central agency should provide the

budget ceiling incorporating all kinds of grants (conditional, unconditional, equalization) related to

all sectors and the center should not hold any amount of district level budget. The LBs shall

prepare their plans based on the grants available from the central together with their internal

resources.

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Empower LBs to finalize the plan. The LBs should be the final authority to decide on their plan.

To make it a reality the system of revising the annual DDC plans at NPC should be discontinued;

the central agencies (NPC or MLD) should limit their role to check if the DDC plans are in line

with policy, guidelines and norms prescribed by central government. The Municipalities should be

treated differently than VDCs because of their capacity, scope and complexity of the functions

they do. At least in planning and programming the Municipalities should be given an independent

status.

Institute a system of direct fund flow and authority to DDC and Municipality. The current system

of routing funds for devolved sectoral services to LBs through the line ministries or the ministry of

local development should be reviewed. A system of fund flow and authority directly from MOF to

DDC and Municipality should be instituted.

Improve the fiscal system to ensure financial control and fiscal discipline. All the accounts of the

local bodies should be audited by the auditor general‟s office and incorporate as a part of AG's

annual report. It is expected that this arrangement will improve the fiscal system of LBs.

Set minimum standards for service delivery. Both quantitative and qualitative standards should

be adequately defined for all kinds of services. Elaborate and clear standards will serve as a

strong basis for monitoring of performance and accountability.

Build up strong monitoring and evaluation capacity at the centre. The sectoral line agencies and

the MLD should have strong M&E system, which should focus on monitoring of both the

performance of LBs and services to citizens, and sharing information for planning and reporting

purposes.

Implementation

Prepare road map/action matrix for devolution and monitor. Based on the above

recommendations a realistic time frame should be set and road map prepared for

implementation. Periodic evaluation of the progress in instituting devolved system of service

delivery and its impact should be an integral part of the action plan. The DIMC and its working

committee – DIMWC – should be responsible for the implementation and monitoring.

Implement devolution and expenditure assignment in phases. The devolution plan should be

phased out based on capacity of local bodies and complexity of tasks. Assessment of LB

capacity and identification of appropriate tasks should be done and phasing plan should be

prepared.

Ensure uniformity in guidelines prepared by sectoral ministries. The implementation guidelines

issued by sectoral ministries should be uniform and coherent in line with the spirit of

decentralization.

Assess financial needs and resource gap of LBs and develop system of transfers. Financial

requirement of all LBs to perform the assigned responsibilities for current and capital investment

should be assessed and resource gap identified. Adequate transfers should be arranged to meet

the resource gap.

Regulate sub-national borrowing. The central government agencies should facilitate and regulate

borrowing of local bodies. Establishment of a sub-national development fund to support capital

requirement of LBs, with appropriate modality should be worked out carefully.

Study Report on Expenditure Assignment

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CHAPTER I

INTRODUCTION

1.1 Background

Decentralization generally meant the delegation of authority to lower units in the hierarchy. To put it more succinctly decentralization is the transfer of delegation of planning, decision–making or managerial authority and responsibility of public functions from the central government and its agencies to local governments or subordinate units of government, semi-autonomous public corporation, regional authorities or non-governmental organizations and private sector. Often times it has been found that the concept is used interchangeably with devolution, delegation and deconcentration.

Decentralization of governance in Nepal began in 1960s. Since then the process has undergone significant changes over time. The development process of decentralization could be categorized into two important phases: Phase I (1960-1990) and Phase II (1990 to date). In 1962 the Decentralization Policy was framed. This was the first officially prepared policy framework on decentralization. Some other features of this phase are the promulgation of Decentralization Act 1982 and Decentralization Regulation 1984. The importance of decentralized local governance was increasingly recognized during this phase.

Phase II may be considered as the consolidation and carry forward phase in the development of decentralization policies in the country. The new Constitution of 1991 has incorporated decentralization into the directive of the state policy, which stated "decentralization should be the means for ensuring optimum participation of people in governance and hence enjoy the benefit of democracy". This phase was characterized by the promulgation of three separate local government Acts (DDC, Municipality and VDC) in March 1992. Limitations in the act resulted subsequently in bringing out another unified act viz., Local Self Governance Act in 1999.

The LSGA clearly manifests its drive towards devolution of powers, responsibilities and resources to local bodies. With a view of carrying forward the provisions made in LSGA a high–level Decentralization Implementation and Monitoring Committee (DIMC) was constituted under the chairmanship of Prime Minister. The Committee prepared the Decentralization Implementation Plan (DIP). The implementation plan has helped in operationalzing the provisions made in LSGA..

In order to act in the areas of fiscal decentralization, an interim Local Authorities Fiscal Commission (LAFC) was formed which later on in May 2002 started operating on a permanent basis as Local Bodies Fiscal Commission (LBFC). Based on a comprehensive study LBFC recommended number of measures for effective fiscal decentralization and devolution of expenditure assignment from central to local bodies. The Commission has also prepared a "Road Map" which highlights expenditure assignment as the first critical step toward fiscal decentralization.

His Majesty Government in the Tenth Plan document has clearly stated decentralization as one of its strategy for poverty reduction. Tenth Plan aims to achieve the objective of poverty reduction by enabling the local people through their greater participation in the decision making and governance process ((NPC, 2002). The other objectives pertaining to decentralization are: (i) accelerate development process by implementing fiscal devolution in a phase wise manner; and (ii) creating necessary institutional mechanisms including the formation of a Local Service Commission. The main strategies to be adopted are: (a) devolution of basic service delivery functions; (b) capacity building of local bodies and (c) decentralization of certain revenue mobilization functions of local bodies. The Plan has set a target of transferring 25000 primary schools, all sub-health posts and agriculture extension services to local bodies over the plan period.

Based on the recommendation made in the DIP, and also as aimed in the Tenth Plan, HMG/Nepal has started the devolution process in education, health and agriculture


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services since 2002, the first year of the Tenth Five Year Plan. These three sectors have started devolving specific tasks and responsibilities (sub-health post in the case of Health, primary education in Education and agriculture and livestock extension services in the case of Agriculture) to local bodies.

1.2 Rationale of the study

The expenditure assignment refers to the functions and responsibilities assigned to each level of government. Studies have documented several problems of expenditure assignment and sector devolution. Unclear division of tasks, overlapping functions, contradiction in legal framework, lack of correspondence between expenditure assignment and fiscal resource available, mismatch between various dimensions of assigned responsibilities, unclear role of private sectors, and inadequacies in the guidelines are some of the major problems of expenditure assignment and sector devolution.

Properly designed expenditure assignment should help in reducing unproductive overlap, duplication and contradictions in the legal and regulatory framework. For the successful implementation of various activities associated with expenditure assignment and sector devolution process in the country it is highly essential that the identified problems be resolved in a sequential manner. The present study has its significance as it focuses on addressing the problems experienced and challenges faced in the exercise of expenditure assignment and devolution of services to LBs in the country.

1.3 Study Objectives

The overall objective of the present study is to examine various facets of expenditure assignments and sector devolution. The specific objectives, however, are:

To document existing functions, roles and responsibilities across levels of government and identify contradictions, inconsistencies and overlapping in the existing Acts, Regulations, by-laws and guidelines;

To clearly delineate and define the specific tasks and responsibilities of all tiers of local bodies and central government and clarify the linkages between them.

To examine the status of sectoral devolution and also to review and identify the gaps in the guidelines and manuals developed for the devolution of services;

To review the existing fund flow mechanism in the assigned tasks mandated through LSGA and other laws and identify the major problems associated with the financial management in the sector devolution processes;

To identify the problems and challenges in the expenditure assignment and sector devolution and recommend appropriate measures for their successful implementation.

1.4 Scope of the Work

As per the Terms of Reference (Annex I-1), the present study intends to cover all areas of expenditure assignment. More specifically, the study covers following broad activities:

Review of existing laws and regulations relating to the decentralization and local self-governance. The exercise is to identify contradictions, inconsistencies and overlapping in the existing laws, by-laws, and rules and regulations concerning the task and responsibilities of various levels of government;

Review of the present provision of division of tasks and responsibilities across levels of government and between the public and private sector. The study recommends the changes required in the existing provisions based on the principle of "subsidiarity". While recommending the division of task to the LBs various factors such as size/economies of scale, financial capacity, existing institutional framework, HR capacity, technology,


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autonomy, interlinks between services, spill over effects, and distance to the citizens have been examined. The strengths and weakness of proposed provisions are assessed;

Review of sector specific guidelines and manuals for the devolution of services to LBs. This task includes review of Operational Manual for Community Managed Schools (2002), National Guidelines Regarding Handover of Sub-Health Posts to Local Bodies (2002), and Agriculture Related Devolution Working Procedure (2002) and assesses their clarity and completeness. This task also encompasses the review of service standards, if any, for the devolved services;

Review of the fund flow mechanism, particularly the responsibilities of various agencies in transferring funds, channeling of funds, account keeping, auditing and reporting tasks. The fund flow mechanism has been carefully examined both at the LBs and at the central level. In addition, a comparative analysis has been carried out on such mechanism currently being applied to LBs and devolved sectors. Furthermore, the study reviewed those programs, which are under-funded, and unfunded. It also analyzes the current budgetary allocations and expenditure patterns for different sectors at the central level and regular and development budget at the district level;

Capacities of LBs are assessed by examining both administrative and technical strengths including the experiences they have gained. The access to services to the citizens in terms of the distance (maximum and average) required to travel in order to avail the services are also examined as this also determines the capacity of the LBs.

Develop TOR for the proposed study to be commissioned later for the preparation of standardized operational manual for the devolution of services of all the sectors and suggest appropriate institutional framework for a better coordination of the processes. The present study suggests outline of the content of such manual.

Suggest appropriate implementation framework for the follow-up on the recommendations made in the study. This framework outlines the required legal and administrative changes and other conditions for the successful reform of the expenditure assignments and fund transfer system to LBs. The study also specifies the responsible bodies and their time-bound action plan, based on an intensive interaction with the concerned officials of the line ministries and NPC members.

1.5 Methodology

The present study has adopted a combination of various study approaches. Major approaches include desk study, consultation meeting, interviews, group interactions, field visits, workshop and finally a round table discussion on major recommendations.

A. Desk Study: This approach involved collection and screening of all relevant documents and literatures. DIP, HMG/Nepal Work Division Regulation, LSGA, and other related regulations were thoroughly reviewed so as to document existing functions, roles and responsibilities of local bodies mandated by law. Various guidelines and operational manuals adopted in the sector devolution were reviewed. This exercise helped in identifying contradictions, inconsistencies, ambiguities and overlapping in the existing laws by-laws, rules and regulations as well as function and responsibilities across various levels of government.

B. Consultation Meeting: Series of consultation meetings were held with constitutional bodies, NPC, ministries, and their departments. Consultation meetings were conducted with various stakeholders such as ADDCN, MuAN and NAVIN including NGOs and civil society organizations. Various external development partners (EDP) supporting the decentralized governance system in the country were interacted. More than one meeting was also held with few ministries to clarify issues and share ideas concerning expenditure assignment. The consultative meetings focused on ways of streamlining planning and budgeting procedures; make fund-flow, auditing, financial management and reporting more effective. Furthermore, the meeting also explored ways of streamlining sector devolution, identified potential areas of devolution of additional services. The study team also sought


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views and reactions of donors on devolution and how they can support in the decentralization process.

Poverty Alleviation Fund (PAF) is projected as a major source of fund for grass root level activities, affecting directly the life and well being of the people. The study team felt necessary to review the programming and fund flow mechanism of PAF. The team held consultation meeting with Poverty Alleviation Fund (PAF) to understand its functional modalities and the role of LBs in the program selection and implementation.

Institutions covered and the officials present during the consultation meetings were presented in Annex I-2. Brief notes of all the consultation meetings are included in Annex I-3.

C. Field Visits: In order to gather the perceptions of LBs on the matter of fiscal decentralization and sector devolution, discussion and interaction with all tiers of LBs were felt very essential. The present study selected 9 districts for obtaining field insights.

Selection of Districts, Municipalities and VDCs: Two sets of districts were selected. In one set of district the field visit was comprehensive that included group meetings, interaction meetings and in-depth interview with different levels of local bodies and officials of the government line agencies including the devolved services. The first set of district included Saptari, Rupendehi, Kaski, Mustang and Kavre. The second set included Morang, Makwanpur, Banke, Syangja and Kathmandu. In these districts the field visit was not as extensive as in the first set of districts. Field activities in these districts confined only to the interaction meetings with DDC and municipality officials.

1.5.1 Basis of Selection

The selection of districts was guided by ecological and regional considerations. Attempts were made, while selecting the districts, to have the representation of both ecological and development regions. Besides, districts were also selected based on their performance, resources base, resource potentials and availability of human resources. From each districts 2 VDCs and Municipalities were selected. Following the suggestion made in the TOR, Kathmandu Metropolitan City was selected.

The selection of districts and their corresponding VDCs and Municipalities including the selection criterion are presented in Table 1.


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Table 1: District, municipality and VDCs selected for the field visits and their selection criterion

Development/ Ecological

Region District Municipality VDC* Selection Criterion

Eastern (Terai) Saptari Rajbiraj Bangamakatti & Pharseth

Relatively poor in terms of HRD, resource mobilization &implementation of DIP

Morang* Biratnagar Diversified resource base, strong human resource

Central (Hill) Kavre

Dulikhel & Kathmandu Metropolitan City

Ugratara Janagal, Chaubas, & Sinthali

Relatively strong in terms of human resource development and program implementation status

Kathmandu Kathmandu Metropolitan City

Strong in terms of human resource development and program implementation status

Makwanpur* Hetauda Resource rich due to resource contribution from Kulekhani hydro project and strong HRD base

Western (Terai) Rupandehi Siddhartha Nagar & Butwal

Sau-Pharsatikar & Padsari

Relatively strong in terms of human resource development, program implementation and resource mobilization

Western (Hill) Syangja* Syangja High resource potential due to resource contribution from Kali Gandaki hydro project

Western (Hill) Kaski Pokhara Bharat Pokhar

Diversified resource base and relatively good HRD

Western (Mountain)

Mustang Jhomsom & Marpha

Relatively weak, resource poor and remote district

Mid-western (Terai)

Banke* Nepalgunj Moderate in terms of resource mobilization and program implementation status

*In these districts field visit was confined to interaction meeting with DDC and Municipality.

It should be noted that there is little variation in the districts proposed in the inception report and districts actually covered in the field visit. Inception Report proposed Jumla district from Mid-western development region, which could not be covered because of the "bandh" called by Maoist from 6 to 8 February. Therefore, with a view to study a district in similar ecological zone Mustang district was chosen as substitute to Jumla. Similarly, the VDCs studied in the field differed from those proposed in the inception report. The final selections of the VDCs were made in the field in consultation with the DDC officials. Their suggestions were guided mainly by security concern.

D. Group Interaction Meetings: Interaction meetings were held in the sampled districts. DDC Chairperson including other DDC officials, Municipality Mayor and officials from other line agencies especially from the devolved sectors attended the meeting. This meeting helped to solicit the views of local bodies and government line agencies on various dimensions of expenditure assignment and sector devolution. Interaction meetings were also held with SMC and SHPIMC in selected district on sample basis depending upon the availability of the Management Committee members at the time of field visits.

As most of the DDCs and Municipalities have newly appointed Chairman and Mayor, it was strongly felt that they might not be able to interact adequately on the issues raised. Hence a one to one interaction with ex-DDC President and ex-Mayor of the selected districts/Municipalities were also conducted. The name of the officials attending the interaction meeting in each sampled district is presented in Annex I-4. Brief notes of the interaction meetings are provided in Annex I-5.

E. In-depth Interviews: Primary schools Head Masters, VDC Secretary, Sub-Health Post In charge and some local community people were interviewed in-depth to seek their


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reaction on various aspect of devolution of selected services to the community including the modality of devolution, composition and formation of management committee, clarity on the guidelines, provision of service standard and many other issues associated with expenditure assignment and devolution of services. Community people were also interviewed to seek their views on the functioning of the primary schools and sub-health post and the changes they have witnessed in the quality of services after they were devolved to local people.

F. Workshop: With a view of getting feedback from various stakeholders key findings were presented in a workshop. The study team members presented the key findings in the plenary session, which was followed by group discussion. Three separate thematic groups were formed. They were: (a) Expenditure assignment and institutional setup; (b) Functional devolution, fund flow and accountability and (c) Capacity enhancement and better linkages. Each group discussed on the various dimension of the theme. Workshop program schedule, list of participants and a brief workshop discussion notes are presented in Annex I-6, I-7, I-8 respectively. Suggestions received and issues raised in the workshop and group discussions are incorporated in the study report wherever possible.

G. Roundtable Discussion: Two separate round table discussions were organized to share the key study recommendations and the immediate future action plan with policy makers and implementers at the central level. The participants were constituted of respective sectoral NPC members, government secretaries of different ministries and other high-ranking officials of planning, budgeting, financial comptroller, auditor General's office and department heads. Besides discussing on the recommendations, the discussion focussed on the time bound action plan suggested in the report. A consensus was reached as to the schedule of implementation. List of participant attending the round table discussion and the discussion notes are presented in Annex I-9 and I-10 respectively.

1.5.2 Field Instruments

Different sets of checklist were prepared to interact with LBs viz,. DDC, Municipality and VDC on various dimensions of expenditure assignment and devolution of services. Field instruments included in the inception report were modified to accommodate the suggestions received from different quarters. Besides, checklists were prepared to have a focused interaction meetings and discussion with the line ministries and LB officials and other stakeholders. Some data formats were also developed to acquire required information from the LBs. Checklist used in the interaction meetings are included in Annex I-11.

1.6 Field Planning and Management

The fieldwork for the Expenditure Assignment Study commenced on Feb 3 and ended on Feb 22, 2004. The fieldwork was conducted in two phases. Phase one of the fieldworks, which covered 8 districts, were completed on February 14. Kavre and Kathmandu were covered during the second Phase of fieldwork that commenced on February 20 and was completed on March 1.

Two teams were formed to manage the entire field activities in a phased manner. Core team members including office secretary participated in the field visit. Two officers from LBFC/MLD and one representative from ADDCN supported the core study team in the field activities.

1.7 Field Performance

All LBs, sectoral line agencies functioning in the districts, ex- DDC Chairperson ex-Mayors, ex-VDC Chaieperson SMC, LHSOMC members, Head Teachers and teachers, Sub-Health


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Post staffs and community people were interacted and interviewed in-depth. Table 2 presents the field performance highlighting the extent of coverage of LBs, various line agencies, management committee, service outlets (primary schools, sub-heath post and agriculture extension center) and community people across the selected districts.

Table 2: Field Performance

District Local Bodies Line Agencies

Mgmt. Commtt

Service Providers

Community People

DDC Munp VDC Edu. Health Agri

Morang

Saptari 2 DEO ./ DAO Ex-VDC

Chairperson

Makwanpur Ex-DDC

President, Ex Mayor

Rupendehi 2 2 DEO DAO SMC(1) School Ex-VDC

Chairperson, Soc. Workers

Syanja

Kaski 1 DEO DHO DAO

HSOMC (2) SHP(1), Drinking Water User's Com.

Ex-Chairperson

Mustang 2 DEO DHO DAO HP(1) Community

People

Banke Ex-DDC

President

Kavre 3 DEO DHO DAO SMC (1) SHP (1)

Kathmandu

1.8 Study Limitations

His majesty Government of Nepal is committed to devolve many tasks to LBs. However, only the services of primary schools, sub-health post and agriculture and live stock extension services at the lowest level are devolved so far. The present study, therefore, focuses only on these three services. The study, however, has analyzed and recommended a set of tasks and responsibilities that could be assigned to LBs in future. Furthermore, the present study reviewed the guidelines/instructional manuals of three devolved sectors only. So far the standardization of services in the devolved sectors are concerned the present study is confined to reviewing the service standard wherever they existed. The study recommended the need to standardised services however, it refrain from doing so as it is outside the preview of this study.

The study is confined mainly to expenditure assignment and the status/issues relating to devolved sector. Within expenditure assignment also, as mentioned, it neither analyses in-depth the standards of services and its quantification nor it ventures on the issues regarding manpower deployment and transfer of government employees to local bodies. Separate studies are being planned to look at these vital issues in-depth. Likewise, the study does not focus on the issues relating to fiscal decentralization and more so on the issues of assignment of revenue, public borrowings of local bodies (both local and foreign) and budgetary operation and deficit etc. It also refrain itself by not going through the concept of establishment and working of development fund such as, "Town Development


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Fund" in Nepal that provides loans to municipalities for their infrastructure/commercial activities.

One may observe that the extent of coverage in the field visit varied across districts. Many factors were responsible for this. The protest activities of teachers during the field visit in Kaski district severely constrained the study team in conducting the interaction meetings with SMC and schools teachers. Likewise, in Mustang the interaction meeting with SMC and schoolteachers could not be conducted due to the closure of the school for winter vacation. Due to growing security concern outside the district headquarter the study team could not cover the VDCs that were proposed in the inception report. They were replaced by some other VDCs where security threat was minimal.

1.9 Organization of the Report

Chapter Two of the report discusses the concept of expenditure assignment and reviews the international practice in the assignment of expenditure responsibility to local bodies. This is followed by Chapter Three that focuses on the decentralization practice and expenditure assignment in Nepal. It also documents existing functions, roles and responsibilities across levels of government and identify contradictions, inconsistencies and overlapping in the existing Acts, Regulations, by-laws and guidelines. It further highlights major issues relating to legislative framework for expenditure assignment in the country. Chapter Four presents the current status of sector devolution and also identifies the gaps in the guidelines and manuals developed for the devolution of services. Terms of Reference (TOR) for a study to be commissioned later on the preparation of standardized operational manual for devolution of services has been prepared and accordingly an outline for developing a standard sector devolution manual has been suggested. Functions undertaken by LBs, their institutional capacity and management practice followed by LBs are presented in Chapter Five. Finally, Chapter Six delineates and defines the specific tasks and responsibilities of all tiers of local bodies and central government, identifies appropriate expenditure assignment together with the institutional setup. It further examines the existing fund flow mechanism and identifies issues associated with financial management in the context of expenditure assignment and recommend measures for their successful implementation.


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CHAPTER II

Expenditure Assignment: Theory and Practices

This chapter describes the concept of expenditure assignment and its underlying principles, examines the prerequisites for its successful implementation, and identifies some of the common problems in its implementation. The chapter also examines the international practice in the sphere of expenditure assignment prevailed currently across the countries of the world.

2.1 Meaning of Expenditure Assignment

Expenditure assignment refers to specifying the functions and expenditure responsibilities for each level of government, central as well as local. In other words, what are the functions and expenditure responsibilities of each level of government in the decentralized system of governance; who will do what? and who will pay for what? is the essence of expenditure assignment. For the successful functioning of the decentralized system of governance the clear assignment of functional responsibilities among different levels of government is highly essential. Failure in doing so may lead to instability in intergovernmental relations and to the inefficient provision/production of public services. Furthermore, lack of clarity in the assignment would lead to the under provision of public services. It is more so in a situation where government budget is very tight (Vazquez, 1998).

The assignment of functions and resulting expenditure responsibilities has been considered as the first and fundamental step in the design of fiscal decentralization (Martinez – Vazquez, 1998). It is argued that the design of other components of fiscal decentralization such as revenue assignment, intergovernmental transfers and sub-national borrowing, in the absence of clear expenditure assignment would be like putting the cart before the horse. Many Latin American countries during 1990s were found making the mistake of putting the revenue assignment first before clearly assigning expenditure responsibilities to the sub-national government, resulting to an unsustainable macro economic situation.

2.2 The Role of Private Sector

The role of public and private sector has to be defined clearly before any attempt to expenditure assignment between levels of government is addressed. Besides carrying out traditional central government function of defense, external relations, judiciary, and protection of national integrity etc, the public sector role should be limited only to those services and activities that private sector will not supply efficiently, either because of difficulty of charging a price, or because of joint-consumption benefits, or those services and activities with desirable redistributional value. That is, public sector should step into the function only if there is a market failure (vaz-quez, 1996).

It is now well established that achieving a clear delineation of roles between public and private sectors is a longer term goal and as such, during the transition years, some activities belonging to private sector is carried out by public sector, mainly through parastatal organizations. The parastatal organizations in Nepal clearly depict it.

It is often ignored that many governmental activities can be either transferred to the sub-national government (through fiscal decentralization) or, alternatively to the private sector. Recent experiences in many countries show that privatization of many public activities is not only feasible but also desirable, since, it has been seen that private sector can do many of the activities more efficiently than the government. and technological developments are helping in this direction. Besides traditional private sector activities such as industry, trade, tourism, financial and other services, non-traditional activities (considered as public sector activities) such as, collecting garbage and its management, generation, extension and distribution of electricity, water supply, health care services, education and skill training


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etc., are being managed by private sector more efficiently. Even the mail delivery services (post office function) are found efficiently run by private sector world wide.

Although privatization is not always the best option however, it should always be open for an option to consider (Tangzi, 2004). Thus it is important to make a list of public activities that can be either privatized or decentralized to local bodies and assess the cost and benefits of doing so. Some of the responsibilities assigned to local bodies such as, solid waste management or managing a drinking water or electricity distribution system can well be privatized or jointly managed with private sector on cost recovery basis. It should however, be noted that privatization of public activities by and large improves service quality and makes services efficient, saving public resource allocation on such activities. The savings in public resource by privatizing some public activities could well be utilized in some other important activity.

2.3 Role of Non-Governmental and Community Organizations

It is now more than clear that the non-governmental and community organizations including civil society can play vital role in grass root level service delivery and awareness creation. They can also work as a link agent between government agency authorized to provide services and people in the village, the ultimate beneficiary. This is important for improving quality and efficiency in service delivery, reducing corruption and sustaining development. In a country where resources are scarce and levels of education of the people are low, such organization can play instrumental role in quality service delivery. As such, it is important to define, and delineate the role of non-government organization in expenditure assignments. Three clear merits can be seen in transferring some roles to these organizations, namely,

Resource Saving – as government can save by assigning tasks. Moreover, they can mobilize resources to add on,

Advantage of technical manpower – provide skill manpower in several areas and,

Build a pressure group – forcing efficient and quality service delivery and reduce corruption.

2.4 Role of Central and Sub-National Government

Musgrave's trilogy of function argues that public sector, in general, has three basic economic roles, namely, stabilization, distribution (and/or redistribution) and allocation (or public service provision). Due to various comparative advantages, it is argued that, central government should assume at least the bulk of responsibility regarding stabilization and distribution/redistribution functions. On the other hand, sub-national governments, by nature of its closeness to people, can play significant role in the allocative function, providing public services to the people. Bringing services closer to people also makes sub-national government to be more accountable.

Ensuring macroeconomic stability is an important task of central government. Because, stabilization policies involve externalities spanning across regional jurisdiction. Moreover, central government has the command on the instruments viz., monetary or fiscal, used to achieve it. Traditionally, distribution or redistribution is generally considered as another important role on the part of the central government, since it can use necessary fiscal and other instruments to achieve it. However, experience has shown that sub-national government does play an important role in designing and implementing poverty alleviation strategy (Rao, 2004) which can affect distribution/ redistribution successfully.

It is seen that there is no fixed rule for expenditure assignments or responsibilities between government and sub-national bodies. With technological change, increase in the capacities of sub-national bodies as well as the changes in the condition expenditure assignment changes overtime. Thus, conceptually it is not rigid. It is rather dynamic in nature that is changing over time and space.


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Once the expenditure responsibilities are clearly assigned to different levels of government the basic question to be followed is whether or not local bodies have had sufficient resources to take up the expenditure responsibilities judicially and to deliver the service effectively. Therefore, there should be the correspondence between expenditure assignment and revenue assignment. In the absence of this the process of fiscal decentralization will suffer a great setback in its implementation.

2.5 Approaches in Expenditure Assignments

Two different approaches are commonly observed in the assignment of expenditures under decentralization exercise namely., the "Expenditure – led" approach and the "Revenue-led" approach. While in the expenditure –led approach functions are first designated with clear responsibility of one or another level of government on a mutually exclusive basis based on "subsidiarity" principle. On the other, under the "revenue-led" approach, by contrast, public revenue resources are first allocated in a general way between levels of government, mostly as a result of political bargain and / or regional power interest.

The revenue-led approach of expenditure assignment are found politically more sensitive than cleaning up the confusion and ambiguity caused due to overlapping of functions at different level of government. In this approach, political bargain between central and sub-national government (and its political leader) determines the volume of resources at the sub-national level resulting into discriminate allocation of resources. Often times, more resources being allocated on activities of self interest rather than on fulfillment of the need of the general public.

Expenditure-led approach is regarded as the best approach in identifying expenditure assignments to central and sub-national government. It minimizes the confusion emerging from duplication and overlapping of function. It is well known that the answer to what and who should do? should always precede that of how to do? and not vice-versa. The expenditure-led approach to assignments of function and responsibility clarifies the question regarding what and who should do? In doing so, it adheres on the principle of "subsidiarity" i.e., function/accountability based on closeness to people.

The basic argument in this approach is that the "Government that are closer to the people should, in principle, be able to provide services more efficiently and effectively than a remote, centralized authority, if assignment of responsibility is appropriate and the system of intergovernmental fiscal arrangements produces the right type of incentives"(Bird, 1993).

Contrasting approaches are also found internationally where by, a "positive" or "negative" list of functions are listed and assigned to different levels of government and local bodies. Under "positive list" approach, the function of each level of government is listed in detail. Where as, in the "negative list"' approach, function are listed in detail to some level of government and "all other" function are allotted to the rest.

2.6 Principles of Expenditure Assignment

The challenge in designing an intergovernmental system is to ensure that it best achieve not only the general objective of fiscal decentralization viz., efficiency, transparency and accountability but also maintain national integrity, political stability and equitable justice to different people and places.

The theory of federalism argues in favor of the decentralized provision of public services which would,

increase efficiency because, local governments are better placed than the national government to deliver public services as a result of information advantage,

population mobility and competition among local bodies for delivery of services will ensure the matching of preferences of local communities and local government, and

ensure accountability and quality of service provided as ,it is easier for the people to make local bodies accountable than that to those stationed in a distant place.

The primary purpose of fiscal decentralization is to increase people's influence over the decision of government that affects them. This can be achieved only when government


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function is assigned at the level closest to the people that can effectively discharge them. This is known as subsidiarity principle.

The principal implies that responsibility for the provision of services should be at the lowest level of government compatible with the size of "benefit area" associated with those services. For instance the benefit area for refuse collection (garbage collection) is clearly the local community, so in accordance with the subsidiarity principle this service should be provided (i.e. delivered and paid for) at the local governmental level where as the benefit area of air traffic control is the entire national territory, so this service should be provided at the central level. Thus, whether or not a given level of government can effectively discharge a given task involves the geographic extent of benefit of the task - the existence of "spillovers" between jurisdictions - and the extent of economies of scale and scope in the task assigned. Moreover, it should also have to be ensured that the given level of government has sufficient capacity and resources to discharge it efficiently.

However, expenditure assignment should look at the following;

Principal of Efficiency:

This principal demands that the assignment of expenditure responsibilities should result in the efficient allocation of resources. Assigning public services with wider benefit areas to smaller units of government, and small benefit areas to higher level of government both are likely to result in the under-provision of services and therefore inefficient allocation of resources. This is due to the fact that when there is a greater distance between policy makers and the people, the former will be les informed about the preferences and the needs of the people. Furthermore, central government officials will be less accountable to voters for the quality of services they provide compared to local government officials. Efficiency in the provision of public services is enhanced if consumption benefits are linked to cost of provision via fees, service charges and local taxes. The discharge of these functions to local bodies can ensure cost recovery as they are close to the beneficiary and are accountable to the people about service quality.

Preservation of macroeconomic stability and growth:

Expenditure assignment should also be guided by the overall objective of macroeconomic stability and economic growth. Expenditure undertaken for the stabilization and growth of the economy are by their scale naturally assigned to the central government. The application of this principle largely facilitates the assignment of expenditure responsibilities to different levels of government. Some public services for example primary education and primary health services may be of local nature by the size of their benefit areas. But because of their relevance to welfare and income redistribution they may also be considered a responsibility of the central government. Expenditure carried out for the stabilization of the economy such as massive investment or unemployment compensation is by their scale should naturally be ascribed to the central government

Redistributive Justice:

This objective is best pursued by the central government. It is generally agreed that expenditure undertaken by government for equity or redistribution of income such as social welfare, poverty reduction program should be the domain of central government. However, as argued above, local governments are seen designing and implementing poverty reduction and income generating program that has significant ramification on distribution.

No single "best expenditure assignment":

There is no expenditure assignment that may be considered as the single best. Therefore it is not meaningful to talk about the best assignment of expenditure responsibilities. What is considered the best assignment is likely to change overtime with changes in cost and technological development as well as change in preferences. The adequacy of any


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principle has to be judged in terms of how well it achieves the goals set by the central government in its decentralization strategy. Country circumstances tend to differ, so no single set of principles could be appropriate to all the countries uniformly.

2.7 Common Problems with Expenditure Assignment

Lack of Formal Assignment:

Lack of clear and formal assignment of expenditure contributes to the instability of the system of intergovernmental finance and provides scope to act arbitrarily and at will by the central government. The lack of clarity in the definition of sub national function leads to a negative impact at least on three important aspects.

Imprecise responsibilities leads to poorly defined corresponding revenue,

unclear responsibilities will lead to a free play by sub national government officials resulting into a preference to invest in populist projects which benefit them in the short run rather than in projects with long-term impact on region's economy, and

Lead to a confusion whether sub national assignment of expenditure represents local priorities or centrally determined programs.

Formal assignment introduces an important element of certainty for budget planning at all level of government, which is good from fiscal management perspective.

Inefficient Assignment:

Another common problem of expenditure assignment is the inefficiency. The continuing dispute on the matter of capital and recurrent expenditure responsibilities across different levels of government has contributed to inefficiency. For example, while local government should be made responsible for delivery of primary education (recurrent expenditure), the central government may retain the responsibility over the construction of schools (capital expenditure responsibilities). Such division of task would lead to sub-optimal return. Responsibilities concerning public utilities such as drinking water and sewerage are generally assigned to central level. From the efficiency point of view such responsibilities should be assigned to local level. The central government officials often argue lack of technical capacity at sub-national level for retaining capital expenditures decision at the centre. It has however, been proved that sub-national government can make capital expenditures decision with equal competence. Moreover, as argued above, authorizing investment decision at sub-national level enhances efficiency of such capital expenses.

Ambiguity in Certain Assignment:

Ambiguity in the assignment of task arises when the task is assigned to more than one level of government. This leads to a situation whereby each level of government feels it is not their responsibility and as such the service delivery of such task suffers.

Shared Responsibilities:

Fragmentation of responsibilities across different levels of government for a particular public service is a common practice in the decentralized system of governance. For example in education sector while responsibilities pertaining to curriculum design, teacher training, setting-up of standard and distribution of textbook are generally assigned to central government, the sub-national level governments are assigned the authority of recruitment and hiring of teachers, operation and maintenance or even construction of school etc. Co-sharing of responsibilities should not be a problem when particular functions and task in a common area are clearly assigned to different levels of government. Otherwise, such arrangement could cause confusion and result to inefficiencies.


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Lack of mechanism for co-ordination and conflict resolution:

Lack of clarity in expenditure responsibilities and ambiguity in certain assignment often lead to dispute and conflict between different levels of government. Therefore, a clear and strong mechanism for coordination and conflict resolution has to be in place.

Macro-Economic problems

Unclear functional responsibility to different level of government and a weak monitoring and conflict resolution mechanism at the centre sometimes leads to macro-economic problems. This was demonstrated in some Latin American as well as transitional economies of the Eastern Europe. The macroeconomic nature of problems arises due to the following;

Fiscal imbalance

Decentralization, if not practiced with hard budget constraint, increases sub-national, spending and national spending resulting into more budget deficits and fiscal imbalance.

Low tax effort

Additional central grants to local government, or a clear indication from the centre in filling up resource gap, ease hard budget constraint on the part of local bodies resulting into a negative impact on the local body's tax collection efforts.

Fiscal policy coordination

With a decentralized fiscal structure it becomes more difficult to coordinate fiscal policy in a counter cyclical sense. At a time when the national government is pursuing a contractionary fiscal policy, sub-national government may pursue expansionary fiscal policy (Musgrave,1983). It is especially true when the local government faces "soft budgets" and easily borrows to meet budgetary deficit. Local government may incur large debt when they believe central government will bail them out. This will have serious implication on economic stability.

Contagion effect

Given the importance of shared tax system between local and central government, shortfall or weakness in central/local government tax collection manifests in a widening of deficit at both tier of government (Purfield, 2004)

Misallocation of resources

In a situation, where central government lacks effective monitoring capabilities, centrally financed but local government implemented programs such as, educational attainment or the quality of health care, or even the old age and widow pension etc., may suffer seriously as the local government have incentive to divert resources to meet their own (political) objectives which may be of local political or personnel value but which would not serve the objective of the centre.

2.8 Conditions for Successful Expenditure Assignment

For a successful expenditure assignment, the following conditions should be fulfilled. The lists are exhaustive but not extensive to reflect all conditions. The list can be grouped as:


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Elected government

There should be an elected local government. Perhaps this is the most essential element. If higher levels of government appoint the local leadership, their accountability will be upwards and not down to the local population and the efficiency advantage will be lost.

Clear function and task

It is extremely important to assign clear and unambiguous task to each level of government. This will improve effectiveness of service delivery and accountability.

Autonomy in planning, prioritization and allocation of resources

Each level of government should be given the autonomy to manage its activities including planning, prioritization and allocation of resources irrespective of its source. The budget autonomy should however, ensure budget comprehensiveness, accuracy, transparency and timeliness. It should also establish the basis for financial control and accurate and timely financial information.

Expenditure and resource correspondence

There should be a broad correspondence between the expenditure responsibilities assigned to each level of government and the resources available to them to carry out those tasks (vertical fiscal balance) and broad match between equitable service provision and fiscal capacity among same level of jurisdiction (horizontal fiscal balance). Each level of government should be provided authority by law to raise revenue and they should be able to exercise this authority. Impose "hard budget constraint" which implies that all local government who are given autonomy requires balancing their budget without recourse to any end-of-year assistance from the central government.

Central government ability to regulate, monitor and conflict resolution

Expenditure assignment requires central government leadership on matters such as imposition of a uniform system of financial accounts, audit rules, disclosure requirements for borrowing, imposing limits on borrowing etc (Bahl, 2001). It is sometimes risky to assign functions to different level of government without developing a proper and strong mechanism for monitoring and conflict resolution at the centre.

Authority for personnel hiring and human resource development

Devolution of task and functions from one layer of government to other should accompany both resources and manpower. It is extremely important that the person working should have accountability to new level of government where task have been devolved. The responsible level of government should be given authority to appoint new manpower in vacant position subject to rules and regulations. Similarly, human resource development should be considered key to the success of expenditure assignment and as such local bodies should make provision for it.

Better linkage

Success in expenditure assignments also depends upon a strong linkage between central and other level of government.

Strong central government commitment

A strong commitment by central government on decentralization and devolution of function is absolutely required to succeed assignment of expenditures. The commitment should however, be reflected in authorizing local bodies on planning and budgeting, fund flow,


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transfer of manpower, resource mobilization and also the willingness to restructure central government institutions.

2.9 Delineating functional responsibility and tasks

It is important to recognize that the assignment of expenditures has a multidimensional component. Depending upon the nature of the task, it may be necessary to involve more than one level of government for effective and efficient discharge of function and tasks assigned. To avoid ambiguity and vagueness, it is necessary to decompose the task into different components and assign responsibility to each level of government. While assigning function it should be made clear as to who should do what? For, in each task it should have to be made clear as to who should plan and prioritize, regulate, finance, provision and produce or deliver services. Such decomposition of task will eliminate ambiguity in function. Similarly, the decomposition of task also helps in pinpointing accountability of the level of government in discharging task. This eases out the problem of monitoring and evaluation. The task thus, can be decomposed broadly into;

Production – actually producing a good or delivering a service,

Provisioning – providing or administering a service,

Financing – Financing a service, and

Regulation – Setting standards, regulations or policies guiding the provision of services.

It should be noted however, that while the decomposition of task clarifies the responsibility of task at each level of government, the successful discharge of task requires effective harmonization and better linkage at each level of government. Failure in harmonization will also result into an inefficient service delivery or a failure in the task assigned.

2.10 Types of Devolution

Devolution implies shifting of expenditure responsibilities to sub national government in which sub national governments are granted substantive decision-making authority. Studies have documented various devolution approaches, which are tested across the countries of the world. Some common approaches that are widely applied and their relative strengths and weakness are presented in a tabular form below.

Types Strength Weakness

1. Cold turkey ( big bang approach)

- Clear and simple - Technical capacity

already exist

- Inadequate local accountability and local financial management system

2. Sector by sector approach - More gradual - Build capacity gradually

- Bureaucratic opposition at center will be strong

- Who will be the first?

3. Gradually within each sector - Provide time for capacity enhancement and change in mind set.

- May result in dismembering of integrated local service delivery system

4. Qualifying districts only - Encourage other districts to strengthen to qualify.

- Improve decentralization process

- Objectivity in qualification test. - Difficulty in running dual system

(partially deconcentrated, partially devolved)

5. Status quo (no devolution)

2.11 Practice of Expenditure Assignment

Different approaches of expenditure assignment prevail across the countries of the world. In the present study the practice adopted by 13 different countries across the world are reviewed. In Tables 2.1 and 2.2 we have summarized the practice followed by these countries in expenditure assignment.


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Almost in all the countries under review, expenditure assignment pertaining to defense, foreign affairs, currency and banking, immigration and international trade are exclusively assigned to central government.

Tasks concerning to environment have been jointly assigned to central and state government. Only in Malaysia this task has been assigned to local government

In those countries where the provision of unemployment insurance exists the task has been assigned to central government with few exceptions to state government as well. The provision of air and rail services is assigned to central government in all the countries. However, in Argentina these services have also been assigned to state and province as well. Interestingly, significant variation in expenditure assignment has been observed across the countries especially in the social services sector for example, health, education, and also in industry and agriculture.

In Bangladesh and Thailand local government has been made fully responsible both in provisioning and production of social services (health and education). More so in Bangladesh. The task relating to industry and agriculture has been solely assigned to local government. In Brazil, Malaysia and Philippines while the central government make the provision of education services, the production service are shouldered by other lower levels of government.

Out of 13 countries under review almost all the countries have assigned both the provisioning and production role of services in social sector to local government. This clearly signifies the importance of decentralized governance system in the delivery of social services to the people.

Table 2.1: Expenditure Assignment of Selected Services in Selected Countries

Country\Sector Education Health Industry & Agriculture

Provision Production Provision Production Provision Production

Argentina C,S,L C,S,L C,S,L C,S,L

Bangladesh L L L L L L

Brazil C C,S,L C,S C,S,L C,S C,S

China C,S,L S,L C,S,L

India C,S C,S,L S, S,L C,S C,S

Indonesia C,S,L C,S,L C,S,L C,S,L C,S,L C,S,L

Japan C,L L F,L F,L L

Malaysia C C C,S C,S C,S C,S

Mexico C,L C,L C,L C,L C C

Nigeria C,L S,L C,S

Pakistan C,S,L S,L C,S,L S,L C,S C,S

Philippines C S,L

Thailand L L L L

Notes: C=Federal/Central Government, S=State/Provincial/Republic/Departmental Government, L= Local Government

Source: Anwar Shah and Zia Qureshi – Intergovernmental Fiscal Relations in Indonesia, Issue and Reform Options, World Bank Discussion Paper 239, May 1994.


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Table 2.2: Expenditure Assignment in Selected Countries

Def Fore. Aff.

In. St. Trade

Envir- Cur-Bank

Inst Trade

Immig.

Unermp. Insu-

Air Rail

Indu. Agric.

Educ. Health Soc Welf

Police Highway Natural Resource

Resid

Argentina (1) F F F F F F,S F,S,L F,S,L F,S F,S F,S S

Argentina (2) F F F F F F,S F,S,L F,S,L F,S F,S F,S S

Bangladesh (1) F F F F L L L L L L L

Bangladesh (2) F F F F L L L L L L L

Brazil (1) F F F F,S F F F F F F,S F F,S F,S F,S F F,S S

Brazil (2) F F F F,S F F F F F F,S F,S,L F,S,L F,S F,S F,S F,S,L S

China (1) F F F F F F F,S,L F,S,L S,L

China (2) F F F F F

India (1) F F F F,S F F F F,S F F,S F,S S F,S S F F,S F

India (2) F F F F,S F F F F,S F F,S F,S,L S,L F,S S F F,S F

Indonesia (1) F F F F F,S,L F,S,L F,S,L

Indonesia (2) F F F F F,S,L F,S,L F,S,L

Japan (1) F F F L F,L F,L F,L L L

Japan (2) F F F L F,L F,L F,L L L

Malaysia (1) F F F L F F F F F,S F F,S F,S F F S F

Malaysia (2) F F F L F F F F F,S F F,S F,S F F S F

Mexico (1) F F F F,S F F F F F F,S F,S S,L S

Mexico (2) F F F F,S F F F F F F,S F,S S,L S

Nigeria (1) F F F F,S F F F F F,S F,S S,L F F,S,L F,S,L F

Nigeria (2)

Pakistan (1) F F F F F,S F F,S F,S,L F.S.L F,S S F,S F S

Pakistan (2) F F F F F F,S S,L S,L F,S S F,S F S

Philippines (1) F F F F F F F

Philippines (2) F F F F F S,L S.L S,L

Thailand (1) F F F F L L L L

Thailand (2) F F F F L L L L

Notes: F= Federal/Central Government S= State/Provincial/Republic/Departmental Government, L= Local Government

(1) = Service Responsibility (2) = Provision of service

Source: Adapted from Anwar Shah and Zia Qureshi – Intergovernmental Fiscal Relations in Indonesia, Issue and Reform Options, World Bank Discussion Paper 239, May 1999


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The assignment of sub-sector responsibilities within the sector for the six selected countries is presented in Table 2.3. From the table co-sharing in certain services and the role of private sectors could be observed.

While in Ghana services relating to all types of education are assigned to CG in Senegal Swaziland, Uganda and Zimbabwe CG role has been restricted to secondary and tertiary education. In Swaziland the role of private sectors in primary and tertiary education has been recognized. Uganda and Zimbabwe follow the co-sharing approach for the provision of primary education.

The services of hospital are set aside for central government. Sub-national government (SNG) in Senegal and Zimbabwe are made responsible for health centers related services. Construction of road has been considered as the shared activities of different partners of development in all the countries of the world.

Local amenities such as water supply, sanitation solid management are mostly considered as the responsibility of sub-national government. In few countries only this task has been provisioned, as the shared responsibility. Uganda is a typical case where private sectors enjoy the authority of producing and distributing electricity.

Table 2.3: Division of Responsibilities among Different Levels of Government

Sector\Country Ghana Senegal Swaziland Uganda Zambia Zimbabwe

Education

Pre-School SNG O SNG

Primary CG SNG CG(P) S S

Secondary CG CG CG(P) SNG CG(P)

Tertiary CG CG CG O/CG

Health CG S S

Health-centers SNG SNG(P)

Clinics S CG(P) CG

Hospitals CG CG(P) CG

Community Amenities

Water supply CG SNG CG S S SNG

Sewerage S CG CG SNG SNG S

Sanitation NA SNG SNG S S S

Solid Waste SNG SNG SNG S SNG SNG

Electricity distribution CG CG P CG O

Economic services

Roads S S S S S S

Local transport P SNG P SNG SNG/P P

Electricity production CG CG CG P CG O

Note: S=Shared, CG=Central Government, SNG=Sub-National Government, P=Private, O=Others

Adapted from Fiscal Decentralization and Sub-National Government Finance in Relation to Infrastructure and Service Provision, Synthesis Report of 6 Sub-Saharan African Country Studies. J. Steffensen and S.Trollegaard. National Association of Local Authorities in Denmark (NALAD), May 2000.


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Chapter III

Decentralization Practices and Expenditure Assignment in Nepal

3.1 Legislative and Regulatory Framework For Expenditure Assignment

A sound legislative framework is one of the essential aspects for effective fiscal decentralization, which needs to be carefully taken into consideration for bringing about desired improvements in the fiscal management of local bodies.1

The legal provisions can be drawn from constitution, Act, Regulation, Bylaws, Guidelines, etc. Legal provisions for delineation of functions are important to promote and institutionalize decentralized governance system. The constitution of the Kingdom of Nepal, 1990 has enshrined a decentralized system of governance as a guiding principle of the state (Box).

The constitutional provisions regarding to decentralization and local self-governance in Nepal

The principles stated in the Article 25 (4) of the Constitution has emphasized to make suitable conditions for enjoyment of the fruits of democracy by making provisions of wider participation of the people in governance through decentralization.

Article 46 (1) (C) of the Constitution has stated that the one-fourth members out of 60 of National Assembly (Upper House in the Parliament) shall have to be elected by the Electoral College consisting of DDC members and chief and deputy chief of the local authorities at Village and Town level.

Article 104 (1) of the Constitution enumerated that the Election Commission shall conduct, supervise, direct and control the election to Local Authorities at Village, Town and District level.

The institutional details of local government structures including electoral system and administrative mechanism, intergovernmental fiscal systems, accountabilities and other are defined in the Local Self-Governance Act, 1999 (LSGA). Moreover, the Local Self-Governance Regulation, 1999 (LSGR) and Local Bodies (Financial Administration) Regulation, 1999 [LB (FA) R] have prescribed the procedural mechanism. Details of the practices, procedures and measures by which the provisions of the LSGA and Regulation are operated by bylaws and guidelines by the respective local bodies as stated in the LSGA and Regulation.2

3.2 Functional Arrangement: Autonomy, Authority and Responsibility

The existing practice to allocate functions and expenditure assignment can be categorized in four major categories of actors. These are central government (HMG), local bodies (envisaged as sub national government), corporate bodies (semi-autonomous bodies) and non-governmental organizations including community organizations and private sector.

As stated in the Article 41 of the Constitution of the Kingdom of Nepal, 1990, the HMG (Council of Ministries) can define and de-concentrate its business among Ministries. The Ministries execute their plans, programs and activities through an established structure and institutions. The Ministries have established their service delivery structure; the typical hierarchy is the Ministry, Department, Regional Office, and District Office. There are variations depending upon the needs - some ministries do not have Department, and others have structures up to the Ilaka level within districts. Central government can also implement its programs and projects through local bodies, civil society organizations, NGOs, CBOs, and private contractors.

1 See, The Local Bodies Fiscal Commission Report, 2000, page 6, 11 (in Nepali)

2 Section, 265 of the Local Self Governance Act, 1999


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More functions and authorities are devolved to the local bodies after promulgation of the LSGA in 1999. Local Bodies are recognized as an autonomous and corporate body with perpetual succession. There are two tiers of local bodies - the DDC at intermediary level and the Municipalities/VDCs at the lower level. The council of the respective local bodies is the apex body to deliberate issues formulates and approves their policies and plans. The council members of local bodies are either directly elected or are nominated from unrepresented sections of the society. The LB Committees are the executing authority to implement its plans and programs. LBs implement their policy and programs through users group, civil society organizations, sectoral units, NGOs and private sector. In accordance with the provision made in the LSGA, programs of the line agencies of central government, local bodies, civil society and private sector should be coordinated and integrated in the plan of the local bodies.

Some public functions and authorities are de-concentrated to corporate bodies or commission or authorities or committees by appropriate legal instruments. Such bodies are autonomous in planning and implementation. The relation and coordination of such bodies with local bodies is not defined adequately despite the fact that they also carry out their functions at DDC, VDC and Municipal areas. Some bodies, such as Town Development Committee, work as parallel institutions to the local bodies.

The involvement and role of civil society organizations including NGOs/CBOs and private sectors in service delivery are increasingly recognized. The LSGA has provisioned LBs to involve private sector and civil society organization for transparency, accountability and assurance of better service delivery.3

However, the provisions are made in different form of legal instrument are inadequately implemented. Based on the major benchmarks, effectiveness of the decentralization practices and local governance in Nepal are presented in the table 3.1 below.

The table clearly shows mixed results in terms of achievements in decentralization practice in Nepal. The contributing factors for such a result include inadequate seriousness on the part of the government, absence of a driving force or a "decentralization champion" at the centre and differences among central agencies on the understanding of a decentralized system of governance. The matter is further complicated by the insurgency and political instability.

3 Section 3 of the Local Self-Governance Act, 1999


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Table 3. 1: Nepal: Effective Decentralization Matrix

Benchmark Status Remarks

Elected Local Officials and Council

Yes Local Bodies Officials are elected for 5 years term. However, nominated LB officials are there at present.

Locally appointed Officials

No Chief Executive Officers at local bodies and Line Agency Heads are deputed from Central government

Locally approved budget

Yes DDC Budget prepared and approved by respective Council of the LBs under the guidelines and Budget ceiling provided by central government. However Central Government can add or remove programs and can modify priorities.

Municipalities budget approved by the respective Council

Absence of mandate on local government as regards to employment and salaries

Partially yes

Local Bodies can hire staffs and fix salaries too except for Chief Executive Officer and Accountant

Control of Local Bodies on Revenues/Resources

Partially yes

Local Bodies are given some authority for tax collection and resource mobilization within the criteria fixed by central government

Central Government distributes development fee to Municipalities, which is collected at the custom point on the basis of a determined formula.

Authority for sale of defined goods and objects is given to LBs

Revenue sharing between Local Bodies and central Government in some of the specified areas is practiced, such as electricity, tourism, forest, etc.

Borrowing Power of Local Government

Yes, but not exercised

Some Municipality have however obtained loan for different activities from Town Development Fund

HMG working on a formula based grant to implementation

Transparent intergovernmental transfer system

No Block grants including of administrative grants are provided by central government to local bodies on ad-hoc basis

Clear Expenditure Assignment

No A lot of overlapping between local bodies and central government prevail

Capacity of Local Bodies to collect tax and deliver services

Very low Inadequate capacity building programs have been launched to strengthen it.

Adequate books of Account

No, Very few DDC have account and internal audit Section

Central Government ability to control and Monitor progress of effective fiscal decentralization

No There are several Committees including one chaired by the Prime Minister. However, it seldom meets periodically.

3.3 Functions and Institutional set up of Central Government and Local Bodies

As mentioned earlier, different laws have set out the functions of central government and local bodies. The HMG Work Division Regulation defines central government functions. Separate other statutory laws also define functions and responsible institutions for certain


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services. Functions of Local bodies have been provisioned by LSGA, though other Nepal Act has also assigned some functions, roles and responsibilities to local bodies.

The general nature of functions across level of government namely central and local bodies are as follows.

Table- 3.2: Functions of Central Government and Local Bodies

Functions allocated to Ministries (The major functions of ministries as stipulated in

the HMG (Work Division) Regulation)

Functions allocated to LBs (The major functions and authorities of local bodies as provisioned in LSGA)

Formulate national policies, plans and programs of the relating sector

Formulate policies and plans of the respective area of LBs to contribute national plan and policy

Implement and cause to be implemented sectoral programs

Implement and cause to be implemented plans and programs within the area of Local Body. Service delivery and production activities are to be carried out by consumer groups, NGOs, CBOs and private sector.

Establish relationships, linkages and coordination with the related agencies/institutions at international (treaty, agreement) and national (horizontal and vertical) level.

Establish relationships, linkages and coordination with MLD, NPC, sectoral Ministries and Donors. Local bodies should coordinate with donors through MLD and direct linkage could be established with other sectoral Ministries in implementation of programs. Local bodies have to report its progress to MLD regularly.

Role of DDC is more coordinative rather implementer. Municipalities and VDCs plays vital role in provisioning and administrative.

Regulatory functions- monitor/ supervise/ evaluate sub-ordinate units.

Regulatory functions- monitor/supervise/evaluate programs and projects implemented in the respective area of local body

DIMC to monitor and supervise Local Bodies NPC/MLD/other Ministries to provide guidelines to

local bodies in effective implementation of plans and programs

Technology development and transfer / Quality control and capacity building schemes

Technology development and transfer / Quality control and capacity building schemes

Carry out research, survey, study (Conference, seminars, workshops) relating to the sectoral issues

Set standards of the services

Set standards of the services

Details of the above mentioned functions across level of governance are given below (Table- 3.3). It Includes functions carried out by central and local government, nature of services which the respective institutions supposed to provide and institutional set up and capacity, mechanism for coordination and linkages and issues/problems associated with the particular tasks. The table shade light on the existing key public sectors and service delivery mechanism of central and local government vis a vis involvement of civil society organizations and private sectors in the state functions.


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Table- 3.3

Institutions and organizational arrangements for delivering key public services

Services/ functions Institutions and organizations Links/coordination to

other stakeholders Problems and

challenges

Roads

Highways, national roads, Inter and intra-district Roads, Rural/ Agriculture roads, Urban Roads Bridges and drains Road/drainage maintenance and upgrading Trail improvement Suspension Bridge construction and operation Construction, maintenance and repair of mule track

Centre level: Department of Roads. Has divisional offices at sub-national level, takes up highways, national roads and strategic roads. The category of roads is defined. Dolidar/MLD: has 75 district level offices, takes intra-district all Agriculture/rural roads and trails not taken up by DOR. Contracting out is the prevalent modality. Other central agencies: Road Board is responsible for maintenance of all roads. Local bodies: All LBs involved in construction, operation and maintenance of roads Mode of action: mainly through users committee (UC), but other modality as well to some extent

National planning commission is the coordinating body DTO to act as technical wing of DDC. However, instead DOLIDAR is working as a separate and parallel office at district level. DDC prepares District transport master plan, periodic plan and annual plan for coordination DDC is to maintain and operate roads handed over by other agencies

Dolidar and DDC‟s functions overlap Overlap of municipal roads with DOR Poor coordination between central agencies and LBs for management of highways and major roads (cf Essential Goods Protection Act) Inadequate budget for management and operation by both the local and central government

Transportation management

Transportation services Vehicle registration and license. Such as, Motorbike, pull carts, Rickshaws, etc vnd Vehicle parking and Traffic management

Central level agency: Ministry of Labor and Transport Management responsible for automobile vehicle registration, route permit. Implements through Zonal Transportation management offices. Ministry of Home: Traffic police responsible for traffic management Local bodies: involved in registering of pull carts and rickshaws. Municipalities also involved in urban traffic management (bus park, cycle stand) Private sector: involved in production of transportation services

Central level coordination through NPC and HMGN, and ad hoc coordination mechanisms At district and sub-district level DDC and municipalities planning process is a coordinating mechanism

Problem experienced in traffic management in municipal areas DDCs‟ role unclear

Settlement development and physical planning

Town development infrastructure, Settlement development Haat bazar Building code and building

Central level: Department of housing and physical planning acts through its offices at the district level. Prepares building code, enforces, Other central level agencies: Town development committee acts in all municipalities and VDCs emerging into municipalities. Can acquire

Mandates of Municipalities and TDC fully overlap While LBs are mandated to settlement planning


26



challenges

permit land and prepare settlement development plan. Other quasi-government agencies include Settlement development company, and Housing company Local bodies: Mandated for the said functions and development of their jurisdiction areas.

and development but are not given authority to acquire land

Irrigation

Construction, rehabilitation and Operation and management surface irrigation schemes Construction, rehabilitation and Operation and management of groundwater irrigation schemes Development and promotion of alternative irrigation technologies

Central level: MoWR for overall plan, policy, research, feasibility study, survey. Implements through Department of Irrigation and its divisional level offices. Local bodies: LBs mandated to formulate, implement, operate, repair and maintain the irrigation schemes. VDCs and DDCs are planning and implementing programs Mode of construction: LBs implement through UCs. Central agency uses both UC and contracting options. Mode of operation and maintenance: Users groups. Users‟ fee is charged for operation and maintenance. Various I/NGOs involved in development and promotion of alternative/small irrigation technologies or methods.

MOWR prepares its own plan. NPC coordinates DDC formulate district policy plan and priorities DDC coordinates other actors particularly in irrigation technologies at district level VDCs are involved in implementation by other agencies. Social Welfare Council at centre regulates I/NGOs who are required to work in coordination with LBs

Technical capacity of DDCs itself weak. So DDCs‟ technical support to VDCs is inadequate Unclear classification of irrigation schemes and inadequate clarity as to what kind of programs are better for which agency I/NGO coordination with LBs is weak

Education

Pre and primary education Non-formal education Secondary education Higher secondary Technical and vocational education School building construction/infrastructure Text Book and Curriculum Examination/Certification Higher Education Higher Technical Education Library Special education Education quality and

MoES; The ministry is responsible for policy, plans, standards, monitoring, supervisions, school establishment, building infrastructure. MoES and its arms include Department, specialized institutions (e.g., curriculum), and Regional Directorate and DEO. Resource centre is part of the network in sub-district level. Responsible for all functions – financing recurrent costs and investments, teacher management, and quality control. Key focus is to increase access, retention and quality of education. Other central agencies: Universities, CTEVT, Medical institutes, Janak Education materials centre, National Library. Target-group focused agencies such as those for women, indigenous people also take education as their primary service Donor aided projects and INGOs as well are active – key areas of involvement being special education, non-formal education, school mainstreaming, scholarships Local bodies: LSGA mandates to formulate and implement education

Central level coordination mechanism: MOES coordinates the central agencies DEC, VEC are to coordinate at the district and VDC level through education plan, monitoring and supervision of schools at districts Donors coordinate with MOES; and INGOs with SWC at the centre and DEO and LBs at district and sub-district level

Coordination between local bodies and SMC is poor SMC is responsible to DEO or RD, so LBs role monitoring and supervision minimized SMC cannot supervise, or control teachers behavior since they are responsible to central government Delineation of functions among LBs is not clear, such as both the DDC and VDC/Municipality can recommend opening or


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challenges

standardization Scholarships and educational grants Overseas education

plan and policies, and coordinate education programs. Grant permission for running pre-primary schools, recommend for permission to open schools and close them. Responsible for schools management and supervision. LBs are engaged regularly in school infrastructure financing, scholarships, filling inadequate teachers‟ salary gap; supporting for technical, vocational and colleges with occasional grants; In devolved schools SMC are responsible for overall management of the schools, though powers devolved from MOES. LBs are not involved in the school devolution process.

closing of the schools. No distinction as to level of education (e.g., primary or secondary education) and responsible LB leading to such a situation as VDCs are supporting college

Health and population

Primary health care (Sub-Health Post) Health centre District Hospital Specialized Hospital (Regional/Zonal Hospital) Preventive health care programs Ayurvedic, unani, homeopathic, natural and traditional medical care services Epidemic control HIV-AIDS control Family planning services Nutrititon, sanitation, safe motherhood

Central agency: MOH, responsible for overall policy formulation, planning and implementing health services. Various departments at the central level. The ministry network extends to VDC level - Department of Health Service Regional Directorate, Zonal and regional Hospitals, District health Offices, Primary health centers at constituency and Health posts at Ilaka level and Sub-Health Post at VDC level. The nature and level of services for each level of health institution is defined. Other central agencies: Health Research Council, Royal Drugs Limited, Hospital Boards and central hospitals There are also Zonal Ayurvedic hospitals Special projects and INGO/NGOs are working in different parts Local level: mandated to prepare public health policy, plan and programs in coordination with the District Health Office. LBs are involved in building infrastructure, epidemic control, and drugs supply Community Drugs Scheme, jointly managed by sub-health posts, VDCs/Municipalities and citizens, implemented in connection to provision of essential drugs. Private sector involved in curative services where service can be charged NGO/COs involved in implementing health awareness programs

MOH coordinates the plan and activities of horizontal departments, divisions and other agencies under its structures. Hospital management committees are represented by persons from HMG, LB, and civil society organizations Local level coordination done through District and Village Health Committees under the Chair of respective LBs LBs as well form committees to coordinate activities of various agencies in their area.

Both LBs and central agency are mandated for operation and management of hospitals and Ayurvedic Dispensaries District Health Management Committee consist of DDC President as person and not through institutional representation Weak coordination between the health committee formed under LSGA. Under-staffed health centers and hospitals at village levels Inadequate drugs supply from central agencies to the local health centers Weak coordination of LBs with I/NGOs


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challenges

Drinking water and sanitation

DW schemes construction DW supply management Toilet construction and promotion Large Drinking Water Project

Central agency: Department of drinking water and sanitation/MOPP, that functions through its Divisional offices at sub-national level. It takes up DW schemes serving population of above 1000. Dolidar/MLD: implements rural drinking water projects serving population up to 1000 population Other central level agencies: Nepal DW Corporation, which provides DW in major urban centers. Rural Water Supply and Sanitation Fund Board implements programs through support organizaitons Projects under the umbrella of MLD and MOPP (e.g., small town, Lumbini zone RWSSP). INGO (e.g., NEWAH, Red-Cross) District donor funded DW projects such as, FINNIDA supported Lumbini zone DW programs and "Ghainto Karyakram" (Rainwater harvesting) in rural areas. LBs: Are also mandated for drinking water and sanitation services. DDC/VDC involved in construction, rehabilitation of DW schemes. Municipalities mostly involved in extension of water city water supply, sewerage Private sector involvement is negligible NGOs/COs working for promoting sanitation practices among people Operation and maintenance: DW corporation performs in urban areas. Large schemes in rural areas are maintained by HMGN agencies. Increasing practice of user charges and O&M by UC. Municipalities have also taken over O&M functions from HMGN (e.g.; Dhulikhel Municipality).

NPC coordinates at the central level District Water Resource Committee permission for use of water resource for different purpose e.g., drinking water, irrigation and hydroelectricity. LBs are considered to coordinate drinking water projects at the district level Overlap of plans and programs of Rural Drinking water and sanitation Development Fund Board with LBs continues. The Board bypasses the LBs.

The distinction of responsibilities between Dolidar and LBs unclear DW corporation and Municipality functions overlap Weak coordination Operation and maintenance problems in HMG supported DW programs, wastage of resources and duplication of work. Role of RWSSFDB and LBs unclear, often LBs are bypassed


29



challenges

Forest and soil conservation

Forest management – community forestry, religious forest, leasehold forests, timber products, private forest Non-timber forest products (herbs, identification, promotion, marketing, commercialization Bio-diversity conservation Soil conservation and landslides control River training Protected area (Wildlife/Park/National Forestry) Watershed management

Central agency: MFSC responsible for policy formulation, planning and implementing programs and regulations related to forest (national, community, lease, private and religious), and natural resource management. The ministry has various departments and regional offices; the department has 75 district offices and a number of range posts at the sub-district level. The Forest offices, along with development functions, perform functions of a quasi-judicial body as well. The district forest offices are of different status and capacity depending upon the volume of work. Department of soil conservation works at district levels with its separate offices. National Parks, conservation areas and hunting areas are defined and respective offices manage them. Other central agencies: several quasi-government institutions are formed for processing of herbs and other forest products. They include Timber corporation, rosin and turpentine company, and others such as KMTNC (which has field offices to manage national parks and conservation areas at Manang, Mustang, Kaski Districts and Annapurna Region) A number of donor-aided projects engaged in forestry and livelihood sector also operate with their separate field offices. Local Bodies: mandated to plan, policy and implementation of forest, bio-diversity, a forestation and soil conservation Community forest users group: Obtain authority from district forest office to manage and use forest patch

Central level coordination is done by Forest Sector Coordination Committee under MFSC DDC is responsible to coordinate services at the district level. Sectoral plan is approved by District Council. Discussions undergoing to form district level sector CC. Provision to share revenue to LBs by MFSC Association of CFUGs and similar organizations are also in regular dialogue with government agencies

Mandated functions to LBs overlap with those of the MFSC Weak coordination in planning and program implantation with LBs. Contradicting provisions in the Forest and LSG Act. Resources‟ sharing between KMTNC and LBs is not provisioned. Local bodies totally by-passed in formation and handover of community forestry, household forestry, LB's not getting any revenue share. VDCs are totally bypassed. LBs neither have some role in management and nor gets revenues.

Hydro-electricity

Large hydropower plants Small and mini-hydro plants Micro-hydro plants Power generation Electricity line extension Electricity distribution

Central agency: Ministry of Water Resources responsible for overall policy, planning and programming... Department of electricity development is responsible for survey and generation licensing of hydropower, and negotiations relating to power sharing with other countries. Electricity Tariff Commission is responsible for fixing electricity tariff. Water Energy Commission is responsible for water sector development strategy, river basin development plan, energy and load forecasting, among others. Nepal Electricity Authority: responsible for production, transmission

Central level coordination is weak between ministries and other central agencies Weak coordination of DDC and Municipalities at district level with the line offices at district level Department of Electricity development, under Ministry of Water

The LSGA empowers LBs to formulate plans and polices relating to utilization of water resources and carry out programs, which contradicts with provision of Water Resource Act that empowers district water resource committee


30



challenges

and distribution LBs investment in the extension of electricity line, electricity generation,

Resource provides survey and generation license and water and energy commission prepares master plan for hydro power development and river basin study etc. Electricity tariff commission suggests tariff structure in electricity. NEA working as sole agency in purchasing power and distributing electricity.

The LSGA mandates LBs for electricity production which contradicts with Electricity Act, 2049 that requires LBs to take permission for survey, generation and distribution of electricity

Renewable energy

Research and development of technologies Technology promotion and dissemination Biogas Solar/Other Energy

Central level: MoST- responsible for overall policy and plan relating to development of alternative energy development. Other central agencies: Alternate Energy Promotion Centre acts as implementing wing of MOST. MFSC also is mandated to look after promotion and development of some technologies Donor-aided programs (e.g., REDP) and INGOs (e.g., ITDG) are involved Agriculture Development Bank is involved in financing and promotion of renewable energy technologies LG Associations providing model guidelines to address alternative energy issues in their plan. Local bodies: DDC, VDC and Municipality are mandated to formulate renewal energy plan and policies, implement. NGOs, professional groups also involved in providing services and raising awareness.

AEPC is the central agency to coordination at the central level LBs are coordinators at the district level, as the plans and programs relating to alternative energy requires to be incorporated in the plans of LBs The 'energy committee' formed under DDC/REDP cooperation prioritizes, plans and approves programs

Inadequate technical human resources with LB Inadequate policy, plan, strategies of LBs for involving private and NGO sector

Agriculture, livestock and cooperatives


31



challenges

Research Agriculture and livestock extension Inputs: fertilizers and pesticides. Agro-vet technical services Market collection centers, market information Processing and post harvest services (including storage) Registration of cooperatives Promotion and support relating to cooperatives

Central level: MoAC: is responsible for overall policy, plan, research study, and implementation. The Ministry has departments, regional and district offices, and service centers at the sub-district level. The Departments of agriculture and livestock services are implementing wings, which have parallel structures up to sub-district level. Besides there are agriculture/livestock research centers/ stations, farms, fisheries that carry out extension services among others. The Department of cooperatives also has parallel structure up to the district level. This is responsible for registration, regulation, promotion and capacity building of cooperatives. Central level agencies: NAARC is responsible for research. Agriculture Input Corporation (AIC) is responsible for supply of inputs, which has its office up to the district level and a network of authorized dealers at sub-district levels. Commercial and development banks e.g., Agriculture Development Bank responsible for loans, which has network of its offices up to sub-district level. Donor supported projects are also engaged in service provision Local Level: DDC and VDCs mandated to plan, policy, strategies formulation, priority setting and implementation of agriculture extension works in their territory; Municipalities not. DDC and VDC are involved in financing of agriculture extension services. In the latest devolution mode of operation the central authority has devolved extension services to DDC, which however implements through the existing central agriculture office in the district. Private firm and companies in supply of pesticides, fertilizer, veterinary medicine. Local level NGOs and COs involved in program implementation and promotional activities. Practice of district offices contracting out extension services to NGOs have begun. Locally developed agro-vet service providers increasingly providing services charging fees

MOAC is responsible for coordination at the central level DDCs and VDCs are the coordinating body at the district and VDC level. Farmers groups and association regularly in contact with LBs and LAs

Planning schedule of LB and LA don‟t match and there is weal coordination Because of absence of local structure and staff the central structure and staffs are implementing programs. Dual divided subordination of staffs Role of VDCs and Municipalities is unclear in agriculture extension services. Service centers of Agriculture and livestock are responsible to the district Agriculture and livestock offices. Little program budget allocated after devolution to LBs VDCs don‟t have say over staff activities who are the first point of contact to farmers leading to inadequate service of extension workers to farmers


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challenges

Culture, heritage and tourism

Tourist product and destination development Promotion and publicity Language / culture preservation and promotion Religious heritage sites conservation and development Trekking/Mountaineering licensing Star and Non Star Hotel Licensing

Central agency: Ministry of Culture, Tourism and Civil Aviation responsible for overall policy, planning and licensing for airlines operation Department of archeology is responsible for preservation of cultural sites and objects Ministry of Home Affairs is responsible for issuing tourist visa Ministry of industry issues license to hotels Civil Aviation Authority Nepal (CAAN) is responsible for airworthiness certification, management/construction of airports, airport handling, pilot licensing and air service agreement jointly with the ministry Other central level agencies: Nepal Tourism Board District level tourism offices are established in few districts. NTB is responsible for promotion and product development Nepal cultural corporation responsible for preservation, and promoting culture. Some agencies such as Gumba management committee under MLD, Lumbini Development Fund, Pashupati Area Development Fund are active in respective jurisdictions. Bodies such as Janajati Upliftment Academy are also active, but most of their activities focus on socio-economic and infrastructure development Associations of entrepreneurs e.g., TAN, HAN, Local level: DDCs and Municipalities could form a sectoral Units relating to tourism promotion and cultural preservation. Few districts have formed tourism promotion committees. Municipalities involved in conserving and preserving archeological sites. Business and private sector involved in production of tourism services

Tourism Board is considered key coordinator at the central level DDCs coordinate activities at the local level Most of the services being of private nature, tourism agencies focus more on regulation Cultural and ethnic community groups coordinate activities among themselves

Weak focus on development functions and weak coordination between central agencies and LBs Increasing demand from LBs to share revenue with them. Cases of municipality fighting with central department for conservation and renovation of archeological and heritage sites and buildings LBs feeling the mandate to preserve culture and language as unfunded

Social development, welfare / security

Disaster mitigation, Disaster rescue and relief program Social security allowance (old-age and widow) Women, children, youth, disabled program

Central level: For disaster related programs Ministry of Home affairs is mainly responsible. There are committees at the district level too under the Chair of Chief District Officer. Humanitarian organizations such as Red cross and other national networks and organizations are working. Red-cross has network at sub-district levels too (Junior Red-cross Circle) DDCs also regularly finance for Disaster relief fund. Municipalities

There are defined coordination mechanism for various services at the central level – the respective ministries being the focal agencies NGO related activities are

Helpless people are in direct contact with LBs but they are not funded for the services LBs distribute social security allowance as agent of central


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challenges

Rehabilitation of displaced people Old age people care Ethnic/backward communities Skill development Promotion, preservation and development of arts and crafts Consumer protection (food quality standards, market regulations) Sports Citizenship certificate Passport

(except for in Kathmandu valley operate fire brigade). VDC and Municipality support disaster relief programs on an ad hoc basis Social security allowance to old-age people and widow is financed by central government and channeled through LBs. Ministry of women, children and social welfare is responsible for developing, and implementing programs related to women, children and ethnic communities. It has women development offices in 67 districts to run the programs. Nepal children‟s organization has also network up to district level. Dalit upliftment commission, women commission, ethnic groups upliftment commission are some other institutions related to target group development Rehabilitation of freed Kamaiya is major responsibility of Ministry of Land Reform. Many donors and NGOs are also involved in this regard. There is no recognition of displaced people, hence no concerted service from HMGN side, humanitarian agencies in the NGO sector are active for this. There are also some old-age homes managed by ministry of home affairs. CDO is responsible for market regulation and consumer protection. Ministry of home affairs is responsible for citizenship certificate and CDO issues certificates on recommendation of LBs Passport is issued by Ministry of foreign affairs. In some districts the DCO is delegated authority to issue passports. The LBs are mandated to provide services in all these functions, but most of them are unfunded. However LBs are involved in co-financing NGO initiatives for various sorts of such services. LBs are directed to set apart some budget for such targeted programs. The LBs are also mandated to regulate market but without much enforcing authority. There are also homes to provide services to orphans and old age people managed by relief and religious organizations

coordinated by social welfare council At the district level DDC is the coordinating body, where the plans and programs of all development agencies are passed and approved.

government but they are not provided with any overhead expenses LBs contribution for disaster management services are also unfunded Weak coordination among LBs and NGOs, INGOs LBs feel stressed with internally displaced people for providing citizen services MOH also design plans and allocate fund for disaster management, hence overlap functions.

Urban environment

Solid waste management Environment protection and Management Environment Guidelines/Evaluation/Act

Ministry of population and environment is responsible for regulatory and enforcement functions related to „brown environment‟. It does not have any implementing wing. Ministry of industry is responsible for promoting environment friendly technologies in industries Solid waste management corporation is central agency

MOPE is the coordinating agency at the central level Local level programs are coordinated through LB planning process Central agencies consult

Provisions of Solid Waste (Management and resource mobilization) Act, and LSGA contradict. LBs find pollution control as not appropriately


34



challenges

LBs: are mandated for solid waste management functions. LBs are also mandated for pollution control functions.

and dialogue with associations of industries is regularly to promote environment friendly practices in industries

mandated to them and is also unfunded

Economic Activities (Business and Industry)

Industrial policy development foreign direct investment and joint ventures Small enterprises registration and promotion

Central level: Ministry of industries is responsible agency. It implements functions through its department and district level offices. The district level offices of Cottage industries development board in some districts are delegated authorities of ministry of industries where the latter has no offices. Foreign direct investments and joint venture investments are given consent by foreign investment board chaired by the minister. Department of Industry is authorized to give consent upto Rs. 500 million equity project. Industrial promotion agencies such as CIDB and IEDI are quasi-government. Donor aided projects (such as MEDEP) are also there, who operate with their own office networks. LBs: are mandated for cottage, micro and small industrial promotion. This function has not been taken up by LBs more seriously, except for providing official coordination and co-financing support to programs and projects Associations of industries are also actively engaged in promotional activities.

Ministry of industries at the central level and LBs at the local levels are coordinating agencies. Dialogue with the associations of industries is commonly practiced.


35



challenges

Judicial and administrative

Vital registration Recommendation/ certification Mediation Marriage Certification Internal migration certificates

Central level: Formal Court System- three tier of Courts viz., The Supreme Court, Appeal Court and District Courts at all 75 districts MLD is mandated for arranging functions related to vital registration which does through LBs Other central agencies: Revenue Tribunal to look behind cases relating to revenue. Administrative Court for looking cases relating to civil servants Local level: District Courts at all 75 districts. Quasi Judicial authorities (Forest, Administration, Land Revenue) VDC and Municipality mandated to decide minor cases within their territory and mandated jurisdiction. VDC and Municipalities providing vital registration services VDC/Municipality provides migration certificates

LBs involvement is limited mainly to recommendation and certification to the quasi judicial bodies in the districts

Judicial power of LBs not yet implemented as related Gazette is not issued MLD (central government) staffs are carrying out, vital registration job in the municipality. Job should rather be handed over to municipality. No provision for separate person or overhead expenses for vital registration, the charge related to it are transferred to central government accounts

Information and communication

Policy, plan and regulation Telecommunication Broadcasting and publications Postal Services

Central level: MoIC for overall policy, plan, standards, license, and quality control relating to information and communication. Postal service network covers sub-district (up to VDC) levels. Other central agencies include (NTA, NTC, Press council, Government Media e.g. NTV, Radio, Gorkhapatra Corporation, motion picture development corporation) Local level: DDC and Municipality mandated to give approval to set up cinema halls. Policy to devolve postal services, which is yet not in practice. Few LBs have been operating TV and radio Private service providers are increasingly involved in all these services

Coordination between NPC and MoIC, Ministry and all the central level agencies and NPC and LBs in planning

Limited services available to the remote areas Authority to approve opening of cinema halls as provisioned in LSGA contradict with another act


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3.4 Key Issues Relating to Legislative Framework on Expenditure Assignment

Inadequacy of the constitutional provision

The Constitution of The Kingdom of Nepal does not explicitly incorporate provisions relating to local governance. Many countries (example: Uganda and Estonia) have experienced benefits of incorporating the following provisions in their constitution itself ;

- Broader principles of decentralization and local self-governance,

- Rights and responsibilities of local governments,

- Basis and principle for enactment and amendment of local governance law

- Delineation of functions and roles of LBs vis-à-vis the central government.

Incorporating such provisions related to local government would contribute to reduced central discretion in determining LG functions and expenditure assignment, and thus make local bodies more responsible.

The country where democracy and decentralization practices are mature, such as Denmark, United Kingdom, they emphasize more on negotiation to address prevailing issues/ problems or conflicts or competing interests. Local governments in these countries are considered effective even without detailed provisions in the constitution. But in countries such as Nepal, where institutionalization process of decentralization is not mature and central discretion is evident, it is being advocated for detail and explicit legal provisions.

Slow implementation of Decentralization Implementation Plan (DIP), 2002

The provisions and commitment made in the DIP, which has deliberated on the issues such as, restructuring of local bodies, fiscal decentralization, functional clarity, amendment in the contradictory Acts with the LSGA, responsible local bodies, etc. is lagging behind.

The DIP, 2002 is one of the very important steps toward effective implementation of the laws, policies, principles and provisions of decentralization and local self-governance in Nepal. The DIP also assigned responsibilities to the concerned Ministries and institutions to carry out the functions and responsibility. The plan has also identified sectors for devolution with a specified time frame.

The DIP has recommended to link functional assignment with classification of the local bodies. It has defined the role and responsibilities of all concerned ministries for clear delineation of tasks between different tiers of local bodies as per the provisions made in Section 243 of the LSGA. It also indicates about the nature and basis of conditional and unconditional (block) grants. The DIP has suggested fund-channeling mechanism to LBs. The Plan has also stated about categorization of plan and programs for implementation modalities for ministries, improving system to make budget ceiling and guidelines to local bodies available in time, transfer staffs at local bodies, capacity enhancement of LBs, and effective management and operation of the devolved functions.4

The DIP has recognized that the other Acts and legal provisions are contradicting with the provisions of LSGA and has committed to amend them within the first year of DIP approval. Implementation of these provisions is lagging behind.

However, the role of DIMC and its Working Committee is not effective in implementing decentralization law and monitoring of the local bodies. Even the meeting of the Committee has not taken place since more than two years.

4 HMG, The Decentralization Implementation Plan, 2002, Essential Steps for Sectoral Devolution, page 19 (Nepali Version)


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Overlap Functions between Central Government and Local Bodies

As mentioned in the table 3.1 and 3.2 the type of functions that are carried out by central government and local bodies are similar in the sense of nature of tasks, planning programming and implementation. In most cases, plans and programs of the central government and the DDC (as an upper level local body) are often duplicated with the lower level local bodies due to their involvement in service delivery functions at local level. Neither the HMG Work Division Regulation nor practice confines the role of central agencies beyond the domain of local bodies. As a result, the central government is involved in services at local level that could be carried out even by the local bodies. The Regulation is also silent about the role of sectoral ministries on the functions allocated to local bodies.

Duplication in functions between DDC and VDC/Municipality

In accordance with provisions made by the LSGA, similar types of functions are carried out by the DDC and municipality/VDC. The LSGA has not adequately defined the services and functions for DDC and VDC/municipalities, and since the DDC does not have a territory of its own the duplication is prevailing. The Local Bodies Fiscal Commission report, 2057 has documented existing functions and authorities among central government, DDC, VDC and Municipalities and has pointed out overlap of functions.5 Examples relating to allocation of functions between central government and local bodies and among all tiers of local bodies in the two devolved sectoral service areas are as follows (Table-3.4).

Table 3.4: Existing practices of allocation of function across level of government

Functions and Responsibilities CG DDC Mun. VDC

1. Education and sports development

Permission for running pre primary school with private resources

Recommendation for permission to open school or close them on priority

Assistance in management of schools in respective areas and recommendation for opening or closure

Management and supervision of schools in respective areas

Assistance in making primary school available in mother tongue

Assistance in supervision, monitoring and management of schools

Provision of scholarship for students of depressed committees

Implementation of audit and informal education programs

Operation and management of libraries/reading rooms

Development and implementation of sports programs

Formulating sports development committee

2. Relating to Health Services

Operation and management of Hospital, Ayurvedic Dispensary and Health Centers

Opening, operation and management of Health Post, Sub Health Post

Formulation and implementation of public health programs like family planning, maternity and childcare, extended inoculation, nutrition, population education and health education.

Provision for prevention of epidemics

Control or prohibition of public use of things harmful for public health

Control or prohibition of use and sale of edible objects harmful for public health

Inspection and monitoring of surgical equipment

Primary health education

Unclear functions in the LSGA

Some of the functions stated in the LSGA are yet to be sufficiently clarified between DDC and Municipality/VDC. Some of the unclear functions as it is provisioned in the LSGA are given in the table 3.5.

5 LBFC, The Local Bodies Fiscal Commission Report, 2000, page 29-33 (Nepali Version)


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Table 3.5: Key ambiguous areas of Functions between DDC and VDC/Municipalities

Service Sectors

Functions and Responsibilities Ambiguities in assignment of functions

Education The LSGA has assigned responsibility to DDC recommending and priority setting for establishment and dissolution of the schools in the District Development Area. Whereas the similar authority and responsibility is given to the Municipality within Municipal area.

Whether the recommendation of LBs is final or not is unclear in the LSGA

Whether the Issues of recommendation of establishment and dissolution of schools at municipal area falls under the authority of respective municipality or DDC, and the coordination mechanism among LBs and central agency is not clear.

Which tier of local body - DDC or VDC/Municipality - is responsible to recommend for opening and closing of primary, lower secondary and secondary schools is not clear.

The LSGA has allocated functions to DDC to supervise and monitor schools and assist in operation and management of schools within district development area and similar responsibility and authority is assigned to the VDC and Municipality for the schools of their respective areas

Issues of supervision, monitoring and management of schools are not adequately addressed in the LSGA. For example, what authority and responsibility do the respective LBs have for supervision and monitoring of schools vis-à-vis the role and responsibility for formation, monitoring and supervision of the school management Committee is not clear in the LSGA.

Similarly, role of DDC in monitoring and supervision of which level of school is not clear in the LSGA. Therefore, issues of monitoring and supervision of schools that are located in VDC and Municipality area is not clear.

Health The LSGA has assigned the function to operate and manage of Hospital, Ayurvedic Dispensaries, Health Centers, Health Posts and Sub Health Posts are allocated to all tiers of local bodies.

6

Classification of such health institutions is not clear.

Which level of local body is responsible for operation and management of health centers (whether it is DDC or lower level local bodies) is not clear.

Taxation and Sale

The LSGA has provisioned to impose tax by DDC on wool, turpentine, worn and torn goods, stones, slate, sand and stones, bone, horn, wing, leather, etc and provisioned for authority to sale sand in the rivers and canals, pebbles, stones, soil, wood swept by river etc. lying in the district development area.

The VDCs and Municipalities claim that they could better utilize and mobilize the resource if the authority and responsibility were assigned to them. It is also opined that the basis for sharing of 30-50% revenue generated from the mentioned areas is not justified and clear for them.

The lower bodies are willing to share the revenue to DDC

The role of VDC and Municipalities and coordination mechanism with respective lower level local bodies during performing this task is not clear in the LSGA.

Key ambiguous areas of Monitoring and supervision

Monitoring and Supervision

Section 210 of the LSGA has provisioned for a supervision and Monitoring committee at district level under the convener of the Member of Parliament.

Whether the committee is answerable to the DIMC or other is not clear in the LSGA. Therefore, the effectiveness of the committee has always been questioned in the past.

6 VDC to operate and manage village level health centers, health posts and sub health posts only.


39

Duplication of functions and authority for expenditure has been prevailed in other areas besides the service areas as mentioned in table 3.3 above. Addressing most of the issues raised above may not require amending in the LSGA, which can be addressed through policy and guidelines. However, the assignment related to tax collection of the said objects shall require amendment in the respective section of the LSGA.

Uncoordinated planning

According to the provision made on Local Governance Act, 2055 integrated District Development plan have to be made incorporating the plans of line agencies and civil society organizations. The plan should take basis of the VDC and Municipality plan while formulating.

The National Planning Commission sets the targets of district development on the basis of the District periodic plan and provides estimation of resources and necessary guidelines to the respective ministries. The LSGA has made provisions that the respective ministries should make available the estimation of means and resources, national development policy relating to that sector and priorities and other guidelines for coming fiscal year for formulating district plans and programs of local bodies. The line agencies are also envisaged as technical hands for LBs to assist in preparation of integrated plan of LBs. However, the practice is different than what is envisaged in the LSGA. In most of the cases the LBs and line agencies plan parallel. This has resulted in uncoordinated planning.

The clause 205 (3) of Act has provisioned that the district plan should be implemented through VDCs. It also leaves room for implementation through users committees and non-governmental organization also. In practice it is not properly done - the DDC and VDC are found to have formed different users committees for the same program they have co-financed, and they are found to be forming separate UCs for programs, such as school building where there is already a management committee.

Unconsolidated task assignments of LBs

The Local Self Governance Act has stated that the LBs should carry out the functions assigned by prevailing other laws7, besides the functions assigned by the LSGA. Functions mandated by other Acts to LBs are more of agency-functions such as making recommendation, be witnessed or be in presence or to certify for judicial and quasi-judicial activities. Most of these provisions have not devolved the authority and responsibility. Some of the functions delegated or causes to be delegated to local bodies are described in the Table 3.6 below.

7 Section 28 (K) (15), 96 (j) (26), 189 (p) (5) of the Local Self-Governance Act, 1999


40

Continuation of contradicting Acts

Many sectoral Acts are identified contradicting with the principles of decentralization and provisions and spirit of LSGA.

Acts contradicting with the LSGA

The following twenty-three contradictory Acts regarding with the effective implementation of the LSGA have already identified. Amendment proposal has been made in the respective Acts. HMG had tabled an amendment Bill to amend ten Acts out of the proposed twenty-three Acts in 20

th session of the parliament.

Due to the dissolution of the HoR the bill could not be passed from the parliament. Contradictions of other acts with the LSGA prevail yet. Currently a Decentralization Committee under the chairmanship of Chief Secretary including MLD and other major stakeholders has been working for making compliance of Education, Forest and Mines and Mineral Act as stipulated in the LSGA.

1. Statistics Act, 2015 (1958) 2. Cinema (Production, Show and Distribution) Act,

2026 (1969) 3. Local Administration Act, 2028 (1971) 4. Education (7th amendment) Act, 2028 (1971) 5. Public Roads Act, 2031 (1974) 6. Births, Death and Other Personal Events

(Registration) Act, 2033 (1976) 7. Land Revenue Act, 2034 (1977) 8. Soils and Watershed Conservation Act, 2039

(1982) 9. Natural Calamity (Rescue) Act, 2039 (1982) 10. Mines and Minerals Act, 2042 (1985) 11. Judicial Administration Act, 2048 (1991) 12. Local Bodies (Election Procedures) Act, 2048

(1991)

13. Sports Development Act, 2048 (1991) 14. Water Resources Act, 2049 (1991) 15. Vehicles and Transport Management Act,

2049 (1992) 16. Forest Act, 2049 (1992) 17. Electricity Act, 2049 (1992) 18. Environment Conservation Act, 2053 (1996) 19. Consumers Protection Act, 2054 (1997) 20. Animal Health and Animal Services Act,

2055 (1998) 21. Construction Enterprise Act, 2055 (1998) 22. Animal Slaughterhouse and Meat

Examination Act, 2055 (1998) 23. Solid Waste (Management and Resources

Mobilization) Act, 2044 (1987)

They have been persisting despite the fact that previous reports, studies have pointed out the contradictions between Acts and suggested improvements in them some 4 years ago, and commitments made by DIP to amend these in the first year of its approval at 2002.

A previous study has already identified twenty-three contradictory Acts regarding with the effective implementation of the LSGA8 (Box).

Previous reports focus more on identifying the contradiction in relation to authority of local bodies rather than overlapping functions and delegated functions to local bodies. Besides those acts recommended to be amended in line with the LSGA, some other Acts and provisions are also identified as allocating functions, responsibilities and authorities to local bodies. Some overlaps, contradicts or are inadequately defined among authorities. A comparative analysis of those major laws relating to allocation of functions and responsibilities to LBS has been made in the table 3.6 below. Many of the points presented in the table are also raised in the list of contradicting Acts mentioned earlier.

8 A study Report carried out by Legal Research and Service Center for DASU/Danida, 2000 for reform in Prevailing Laws in relation

to Effective Implementation of the Local Self-Governance Act, 1999.


41

Table-3.6: An Overview of Contradictory Acts in relation to Expenditure Assignment

Sector Functions/

responsibilities Contradictory Provisions laws Issues and problems

Education

Formation of DEC; major responsibilities of the committee is to formulate District Education Plan, coordinate, monitor and evaluate to VEC.

Education (seventh amendment) Act, 2028 has made the provision for formulation of district education plan by the DEC. The Act has not further elaborated the process of planning. The LSGA has provisioned for a plan formulation committee. DDC can form sub-committees in any sector as necessary. Therefore, the provision of the Education Act contradicts with the provision of LSGA in the preparation of integrated district plan of the sector.

It is not clear who (DDC or DEC) is the final authority. Confusion and conflicts prevailed whether the DEC should follow the participatory planning steps. Primary school devolution Guideline is silent in terms of steps and process of preparing the DEC, VEC and SMC plans and their coordination with LBs.

Establishment and provide assistance in making primary schools available in mother tongue

Act related to upliftment of Indigenous and Ethnic Communities gives the authority to the central agency open the schools of indigenous /ethnic language at primary level, LSGA has provisioned LBs to assist in making primary school available in mother tongue within their own area

The Act is silent in coordination with VDC and Municipality No procedures and process of opening primary schools in mother tongue are incorporated in the Primary School Devolution Guideline. Both the LSGA and the Act do not define role of DDCs.

Monitoring and Supervisions of Schools

Education Act has provisioned for supervision and monitoring of schools by SMC. It has made the provision for dissolution of SMC by either DEO of Regional Directorate and made it responsible to those institutions. LSGA has assigned the responsibility to LBs for supervision, monitoring and assistance in operation and management of schools. Though it has not explicitly defined the role and functions of LBs in this regard.

The VDC and Municipality do not have any say in the operation and management of schools SMC are responsible to regional educational directorate or district education officer. Weak institutional linkages and coordination between LBs and SMC.

Coordination in program implementation such as, carrying out informal education, adult literacy and scholarship to the children of disadvantage group.

Education Act has made the provision of carry out informal education programs. The same type of functions assigned to local bodies by LSGA.

Overlap of function among all institutions There is no integration at any level Plans and programs of GOs, NGOs, DDC are not integrated or coordinated with VDC/Municipality plan.

Sports Formation of Sports Committee at local level and formulation and implementation of plans and programs relating to sports development.

Sports Development Act, 2048, has provisioned to formulate Sports Development Committee at District level and no provisions are made to form the committee at Village and Municipality level. The LSGA has provisioned to form Sports development Committee at Village, District and Municipality level and responsible to assist local bodies to formulate sports development plans and implement in the local level.

Two separate structure for the same purpose. Issue of harmonization of the two Acts. Unconsolidated plan

Forest Plan formulation The Forest Act, 2049 has made provision to Overlapping of authority


42

Sector Functions/


and implementation of forestry, bio-diversity and soil conservation; and carry out functions relating to environment protection, promotion and afforestation

formulate overall national policy, plans. It has also stipulated to formulate working plans relating to national forest, forest managed by HMG, protected forest by MoFSC. The HMG Work Division Regulation, 2057 has provisioned to formulate overall policy and plans of forestry, bio-diversity and soil conservation and implementation thereof by the Ministry of Forest. The LSGA has assigned the similar promotional and development functions to DDC/VDC and Municipality.

and duplication of functions and resources between LBs and central government. The practice to unilaterally formulate sectoral plan by the central government offices is prevailing.

Utilization of forest products including sand, stones, pebbles, soil, in the forest area, wood swept by river, dry timber, fire wood, branches, splints, twigs and roots, etc.

Forest Act, 2049 has provisioned that the utilization of such forest objects should be done only after permission taken from government. District Forest Office manages Wood swept by rivers. Definition of national forest made in the Forest Act is vague and it covers all the fallow land and other land excluding private forest areas and land where no other person (natural or corporate) has right to utilize such objects laid down in that area. The LSGA has provisioned that the DDC can formulate management plan and sale forest products including sand, stones, pebbles, soil, in the forest area, wood swept by river of DDC area and VDC can generate its internal resource by selling of dry timber, fire wood, branches, splints, twigs and roots, etc in the VDC area.

The provisions of the Forest Act have limited the authority of local bodies in utilization of the forest products and objects laid down within forest area. No room for LBs to plan the resource utilization. Undefined forest areas for LBs to manage. No basis or and criteria for the utilization of the forest products.

Mines and Minerals

Sale of sand, stone, slate, soil and soil from public land

The Mines and Minerals Act, 2042 requires permission of central government for sale of sand, stone, slate, soil in any area of the Country. The LSGA has given the authority to DDC to sale of sand, stone, slate and soil of the DDC area and Municipality can sale the soil of any public land within Municipal area.

The Mines and Mineral Act has limited the authority of local bodies. Undefined criteria, policy and coordination mechanism.

Soil Conservation and Watershed management

Formulation of plan and implementation relating to soil conservation and watershed management

The Soil Conservation and Watershed Management Act, 2039 stated that the mentioned activities such as electrification within the watershed area, afforestation, other activities for soil conservation in the areas, etc should be carried out by the Watershed Conservation Officer. LSGA has provisioned for formulation and implementation of soil conservation programs and activities by VDC and DDC. The DDC could establish sectoral unit.

Weak coordination between two institutions in planning and program implementation in the context of separate provisions of the two Acts. Electrification in watershed management area contradicts with LSGA and other Acts as well

National parks and Wild life conservation

Utilization of forest products from National park and resource sharing

National parks and Wild life conservation Act, 2029 made provision for utilization of the forest products from national parks, protected areas, buffer Zone areas with coordination of LBs and sharing of revenue to the respective community. LSGA does not make any provision relating to this aspect.

No coordination mechanism for information and revenue sharing with LBs developed yet. Unclear procedure and criteria of revenue sharing to LBs Role of LBs in activities in the buffer zone is not clear

Physical Policy and plan HMG (Work Division) Regulation, 2057 Town Development


43

Sector Functions/


Planning and development

related to formulation, implementation of housing, settlement development, and land use

allocate functions to the Ministry of Physical Planning and Construction to formulate policy plans and implement regarding to residential areas, urbanization and town development. The Town Development Act, 2045 (1988) provisioned to form “Town Development Committee” either at village or town or Ilaka or regional level to implement town plan formulated by HMGN LSGA has assigned the functions to implement or cause to be implemented the residential, settlement and land use policies and plans by VDC/ Municipalities in the respective area

Committee is even working in the municipality areas doing the similar functions that the municipality supposed to do. Lack of coordination between municipality and Town Development Committee

Formulation and implementation of Housing Code.

Building Act, 2055 (1999) has provisioned for formulation of a “Building Construction Management Strengthening Committee” responsible for formulation of Building Code (Bhawan Sahnhita) and supposed to submit it to MoPPC for approval. The committee can delegate some of its authority to any Municipality, Whereas the LSGA has assigned functions to VDC and Municipality to prepare housing plan, criteria for house, approve design of houses or building,

The functions of the committee overlap with the function of local bodies. There is no provision for delegating authorities to VDC

Monitoring of implementation of the Housing Code

In accordance with the provisions made in the Building Act, 1999, the Building Construction Management Committee is responsible for all the plans and programs to be implemented. The Act has also provisioned that the committee can delegate some of its power/ authority to LBs. LSGA stipulated the role of the VDC and Municipalities to monitor of the implementation level of housing code.

Role of VDC/Municipalities in monitoring of housing code is not clear.

Construction License

Permission for Construction Enterprises License

The Construction Enterprises Act, 2055 has provisioned to provide contractor‟s license of any class by HMG. It stated that any person or company should seek permission for Construction (Contractor) License from the national construction Committee. Provided it is nor necessary of recommendation from construction committee to provide license for contractor of class “D ” The Local Bodies (Financial Administration) Regulation has provisioned that the DDC shall issue the contractor license for class “D” and renewal thereof.

Confusion prevailing that whether the HMG or DDC should issue the license of class “D” contractor.

Waste Management

Formulation of waste management and sewerage plan

Waste (Management and resource mobilization) Act, 2044 assigned the given function to the Solid Waste and Resource Mobilization Centre LSGA provisioned the same functions shall be carried out by the municipalities.

In reality all the functions are handling by municipalities, hence no significant role require for central agency VDCs are not given any function and authority

Road and Transport

Vehicle parking -arrangement of bus parks and parking places

The Vehicles and Transport Management Act, 2045 has made provision to arrange of bus parks or any other parking places in consultation with the local bodies The LSGA has provisioned to arrange or

Inadequate authority to municipality and DDC Task and authority are overlapped between


44

Sector Functions/


cause to be arranged bus parks and parking places by Municipalities and DDC can also make necessary arrangements regarding to means of transport operated within the district (including root permit- at present it is not explicitly provisioned in LSGA)

central government and local bodies.

Water Resource

Formation of Water Resource Committee; responsible to grant permission for the operation of water resource development and utilization plan

Water Resource Act, 2049 has provisioned for taking permission letter from district water resource committee for operation of any programs relating to water resource development. The LSGA has assigned functions to LBs to formulate plans and polices relating to utilization of water resources and carry out programs.

The Water Resource Act limits the role of DDCs, VDCs and Municipalities

Electricity Electricity survey, generation, distribution permission

Electricity Act, 2049 made the provisions for taking permission letter for survey, generation and distribution of electricity, but the LSGA has devolved functions to LBs to formulate plans, operate small hydro projects, survey, generate and distribute electricity and cause to be done the same. The Soil Conservation and Watershed Management Act, 2039 also provides authority to the Watershed Officer for electrification in the watershed area. Section (4) (G)

Inadequate authority to LBs Contradictions among the Acts

Health Opening, operation and management of Health Post, Sub Health Post; VHMC responsible to formulate and operate health plans and programs

The Sub Health Post Devolution Guideline, 2060 provisioned for devolution of authority to operate and manage of the Sub-Health post to the VDCs and Municipality as per the provisions of LSGA. It has also provisioned Sub-Health Post Management Committee for operation and management of the Sub-Health Post. Health Posts and health centers are operated by central government LSGA has provisioned for operation and management of Health Centers, Health Posts and Sub-health Posts by VDC.

No major contradictions The role of HMC and procedures for integrated VDC plan formulation is not clear. Inadequate clarity about the responsibility of VDC and HMC

Formulation and implementation of plans and programs relating to public health services, such as family planning, maternity, nutrition, etc.

LSGA has made the provisions for formulation and implementation of said plans and programs by all tiers of local bodies, viz. DDC, VDC and Municipality HMG (Work Division) Guideline also provide the same functions to the Ministry of Health

Functions are overlapped across level of governance. GOs, NGOs, LBs, COs alls sectors involved

Consumer protection

Control or prohibition of public use of inedible objects and things harmful for public health

The Consumer Protection Act, 2055 has made the provision to control and prohibit of public use of inedible objects and things harmful to the public health. The Act stated that the HMG could appoint or depute any officers as an Inspection Officer for the purpose. The LSGA has also provisioned to control or prohibit of public use of inedible objects and things harmful for public health by DDC and Municipality.

Overlap of function and authority Lack of coordination mechanism between District Level Inspection Officer and LBs


45

Sector Functions/


Information and Communication

Establishment of District Information and Records Center (DIRC) of data/information about the district

The Statistics Act, 2015 has made provision for taking approval from Central Bureau of Statistics to collect any data/information relating to financial matter. The data/ information must be certified by the CBS before its publication and sharing to other organizations LSGA stipulates DDC should maintain all data information relating to district. The Act has also provisioned of DIRC at the district level.

Inadequate authority to DDC Confusion as to what information to use for planning Unclear coordination mechanism between CBS and LBs Long gap for public to get updated and authorized data

Operation and maintenance of infrastructure, and utilities

Maintenance and Supervision of public goods, such as roads, electricity, petrol pumps, oil Dipo, drinking water sources, telephone booth, etc.

Essential Goods Protection Act, 2012 has provisioned to take care of the necessary goods by the nearest local bodies (VDC or Municipality or DDC) and District Administrator Officers as defined in the section 2 of the Act. LSGA has made the provision that LBs should maintain and supervise the projects, public goods that are made by them or transferred to them by any other institutions.

Duplication of authority between District Administrative Officer and LBs Unilateral assignment of tasks Compensation to LBs for such tasks is not clear

Special Programs

Carry out special programs and activities through de-concentrated structure, such as Poverty Alleviation Fund, Rural Water Supply and Sanitation Development Fund Board, etc.

Various laws relating to semi-autonomous institutions such as boards, committees, authorities authorize their functioning in LB territory. Their planning and program implementation modalities vary. A few examples are given here: Section 3, (kha) of the Regional Development Plans (implementing) Act, 2013 provisioned to Construct necessary ways, GHAT (embankments), Canals and carry out other functions in the stated area as per the Act. Section 6 of the Act states supremacy of its provisions over any other acts or provisions RWSSFDB implements its programs through SOs without coordination with LBs PAF program implementation modality disregards LBs role LSGA has envisaged integrated plan of each tier of local bodies and carry out plans and implement.

Functions are overlapping LBs role and authority undermined

Social Welfare/ Disable Protection

Formulate Plan and implement programs relating to disabled persons

Disable Persons Protection and Welfare Act, 2039 has provisioned to establish an "Orphanage Service Coordination Committee" to formulate plans and implement programs relating to disable protection and promotion. HMG may appoint a "Social Welfare Officer" at district level to implement the said plans and programs The ministry may delegate some of the activities either to the local bodies or social welfare institutions at implementation level. The LSGA has assigned responsibilities and functions to formulate plan and policies by LBs in promotion and protection of the condition of disable. LBs could form their own sub committee in such a matter for social welfare proposes.

Overlap of functions No mechanism envisaged to coordinate in planning and program implementation Two district level structure for similar purpose


46

Sector Functions/


Culture/ Indigenous and ethnic community

Formulate plan and implement programs relating to development of indigenous and ethnic community

The Act related to indigenous and ethnic community upliftment has provisioned various functions such as, formulation and implementation plans for protection and promotion of language, script, literature, history, art, culture, traditional skills and technology of respective indigenous or ethnic community. Collect and manage information relating to indigenous community. Carry out special programs to uplift economic and social standards of disadvantage group of the community LSGA provisioned for formulating plans and implementation of plans and programs relating to promotion and protections of culture, collect data information, update and keep in District Information and Record Centre

The provisions stated in the Act overlap with the functions of LBs. Unclear modality of planning, implementation and coordination with local bodies

Land Use and management

Acquisition of immovable property

Immovable Property Acquisition Act, 2013 has stated that the HMG can pool land and building for public good, facilities and use. The LSGA has allocated functions to local bodies such as construction and extension of public road, prepare and implement housing plan, etc which requires land pooling authority and hence the authority for land acquisition is given to the local bodies, which the local bodies have to make it happen through central government.

Inadequate authority to set out the procedure locally under broad framework provided by the centre No coordination and reporting mechanism spelt out

Social welfare

Support in implementation of the Social Behavior Reform Act

Social Behavior Reform Act, 2033 has allocated responsibility to VDC and Municipality to orient and convince people that not to carry out the activities prohibited by the Act. It has given the responsibility to LBs to inform the District Administrative Office in case of violation of rules. It further stated that if the representatives of LBs do not comply with the rules, it will be considered as violation of code of conduct and shall be liable for additional punishment. LSGA has not made any explicit provisions for compulsory formulation and implementation of Code of Conduct by LBs. However, LBs shall formulate Code of Conduct for LB representatives as provisioned in the DIP

Effective implementation of the Act is lagging behind. Compensation to LBs for carrying out such functions undefined

Vital registration

Carry out functions related vital registration

The Birth, Death, Marriage Registration Act, has provisioned to a "Registrar" deputed by HMG under this Act. LSGA has provisioned that the VDC and Municipality shall carry out functions of registration of birth, death, marriage and etc in the respective area.

Contradictions in Act Unclarity prevails as to whose responsibility is this Unclarity about compensation to LBs for carrying out the function


47

Sector Functions/


Financial procedure

Responsibility of budget and programs carried out by LBs.

Financial Procedures Act, 2055 has made the secretary of the ministry responsible for overall financial management affairs of the Ministry and subordinate department/offices including spending of funds, preparation of financial statement, getting accounts internally and finally audited. The LSGA has provisioned that the respective council will be responsible in planning/ programming/ budgeting and the LB secretary is the key personnel made liable for the overall financial management affairs.

Inadequate provisions for the direct release of budget authority and funds to local bodies, the secretaries of the line ministries are still responsible for the budget and programs allocated to LBs.

Weak fund flow and financial control system

Along with functions and responsibilities, budget allocation and flow of fund procedures are important aspects to be considered for the effective decentralized governance. The Financial Procedures Act, 2055 deals with provisions relating to budget formulation, budget release, spending of funds, internal control and auditing. The Act has not, however, prescribed any special or separate provision relating to the budgeting and fund release procedures applicable to different tiers of LBs.

Existing Procedure for Budgeting and Fund Flow

The Ministry of Finance (MoF) is responsible for the preparation of budget for regular activities and development programs of the government. The Act has made the secretary of the ministry as the "responsible officer" for the overall financial management of the ministry and offices subordinate to it. According to the Act, the MoF is to provide authority for spending to the concerned ministry, which then provides such authority to the Department Chief. The authority then moves down to the subordinate offices from the department chief. The Act requires the MLD to provide statement relating to foreign debt, grant and support received by LBs to the MoF.

The Act has also clarified that the term "Secretary" as defined in the Act means the secretary of the ministry, secretary or administrative chief of the Constitutional Bodies, secretary of any Commission and Secretariat of the central level.

The Act has designated the secretary as the officer responsible and flow of budget authority can be affected only to subordinate departments and offices. The LSGA has, however, specifically provided that the LBs should keep contact with HMG through MLD and they may have direct contact with other ministries in respect of budget and program.9 The existing practice of flow of budget authority from the line ministries to the DDC in the case of devolved sector functions are not in conformity with the Financial Procedures Act.

9 Section 240 of the Local Self-Governance Act, 1999


49

CHAPTER IV

Status and Issues in Sector Devolution

The present chapter describes the current status of sector devolution, reviews the sector guidelines and investigates some of the overriding issues in the process. The chapter further examines the national minimum standards set in the devolved sectors and analyzes the existing institutional arrangements and implementation mechanism.

4.1 Selection of Sectors for Devolution

The Local Self-Governance Act (LSGA) 1999 has envisaged devolution of authorities and responsibilities and resources to the local bodies as one of its fundamental principles. Local Self-governance Regulation (LSR) 1999 and Local Bodies (Financial Administration) Regulation (LBFAR) 1999 are the operational tools to implement the overall process of decentralization to local bodies in Nepal. In order to oversee the decentralization process put into practice as contemplated in the LSGA, a high-level Decentralization Implementation and Monitoring Committee (DIMC) is established. This Committee has adopted a Decentralization Implementation Plan (DIP) with an objective to operationalize the provisions of LSGA. The DIP has identified education, agriculture, health and postal services as the initial sectors for devolution to local bodies. The budget speech of HMG/N for fiscal year 2001/02 also reiterated the commitment of the government to devolve the said services.

The devolution process has started in all the sectors excepting postal services. The devolution of postal service could not take place owing to some technical reasons. Accordingly, the hand-over guidelines/manuals were prepared for the devolution of sub-sectoral tasks and responsibilities to the local bodies/management committees. Based on the experience of implementation, the guidelines are being reformulated and updated. The sector/sub-sectors/functions chosen at present are the ones for immediate devolution. At this stage, it is expected that more and more sector/sub-sectors will be brought under the scope of devolution.

Devolution of Agriculture and Livestock Extension Services: The Ministry of Agriculture and Cooperatives (MoAC) decided to devolve district level agriculture and livestock extension services to DDC in all 75 districts of the country with effect from fiscal year 2002/03. The agriculture extension programs subjected to devolution included sub-functions such as programs to:

Increase the production and productivity of cereals, vegetables, cash crops, fruits, lentils, and oils.

Collection, updating and sending of data to related institution of farming area, production and productivity of crops produced in the district.

As planned, the process of devolution of selected functions and sub-functions in the agriculture sector were completed by the fiscal year 2002/03. A comparative statement of development budget allocated in agriculture sector and those for devolved functions for the fiscal year 2002/03 and 2003/04 is provided in Table 4.3.

Devolution of Primary Health Services: Since the establishment of SHP in 1992/93 as the lowest health service outlet by 1999/2000 altogether 3179 sub-health posts were established spreading over the VDCs across the country. The remaining VDCs had a health organization of some type already established within their territory. Ministry of Health (MoH) decided to devolve the management of sub-health post (SHP) and primary health services from fiscal year 2002/03 by handing over Sub-health Posts to Sub-health Post Implementation and Management Committee (SHPI&MC) especially established for the purpose.

The SHPI&MC is constituted under the chairpersonship of VDC Chairperson and includes 8 other members including Chief of local health organization as the member secretary.


50

National Guidelines Regarding Hand-over of Sub-health Post to the Local Body 2002 issued by His Majesty‟s Government, MoH has made the SHPI&MC responsible for all aspects of management including the quality of health services provided by SHP.

Current Status: The hand-over of health service outlets to SHPI&MC started from the fiscal year 2002/03. In the first year, 472 SHPs spread over 12 districts and 595 VDC were selected for hand-over. Of this, the 468 SHPs were actually handed over which did not include 3 SHPs of Bhaktapur district. During 2003/0410, additional 764 spread over 1411 new districts and SHPs, one PHC and 2 HP from the group of 12 districts selected for devolution during fiscal year 2002/03 are also planned for hand-over. Out of this, 492 SHPs have already been handed over till 13 March 2004.

The districts covered for hand-over of SHP, HP and PHC by the end of fiscal year 2003/04 were 26. Out of 1,239 health service outlets planned for hand-over by the end of 2003/04, 960 were handed over till 13 March 2004. The current status of devolution of health service facilities at the national level and in the surveyed districts is presented respectively in Table 4.1 and 4.2. A comparative statement of development budget allocated in health sector, SHPs and those for SHPs planned for hand-over during the fiscal year 2002/03 and 2003/04 is provided in Table 4.3.

Devolution of Primary Schools: Under the Education Sector, devolution of primary schools to SMC (SMC) started from fiscal year 2002/03. This preceded the issue of Operational Manual for Community Management School by the Ministry of Education and Culture (MoES) in 2002. According to the Manual, the primary schools have to fulfill following criteria in order to become eligible for hand-over to SMC:

- Obtaining grants from HMG/N on a regular basis,

- The school is the one, which is operated by the SMC formed under the provision of Education Act,

- The institution managing the school at present (VDC, Municipality or SMC as the case may be) has given consent to operate the same by the community, and

- Meeting of parents of the school have given consent to operate the school by the community.

Current Status: Of the total number of about 26,000 primary schools in the country, which would be eligible for hand-over to the communities, the government has planed to complete the hand-over of 1,500 schools by the end of fiscal year 2003/04. Of this, 724 schools have been handed over as on 10 March 2004, which constitutes 2.78 percent of the total schools and 48.27 percent of those, planned for fiscal year 2003/04. This includes 20 senior secondary, 44 lower secondary and 660 primary schools.

The current status of devolution of schools at the national level and in the surveyed districts is presented in Table 4.1 and 4.2. The statement of regular budget allocated in education sector, primary education sub-sector and estimated allocation for primary schools handed over to communities during the fiscal year 2003/04 is included in Table 4.3.

10

As of 13 March 2004

11 Till 13 March 2004, none of the SHP in Illam, Kavre, Rasuwa, Surkhel has been handed over. Some SHPs of

remote VDCs of Dhanusha and Sarlahi were yet to be handed over.


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Table 4.1: Status of Devolution of by Type of Services and Year at National Level

Services Devolved 2002/03 2003/04* Total

A. Health

i. No of Districts Covered 12 14** 26

ii. No of VDC Covered 595 867 1462

iii. Total SHP in the District Covered 472 767 1239

iv. No of SHP Handed Over 468 492 960

v. % of SHP Handed Over to SHPMC

B. Education

i. No of Districts Covered 40 40

ii. No of Primary Schools (Public)

Handed Over to SMC

660

660

* As of 13 March 2004

** Till 13 March 2004 none of the SHPs in Illam, Kavre, Rasuwa and Surkhet were handed over. Some remote SHPs of Dhanusa and Sarlahi were also yet to be handed over.


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Table 4.2: Status of Devolution in the Sampled District

Services Devolved Name of the Sample Districts

A. Health Morang Saptari Makawanpur Kavre Kathmandu Kaski Syangja Mustang Rupandehi Banke

No of VDC Covered 65 47 69 46

Total SHP in the Covered District 49 103 Service not Devolved

Under Consideration for Devolution

Service not Devolved

34 Service not

Devolved

Service not

Devolved

58 35

No of SHP Handed Over 49 103 34 58 35

% of SHP Handed Over to SHPMC

B. Education

No of Primary Schools Handed Over to SMC 23 Service not

Devolved

9 21 3 37 35 Service not

Devolved

5 20

One Primary Health Post and two Health Posts are in consideration for devolution in Morang, Sunsari, Jhapa, Chitwan, Lalitpur, Bhaktapur, Mohattari, Kapilbastu, Kaski, Rupandehi, Banke and Kanchanpur Districts in the fiscal year 2003/04.


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Table 4.3: Allocation of Budget by Sectors and Devolved Functions

(Figures in Rs. '000)

S. No. Sector/Function Fiscal Year

2002/03 Fiscal Year

2003/04

Deviation from

Preceding Year (%)

A. Total of Agriculture Sector

2,256,732

2,296,736 1.77

B. Agriculture Extension

456,489

451,456 (1.10)

C. Livestock Extension

223,250

290,720 30.22

D. Total of Devolved Function of Agriculture Sector (B + C)

679,739

742,176 9.19

Allocation on Devolved Functions as a % of Total Sectoral Budget (D/A X 100)

30.12

32.31

E. Total of Health Sector

2,701,898

2,856,298 5.71

F. Allocation for SHPs Planned for Handover during the Fiscal Year

135,425

399,170 194.75

Allocation for SHPs Planned for Hand Over to Committee as a % of Total Sectoral Budget F/E X 100)

5.01

13.98

G. Total of Education Sector (Regular)

11,055,611

11,244,801 1.71

H. Total of Primary Education Sector

5,831,000

5,759,930 (1.22)

Allocation on Devolved Functions as a % of Total Sectoral Budget

52.74

51.22

I. Estimated Allocation for Primary Schools Handed Over to SMCs NA

146,214 NA

J. Estimated Allocation for Handed Over Primary Schools as a % of Total Sectoral Budget K/I X 100) NA 1.30 NA

Source: HMG/N's Budget (Red) Book and Budget Speech of Fiscal Year 2002/03 and 2003/04

4.2 Remarks on the Steps Followed in Sector Devolution

Following the identification of education, agriculture, health and postal services in the DIP, HMG/N, through budget speech of fiscal year 2002/03 announced its intention to devolve these services to local bodies. The devolution of agriculture and livestock extension services to DDCs of all the 75 districts took place at one go during that fiscal year with the issue of “Agriculture Related Devolution Working Procedures, 2059”. It is apparent that the devolution took place by the formal decision of the central government and no effort seemed to have been made to seek the formal agreement/understanding of DDCs in the matter.

National Guidelines Regarding Hand-over of Sub-health Post to the Local Body 2002 issued by HMG/N has made the SHPI&MC responsible for all aspects of management including the quality of health services provided by SHP. The hand-over of SHPs to SHPI&MC started from the fiscal year 2002/03 with the constitution of SHPI&MC under the chairpersonship of VDC Chairperson. The formal hand-over was preceded by orienting the members of the Committee on different aspects of devolution and on their roles and responsibilities following the hand-over. The hand-over is being carried out on a phase


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wise manner and as of 13 March 2004, some 960 SHPs of 26 districts constituting about 30 percent of the total number of 3179 SHPs have already been handed over.

The hand-over of primary schools to the communities is somewhat cumbersome and requires completion of long procedural formalities before the actual hand-over. This could be the reason why only 44 percent of the school hand-over planned for fiscal year 1,500 had taken place till date. In view of the present progress made in the hand-over, it would take many years to complete the hand-over of all the primary schools in the country estimated to be in the range of 26,000.

In order to become eligible for hand-over, the Guidelines require the primary schools to fulfill certain pre-conditions12 as set out in Clause 3 of the Guidelines. To initiate the hand-over process, the Department of Education calls for a preliminary application in the prescribed form from among the local bodies or SMCs. The District Education Office makes an initial scrutiny of the applications and forwards the same with recommendations if the particulars mentioned in the application are found correct. The Department of Education then grants a preliminary permission to operate the school by the community on the recommendation of a five-member committee constituted under the coordinator ship of the Director, Department of Education13. The District Education Office then enters into an agreement with the local body or SMC, as the case may be after submission of application for the same by such body or SMC.

4.3 Review of Sector Devolution Guidelines

Process review of the devolution of services was carried out for health services by MOH in 2003. Likewise, process review of the devolution process of three sectors was carried out by DASU in 2003. Both the reviews have documented major issues in the devolution process. The present study also confirms their findings.

A general review of all the sector guidelines/manuals and processes followed prior to and subsequent to devolution showed a number of inadequacies, inconsistencies and unclarities, which are highlighted below.

General Review of all Sectors:

The Sectoral Guidelines/Manuals do not reflect the vision of the government in the devolution of tasks/functions within the sector to LBs. There is no indication in the Guidelines regarding the potential sectoral services/functions, which can be devolved in the foreseeable future or in the long run.

In respect of all the sectors subjected to devolution, the Sectoral Guidelines do not provide any mechanism should any dispute arise in the implementation of devolved sector/sub-sector/functions.

The Guidelines do not provide any mechanism or bases for the determination of the size of financial compensation which the DDC or committees would be entitled to after devolution of specific service delivery function to them. This could form the bone of contention between the central government and local bodies/committees in future.

Guidelines/Manuals are not clear. They are silent in several provisions of staffs hiring firing, transfer and promotion.

The ultimate user of the manual is not clear

Management committees are not given adequate responsibility and authority.

12

The pre-conditions are: School be the one receiving grant from HMG on a regular basis, SMC formed as per Education Act, consent given by VDC/Municipality/SMC and meeting of parents to get the school run by the community.

13 During interaction on the draft report of the study, it was clarified from MoES that the process of granting

permission for the handover of primary schools has been shortened with the delegation of authority to the DEO.


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No authorities have been given to VDC, nor its role defined clearly. Guidelines are unclear regarding what DDC should do and also the new role of line agencies has not been clearly identified.

Guidelines does not speak about the norms and standards required for the quality of service to be provided.

Review of Agriculture Sector Guidelines:

Devolution up to whom? In the case of agriculture and livestock extension services, the responsibilities for carrying out specific tasks at present are given to DDCs. The service centers of these line agencies are VDC based. Without in any way involving the VDCs and service centre not devolving, it is difficult to imagine how the DDCs could implement these tasks even with adequate resources and manpower. In order to make the service delivery more efficient and cost effective, VDCs should be the agencies responsible to oversee the implementation of these activities within their territory.

Currently, agriculture and livestock extension services are devolved to DDCs and they are being made responsible for planning, monitoring and evaluation of the activities carried out in these sub-sectors within the district. The DDCs, however, neither possesses manpower with required skills to perform these tasks, nor have the line ministry provided resources for the same. Clearly, this is a case of unfunded mandate passed on to the DDCs.

Review of Health Sector Guidelines:

The Guidelines lack clarity in several aspects of devolution. It has not prescribed any tenure for the elected members of SHPM&IC.

The Guidelines states that emergency services will be available round the clock in SHP, HP & PHC but does not clarify how this will be ensured. Therefore, this provision does not appear practical.

The Guidelines has also included non-medical activities under the scope of work of the SHPM&IC. Activities such as checking adulteration in food items, controlling indiscriminate use of pesticides and maintaining hygiene in hotels and restaurants have also been specified as the scope of work management committee.

In the spending of budget of SHP, the VDC chairperson or the person appointed by him and the VDC Secretary operate the bank account. Article 28 (g) of the LSGA also requires the VDC to operate and manage sub-health post. In addition, the Sub-health Post Hand-over Guidelines also make it necessary to VDC to take care of the repairs and maintenance of this health institution. It is thus apparent that the Guidelines have failed to differentiate between the provisioning and production role, which the VDC is expected to play in the process.

Review of Primary Education Guidelines:

The Sector Devolution Guidelines does not contain any provision to involve the local bodies. It has not envisaged any direct role and responsibility to these bodies in the devolution process.

Prior to the devolution of primary schools, the central government used to provide and fund the cost of salary of minimum of 3 teachers irrespective of the number of students. Provided the number exceeded 135, the quota of teachers approved and funded was one teacher for additional 45 students. Multi-grade teaching is practiced in case the number of classes exceeded the number of students. After the hand-over of primary schools to the communities, the number of students in the schools might go up or down. The guideline is silent whether the government will adjust the number of approved teachers based on the increment/decrement in the number of students.


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The Guidelines has specified that it is the SMC, which has the authority to permanently recruit the teachers in the community, managed primary schools. It does not, however, indicate in clear terms that it is the central government, which will continue to bear the financial liability on account of salary and pension of such permanent teachers. There is thus a fear among the local people and teachers' community that once the primary schools are handed over; the responsibility to bear such costs will fall on the SMCs.

It is the policy of His Majesty's Government to provide free education to primary level students although the schools were charging fees to the students in one name or the other. The Guidelines is silent as to whether the community handed over schools will be entitled to levy any fee to the students or not.

A lump sum grant of Rs. 100,000 is provided to SMC of the community handed over school. The Guidelines does not clarify on what activities the community managed schools should spend/invest the lump sum grant of Rs. 100,000.

HMG/N has been using the loan and grant received from donors to fund the construction cost of primary schools and to equip them with furniture and equipment. It is not clear in the Guidelines whether the central government will be a party to bear such cost in future especially in the case of primary schools handed over to the communities.

Recurrent cost on a regular basis is also required to operate and maintain the primary school buildings handed over to the communities pursuant to the agreement entered into between the SMC and District Education Office. The Guidelines does not indicate the commitment and will of the government to bear such cost in future.

4.4 Institutional Set-up, Implementation Mechanism and Linkages

4.4.1 Agriculture and Livestock Extension Services

The service centers shall undertake actual implementation of the program related to agriculture and livestock extension service devolved to DDC. There are no pre-condition for devolving these tasks to DDC and the functions selected for devolution were entrusted to all the DDC starting in the fiscal year 2002/03. In the functions devolved in the sector, the DDC is required by LSGA to form Subject wise Plan Formulation Committee (SWPFC) for Agriculture. The Guidelines has entrusted the task of quarterly and annual evaluation and review of the performance level, work efficiency, outputs and results to the DDC in which the SWPFC will play an important role. In addition to this, District Agriculture and Livestock Office (DALO) is also made responsible for developing a system of regular monitoring and evaluation of the programs that are implemented within the district.

In respect of the devolved services, the Guidelines also requires the DALO to carry out important responsibilities such as formulating the program taking into account the central guidelines, assisting the DDC in preparing periodic plan and implementing the approved programs in cooperation with DDC

4.4.2 Primary Education

Under the scheme of devolution of primary schools to the communities, the SMC has a prominent role to play. The SMC has been entrusted with authority and responsibility to perform a number of functions including the appointment of head teacher and teachers from own resources of the school and monitoring and evaluating their performance. SMCs are also authorized to enter into an agreement with any governmental or non-governmental organization and other agency for the benefit of the school and to form subject wise sub-committees in different areas of school administration, physical construction and monitoring and evaluation. The guideline has conceived the meeting of parents as the general assembly to which the SMC will be responsible.


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The Guidelines does not suggest a formal mechanism to convene the meeting of parents; nor does make a permanent body by specifying the membership procedure. The Guidelines empowers such a meeting to approve the bye-laws for educational, financial and personnel management of the school formulated by the SMC. In addition such a meeting shall also have authority to:

- Select member of the SMC, the meeting of parents, members of he teachers and parents association and to represent the parent in the monitoring committee (in the subject wise sub-committee)

- Grant consent to the management of a school by the community

- Evaluate the working progress of the school

- Monitor the activities proposed by the SMC and carried out

In terms of inspection, monitoring and evaluation, the SMC and DEO have been given power to monitor the performance of head teacher and SMC respectively. Furthermore, the monitoring committee formed by the meeting of parents is to monitor and evaluate: i) progress of the school, (ii) quality of teaching and learning in the school, (iii) fixation of fees in the school (for the lower secondary and secondary education) (iii) regularity of students and teachers and (v) efficiency of the SMC and head teacher.

4.4.3 Sub-health Posts

The Guidelines on Health requires the formation of a 9-member SHPI&MC to be chaired by the VDC Chairperson to manage the SHP. The SHPI&MC is made responsible for all types of management including the quality of health services. It is not clear from the Guidelines to whom the SHPI&MC is accountable. Under the "Role of VDC", the guidelines require the VDC to provide guidelines to the SHPM&IC to plan a time bound integrated project and to take care of the repairs and maintenance of the SHP.

4.5 Autonomy and Responsibility

In the case of devolved functions, autonomy of local bodies or committees established for the purpose of operating and managing the services refer to a situation wherein these bodies/committees would be able to provide services of required quality and quantity based on the local needs without any constraint.

The devolution of selected functions in agriculture sector up to DDC without involving VDCs in any way makes it very difficult for the implementation, supervision, monitoring and evaluation of the activities carried out. In addition, the cut in budgets after devolution and a comparatively high proportion of salary component in the extension service budget as compared to the 'real' program budget is forcing the DDC to provide additional funds from its own block grants/internal resources. As a result, the DDCs are forced to bring down the level of service provision as compared to the period prior to devolution. These factors are severally affecting the autonomy aspects and these are clear instances of under-funded mandates imposed on DDCs by the center.

In relation to devolution of primary schools, the DDC, Municipality and VDC have not been directly involved. Their involvement is limited to passing a resolution for the hand-over of primary schools to the community run by them at present. This provision is against the spirit of LSGA, which authorizes the Municipality and VDC to supervise and manage schools and the DDC to plan, supervise, assist and monitor education in the district. These situations have severally eroded the autonomy and responsibility granted to some extent by the LSGA to the local bodies.

In the health sector, the role and responsibilities of VDC in relation to the SHP has not been clearly defined and specified in the Guidelines. Section 3.2 (b), (c) and (d) of the Guidelines require the VDC to set aside funds for health services and also given responsibility to raise funds for the purpose. It also requires the VDC to take care of the


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repairs and maintenance of the sub-health post. It is apparent that these types of unfunded mandates would adversely impact upon the autonomy of the local bodies.

4.6 Legislative and Regulatory Framework

Local Self-Governance Act 1999 is the legislative and regulatory framework around which the devolution of agriculture and livestock extension services revolves. Clause 6 of the Guidelines provides that the plan should be implemented as per the Act and Local Self-Governance Regulation 1999. Clause 7 of the Guidelines has made it mandatory to maintain the accounts as provided in LBFAR and follow the auditing procedures as stipulated in the same regulation.

In regard to matters not provided in the Operational Manual for Community Managed Schools, the Education Act 1972, Education Rules 2002 and Teachers Service Commission Rules 2000 are applicable. This has been clarified in Clause 17 (1) of the Manual. According to the Act, the District Education Committee formally approves a District Education Plan. In the case of teachers permanently appointed under the Act, the Guidelines guarantee their facilities in terms of those provided by HMG/N to the teachers of primary schools (not handed over to the community) from time to time.

The Health Sector requires the SHPs to maintain the accounts as per Article 69 of the LSGA and Appendix 2 of LBFAR.

4.7 Planning and Selection of Programs

In the agriculture and livestock extension services, DDC is the authority responsible for the preparation, approval, implementation and monitoring and evaluation of district level annual programs with the assistance of DALOs. In the preparation of annual plan related to the devolved functions, the same participatory approach of involving VDCs and line agency personnel in the process is followed.

The selected programs have to be passed by the annual meeting of District Development Council. The DDC is authorized to prioritize the programs provided the actual budget allocated to it is different from the previously estimated ceiling. The Guidelines makes it mandatory to consult the Agriculture Development and Livestock Service Office before making any decision.

The Seventh Amendment to the Education Act has provided for the constitution of a District Education Committee represented by a number of district officials. It also provided for the establishment of similar Village Education Committee composed of local personnel. The Education Act has empowered the District Education Committee to approve the District Education Plan and Village Education Committee to monitor and promote education. These provisions are against the spirit of LSGA, which has given certain authority to VDC and DDC in the planning, supervising and monitoring of the education in the district and village level.

In the case of SHPs, the district health office or the hospital, as the case may, does the planning which is required to be presented to the District Council for approval.

4.8 Flow of Fund

The block grant representing the budget to implement agriculture and livestock services programs in the district is routed through DDF which then automatically provide the entire budget available to the line agency for implementation. The Guidelines issued specifies that the concerned office will implement the approved programs under the accountability of the DDC. The following arrangement of flow of fund applies in the case of devolved

functions of agriculture and livestock sector: MOA&C DDFDALO.

There are conflicting provisions in the Health Sector Guidelines regarding the manner in which the flow of funds is to be channelized from the center to district and on to the SHP. Section 3.1 of the Guidelines specifies that MoH is to provide grants to DHO while under


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the provision made in Section 1 of the "Roles and Responsibilities of DDC and Health Organization", the DDC is required to send the funds to VDC directly by informing DHO. VDCs request funds for the sub-health post on a trimester basis.

The SMC is released budget on a trimester basis. The usual process of fund flow involves budget authority provided from Department of Education to LDO. The release of budget is routed through DDF to DEO and then to Community Managed Schools.

4.9 Accounting and Auditing

All the sectoral guidelines and manuals require the maintaining of accounts relating to fund spent on devolved functions as provided in LGFAR. It was, however, found in the case of agriculture and livestock sector that the budget is automatically routed through the DDF and authority to spend the entire funds available are provided to the concerned line agencies. In the event, it was very difficult for the line agency to maintain separate set of accounts for the devolved functions under LSGA and those of the remaining functions under the central regulation.

In practice, the Agriculture and Livestock Service Offices are therefore maintaining books of accounts based on central financial regulation. Furthermore, the internal auditing of the funds spent is being undertaken by the DTCO although as per the LSGA, the internal audit section of the DDC is required to conduct such audit. In order to carry out the final audit under the banner of DDC, the consolidated financial statement of DDC should also include the line agency expenditure related to the devolved functions. It is difficult to imagine that the DDC will agree to get the final audit of funds spent by the line agency in its name. The final audit of devolved sector budget is therefore being conducted by the Auditor General Office as the central budget and not in the form of DDC budget.

The CMS and SHPs are required to maintain books of accounts as prescribed in the LGFAR. The provision relating to the audit of CMS requires that the registered auditor listed with the Regional Directorate and appointed by DEO carry out the final audit of the accounts of CMS. The SHPs are required to get their accounts internally audited by DDC and finally audited by AGO as in the case of agriculture and livestock service extension program. The situation of non-compliance of these provisions is also prevailing in SHPs due to obvious reasons.

4.10 Mechanism of Monitoring and Evaluation

Agriculture and Livestock sector guidelines has envisaged monitoring and evaluation role to VDC at the rural level, DDC members at the ilaka level and Subject-wise Plan Formulation Committee at the DDC level. In addition, DDC is required to carry out quarterly and annual evaluation and review of the performance level, work efficiency, outputs and results of the development activities. The Guidelines has entrusted the task of developing the system of regular monitoring and evaluation of the programs implemented within the district to District Agriculture and Livestock Office. The programs of national importance and special importance at the local level are to be regularly monitored by the ministry, departments and regional directorates.

According to the Health Sector Guidelines, the devolved functions are to be monitored and evaluated by the District Health/Public Health Office. It is also required to submit monitoring and evaluation reports to the region and centre on a regular basis. The guidelines require the DDC to carry out inspection to ensure that the local health institution is properly following the policies and guidelines issued by it from time to time.

The Operational Manual for Community Managed Schools requires regular monitoring of the head teacher by the SMC and the SMC by the District Education Office. In addition, the monitoring committee formed by the meeting of parents is also made responsible to monitor and evaluate the efficiency of the SMC and head teacher. The Manual has also given exclusive authority to this committee to undertake monitoring and evaluation in such


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matters as the progress of the school, quality of teaching and learning, fixation of fees for lower secondary and secondary education and regularity of the students and teachers.

4.11 Reporting Requirements

According to Agriculture Sector Guidelines, the District Agriculture and Livestock Office is required to regularly report to the DDC on the tasks completed in devolved activities. It is also needed to submit reports in the prescribed format to the NPC, ministry, department and regional directorate. Besides, progress made on national priority projects is also the subject matter of reporting to the ministry, department and regional directorate.

The Health Sector Devolution Guidelines requires the health institution handed over to submit report of cash and kind receipt from HMG/N and funds received from other agencies to the DDC, District Public Health Office and DTCO. The institution is also needed to submit a statement of budget release received from the DTCO on the recommendation of DDC on trimester and annual basis. It is also to report to the concerned agencies on the health program and activities based on the records maintained as per the management information system. The Guidelines also requires the Primary Health Care Centre to prepare consolidated monthly report of the activities of health posts and its own and submit the same to the District Health Office. The Guidelines has also given responsibility to the VDC/Municipality to submit integrated plan of its area to DDC through the District Public Health Office.

According to Operational Manual on Community Managed Schools, the District Education Officer is responsible to report to the ministry whether a school has been operating its business as per the agreement entered into or not. The Guidelines also require the SMC of to submit statement of its income and expenditure and education achievements to the meeting of parents.

4.12 Human Resource and Service Issues

In the agriculture and livestock extension services, the central staffs are being deputed to implement the devolved functions till the formation of local service commission. These staffs have dual responsibility towards the DDC for implementation of the activities related to devolved functions and towards the central government for their personnel administration and career development. Being the central staff deputed under the control of DDC for the time being, the DDC has no authority to hire and fire them or to punish and reward them based on their performance. Similar is the case with the staff manning the SHPs at present. The Health Sector Guidelines (Clause 2) specifically mentions that the employees working in the SHP will be sent on duty until the formation of local service commission.

The Education Sector Guidelines has given authority to SMC to appoint teachers from the resources of the school from among the persons who have obtained a teaching license through competition. The Guidelines has, however, given authority to DEO to transfer the teacher from one school to another within the district on the unwillingness of a permanent teacher appointed under Education Act or on the recommendation of the SMC owing to some valid reasons.

4.13 Role of Central Government, Regional and District Offices, DDC and Municipality/VDC in the Implementation

Agriculture and Livestock Extension Sector: In the devolved functions of agriculture, the central government acts as a contributory of funds to implement the devolved services. For the purpose, the expenditure authority flows from the MOA to the concerned department and to the DDC. Provision of norms along with the technical service for district level program comes under the jurisdiction of the central government. Moreover, the central government also carries out regulatory activities in support of the programs implemented in


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the district level. The Guidelines also specifically require the Regional Directorate to support the process of formulation of district level program.

The DALO has a leading role to play in formulating the programs and proposing to the DDC for the approval and amendment of the norms. In addition, the Guidelines also make them responsible for the implementation of the approved programs in cooperation with the DDC and to carry out monitoring and evaluation in respect of such programs. The Office is also responsible to carry out regulatory and quality control functions on behalf of HMG/N.

The Guidelines has specified that the DDC will be responsible for the preparation, approval, implementation, and evaluation of the annual programs. It has also made mandatory to consider the norms approved by the central government while approving the programs related to devolved sector. It is also required to coordinate with the Regional Directorate for the necessary resource matching for seeds, saplings, insecticides, fertilizers, fishes and livestock bread improvement.

The devolution of agriculture and livestock extension service is up to DDC only. The Sectoral Guidelines has not given any role to Municipality and VDC in this respect.

Primary Health Sector: In the SHPs handed over, the central government‟s role is the provider of funds to manage SHPs and supplier of family planning measures and other materials. The District Health Office/Hospital is made responsible for providing budgets to SHPs, making medicines, machineries and human resources available.

The DDC is responsible for providing authority to VDC in respect of SHP budget and undertake periodic supervision of SHPs. The Guidelines requires the VDC to provide guidelines for .the preparation of plan, to take care of repairs and maintenance needs of SHP, management of additional human resources and to form a medicine revolving fund. It also directs the VDC to set aside a certain percentage of the funds received as block grant from HMG/N for health institutions.

Primary Education Sector: The central government plays the role of a financer in the provision of grants to meet the salary of teachers and stationery expenses of the primary schools handed over to the communities. It also provides a lump grant on the basis of an agreement entered into at the time hand-over.

The Regional Directorate is responsible for publishing the list of auditors to be appointed by the DEO for the audit of community-managed schools. The Guidelines has given responsibility to DEO to inspect, evaluate and observe the schools and report to the MoES on a regular basis and also to communicate the evaluation of academic standard to the SMC. The Guidelines has not given any specific role and responsibility to either DDC or VDC concerning the community managed schools.

4.14 Standardization of Services

In the provision of services to the public, countries set their own minimum standard norms. These standards define the inputs in terms of manpower, infrastructure, instruments, equipments and logistics needed for delivering the services. The standards are set to ensure quality services to the people. The standards will have immediate implications on the volume of budget. In the context of devolution of services to local bodies, the standards serve as the basis for determining the amount of grant to be provided by the center to the local bodies.

In the present study attempts are made to review the existing national minimum standards set by the government for the provision of services. The review is confined to only those three services i.e., primary education, sub-health post and agriculture and livestock extension which have been devolved so far to the local bodies.

In the health sector, MoH, HMG/N has set the standards for service provision in the sub-health post (SHP). These include provision of a SHP for each VDC comprising of 4,000 populations on average. Standards are also set for the types of health services to be provided, location of service outlet to be established, service hour, provision of manpower


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including their tasks, types of essential drugs and quantity of drugs to be procured and stores and list of items to be carried in out-reach clinic. Standards are also set for other medical consumables. However, no standards have been set in respect of equipments and instruments at the SHP level. Moreover, the VDC has been made responsible to provide physical structure (building) and physical facilities (rooms and furniture) without indicating any standard for the same. (Refer Annex IV-I and IV-II for details)

MoES has set standards for service provision in primary schools. The standards are defined in terms of classroom size, layout of the classroom including height of the classroom, number of students per classroom, minimum number of teachers and school hour. These are also prescribed for education materials, textbook instructional manual and library facilities. Standards have also made provision of lavatory facilities, drinking water and medical facility. The standard for physical structure (building.) and physical facilities (rooms and furniture) have not been set properly as this is not expressed in quantitative terms. The standard also requires a primary school to have compound wall and play ground without specifying the minimum areas for the same. (Refer Annex IV-III for details)

4.15 Issues and Performance in the Devolved Sectors

Many issues have surfaced in the process of devolution of selected sectoral functions to the DDC and management committees. The issues are both generic to all sectors and sector specific. These issues could be indicative of weaknesses inherent in the process, which the sector ministries currently involved in the sector devolution need to properly and adequately address to make the devolution process smooth. The issues are listed below under general and sector specific category.

General Issues of all the Sectors:

Devolution program is not timely as the local bodies have no elected representatives.

The sector devolution guidelines were generally found prepared by the line ministries in coordination with the Ministry of Local Development (MoLD) but without any consultation with the local bodies or their associations.

Orientation training to Management Committee is inadequate and modalities impractical.

Accountability of staff has been a major issue in all the sectors. To whom the staffs are accountable are not very clear. Staffs complained that they have been experiencing the problem of dual accountability.

At present the central grants related to the devolved sectors are being routed through the DDF. It was, however, noticed that the DDC has little or no authority to reallocate or withhold unspent budget of line agency; it is only being made an additional layer in the flow of funds causing delay for the funds to reach the desired destination.

The expenditure authority to DDC in the case of devolved sector budget was, in fact, found accompanied by instructions of the concerned line ministry/department requiring the DDC to transfer entire funds to the concerned line agency for the implementation of the program.

In the implementation of devolved sector budget, the accounting and auditing process as envisaged in the LSGA should have been followed. In practice, the line agencies are applying the central regulations.

Agriculture Sector Issues:

Low level of non-salary budget: The agriculture and livestock extension service subjected to devolution contain very little program budget; rather it is mostly composed of salary related budget. For instance, the total budget of livestock extension service in Kavre district for fiscal year 2003/04 composed of less than one percent for program related activities; the remaining 99 percent accounting for the salary budget of the extension staff. As a result, the DDC had to provide budget from its own internal resource to fund


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the cost of such services. It is thus a clear case of under-funded mandate passed on to the DDC.

In paper, the existing service is transferred to DDC but in practice DDC does not know about it and confusion has arisen.

Health Sector Issues:

The merits and demerits of hand-over and roles and responsibilities of the committee and other stakeholders do not seem to have been properly and adequately advocated by the center to the stakeholders. As a result, the concerned parties in most of the cases were not found aware about the same.

Adequate preparations were not found made before the devolution of services to SHMPI&MC resulting in inadequate and ineffective orientation. This is substantiated by the fact that the hand-over and orientation activities went together.

Primary Education Sector Issues:

SMC members and even teachers were not found fully aware about the devolution process.

At present, most of the VDCs are funding the cost of additional teachers of primary schools within their territory out of the block grant of Rs. 500,000.00 provided by the central government. In this situation, it is not conceivable to think that the VDCs should not be involved in any way or should not have any role in the process of devolution of primary schools.

The Teachers Service Commission (TSC) has been publishing the names of successful candidates appearing in the teachers' selection examination conducted some 8 years ago. The Guidelines is not clear as to whether the teachers newly recruited by TSC will be posted to the community handed over schools or not. The examination was of course held for all the teachers' positions, which had fallen vacant up to a certain date prior to the date of holding examination. In such a situation, it is difficult to comprehend how the central government will resolve the fate of such teachers provided they will not be entitled for appointment in such schools.

At present, there are more than 26,000 primary schools in the country. The government has the required fund to provide such grant to only 1,500 schools. Until now, some 660 schools have been handed over to the communities. It appeared that the government is not clear as to how it will manage the lump sum grant of Rs. 100,000 to be provided to each primary school handed over to the community.

Municipalities were not found consulted while handing over the management of primary schools to SMC. This has been a major issue in Biratnagar Municipality

In some of the districts, the number of students is very few in the schools. This has indicated the need of merging the schools. Due to this, the devolution process in education has been delayed in Mustang district.

Subsequent to the handover of primary schools to the community, the central grant provided to ensure access, quality, etc. would be based on a formula. Accordingly, the size of such grant would be determined on the basis of number of students in the school multiplied by the rate per student. In a remote district like Jomsom where the number of students is very few, the revised basis is proving to be a financial disincentive which explains the reluctancy on the part of the community to take over the responsibility of the management of the school.

Performance in the Devolved Sectors:

In the agriculture and livestock extension service, the service centers are facing serious problems of reduced level of budgetary provisions from the centre subsequent to the devolution of these functions to DDCs. As a result, some of the DDCs are providing funds


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from their own sources to somehow mitigate the worsening situation. This could not however avoid the situation of reduction in service provision.

The devolution of primary schools appeared to have made positive impact on the management of schools since the SMCs are assuming more and more responsibilities in the management of schools. As a result, the teachers are reported to be attending the schools more regularly than before.

Of all the sectors devolved, the hand-over of SHPs to the SHPI&M Committees seems to have the most positive impact. It was visible that there were sufficient stocks of essential and other drugs in the surveyed SHPs. The locals served by the SHPs reported improvements in the service provision in terms of regular opening of SHP, attendance of health staffs and number of hours of service provided.

HMG has gained both positive as well as negative experience in the sphere of devolution of services. On the whole the move is considered to be in the right direction. However the tempo of service devolution has been significantly affected due to uncoordinated activities and variations in the understanding of the decentralized system of governance among different ministries resulting to variations in the implementation modalities and roles and responsibilities of various partners. Such a situation would significantly slow down the pace limiting in the attainment of the goal envisaged in the decentralization implementation plan (DIP).


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Chapter V

Functions, Capacity and Management Practice of Local Bodies

This section builds on the review of the existing legislation and practices of decentralization (Chapter III and IV) and provides an overview of the situation based on the opinion of stakeholders and practices of the LBs visited during the field study. The chapter focuses on the practice and attempts to point out only the pertinent information related to functions of LBs, the roles LBs have assumed in public service provision and their capacity.

5. 1 Functions undertaken by the LBs

The tables (Annex V – 1, 2 and 3) show the major functions the LBs have undertaken from various sources such as block grants, conditional grants, and internal. The LBs and the stakeholders point out the following situation with regard to provision of public services:

The central government has taken most of the responsibilities to provide services. The local bodies re taken as institutions that provide additional services to citizens, if they have the required resources. Consequently no expenditure responsibility or authority was accorded to LBs, which still continues.

Related to the above the service provision is organized in such a way that there is full coverage of the whole population with central agencies through their deconcentrated networks (such as sector ministries with Department, Regional Directorate, District Office, and Sub-district level units) and delegated networks of parastatal organizations (such as Corporations, Development Board, and Agencies created under statutory Acts).

Increasing understanding is taking place with regard to need to decentralize functions to LBs. As a result, adjustments are taking place wherein the central agencies are restructuring their organizational set-ups and giving up more space for LBs (Sector agencies such as Roads, Drinking Water and Irrigation abolished their District Offices and created Division Offices, and redefined their scope of work vis-à-vis the LBs).

There is less duplication of functions and more understanding in sectors such as irrigation and roads where the sectoral agencies have already pulled out their District Offices. Debates as to what are appropriate functions that should be assigned to the LBs are in the increase, both among the LBs and central agencies. Discussions have begun to un-bundle functions related to public services. Municipalities are therefore rightly demanding for distribution of electricity leaving the functions related to power generation to the central agency.

In sectors where there is no sole accountability LBs seem less interested to invest. Corollary to this if accountability of LBs is clearly spelt out then the LBs tend to allocate budget. This tendency can be observed in that Municipalities spend on urban roads and sewerage; DDCs on rural roads; and VDCs on roads and trails. In the devolved sectors the LBs are concerned with the program budget (Agriculture has only little program budget, they fear that the LBs or communities have to arrange expenditure needs once the primary schools are devolved). They are more serious as to how to find sources for investing in these sector programs, especially after the functions are handed over.

Most common functions

The functions most commonly taken up by most LBs include the following. It should be noted that the functions are not exhaustive list of activities, but they are the ones that most commonly appear in the plans and programs of the LBs.

It is not explicit in law neither it is an agreement between the actors, but Siddharthanagar municipality feels it has:

- Sole responsibility in solid waste management and cleanliness

- Big responsibility for improving sewer system - Partial responsibility for drinking water supply

- Some responsibility for electrification


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Functions DDCs Municipalities VDCs

Most frequent recurrent expenditure across LBs

School support Roads maintenance VDC technical support Scholarships Women and children development HRD VDC grant

Solid waste management Street light Park and greenery Drinking water Public toilet Fire brigade Urban clinics

School support Roads maintenance Health post support HRD

Most frequent capital investment expenditure across LBs

Roads Drinking water Matching investment funds River training Agriculture promotion

Electricity extension Bus parks and markets Sewerage School infrastructure Community buildings

Drinking water Roads and culvert School infrastructure

It is noted that that there is little clarity what service a particular LB is expected to produce, which is reflected in the allocation pattern of the LBs. however, the case of Municipalities is different than the VDCs and DDCs, as one can notice the a certain set pattern of LB expenditures.

Functions that are insufficiently defined

There are a number of functions LBs have not understood well. One common is the human resource development. Example: A VDC is found to have transferred a portion of its HRD budget for security; many others are spending the fund for supporting school teachers‟ salary. Many functions are overlapping with other central agencies that are already noted in the discussion related to contradicting Act. Some other functions that are either unclear or too complicated for their level include:

VDCs Municipalities DDC

Electricity generation and distribution Veterinary hospital operation Construction operation and maintenance of deep water Implement irrigation projects, dams, canals Environment protection Language and culture preservation Act as motivator for carrying out cottage industries Control natural calamities

Deep water preservation Act as motivator for carrying out cottage, small and medium industries Control natural calamities

Make necessary arrangement for deciding the means of transport Develop and promote waterways Promote environment Give approval to open health posts Control natural calamities

The table shows that there is more clarity of functions in the case of municipalities and most confusing are the functions assigned for VDCs.

Unfunded functions

Functions those are unfunded include the ones that are unclear. Moreover, the LBs consider that the following functions are largely unfunded, or very few are funded in terms of conditional grants and transfers. There is no limit of LBs functions, and most of them are unfunded.

- Protect government or unregistered land - Arrange for aged rest houses, orphanages and helpless people - Operate health posts (including Ayurvedic and Unani clinics) - Electricity line extension - Vital registration especially in case of VDCs - Preservation of language and culture - Disaster management - Pollution control


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Unmandated revenue

LBs appear not having a feeling of obligation for any public service, other than related to recommendations and certifications. Therefore the resources are also used for programs of their own wishes. It is reported that for majority of LBs even the budget heading and format of two consecutive years need not match. This implies that the revenue need not be directed to a certain direction. In this sense, the revenues of LBs are mostly unmandated. This is verified by the field observation that the LBs cannot mention what kinds of functions they are obliged to undertake after, for example, having received the authority to collect land tax, and revenue sharing from central government.

5.2 System and processes of executing tasks undertaken by LBs

Planning and budgeting:

LSGA has prescribed each LB to have a periodic plan, programs and budget (normally 5-year comprehensive development plan) and, based on this, prepare annual plans, programs and budget for implementation. About two-third of DDCs, and some Municipalities and VDCs have prepared their periodic plans. Annual planning system specifies a two-year cycle in which programs planned in a given year are for implementation in the coming fiscal year. The LSGA and several relevant guidelines are there to guide LBs in their planning process. Criteria (financial and non-financial) are suggested for program identification, prioritization and selection.

The practice of program identification and prioritization is bottom-up. The VDCs and Municipalities identify programs and plans based on objective data and through participatory process involving community organizations, ward committees, local interest groups. The programs thus obtained are subject to the scrutiny and discussion of relevant plan formulation committee before finalization. DDCs plans engulf the plans of all development actors such as VDCs, Municipalities, civil society and private sector.

Planning and budgeting of LBs go together, and sometimes budget is allocated for programs and projects without prior cost estimation. Issues and observations related to planning and budgeting are as follows:

About the planning process:

VDCs and DDCs are relatively better in following the mentioned processes. Relatively fewer municipalities follow the process. Majority of the Municipalities reportedly loosely allocate budget for different sectoral areas; the actual plan are selected, approved and implemented throughout the year. Similar ad-hocism is found in the case of DDCs and VDCs as well. As a result the two-year cycle of planning process has reduced down to a one-year cycle wherein quite a number of projects are approved for the current year. For this quite an amount allocated for personal discretion of office holders, which are approved anytime during the fiscal year. Some positive examples are also there against such practice - Butwal Municipality prepares annual projects and programs and work-plans and schedule well ahead. The situation of ad-hocism has been aggravated with the presence of “constituency development fund” (often termed as MP Fund) and topping up of development grants by the MLD. These mechanisms channel the funds through the LBs, or at least involve them during implementation, but the decisions are taken anytime during the fiscal year. Such practices degrade the value of LB planning exercise, and yet consume LBs time and resources, and are sources of ill-fames. For example, majority of the irregularity amount of 2 billion relating to MLD is the irregularities related to the MP-fund.

Project selection and prioritization criteria are seldom used, and use of objective information in project selection is rare if at all used. As a result annual plan often turns out to be “wish-lists” than a real plan for implementation. And this process is repeated every year, so the LBs are reported to face expression of “planning fatigue” among people. To deal with this situation the LBs try to accommodate the wish-lists in their plans. A consequence of such practice is that LBs tend to initiate projects with small amount of


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money to satisfy their constituencies, resulting into selection of projects that cannot be completed in one or two years. Such projects seem to be effective to pacify people but actually turn out to be high cost or remain on-going for ever. Example is a road project in Saptari: allocated budget for a 13 KM road is earth-filling for 2.5 KM, which is also reported to have washed away by the time of next planning.

About the quality of plan

LBs plans don‟t differentiate or group their programs and activities in terms of their nature and obligations of LBs. Capital investment and recurrent costs are not differentiated. As a result infrastructures once invested upon are sometimes forgotten once they are built. Normal practice is to hand over the projects to users for operation and maintenance but the projects having O&M responsibility on the LBs themselves suffer most (example is guest house). Programs of day-to-day concern to citizens (such as health services, and those larger good such as preservation of language and culture) seem to receive similar considerations while planning. The concept of classifying LB programs and services, for example into categories such as essential services, merit goods, public goods or private goods, is yet to be adopted in planning practice. Encouraging practice of allocating budget for sectors with very few LBs, which sectoral committees then redistributes among projects.

Budget allocation pattern of LBs

Budget allocation pattern of the local bodies is presented in Annex V – 4. It is questioned by specialists that the resource allocation practice of LBs reflects the long term plan, the priority set out, and the nature and specific situation of the district on the whole. The balancing of the plan in sectoral areas and services to people are often overlooked. However, the practice of equal distribution of the budget across geographical/political area (or the representatives) such as among wards and ilakas, is widely adopted. Some exceptions are however emerging with growing awareness about the ineffectiveness of such practice, as claimed by Hetauda Municipality where they completely abolished the system of equal distribution of budget.

About the planning system

Plan approval and budget flow system is reported to consume too long a time (passing through DDC to NPC and MOF) that it leaves little time for implementation. For example DDC sends its plan in February-April, NPC approval takes place in May-June, and it is November-December by the time MOF approves the budget and funds reach the district. Since DDC has to initiate another year of planning by December-January, there is virtually no time to concentrate on implementation.

LBs are expected to consider the plans and programs of various service providers (GO, NGO, and private sector) before formulating their own plans, this has not been translated into practice. This is particularly emphasized with the case of DDC, where the DDC is envisaged to play a coordinator of all agencies. In the end the plans of the LBs are mostly their own plans and less comprehensive. It is reported that the planning cycle of line ministries and other government agencies often don‟t match, the NGOs may not wish to coordinate with LBs, and the LBs themselves have not been able to take up a coordinating role in its real sense.

Existing Procedures for Funds Flow, Accounting and Auditing:

Clause 6 of the Financial Procedures Act 1999 has defined the procedures for the flow of budget authority from centre to the field offices after the enactment of Vote on Account or the Appropriation Bill. Accordingly, the MoF issues budget authority to the concerned Ministry. The concerned Ministry then arranges for the transmission of such authority to subordinate offices through the Department or direct from the ministry if there is no department under that Ministry. Thus the existing legal provision does not allow the MoF to


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provide budget authority directly to the local bodies; nor does it permit the line ministry/department to give such authorization other than to subordinate line agencies.

In the case of LBs, the MLD, after receipt of the authority from MoF, authorizes the DDCs and Municipalities for their share in the block grant amount included in the annual budget. The authority for the block grant budget of VDCs is, entrusted by MLD to the concerned DDC. The Office Chief authorized by the concerned Ministry or the Department as the case may be will have the authority to receive budget release from the District Treasury and Controller Office. Besides, s/he will have the responsibility to spend the budget by following the prevailing rules and regulation, prepare the accounts on the basis of books of accounts maintained, get the accounts audited and settle the audit irregularities. As an agency authorized in respect of VDCs‟ budget, the DDC request the DTCO for the release of VDCs‟ budget and disburses the fund to the respective VDCs on receiving the release of budget.

In the case of budget relating to agriculture and livestock extensive services devolved to DDC, the Ministry of Agriculture and Cooperatives provides authority to DDC, which then authorizes the line agency for implementation. The fund is channeled through DDF and then to District Agriculture and Livestock Service Office. In the case of budget of community-managed schools and SHPs, the DDF is another layer for the automatic routing of funds to DEO and VDC respectively. In the case of devolved sector budget, the existing arrangements of flow of authority from the concerned line ministry/department to DDC does not conform with the provisions of Financial Procedures Act, which allows provision of such authority only to the subordinate line agencies.

The LSGA and LBFAR have specified the procedures and methods, which the local bodies have to follow in maintaining the books of accounts. Accordingly to LBFAR, the DDC and VDC has to maintain books of accounts on cash basis following the principle of double entry system. The format of books of accounts to be maintained by DDC, VDC shall be as prescribed under rule 51 and 15 of LBFAR respectively. Rule 16 of LBFAR has given option to municipality to choose between cash and accrual basis of accounting by following the double entry principle. Municipalities are required to maintain the format of books of accounts as specified under rule 32 of LBFAR.

LBFAR has envisaged the establishment of an internal audit section in the DDC and Municipality to carry out the internal audit of their income and expenditure. Moreover, the Internal Audit Section of DDC is also responsible to perform the internal audit of VDCs on a trimester basis. The internal audit section is yet to be established in majority of the DDCs; the internal audit of those DDCs is being carried out by DTCO based on tacit understanding reached the Financial Comptroller General and the Secretary of MLD. The DTCO however only subjects the portion of DDC expenditure released by it to internal audit.

According clause 69 of LSGA, the final audit of VDC will be carried out by an auditor approved by the DDC on the recommendation of the accounts committee constituted by the Village Council. Similarly, the final audit of the Municipality is to be carried out by a registered auditor appointed by Municipal Council on the recommendation of the accounts committee. The LSGA has, however, entrusted the task of conducting final audit of the DDC to the Auditor General.

In regard to audit irregularities pointed out in the audit reports, the LSGA has given exclusive power to the respective council of local bodies to regularize the same and to give direction to the Committee for the settlement of irregular amounts if these could not be regularized. Since the final audit of VDCs and Municipalities are never done by the Auditor General, these do not form part of the Auditor General‟s Annual Report. Moreover, this report does not include the DDC‟s audit reports as part of the consolidated report which is discussed and deliberated upon in the Public Accounts Committee of the Parliament.

Program implementation, monitoring and evaluation

LBs are free to choose their modality of program implementation, through contracting, NGOs, UCs or directly themselves. As reported, contrary the practice of doing-all-oneself followed in previous years, the LBs are increasingly implementing programs through others. In this regard the LBs are discharging more the role of a provisioning agency than


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implementers themselves. Following are the mode of operation as agency responsible for provisioning of services.There is an increased level of acceptance, and practice thereof, among central government and LBs to involve private sector in service provision. Public-private partnership is a preferred mode of cooperation for delivering public goods of private nature. Following are some examples of modality LBs have followed:

The LBs have also recognized the role of NGOs for service delivery. The LBs have developed working modality, and entrusted NGOs for production functions. Some have defined structure for coordinating NGOs in development.

The LBs implement most of the programs involving Users‟ Committees (UC). However, the practice has stopped in most of the VDCs, where construction programs are implemented through contractors, after the termination of the tenure of elected VDC representatives. Another issue related to the use of UC is that even for the projects or programs given to beneficiaries already having permanent COs, forming an UC specifically for the concerned program/project is taken as required (example, school programs require UC despite existence of permanent SMC).

LBs have also started forming committees and similar institutions are delegating authorities to them. Parks management in Hetauda and Butwal are examples. Some LBs have also formed committees to look after special programs such as women and Dalit.

DDCs have also been found implementing their programs through VDCs and Municipalities.

The monitoring system and practice of LBs is considered weak. The LBs are envisaged to play monitoring role of all the development programs in the district. In the case of DDC two committees are envisaged in rules (one committee headed by MP, and another sub-committee under the coordination of the DDC vice-president). The former hardly exists, while the latter one is, though exists, not quite functional.

Monitoring is often equated with the regular progress review exercise, which is done focusing on the input monitoring aspect before planning. The notion of result and impact monitoring, and mechanism to link the monitoring information with planning, is yet to be developed.

5.3 Roles and responsibilities assumed by LBs for service provided through central agencies

The central government through its delegated or deconcentrated agencies has assumed the key responsibilities for organisation of the services to citizens. As such there is a quite sufficient network of the central agencies up to the sub-district level for all the public services. Institutionally these agencies enjoy complete freedom. They can, and do, work totally independent of LBs in such a way that the role of LBs among common citizen is minimal especially in obtaining public service. The LBs are “must” only for documents such as special kinds of recommendations and paying land tax. This is one reason why citizen did not at all notice the absence of elected LB for a long time in the immediate past, as far as the provision of public services is concerned.

The central agencies discharge the responsibilities for the actual production of services on their own in certain cases, and through UCs and private contractors in others. The central agencies involve the LBs as much as possible in various ways such as facilitators, coordinator, mediator, and monitor.

Role of LBs for service provision in general

As stipulated in the LSGA the role of DDC is more pronounced especially for coordination in planning, monitoring and evaluation. The role is not so prominent for Municipalities and VDCs. The municipalities feel that they feel in working of line agencies adversely due to uncoordinated way of doing things. “We build roads, they …”; “We construct and maintain drinking water system, they collect fees”. Despite such skepticisms the line agencies feel the LBs as good interface between the line agencies and common citizen.


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The LBs are considered as facilitating agencies at the local level for central level agencies. They facilitate the central agencies in implementing their programs among people, and they also provide infrastructure, and other non-salary support, to central agency offices in a district. (Example: SHP building, hospital, furniture etc)

The LBs are also allocating their budget in various sector programs, which can also be taken as additional services to people. Apart from providing fund for additional programs through its own source, the LBs have little say concerning the determination of the quantity and quality of the services. Through planning process they can identify priority sector for the district for guiding their own resource allocation; though in principle the central agencies are also to consider the priority set by LBs, it is reported to be less effectively followed in practice. The DDC President chairs various sector committees (example: education and forestry) formed to decide on the respective services. These committees are also envisaged to follow central guidelines regarding the level of services, and primarily engage in supportive functions such as distribution of the available services and interface central agency and people.

The LBs also have responsibilities for the monitoring and supervision of service provision. As envisaged the LBs have to monitor, solve problem, and give feedback to central agencies engaged in service provision. However, as mentioned earlier, they are not so effective in this regard.

5.4 Capacity of Local Bodies

The capacity of local bodies is reviewed focusing the inquiry in the following four areas – a) institutional set-up and functioning including the regulatory framework and enabling policies; b) the organization structure and working mechanisms and their relationships with other actors in public and private sector; c) resource availability and mobilization including financial, physical and human resources, and d) the operating system and overall working environment of the LBs.

a. Institutional set-up

The institutional arrangements (LSGA and regulation provisions, 10th plan/PRSP policy, and DIP) provide sound basis for capable LBs in Nepal. The people, GOs and NGOs recognize the LBs as a constituent of the state, and service provider to people. The way LBs are formed in the past has established them as representative organizations of people at the local level. Thus they enjoy legitimacy, popular mandates, resources and trust.

The LBs claim that because of these conditions they are more responsive and accountable to people than any central agency. Therefore they are more appropriately placed when it comes to take responsibility for service provision.

Size of LBs

There is no uniformity or standards about the size of LBs in Nepal, and this has been noted by earlier works such as LAFC Report, 2000. The following tables give an overview of the same.

Districts

Area (sq. Km)

Population No of VDCs No of Municipalities

Banke 2337 385840 46 1

Kaski 2017 380527 43 2

Kavre 1396 385672 87 3

Makwanpur 2426 392604 43 1

Morang 1855 843220 65 1

Rupandehi 1360 708419 69 2

Mustang 3573 14981 16 0

Saptari 1363 570282 114 1


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Municipalities

Municipalities District Area (Hac)

No of wards

Population Distance to HQ (KM)

Biratnagar Morang 5990 22 166674 0

Butwal Rupandehi 7953 15 75384 23

Dhulikhel Kavre 1087 9 11521 0

Hetauda Makwanpur 5550 11 68482 0

Kathmandu Kathmandu 4821 35 671846 0

Nepalgunj Banke 1314 17 57535 0

Pokhara Kaski 1520 18 156312 0

Rajbiraj Saptari 319 10 30353 0

Siddharthanagar Rupandehi 3680 13 52569 0

VDCs

District Area

(sq. Km) No of wards

Population Distance to HQ (KM)

Farthest VDC (KM)

Bavangamakatti Saptari 8.65 9 6967 9 51

Farseth 4.70 9 3275 5.5

Ugratara Janagal Kavre 6.76 9 5197 5 60

Choubas 13.125 9 2447 29

Sou-pharsatikar Rupandehi 16.55 9 7973 16.5 90

Padsari 7.38 9 7768 4

Jhomsom Mustang 185.27 9 1698 0 110

Marpha 93.06 9 1550 8

The tables above do not at all show if the number and size of LBs has any correlation with population, area, coverage, administrative division or other socio-economic basis or considerations. It reconfirms the most commonly held belief that the LBs are formed taking political considerations into account, and that service provision through LBs was not thought of in designing LBs. This means one cannot generalize the LBs in terms of their service needs or organization needs. The only commonality is among VDCs which are divided into nine wards. The fact, that just because of this compulsion even a cluster of homogeneous village is found administratively divided, again confuses if looked into from the point of view of service provision.

Organizational/administrative set-up

The generic organizational structure of the LBs is as follows. While the council is the supreme LB body the executive is the Board. The Council forms accounts and audit committee and other committees as necessary to support or supervise the Board‟s actions. The LB chief (DDC president, Municipality mayor, or VDC chairperson) represents the Board who is assisted by Secretary who is a civil servant. HMGN supports the DDCs with a few administrative and technical staff to run the LB office. The LB is free to design its administrative structure.

The following chart shows the generic organization structure of the LBs.

Council

Board

Various Committees

LB President/ Mayor/Chair

Secretary

Divisions/ Sections/ Units

Accounts / Audit Committee


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Committees

Committees are regarded as extended hands of LBs, hence indicative of their capacity. The LSGA and rules have provisioned to form committees to each LB to form committees for different purposes. The key objectives of these committees are: a) to regulate the internal working procedures and accounts, b) facilitate and maintain the intervention-focus assumed by DDCs, c) ensure effective interface between the DDC, service providers, and people.

A DDC has to form accounts committee, plan formulation committees, monitoring committee and sub-committee, and can form subject-matter / sector committees as required. The Municipalities and VDCs should form accounts and audit committee, subject matter/ sectoral committees as required and advisory committee involving citizens.

Most LBs are comfortable with the statutory committees (such as accounts and audit committee, and sectoral committees for planning purpose) that are specified in the law. In most of the VDCs and many Municipalities such committees that involves people other than elected is hardly formed. In the present situation where there are no elected local bodies, even basic essential committees such as accounts and audit committee are not formed. LBs seem to have realized the importance of forming committees with delegated power and authorities if they are supposed to take up increased responsibilities and work effectively. Increasing trend of forming committees for specific purposes is evident. Innovative LBs have formed subject-matter committees involving citizen representatives. Examples are Committees related to Dalit and Women; Tourism Development and Park Management; Poverty Reduction; and NGO coordination.

LBs have taken lead in creating services and then handing over management responsibility to different organization. Examples are Martyrs Park in Hetauda, Drinking Water and Hospital in Dhulikhel (Box).

Administrative operative structure

The LBs are free to decide on their administrative/ organizational structure according to their needs and means. The following table gives a summary the organizational structure of LBs. The organization structure LBs is summarized in Annex V-5. Some common problems noted in the organization structure include:

Not considering a few exceptional ones the VDCs virtually don‟t have a formal administrative structure; they are operating as a one-person office. The fact, that each Municipality has its unique administrative structure, shows that they do deliberately design their organization specific to their situation. The DDCs seem to be in-between – that while some are operating with the prescribed general organization structure provided by the MLD long ago (LAFC report, 2000), a few have designed their organization structure themselves.

Unclear linkage between the organization structure and the purpose of the organization (example: DDCs considered as coordinating agency where there is no supportive structure for such function)

Sections/units are created with little functional justification or alignment (example: “store”, “typing” and “technical” are sections of similar status). Organization structure does not strongly indicate authority, communication and linkages between units/sections (example: authority is centralized to secretary and/or the LB chief). Inadequate structure to manage sector programs. Except for a few DDCs (e.g., Makwanpur, Morang, Rupandehi), and Municipalities (Kathmandu, Butwal, Hetauda) the LBs organization structure don‟t show capacity.


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Medical institutions in Dhulikhel

Dhulikehl offers exemplary medical institutions and services which began as projects initiated under the auspices of Dhulikhel Municipality. The initiative started in 1996 with a “small beginning” with a community run hospital at Dhulikhel and six satellite clinics in Sindhupalchok, Kavre, Lalitpur and Dhading. At present there are three autonomous, independent and not-for-profit institutions – KU Medical School (KUMS), Dhulikhel Medical Institute (DMI) and Dhulikhel Hospital (DH). Though separate and independent institutions having separate management committees they work as one; strengthening and building on the path of coordination demonstrated by the Mayor of Dhulikhel Municipality in the early days.

These institutions offer poverty related programs and preventive and primary health services through the outreach clinics, curative hospital services, paramedical education and advanced medical education. “We provide almost all services related to health care”, says Dr N. Sharma, the program coordinator. KUMS is running MBBS program since 2001 (40 students per year); DMI is running nursing, general medicine, clinical laboratory and ophthalmic assistant education programs (200 students per year) and; DH offers ambulance, diagnostic, and therapeutic services (160 beds at present undergoing expansion to reach 350 beds in near future). The hospital has all services but cardiac and neurosurgery.

The Municipality had pledged about 10 million to kick-start the projects, the total cost must have crossed one billion. Where did all the money come from? It is from a number of national and international institutional donors and very large number of individual donors. “We have started expansion programs even without knowing the financial source, but we will complete in three years at the most”.

The educational programs are financially self-sufficient. DH is running at 90% cost recovery, which is highest rate of cost recovery among similar hospitals. Of the annual budget of 40 million the book recorded a loss of 2.2 million, not counting the charity work equivalent to 4.6 million DH has provided. The charity includes the cost of running the outreach clinics and providing free medical services to needy.

The elements of successes are vision, leadership, determination and triggering-up. At the operational level it is the quality of staff and fair and undifferentiated services to all. Operational professionalism with complete freedom from political or power centers, openness and self-help culture are essential. “We don‟t have a peon in our employees, we do our jobs ourselves!”

b. Resources of LBs

The resources of LBs are assessed in terms of human and financial resource they enjoy.

Human resource

Three types of staff are found in LBs – the HMGN employees or the civil servants, hired by the LBs under administrative grant support from the HMGN, and those hired by the LBs themselves from its internal resources. The minimum number of HMGN employees in DDCs includes a Local development officer (DDC secretary), a Planning, monitoring and administration officer, an engineer, and an Account officer or accountant. It is only the Executive officer (Municipality secretary) and the VDC secretary respectively in Municipalities and VDCs.

There are also HMGN employees in some DDCs or Municipalities assigned by HMGN to carry out the vital registration functions; in VDCs the secretary does the function. The number of staff with the LBs is shown in the following tables:


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DDC (P=Position; F=Filled) Designation Saptari Rupandehi Banke Mustang Morang

P F P F P F P F P F

HMG

LDO 1 1 1 1 1 1 1 1 1

PMOA 1 1 1 1 1 1 1 1

Accounts officer 1 1 1 1 1 1

Accountant 1 1 1 1 1

Support staff (vital registration) 2 2

Sub-total 3 3 5 1 3

Admin grants and internal

Internal audit officer 1 4 3 1 1

Program officers 5 4 4 3 4 3

Technical officer 1 1

Sub-total 0 7 5 8 6 0 5 4

Overseer 8 6 6 1 1 2

Assistants 4 9 5 2 2 1 6

Accountant 1 0 3

Sub-total 12 15 11 4 3 1 11

Sub-accountant 2 4 2 3 3 2 4 2

Sub-overseer 7 12 12 3 3 1 7

Technicians 1 1

Support staff 9 12 10 9 5 8 7

Sub-total 18 29 25 15 11 2 16

Peon or similar 10 22 16 18 15 6 21

TOTAL 43 60 35 10 55

Municipalities (P=Position; F=Filled) Designation Hetauda Rajbiraj Butwal Nepalgunj Biratnagar

P F P F P F P F P F

Executive officer 1 1 1 1 1 1 1 1 1 1

Engineer 3 2 1 2 1 4 4

Specialists 3 1 4 3 2

Admin officer 2 2 2 7 4

Finance/revenue officer 2 2 3 2 1

Sub-total 11 8 2 12 2 12

Junior Engineer/ overseer 4 3 1 6 3 12 11

Admin assistants 4 3 2 7 3 15 11

Finance/ revenue assistants 4 4 1 2 2 3 3

Specialist Assistants 8 2 2 6 10 10

Sub-total 20 12 6 21 8 35

Admin support 46 42 11 47 21 113 98

Specialist support 5 4 1 6 3 9 8

Technical support 10 8 5 15 2 25 25

Finance support 7 7 1 2 1

Sub-total 68 61 18 70 27 131

City police (all category) 19 18 66 6 18 16

Fire-brigade (all category) 3 2 2 16 11 20 18

Sanitation (all category) 44 43 20 89 100 99 92

Drivers (heavy and light) 8 8 4 13 3 16 10

Sub-total 74 71 26 121 119 136

Helpers 43 43 13 7 17 77 73

Other 5 5 3

Sub-total 48 48 16 7 16 73

All total 221 200 68 294 173 387

Note:


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Specialist positions include– legal, partnership development, meat inspector, community organizers, food technician, enterprise development, sports, amin, health, foreign coordination, Administration positions include –admin officer, computer, information Finance - internal auditor, accountant, financial management

VDC

Positions Bavangama-Katti

Pharset Sou-

pharsatikar Padsari Choubas

Ugratara anagal

VDC Secretary 1 1 1 1 1 1

Technical assistant 1 1

Administrative support staff

1 1 1

Peon 1 1 1 1

Total 4 1 4 2 3 1

Human resource management system

Though considered autonomous the HMGN deputes and transfers the LB Secretary, without consulting the LB officials. While functional subordination of the Secretary is with the LB administratively his/her loyalty is with the HMGN itself. Again since the Secretary is also the administrative chief of LBs and commands control of the LB staff, the operational and administrative control of LBs is with HMGN. The Secretary is responsible for the accounts and resources, so normally the accountability is not normally delegated to the lower staff. Exception to this practice is seen in Makwanpur DDC where the LDO strongly favours delegation of authority, and he has done so in practice. Municipalities such as Kathamndu have also practiced assignment of functions and financial authority to its departments.

The following are some observations:

Tendency to hire low level staff in general is common; the ratio of officer level staff to support level is very low. This situation makes it difficult for LBs to coordinate with other development actors. LBs in more accessible regions seem to be able to attract qualified higher level staff.

Inadequacy of specialists among LB staff is evident. This may imply difficulty to take over functions requiring specialized skills.

Staff mobilization is weak in general. Only a few LBs have prepared job descriptions but still result based performance monitoring is yet to be practiced. The working standards and guidelines are largely inadequate if at all.

Inappropriate staffing (in terms of number and competencies) in accounts and tax administration sections; the accountants are overburdened.

It is also commonly held that staff motivation is low and major reasons for this is inadequate training and career development opportunities.

115 Secretaries in 114 VDCs?

A unique situation occurred in Saptari, where at one time there were 115 VDC secretaries in the district with 114 VDCs. It so happened that the MLD transferred a VDC secretary to another district and filled up one from another district. However it was found later that the one transferred from the district was retained but by that time the other transferred to have already joined his job. It took quite a time for the DDC to resolve the posting of the secretaries.

The VDC Chair, who shared the experience, says: had human resource management authority with lower level, such problem would not have cropped up, or would have resolved immediately once noticed.


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Financial resource

LBs revenue sources include internal revenue (tax, service charges and fees), grants, and shared resources. Resource mobilization through LBs is much higher than their revenues through practice of investing in partnerships with private sector and users. Weak financial base and inadequate efforts are typically reported as the reality of LBs.

c. Operating system and environment

Standardization of operational system, procedures and use of technology

There are provisions and support to LBs to design system and standardize their working processes. Almost all the VDCs operate using the operating processes and system prescribed in the Act, rules and guidelines or directives given to them. The Municipalities and DDCs are putting in efforts to develop their system and processes suitable to their situation and preparing guidelines for standardization. The list of such by-laws and guidelines is presented in the following table.

Municipalities DDCs

Integrated property tax Solid waste management Financial administration Poverty reduction Personnel and administration Park management Learning centre operation HRD centre operation

Personnel administration Local bodies financial administration Local development fund operation Program monitoring and evaluation District NGO cooperation Gender equity Operation of information and documentation centre Public-private partnership HRD centre establishment and operation Construction works operation

Corporate accounting system is being followed in some Municipalities (Kathmandu, Butwal). Computerized accounting package is being used by some DDCs (example: Kavre). Internal auditing system has been operational in Kavre and Makwanpur while in many other DDCs it has not been in practice.

The areas of improvement that the LBs themselves have most commonly identified for their improved system and procedures include: a) Staff and personnel management capacity: specifically job description, aligning staffing to functions and performance evaluation; b) Financial management: focusing on financial control, accounting and auditing; c) Information management: collection of input, result, impact level information, processing and feeding back to planning purpose, information dissemination, and; d) Office operation: standardizing systems and processes, filing and logistic management.

d. Equipment and technology used

Annex V-6 gives an overview of the equipments and technology used by local bodies. The following are the observations in this regard.

Means of transportation are not sophisticated with the VDCs. The Municipalities are better placed. Heavy equipments and machinery are increasing with LBs – a few DDCs possess Dodgers; some Municipalities possess sewer suction machines, many have fire brigade. However, VDCs do not have machinery. Kathmandu municipality doesn‟t possess fire engine, the fire brigade for valley has been operated by central agency.

About the office equipment the VDCs are far from using computers and fax machines. They are common with DDCs and Municipalities. Telephone is common to all LBs, but e-mail and internet is limited to a few DDCs and majority of Municipalities.

Most of the LBs consider they are not adequately equipped. Furthermore, the available equipments are not properly maintained and used. However, a few express that they are well placed in the availability and use of equipments, and that they have the


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capacity to avail equipments necessary to deliver the level of functions they assume, so the quantity and quality of equipments they are using don‟t reflect their true capacity.

Capacity building initiatives and plans

LBs are aware of their limited capacity – in terms of quantity and quality of their HR, organizational set-up and materials. They, particularly the DDCs and Municipalities, are conscious to the need to build capacity. Numerous institutions – government, donors and the associations of LBs are seriously working to strengthen the capacity of LBs.

Most of the DDCs and Municipalities have established HRD unit. The mandate of the unit encompasses capacity building of its staff and that of people in their constituency. Joint initiatives of LB and donor for capacity building are in the rise. While some LBs have elaborate HRD competency development plans, others are aware of such a need.

The practice of hiring staff by the LBs itself is considered full of flaws, and is reported to have most likelihood of obtaining sub-standard quality staff. The existing staff as well as the LB officials admit this reality, but also aware of the political and practical limitations. The formation of local service commission, which is underway under the auspices of MLD, is expected be address the system improvement in hiring and firing LB staff.

DDCs and Municipalities are found to have taken initiatives to reorganize the administrative system and structure (example Rupandehi DDC and Kathmandu Municipality), which is done with the help of expert consultants.

Issues and observations on capacity of local bodies

The LBs appear to equate capacity to human resource quantity and competency, and equipment and vehicles. The several other aspects of capacity – organizational systems and procedures, linkages, establishment of support institutions and practice of partnering with others are either not appreciated or considered.

A VDC with a Difference

Unlike most of the VDCs that operate from secretary or Chairpersons homes or bags, Sou-Farsatikar VDC of Rupandehi is different. The office opens full day, and people know it opens regularly. Besides the VDC secretary, it has a few support staff from internal source – the technical assistant, office assistant and peon.

The planning system has now improved; since long ago the practice of dividing the budget equally among wards or so has been stopped. “We have completed to open roads, now whatever we do in roads is to upgrade and maintain them” they assert. The VDC has also successfully developed a new Haat-Bazar, initiated social programs such as agriculture and are now focusing on street cleanliness, solid waste management.

Programs are supervised regularly, through UC and the VDC as well to see their smooth implementation. Several interaction programs are undertaken to facilitate communication between the VDC and the citizens.

Most of The VDCs are considered organizationally very weak, and therefore there is little to comment about their organizational/administrative capacity. However there are some – such as Bavangamapatti in Saptari and Sou-pharsatikar in Rupandehi – who operate as established organizations (Box). Most of the Municipalities have developed their system and procedures suitable for them, while some of the DDCs are established themselves as coordinating body of public services.

Capacity develops with increased responsibilities. It is argued that LBs should not be devoid of functional responsibilities appropriate to them just in the pretext of their limited capacity at present, since capacity develops with practice and this will only be possible when they are given responsibilities due to them. The Case of Dhulikhel Drinking Water Project (Box) confirms this argument.


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It is also observed, and reconfirmed with LBs officials, that LBs have not established their sectoral-units mainly because of the presence of HMGN sectoral line agency, and that it is not because of their reluctance or inability to establish and run such units.

It is worth noting that LBs adopt good practices of other LBs. Success of Martyrs Park in Hetauda encouraged many municipalities to form different types of parks; the establishment of Dhulikhel Hospital enticed Lekhnath Municipality; Makwanpur DDC is working out an innovative monitoring system and format after Ilam DDC prepared a monitoring by-law.

5.5 Linkages with the citizens and their effectiveness

Linkage with citizens is assessed to see how the LBs involve citizens in their affairs, and to what extent the citizens have access to LBs functioning/services. Three kinds of linkage mechanisms are traced – structural, procedural, and deliberate. The structural mechanisms include those related to the very formation of LB and are related to the regulatory framework. Procedural mechanisms include those that must be complied with in the process of carrying out mandated functions. Deliberate are those that the LBs have done in a planned way to improve links to citizens.

One of the strong structural mechanisms is the provision that LBs must nominate women and disadvantaged groups to the council and Board. This is done to ensure that LBs represent the true composition of their citizens. Although the nomination of an individual was criticized the system as such was reported to be very useful. With the dissolution of LBs this mechanism has suffered.

There are a few very powerful procedural mechanisms. Some of them are: a) LBs must hold council meetings where they need to present their activities and status to the councilors and general public. Though the council meetings are prescribed to be held twice a year, it is held once a year; b) LBs‟ periodic and annual planning process is such that they must involve citizens groups, civil society organizations, private-sector and HMGN line agencies. An integral part of the process requires that LBs should inform the stakeholders about their policies, priorities, preferences and direction; and; c) LBs involve UCs for most of the production functions, which is an important mechanism to link the LBs with citizen.

Besides the above, LBs are keenly putting in efforts to enhance links with citizens. The power of citizen support, participation and ownership in LBs affairs is realized as never before. One of the most effective mechanisms identified is increased information and communication and a transparent LB operation. The LBs are practicing the following deliberate mechanisms to enhance their links to the citizens: a) defining and publication of citizen charter; b) forming special purpose committees (e.g., park management, tourism development, public-private partnership, NGO coordination), and delegating authority to them; c) communicating to public through Radio, TV, notice boards, periodic bulletin, newspapers; regular public hearing or policy dialogue, and; d) operation of website.

The focus of most instruments is to communicate information on the plans, budgets, financial status, and program implementation status. The two-way forum such as public hearing is designed and implemented with the primary objective to discuss the problems faced by people and seek opinion on special matters.

Most of the committees are acting as policy recommendation, and forum for voicing opinion of citizen in the specific sector, but still work in practice under the broad guidelines provided or intentions indicated by LBs. A few of them who are strong act as guide to the LB administration.


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Dhulikhel Drinking Water Project

Dhulikhel was a small town with natural beauty and a lot of potential for economic growth. Way back in late 1990s the local people realized that harnessing the potential would not be possible without dealing with the problem of drinking water. A source sufficient to fulfill water demand for a reasonably growing population was 14 Kilometers away. A feasibility study showed a need for a highly complex technology and well-managed system. The local leaders approached Drinking Water Department but did not get an encouraging response to take up the project. HMGN and the department however, gave an assurance to assist in any other ways. They approached GTZ (Bhaktapur Development Project), who showed interest but they could support if two conditions are fulfilled – Dhulikhel, then an average VDC with low capacity, should be declared a Municipality (which would enjoy more responsibilities and could enhance its management capacity significantly) and once complete the project should be handed over to Water Users‟ Committee to manage the service, which should have at least Rs 300,000 as seed money to begin with. HMGN and the people agreed to meet both the conditions, and the project began in 1987.

The project was complete in 5 years. Though the Project Office was mainly responsible for construction it involved the WUC during the period in decision making. After the completion in 1993 a WUC was elected that took over the management responsibility from the Project. The project retained many of the technicians who were employed by the Project during construction. For one year of operation and maintenance HMGN paid for salary of the technicians and the WUC obtained guidance and support from the Project in managing the system. Thereafter the system is solely managed by the WUC. At present there are about 900 taps (including household and corporate taps). The projected capacity of 1200 taps by 2012 is being reached much faster than expected, thanks the construction of Sindhuli highway and other activities spurred based on the drinking water system itself such as Kathmandu University, Dhulikhel hospital and resort and hotels. The WUC proudly reports to have supplied 24-hour supply of drinking water and claims to have dealt with any problems most efficiently. Its vision is to complete even major repairs within three days.

A general assembly represented by a person per tap is the supreme body that elects 11-member management committee (MC) for four years. Nine of the MC members including the Chair, a Vice-Chair, five male members and two female members are elected by the assembly. The Mayor of Dhulikhel Municipality and the Project Manager are respectively ex-officio member and member-secretary of the MC. Though election is held every four years the assembly takes place every year and discusses and takes action regarding: audit report, annual plan, quality of service, tariff, and other related matters. The assembly is, in other words, public hearing of the MC‟s functions.

The MC sits every 4th day of the Nepali colander month. Operational decisions such as approving request

for new taps, and review of tariff collection status and service quality are major agenda for MC deliberations. A project office with 15 staff (10 of them are technical) is authorized for daily management of the system. Though drinking water project is operating completely independently of the HMGN drinking water office it has good relationship with the municipality.

Operationally the project is self-sufficient. There is an annual saving of around Rs 8-9 Lakhs of its total revenue of about 34 Lakhs. Due to high degree of technical complexity and thus the very high investments the cost recovery from the users‟ fees, however, is almost impossible. Nevertheless, the project has saved a considerable amount of money (about 6 million so far) for extension of pipelines and minor rehabilitation in case of need.

The management of the project has observed that “willingness to pay” for service is not an issue if the quality of service is of high standard. Good governance practice is another factor. The project strictly enforces its rules to all its clients (problems were faced initially to enforce rules to government administration offices and security forces, the project once disconnected its tap to Dhulikhel Prison). High degree of ownership is ensured once such projects work closely with people and listens to their voices. Leakages are very low in this project because every user is also master and supervisor of the project.

The initial reservation of technocrats that a project of this size and technical complexity is beyond capacity of the local community to manage is proven baseless. Rather it is a living example that given supportive environment and trust “common people” can do beyond the imagination of “bureaucrats and technocrats”. The drinking water project has become a boon for the small town which is developing as a hub for service industry and a major tourist attraction in Nepal and thus mainstay for improving livelihood of the population.


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Chapter VI

Recommendations: Design of Expenditure Assignment and Institutional Set Up

This chapter gives the recommendations of the study. The recommendations are presented in following four broad areas:

- Public services and their expenditure assignment to appropriate level of government14 - Institutional set-up and linkages among the various level of government to carry out

the expenditures assigned - Operating systems and processes for service delivery - Future steps and actions to implement the recommendations

What follow is the details of the recommendation.

6.1 Public services and their expenditure assignment

This section recommends the appropriate tasks and functions for the different levels of government. The recommendation is based on the principles of expenditure assignment as discussed in Chapter 2, international practice, extensive consultation with the stakeholders, both at centre and field, and an assessment of the current situation of the country and possibility. A short recollection of the principles follows, before going into the recommendations.

6.1.1 Determinants of expenditure assignment

As discussed above, three criteria are commonly used to judge an expenditure assignment – effectiveness, efficiency and responsiveness. The three criteria should be considered simultaneously to ascertain an appropriate level of government for expenditure assignment. The following section describes the determinants used by the study for assigning expenditure.

a. Role of government and local bodies

One of the major paradigm-shift is that an effective government redefines its role from “command and control” to policy guidance and facilitation. This means government should focus on establishing policy framework, structure proper incentives for local governments and other service providers, and stop delivering most public services. Primary functions of central government would be in setting standards for services, enforcing and monitoring the standards, coordinating, and capacity building of actors. Whilst the central government is considered good for redistributive services and macroeconomic stabilization, the local governments are effective if they are held responsible for providing localized services, whose benefits are internalized within the territory.

b. Characteristics of goods and services

The proper role of various levels of government and private sector can be delineated by understanding of the nature of goods and services. Two important properties are useful for classifying goods and service: exclusion (once produced a producer can or cannot deny the use of goods or services to users who don‟t fulfill set criteria) and consumption (some goods and services are consumed by an individual; others are consumed jointly by many). These dimensions give four types of goods and services. The following table gives an

14 The term „government‟ is used here in a broader sense, encompassing all social institutions involved in public service delivery


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overview of the typology of the goods and services, few examples of each type, and generally considered appropriate supplier15.

Nature of goods Characteristics Examples Who is generally considered

better suited to provide

Private goods

Exclusion feasible

Individual consumption

Market purchases Market; not generally supplied by government. However, gov‟t regulates, sets standards and ensures public safety

Toll goods Exclusion feasible

Joint consumption

Cable and satellite TV; telephone; piped water, library; electricity; higher education

Through government service, intergovernmental agreement, private sector, voluntary arrangement

Collective goods Exclusion infeasible

Joint consumption

National defense; broadcast TV; Police; central park; highways

Government service; intergovernmental;

Common-pool goods

Exclusion infeasible

Individual consumption

Air; fish in the sea; minerals; open range; street parking;

Government service; intergovernmental; private contract; voluntary arrangement

The concept can be depicted graphically as follows. The chart also broadly indicates appropriate domain for production and supply of the goods and services according to their characteristics.

It should be noted that the classification is indicative as no goods and service can be classified as shown in the table in its purer form; the degree of the presence of the characteristics for various types of goods and service vary. A fifth classification of goods and services is also regarded essential in order to assign public expenditures. That is worthy goods or Merit goods, which are essentially private and toll goods but are defined by the government as collective goods. Supply and consumption of such goods, though could be left for market where the users pay the producers, is speed up by the government interventions through subsidies or other incentive measures for the supplier and consumer and not solely leave for market forces operate for their production and consumption. Their inherent nature (toll or private goods) basically indicates who is better provisionary.

15 Savas, E. S.; Privatization: The key to better government. (New Jersey: Chatham House Publishers, Inc., 1987; pages 35-117


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c. Principles of subsidiary

A very important determinant of expenditure assignment is principle of subsidiarity. This has two dimensions – the lower the government level assigned for a service the better and the closest the government to people the better assignment. Expenditure assignment following the principle of subsidiarity enhances accountability. The subsidiarity principle may take the assignment of responsibilities and functions beyond formal government structure and give it to citizens and their organizations16. The study has therefore included CO and private sector in the expenditure assignment (though only the obvious functions are assigned/indicated for these agencies with a view to leave the ultimate decision making authority central agency and local bodies whether or not to engage them).

d. Service focus (redistributive justice, macroeconomic stability, economic growth)

As explained in section 2.7 expenditure assignments such as social welfare and poverty reduction programs should be the domain of central government. Similarly public services such as primary education and primary health services are considered responsibilities of central government though they appear to be localized services. The public expenditures such as unemployment compensation and massive investments are measures for macroeconomic stability and economic growth and therefore suitable candidates for central government.

Building on these principles and concepts, and as indicated in the TOR, the study developed determining factors for appropriate expenditure assignment. These factors are used against each service to determine the appropriate level of government and associated functions. They are summarized below:

Key considerations

Key words

Role of government Standards setting; policy initiative, regulation and supervision; production; provisioning

Type of goods Private; Merit; Toll; Common-pool; Collective

Service focus Redistributive justice; Economic growth; Macroeconomic stability

Good governance Principle of subsidiarity; Responsiveness; Accountability

Capacity Technical; Human resource; Financial; Organizational

Other Localized; Spillover effect; incentives for engaging; Stakeholders consultation

6.1.2 Identification of public services and the level of governments for assignment

Public services: The expenditure assignment exercise begins with a goods or service in question; once it is decided then only one can use the above mentioned factors to analyze and arrive at appropriate assignment. The scope of public goods and services is so large that the study has limited the list of goods and services for deliberation. The study has therefore followed „bundling‟ approach (for example if school management function is considered then it would men also the services related to building or furniture). However, the list is not exhaustive. With the belief that anyone interested in assigning expenditure in the list would follow the path and arrive at a rational assignment, it has covered a wide variety of public goods and clearly shown how an expenditure assignment has been reached (Section 6.1.3).

16 Martinussen, John; Local Authorities in Nepal; Kathmandu 1993


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Level of government: Delineating expenditure assignment requires identification of the agencies responsible for public services. The study has covered the appropriate assignments for the following agencies. The Central Government (CG) includes government ministries and its deconcentrated units, the corporations, boards, or special institutions formed by the central government under separate act and their deconcentrated units at sub-regional levels. The authority at intermediary level is the District Development Committee (DDC), and at the local level are the Municipality (Mun) and the Village Development Committee (VDC). Besides the formal structure, other types of organizations, engaged in supply of goods and services, termed as Community Organization (CO), are considered for expenditure assignment. The COs in this study includes the committees (or sub-committees or board) the LBs have formed, users committees, community groups, clubs, social organizations and local NGOs. The Private sector (Pvt) organizations that are responsible for providing public services include business and construction companies and consulting companies are also taken as integral part of supply of public services17.

Functions: Better understanding of the role and responsibility of the agency assigned for a service requires breakdown of functions relating to supply of a service. Four– provisioning, production, regulation and financing – are considered generic functions. However for better clarity as to the role of respective agency the study has tried to break down the functions into more categories: they include policy formulation, priority setting and planning (PP); service standard/quality setting (SQ); financing full costs (FF), co-financing (CF); provisioning / administrative arrangement (PA); service delivery and or production (SP); implementation monitoring / supervision (MS); monitoring of service quality or standards (MQ); and enforcing policy (EP). For ease of understanding the assignment of the function provisioning and administrative arrangement (PA) is taken as encompassing of all these. Therefore an agency assigned for PA will have responsibility for all the functions that are not assigned to any other agency. In this sense, the agency assigned with PA function can choose its mode of operation, and define the quality and quantity of service on its own. However, if is also assumed that, if any one or more agencies are assigned a specific function then the agency with PA responsibility must work with them to supply the services, and should not by-pass the other.

The assignment of tasks to private sector and civil society is found difficult to generalize and make a definitive one, since they are not equally developed or active in all parts of the country. Therefore, the study has assigned some functions with caution, bearing in mind that the agency with PA responsibility has to decide who should be assigned with those functions at the time of implementation. For example SP function assigned to CO or Pvt is particularly deserves more attention of agency given with PA responsibility. The local or central government body should consider giving the SP function to CO or Pvt as priority, but at the same time should also judge if they are the best delivery organizations.

6.1.3 Delineation of expenditure assignments

The study has delineated major public expenditures across the level of government both vertically and horizontally, which is presented in this section. Delineation of tasks and functions for service delivery was a challenging exercise in view of the diverse nature of LBs in size, population, service needs and financial and organizational capacity. Expenditure assignment exercise would have been more objective if there were uniformity among LBs in one or another aspect. The need

17 The study team is firm to keep the CO and Pvt as the service agencies for expenditure assignment despite some of the stakeholders‟ suggestion to limit assignment of functions only to the central agencies and local bodies. The study team considers CO and private sector important as upheld by the principle of subsidiarity (refer 6.1.1 c) and is guided by the TOR that explicitly demands that assignments be made to them.


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for restructuring of number and size of LBs is raised by many experts in Nepal and various proposals have been put forward. In fact, international experts take reorganization of LB size and territory as one of the major preconditions for determination of appropriate expenditure assignment.

However, the Study Team is assured on the practicability of the delineation since it not only uses the principles, criteria and determinants of expenditure assignment but is also done in consultation and with consensus of the stakeholders at the central and local levels. An elaborate matrix of the public functions and responsibilities is given below. The matrix lists the functions assigned to each level of government corresponding to each service. The figures in the remarks column generally shows the applicable determinants as summarized in section 6.1.1.


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Expenditure Assignment Study

Delineation of Expenditure Assignment

Functions: Policy/planning and priority setting (PP); Full financing (FF); Co-financing (CF); Provisioning/administrative arrangement (PA); Service delivery/production (SP);

Implementation monitoring/supervision (MS); Service standard/quality setting (SQ); Monitoring service quality/standards (MQ); Enforcing policy (EP). Function PA includes all functions and responsibilities

Level of government: Central government (CG); District development committee (DDC); Municipality (Mun); Village development committee (VDC); Community organization (CO);

Private sector (Pvt)

Proposed

SN Functions and Responsibilities CG DDC Mun VDC CO Pvt

1 Road, Transport and physical Planning

Highways, national roads (including bridges) PA Collective goods; impact is beyond territory of a LB

Inter-district roads including bridges PA MS Collective goods; regional coverage/impact; Equity focus; CG is better subsidiarity; DDCs can supervise since action is at the CG territory

Intra-district roads (rural and agricultural) including bridges CF CF, PA Collective goods; district wise coverage/impact; DDC are better subsidiary; DDCs have experience and capacity

Urban roads construction, maintenance and rehabilitation CF PA, CF Collective goods; localized coverage/impact; Municipality as better subsidiary and have experience and capacity

Trail improvement/maintenance (including local / suspended bridges)

PP, CF

PA CF Collective goods; regional coverage/impact; needs clear role of CG; but LBs have capacity and conventionally LBs are doing PA functions

Suspension bridge (construction/maintenance) on the main trail

CF, PA

MS Toll goods; mostly regional impact; localized action but technically demanding; LBs involved in operation and maintenance

Vehicle parking PP PA PA Toll goods, localized impact and action; DDCs involved to harmonize land-use plan

Motor vehicle registration and license PA Private goods but impact on collective goods (environment); cross LB impact and coverage; technically and organizationally demanding for LB to manage

Pull carts, rickshaws registration PA PA Private goods but impact on collective local traffic; justified by convention

Issue, renewal and cancelation of A, B, C-class contractor license

PA Private goods but impact on collective services; justified by convention

Issue, renewal and cancellation of D-class contractor license PA Private goods but impact on collective services; justified by convention and capacity

Settlement plan, development PP PP PA PA Merit goods; impact is local; demands harmonization across Municipalities and VDCs; but the ultimate action takes place in LB territory

Haat bazar development and management PP PA PA Merit goods; mostly localized and actions impacts on LBs plans

Building code development enforcement PA EP EP Merit goods; demands harmonization across nation; the ultimate action takes place in LB and impacts on LBs plans

2 Irrigation

Construction and rehabilitation of large surface irrigation schemes

CF PA Toll goods turned into merit; mostly localized action but impacts on national economy; DDCs have capacity and experience

O&M of surface irrigation schemes CF CF PA Toll goods; benefits are confined to users; best subsidiarity is CO


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Construction and rehabilitation of groundwater irrigation schemes

PA, CF

CF CF CF SP Common-pool goods, technically demanding; LBs must also be involved since the ultimate action takes place locally and impacts on LBs plans

Construction, maintenance and rehabilitation of small irrigation schemes

PP, CF PA PA Toll goods turned into merit; localized action but impacts on poverty situation;

O&M of groundwater irrigation schemes PP PA SP Toll goods; benefits are confined to users; DDC involved since this involves use of natural resource, better production subsidiarity CO

Development of alternative irrigation technologies PA Collective goods with nationwide impact; best subsidiary is CG

Promotion of alternative irrigation technologies PP CF, PP PA PA SP Merit goods of private consumption; action and impact is mostly local; LBs are best suited for PA, it should also be in line with CG policy

3 Education

Pre-primary education PP PA PA SP Merit goods, localized action and benefits; it is in line with current practice

Primary education PP, FF

PA PA SP Merit goods, localized action and benefits; it is in line with current practice

Non-formal education PP, FF

PA PA SP Merit goods of private consumption; LBs are best suited for PA, it should also be in line with CGs policy and plans

Secondary education CF CF, PA CF, MS CF, MS SP Merit goods of private consumption; DDCs are best suited for PA for economy of scale

Ten plus two SQ SF, PA MS MS Same as above

Special education (education for blind, deaf and other physically challenged)

PA CF CF, MS CF, MS SP Private goods turned into merit; mostly localized benefit; assigned to CG because of economy of scale and expertise required

Technical and vocational education SQ SF, PA CF, MS CF, MS Merit goods of private consumption; DDCs are best suited for PA for economy of scale

Higher (and higher technical) Education PA Collective goods, national coverage/impact

Schoolarship/incentive programs (including mid-day meal) CF, PP

PA CF CF SP Merit goods; national impact; localized action; economy of scale makes DDC better PA, but other LBs too involved to top up or speed up the process

Text Book and Curriculum PA Collective goods, national coverage/impact

Examination/Certification PA Same as above

Library CF CF PA PA SP Toll goods turned into merit; mostly localized action; LBs have capacity and experience

4 Health and population

Sub-Health Post (Primary health care) FF PA PA SP Merit goods, localized benefit but national impact; in line with current practice

Health post/centre FF PA MQ MQ SP Merit goods; action cover at sub-district levels national impact, DDCs are best suited for PA for economy of scale

District Hospital CF PA SP, CF

Merit goods; DDCs are best suited for PA for economy of scale

Regional/Zonal Hospital PA Merit goods, non-localized benefits; demands expertise

Specialized Hospital PA SP Merit goods of private consumption; PA to CG because of economy of scale and in line with current practice

Preventive health care programs CF CF PA PA SP Collective goods; local action with wider impact; demands capacity, economy of scale suggests DDC as best subsidiary

Ayurvedic, unani, homeopathic, natural and traditional medical care services

PA CF, MS MS SP Toll goods turned merit; focus is preservation of technology and know-how; so largely a collective goods having national coverage; role to LB since action is localized


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Epidemic control CF, PA

CF CF, SP CF, SP SP Collective goods; impact is beyond local territory, but action is localized

HIV-AIDS control PA MS MS MS SP Same as above

Family planning services FF, PP

MS PA PA SP Merit goods; national impact; but action is local and close to local bodies

Nutrititon, sanitation, safe motherhood CF CF, PA SQ, CF SQ, CF CF, SP

Same as above

5 Drinking water and sanitation

Large drinking water project PA Toll goods, technology and economy of scale demands makes CG better subsidiary

Small DW schemes construction PP, CF

CF CF, PA CF, PA SP Toll goods, localized action; in line with current practice

DW supply management PA PA SP Toll goods, localized action and benefit; Municipality have capacity; incentives for Municipalities to get involved in (linking it with resource mobilization)

Toilet construction and promotion PA PA SP SP Private goods turned into merit; mostly localized action, bundled with DW schemes management

6 Local (urban or local bazaar) services

Sewerage PA PA Toll goods turned merit; the action and benefits are internalized; in line with existing practices

Fire brigade CF CF PA Toll goods but substantially collective benefit; in line with existing practices

Street lights PA PA Collective goods; action and benefits internalized within a territory

Urban beautification PA Same as above

7 Forest and soil conservation

Forest management – community forestry, religious forest, leasehold forests, timber products, private forest

PA MS MS MS SP Common-pool goods; natural resources - high spillover effect; LBs must also be involved since the ultimate action takes place locally and impacts on LBs plans

Non-timber forest products (herbs, identification, promotion, marketing, commercialization

PA CF MS MS SP SP Collective goods; demands high expertise; LBs must also be involved since the ultimate action takes place locally and impacts on LBs plans

Bio-diversity conservation PA CF, MS CF CF SP Collective goods; national and international impact

Soil conservation and landslides control CF CF PA PA Goods with substantial collective characteristics; but action is localized so assigned to LBs

River training CF CF PA PA Same as above

Watershed management CF PA CF, MS CF, MS SP Same as above

Protected forest area (Wildlife/Park/National Forest) PA SP Collective goods; wider impact (national); in line with prevailing participatory management practices

8 Water resources and electricity

Large/medium hydropower plants PA SP, CF

Merit goods; involves decision over natural resources (collective goods); demands high technical capacity

Small and mini-hydro plants PA SP, CF

SP, CF

Same as above

Micro-hydro plants PP PA SP, FF

SP, FF

Merit goods; localized impact and action; DDCs have begun taking up in practice

Electricity line extension PA CF CF CF Collective goods; action and impact is beyond territory VDC or Mun.; in practice LBs are involved in partial financing of extension


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Electricity distribution PA SP SP Toll goods; localized action; Municipality have incentive to take up distribution; involvement of CO has proven to achieve efficiency gains

6 Renewable energy

Research and development of technologies PA Collective goods with national impact and coverage; requires high technical capacity

Technology promotion and dissemination CF CF PA PA SP SP

RE technologies are mostly private goods made merit and benefits are localized, impact is national; good governance factors suggest LB as better PA; does not require special capacity

Biogas CF PA PA SP, CF

SP, CF

Same as above

Solar/Other Energy CF PA PA SP, CF

SP, CF

Same as above

9 Environment

Solid waste management PA PA SP SP Collective goods; the benefit is localized. LBs are best subsidiary

Environment protection and Management PA Highly technical, collective goods. Nation-wide impact.

Environment Guidelines/Evaluation/Act PA Same as above

Environment Assessment PA SP Same as above

10 Agriculture, livestock and Cooperatives

Research PA Highly technical, collective goods; nation-wide impact

Agriculture and livestock extension CF CF, PA SP, SQ SP, SQ SP Merit goods, mostly the benefits and action are localized but economy of scale makesDDC a better subsidiary, with role to VDC and Mun

Inputs: fertilizers and pesticides. PP, MQ

PA PA SP Private goods often seen as merit goods, having high safety needs; the transaction is localized, so VDC and Mun regarded better subsidiary

Agro-vet technical services PA PA SP Same as above

Market collection centers, market information PA SP SP SP SP Mostly collective goods; localized action but impact on poverty; economy of scale makes DDC better candidate, with important roles to Mun and VDC

Processing and post harvest services (including storage) PA SP SP SP SP Same as above

Registration of cooperatives PA Toll goods; localized action and impact, economy of scale makes DDC better subsidiary

Promotion and support relating to cooperatives PA Same as above

11 Culture, heritage and tourism

Tourist product and destination development CF, PP

PA SP SP SP SP Toll goods, localized action and impact; economy of scale makes DDC better subsidiary, private sector oriented service needs significant involvement of private sector

Promotion and publicity PA CF Collective goods; economy of scale and coverage calls for CG involvement

Language / culture preservation and promotion PA MS MS MS SP Collective goods, national coverage and impact, so good for CG; since action is often localized, need clear role to LBs with significant involvement of COs

Religious heritage sites conservation and development PA CF, PP CF, PP CF Collective goods, national coverage and impact, so good for CG, but since action is often localized, role to Mun and VDCs clear

Trekking/Mountaineering licensing PA Toll goods; assignment to CG is convenient to customers; in line with existing practice


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Non Star Hotel/restaurant Licensing PA PA Toll goods; localized action and impact, strong incentives for Mun and VDC involvement

12 Social development, welfare / security

Disaster mitigation CF PA SP SP SP Collective goods; localized action and impact; economy of scale makes DDC better subsidiary

Disaster rescue and relief program PA CF SP SP Collective goods; localized action and impact; needs to mobilize security organizations, COs, CG and LB quickly; so CG is better subsidiary

Social security allowance (old-age and widow) FF MS PA PA Redistributive justice focus; so the policy and finance is for CG; but since the action and impact is localized, LBs are better subsidiary

Women, children, youth, disabled program CF CF, PA SP SP SP Merit goods, targeted beneficiaries; localized action and impact; economy of scale makes DDC better subsidiary

Rehabilitation of displaced people PP, FF

PA SP SP SP Same as above

Old age people care CF, PP

CF PA PA SP Same as above

Ethnic/backward communities CF, PP

CF, PA SP SP SP Same as above

Skill development CF, PP

CF, PP PA PA SP Merit goods, targeted beneficiaries; localized action and national impact; economy of scale makes DDC better subsidiary

Promotion, preservation and development of arts and crafts CF, PP

CF, PA SP SP Same as above

Consumer protection (food quality standards, market regulations)

PP, SQ

CF PA PA Collective goods; action and impact mostly local; CG needs to provide standards and guidelines

Sports CF CF, PP CF, PP CF, PP PA Incentives for engagement to CO; CG and LBs needs to provide policy and enabling environment; largely continuation of existing practice

13 Economic Activities (Business and Industry)

Industrial policy development PA Collective goods; national regulatory impact; good for CG

Small enterprises registration PA SP SP Collective goods; incentives for DDC and convenience to customer

14 Judicial and administrative

Vital registration PA PA Localized action; most appropriate subsidiaries are Mun and VDC

Recommendation/certification PA PA Most appropriate subsidiaries are Mun and VDC

Mediation PA PA Same as above

Marriage Certification PA PA Same as above

15 Airlines

Certification/Operation License PA National impact and operation; technically demanding

Airport construction and management PA SP Technically demanding; economy of scale

Airport Handling PA SP Same as above


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Functional responsibilities of central government and local bodies

The delineation of the functions and tasks avoids overlaps of responsibilities between the central government and local bodies. The table below shows the key feature of the recommendation, which can also be used for developing financing modality.

Functional responsibility and financing modality

Example of the corresponding public services/tasks

Full central government responsibility

- Primary School

- Higher Technical Education

- Zonal/Central/ Hospital

- HIV/AIDS, Preventive health program,

- Large DW Construction Scheme

- Safety nets for old/widow

Full LB responsibility

- Pre-primary education

- Operation and maintenance of drinking water system

- Urban Settlement/ Housing

- Urban beautification

- Electricity distribution (in Municipal areas)

CG responsibility delivered by LB

- Primary education

- Old age, widow pension

- Minority/indigenous people development programs

- Dalit upliftment program

- Non-formal education

- Girl child education promotion

- HIV/AIDS program

- Preventive health care program

- Sub-health post / health centre

Shared responsibility of central government and local bodies but delivered by local bodies

- Lower secondary and Secondary education

- Vocational and technical education

- District hospital

- Drinking water programs

- Poverty / income generation programs

- Women development

- River training and flood control

- Environment protection and bio-diversity conservation

- Family health (population), sanitation and nutrition programs

- Rural roads

- Irrigation

- Vital registration

- Culture and heritage

- Social Services/Commitments: (old age home, child care)

LB responsibility shared (partly financing) by CG

- Solid waste management

- Fire brigade

- Public library

- Local heritage site conservation/rehabilitation

- Urban roads


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6.2 Institutional set-up and linkages

The study observed the need to improve the institutional set-up, linkages and processes of service delivery in order to get the services provided effectively according to the delineation of expenditure assignments. The recommended Institutional set-up for the public service delivery is graphically shown in the charts1 and 2. The charts show the program and financial linkage among them in the provision of public services and the key roles of the actors at central and local levels. The remaining part of the section describes the recommended institutional set-up, linkages and processes, beginning with the design considerations.

6.2.1 Design considerations in proposing the institutional set-up

The proposed institutional set-up has given consideration to address the following key issues raised during the study and field work.

a. The planning, budgeting and system of approving the plans of LB must respect the LB. The planning system is such that it leaves room for maneuvering at the centre before the plans are finally approved for funding. The practice is that once LBs pass their plans they are forwarded to NPC for final approval for funding, and since here the LBs‟ plans are scrutinized and adjusted, the ultimate result often comes different than what LBs have planned. Negative consequences arise of this system are that LBs‟ authority and credibility is challenged or undermined because influential persons at the centre may get their plan approved irrespective of LBs‟ decisions, and since long spell of uncertainty prevails since the LBs are not sure if their plans will be approved as they have passed. Typically the plans passed by LB council hold little or no value in the end and by the time budget is approved and funds released there is virtually little time for LBs to implement, as they have to start the next planning-cycle. LBs have experienced „planning fatigue‟ among people since LB seem to be asking to plan for next year without implementing the programs planned last year. It is noticed that because the central government does not provide definitive budget ceiling (pertaining to conditional, unconditional and equalization grants) and sticks with what ceiling is given for planning such practice sustains. The remedy to this situation would be to avail LBs the exact budget ceiling, and any guideline associated to it, before they plan and stick to it; and then honor what LBs have planned so long as they have not violated the framework given to them. This would ease the functioning of the central agencies; the NPC and MOF by relieving them to dealing on projects to be approved in LB plans and the MLD to concentrate on monitoring and evaluation of how LBs are functioning. Coupled with this when the funds to the LBs are availed directly from the MOF to implement approved plans right from the beginning of the fiscal year the current problems will cease to exist.

b. There is a need to improve the quality of LBs’ plan. Observers note that the LBs cannot resist political pressure at the local level, don‟t treat all the sectors judiciously, divide budget equally, and spread funds thinly over too many projects. Planning decisions are mostly on-going activity of the Board instead a once-a-year business as envisaged in the act. Therefore, it is better to wait until they prove themselves before bestowing important authorities. The argument is valid but does not present a holistic picture. They cannot prove if they are not given authority in the first place. Secondly not all LBs are alike; and that the better ones should not suffer because of the poor performance of others. Besides, there is an observable trend of incorporating better practices among LBs, which must be supported. There is a need to develop supportive instruments to improve the quality of LBs‟ plans – they could be the composition of grants (conditional, matching and unconditional), service standards and guideline, and strong monitoring and supervision. Moreover, an important role of the central agencies closest to the LBs should be to provide technical support in planning and programming in the respective sector.


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Civil society / private sector

DDC Section

DDC Section

National Planning Commission

Other Line Ministries

Ministry of Finance

Auditor General

Ministry of Local

Development

Municipality

VDC

DDC with sectoral sections

Funds Plan/program Information/coordination

Departmental, Regional and Sub-regional offices

of Line Ministries

Chart 1: Proposed institutional set-up

c. The relationship between Municipalities, VDCs and DDCs must be clarified. At present the relationship between DDC and Municipalities is not found cordial. The Municipalities are accorded the same status as VDCs with regard to the formation of DDC and representation in its affairs. The municipalities feel that territory of their jurisdiction, size of population, responsibilities is far greater than VDCs; it is virtually a number of VDCs put together. Similarly, they are different from DDCs in many respects such as the amount of budget they handle, and the nature of their functions. A few municipalities also question about the capacity of DDCs to guide Municipalities, and others point out the fact that there is virtually no relation between DDCs and municipalities in terms of working together for services in municipal areas (Box). These views and the facts suggest for a differential treatment of municipalities, though not all municipalities are equally bold enough to challenge prevailing concept with regard to status of DDC vis-à-vis VDCs and Municipalities. The VDCs don‟t challenge the role of DDCs but enjoy an autonomous status, which can have direct relation with other agencies. The study recommends that Municipalities be accorded differentiated treatment than VDCs as far as tasks, functions, links, and arrangements related their authority or work processes are concerned. In fact in many ways this recommendation can simply be taken as formalization of the existing reality and practice of doing business. In the same vein, the DDC should aim not in managing the affairs and budget of VDCs, but act as facilitators and coordinators.


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Municipalities on their relations with DDC

“We handle budget of 2 billion, they 15 million” “Our relation is limited to the extent that we are giving them motor and petrol, because we are subordinate

by law” “What is the need for a different layer of LB, when the people are directly served by a body such as

municipality?” “Though officially required the ilaka member hesitates to attend municipal meetings” “Municipality is not bound to channel its plans through DDC, we are different by law”

d. Appropriate system must be designed so that line ministries are not expected to devolve funds for which they are accountable to LBs. Current law and practice holds the line ministry secretary accountable for the funds channeled through the ministries. The secretaries do not feel comfortable to delegate to transfer such authority to LBs that are not under their control as they are governed by separate Act, and follow separate accounting practice. The devolution of health, agriculture and education sectors have suffered the problem and at the end the DDCs has become “post box". Therefore there is a need to devise mechanism in which the accountability is transferred to the LBs and the funds to LBs do not have to be routed through line ministries. As long as the funds are routed through the line ministries the DDCs will continue to remain as „post box‟ and the operation of DDF will be a nightmare. The study proposes that the funds be directly transferred to DDF from the MOF.

e. The DDC as well must act as a true and effective coordinator of development efforts. If it engages itself in implementing programs itself, then it cannot be. So DDC should focus on managing implementation, but not implementation per say. The DDC administrative structure should be such that the sections and divisions are structurally made capable to take decisions on funds for approved programs, and are held responsible and accountable for outputs and results. The current situation is that the head of DDC administration is the secretary of DDC Board, so the distinction between these functions is blurred. Just as the central government is effective being enabler and facilitator the DDC should remodel itself in the same line. The sections will be independent wings with clear mandates and budget, and the board will be monitor and supervisor of the sections – the sections in turn will assign production responsibilities to VDCs, civil society and private sector.

f. There should be no room for public expenditures that by-pass the LBs: Currently various program modalities tend to by-pass LBs. Among them is the Constituency Development Fund (popularly known as MP Fund), in which MPs approve fund for a program/project, on their personal discretion, even if it is not in the LB priority, and sometimes at odd time of the year. Yet the administrative and financial accountability rests on the LB to execute such programs. Another notable program, The Poverty Alleviation Fund (PAF), which is in the stage of finalizing the modality of its operation, seems to recognize the importance of LBs but is not giving them a role. The study could not find room to adjust interests or modalities such as the MP funds and PAF – no literature on decentralization or international practice supports such interests; the public expenditure assignment should not by-pass LBs in any case. The study team strongly believes either such practice be abolished or aligned in the decentralization spirit. The Rural Water Supply and Sanitation Fund Development Board, having worked for few years in a different way, has revised its working modality that gives LBs some role and honors LB plans; it is better if others learn from this experience. Therefore the study has worked out institutional framework or the division of tasks and responsibilities considering no room for the existence of such programs and modalities.

g. Line ministries and local bodies need to redefine their functional relationship. When the sectoral line ministries devolve most of their field functions to local bodies then it is all the more essential to define their relationships with the LBs. The complication lies in the fact that the LBs are not subordinates to line ministry, yet the line ministries have certain sectoral accountability that they need to discharge through LBs. In the devolved context they should work in a partnership spirit, i.e., they should build mechanisms to share experience, expertise and technical know-how, and set targets together. In this connection the LMs should support LBs in


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planning and programming, supervise and monitor LB functions or compliance on sectoral issues. The role of LMs will substantially change, and the expertise they need will be different. The district and sub-district level offices of the line agencies have to be merged with LB structure.

6.2.2 Role of central government agencies

According to chart 2, while the central agencies coordinate each other and link with LBs on their own relating to technical matters, the program coordination responsibility lies with the Ministry of Local Development. The funds shall flow directly from the Ministry of Finance to the local bodies. This proposal differs from the current mechanism in which the budget flow to the LBs is routed through the respective line ministries and the MLD. The roles and structures of the specific central agencies are pointed out in the following section.

National planning commission: The national planning commission will empower the Municipalities and DDCs to approve the jurisdiction level plans under broad guidelines. This means the programs and plans of LBs will not have to be approved by NPC prior to budgeting by the Ministry of finance. NPC will, however, take note of the LB plans and coordinate with the sectoral ministries for planning and monitoring.

Auditor general’s office: The AGO will make necessary arrangements for auditing the finance and accounts of Municipalities and DDCs, conduct audit regularly and incorporate the results in consolidated report to be presented to the King and the parliament as mandated by the constitution.


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Ministry of finance: The Ministry of finance will send the budget ceiling to LBs based on the discussion with NPC and MLD on the tasks devolved to LBs and calculation of expenditure needs. When LB planning process is complete MOF will transfer the funds, along with expenditure authority, to LBs directly to the DDF and Municipality and hold the respective LBs accountable for the funds.

Ministry of local development: The ministry of local development will play the role of a coordinating ministry and champion of decentralization in Nepal. It will devolve the implementing functions to LBs and reorganize itself. It will facilitate the program linkages between LMs and the LBs, and focus itself in capacity development, and supervision and monitoring of LBs.

Auditor General

- Conduct audit and control financial management of LBs

Overall role of central agencies

Taking policy initiatives; Coordinating at national level; Developing central level programs; Setting service standards and goals; Capacity building initiatives Facilitation

Department, Regional and Sub-regional offices

Provide technical assistance to LBs

Implement central level programs through LBs and other actors

Strengthen capacity of DDC, Municipalities and VDCs in the sectoral area

Coordinate national program implementation

District Development Committee with sectoral

sections

Prepare and approve district level plans and budget for basket fund and internal resources

Implement programs using appropriate agency (Mun, VDC or CO) and mechanism

Supervise and monitor Carry out internal audit of VDC

VDCs Prepare VDC level plans and budget

and get approval from DDC Authorize implementing agency for

production functions Supervise and monitor implementation

Civil society and Private sector

Act as service providers Participate in LB affairs

Chart-2: The actors and major roles

Ministry of Local Dev

- Act lead agency and champion of decentralization; - Coordinate in program aspects - Monitoring, guidelines and supervision and capacity building measures; - Shed off implementing functions

Ministry of Finance

Provide timely budget ceiling for planning in a basket of funds for all development programs

Avail financial authority and funds directly to LBs

Provide budget to implement national priority programs

Nat’l Planning Commission

- Plan and program guide; - Work with MOF for setting grants amount and criteria Honor plans of LBs and discontinue amending LBs programs

Line Ministries

- Provide technical guidance / guidelines; - Set service standards and goals;

DIMC/DIMWC

- Push and follow-up of

decentralization, - Policy guidance

LBFC

- Play active role in facilitating fiscal decentralization - Policy study and feedback

Municipalities

Prepare and approve municipal level plans and budget

Implement designated service responsibilities

Authorize implementing agency for implementation (production)

Supervise and monitor implementation

LB Associations

- Capacity building - Norms and codes - Advocacy and feedback (upward and downward)


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Line ministries: The major responsibilities of line ministries will be in formulating policy, building and strengthening linkages and coordination at national and international level and monitoring and evaluation. The line ministries will abolish their district level offices and transfer the relevant functions to DDC. The HMGN line agency will set-up Sub-Regional Office to assume the regulatory tasks of government and to carry out functions that are identified as appropriate for central agency. The sub-regional office of majority of the LMs would need to have jurisdiction of more than one district (such as Divisional Office of Road or Irrigation) which should be decided considering the workload and accessibility.

The role of HMGN line agencies‟ offices with the LBs will be mainly to provide technical assistance in planning and programming, linking central policy with local ones, and enable LBs than routine implementation of programs. The organizational structure, TOR of each unit and work procedures will need to be revised. Once the majority of the implementation function rests with LBs the field level staff of the line ministries should be working for LBs, which calls for a working out appropriate staff management and subordination system, especially in relation to those employed under central civil service.

The LSGA allows each ministry of HMGN to directly work with the LBs. Therefore in technical matters, and on matters related to capacity development of LBs, these agencies will work directly with LBs. The MLD will facilitate the coordination of LBs‟ programs and plans with the ministry of finance and national planning commission. As mentioned earlier the line ministries need to support the LBs in sectoral planning, technical supervision, and share reports and information.

Local bodies' fiscal commission (LBFC): The establishment of LBFC has been taken as a welcome move by all stakeholders. However, it is yet to function as an independent body of professionals and represent various interests in its composition. Therefore, there is a need to further strengthen it to play a key role in fiscal decentralization in Nepal.

Decentralization implementation monitoring committee (DIMC): The role of DIMC and its working committee (DIMWC) in pushing forward the cause of devolution and implementing the expenditure assignments as recommended in this report is vital. DIMC needs to point out the appropriate working modality and the specific tasks that need to be devolved to LBs to line ministries, and give required guidelines or directives.

Semi-government organizations: Several functions currently done by semi-government organizations (e.g. commissions, corporations, committees, boards, and authority) are identified as appropriate to be done by LBs. Such agencies should devolve those functions to LBs, and for functions that are not devolved should work in close coordination with LBs in similar manner as suggested to the line ministries. The table below shows the implication to major agencies according to this recommendation

Local Bodies’ Associations: The role of LB associations will be in capacity building of LBs, evolving norms and code of conducts, advocating the areas of change, building linkages with other agencies, and providing pertinent information to all central level agencies to expedite and strengthen the process.

6.2.3 Roles and functioning of local level agencies

District Development Committees: The role of DDCs will be to coordinate plans and programs of different agencies in the district. The DDC will avoid implementing programs on its own, but will focus on creating enabling environment for engaging municipalities, VDCs, NGOs and private sector. The DDC will have to act as focal point for generating, maintaining and updating information about the district. In line with this the DDC should rather form committees, boards or similar other institution under and delegate the functions that it is supposed to implement. Some other key responsibilities roles of DDC will be to coordinate, provide support and building capacity of VDCs for program implementation and monitoring, supervision and evaluation.

The DDC will have to restructure its organization and systems. It should have appropriate number of sections (based on the priority sector, nature of focused programs and workload) with adequate quantity and quality of staff to deliver sectoral programs. The sections will be responsible to carry out the programs and


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receive budget through mandatory provisions (unlike at present where they get only if LDO delegates, but just like the HMGN ministries get approved plans and budget from ministry of finance). This arrangement will also be supported with a practice of allocating the total budget at the outset leaving little, if at all, budget for contingency or ad-hoc program decisions in the middle of the fiscal year.

Municipalities: As local bodies in direct contact with citizens Municipalities will be responsible for most of the services to citizen; in the situation that the LMs will have only Sub-regional offices, a Municipality is the representative of the state that is closest to people, hence the ultimate service provider. However, as much as possible Municipalities will involve civil societies and private sector for production responsibilities so that they can play the role that an effective government plays – take up provisioning responsibility, outsource production responsibility and be engaged more in monitoring, supervision and enforcement functions. As in the case of DDC the Municipalities should also focus on discharging their duties and responsibilities through formation of committee, board or similar functional structure rather than bloating its own administrative structure.

Most of the municipalities already have appropriate administrative structure. In order to be effective the municipalities need to improve their planning process and make the respective sections or divisions of their structure more responsible and accountable. The sections and divisions would be more effective than today it they are authorized for the budget related to the functions of their responsibility. As in the case of DDC the amount of discretionary decision should also be reduced to a minimum level.

Village Development Committees: The role and functioning of VDC would not be different than that of Municipalities; it is only that the quantity and intensity of the services might differ. The VDCs will also be direct service providers in most of the cases. However, VDCs would also involve civil society and private sector in service provision to the extent possible and assume the role of an agency responsible for provisioning, monitoring and supervision. The VDCs should also have appropriate structure or working hands to deliver its designated responsibilities. One of the major requirement for the VDCs to work as organized bodies is to increase its staff strength from now; with the increased amount of functions and responsibilities it is going to undertake and since there will not be any other responsible government according to the recommendation the need for at least an accountant as regular staff is deemed necessary. The modality of functioning recommended for DDC and Municipality will also apply in the case of VDCs as well.

Community organizations, NGOs and private sector: The role of CO, NGO and private sector is envisaged mainly as producers of public services. They will work closely with the local bodies and offices of line agencies and assume the service delivery responsibilities.

6.2.4 Linkages among central government, local bodies, community organizations and private sector

The institutional arrangement envisages a complimentary linkages and relations between and among central government, local bodies, civil society and private sector.

The central government sub-regional office will work closely with the local bodies and plan programs according to the expenditure assigned to them. One of the roles of the line agency offices will be to provide technical backstopping and support to the local bodies for planning, programming and implementation. While the programs related to the local bodies will be approved by the local bodies themselves, the programs assigned to the central agency and corresponding budget flow from the line ministries through the existing official channels. The line ministry Sub-regional offices will implement most of the programs themselves


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Exemplary LB relations

Kavre DDC prepared Tourism related video through Dhulikhel Municipality

Rupandehi DDC provides Fire Brigade operation grants to Municipalities who in turn provide support to nearby VDCs in need

Hetauda Municipality provides funds for adjoining VDCs roads connecting the municipal area

involving private sector and community organizations wherever possible. These offices may also implement some programs in partnership with LBs in mutual understanding (this is likely since the point of action will be a territory or among citizens where LBs are closest state organizations, and that the LBs would have implementing structures and staffs that LMs can use). Part of the programs and funds of the Sub-regional offices can thus be channeled through the local bodies.

The DDC again being not an implementing agency will route the program through VDCs, civil society and private sector agencies. The linkage of DDC with VDC is stronger compared to that with Municipalities. It is expected that the linkage will improve when DDC acts as true coordinating body in terms of planning, budgeting and programming as discussed under section 6.3. Exemplary relation between DDC, VDC and Municipality are seen in various places (box). Such cooperation is expected to rise as the LBs are fully responsible and autonomous to decide on the modality for providing services.

The relationship between Municipalities and adjoining VDCs is particularly crucial – since they are closely economically and socially. With, or even without, DDC coordination the links are growing and expected to grow over time. This phenomenon should be encouraged.

The national plans, programs and strategy, and the medium-term plan of LBs shall be the coordinating and linking instruments for forging effective relationship among central government, local bodies, civil society organizations and private sector. The local bodies and central government agencies shall refer to the plans, strategies and priorities of each other for preparing their plans, and the civil society organizations and private sector shall use the central and local plans and offer their services to complement the plans. The mid-term plan of LBs will guide their annual plans, and serve as basis for the central government to arrive at the support the LBs will be entitled from the central government.

6.3 System and processes for service delivery

6.3.1 Planning, prioritization and allocation of resources

The central level agencies, particularly the NPC, MOF and MLD will work out the total size of the development expenditures (conditional, unconditional and equalization grants; and service standards and expected outcomes) to the DDC and the Municipalities. The budget ceiling will then be sent to the LBs, which they will allocate to programs and various services sectors based on central guidelines, LB priority and other considerations. The DDC will also have to do similar exercise – i.e., it will work out the central grants amount and internal resources to determine the grants to the VDCs and Municipalities and for other programs that it intends to implement through them. Along with the amount of grants and program costs it will make available as ceiling for the VDCs and Municipalities it will also send its own policy, guidelines and directives, and service standards and expected results to them. Thus the Municipalities will receive two ceilings – one pertaining to central grants to them and another, the DDC‟s grants (if any) to them; whereas the VDCs will receive only from DDCs. The VDCs and Municipalities then add up their internal resources to the grants to arrive at the total public expenditures they will allocate.


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The VDC and Municipalities will prepare their plans within the funds available to them; they will have to take responsibility for any program they plan exceeding the available funds (ceiling). The VDCs will get legality check of their plans from DDC (if the allocation is in line with the guidelines, policy and norms), while the Municipalities get it checked from MLD. The plans prepared by each LB are final and NPC will not change it as long as they are legally harmonious.

This arrangement will enable the DDCs to plan their programs and allocate funds in the areas of their priority and allows sufficient time to implement them. However, the central agencies will have to inform the budget ceiling as basket fund (with conditional, unconditional and equalization grants) and guidelines for allocation, if necessary, along with the service standards and targets expected from them.

6.3.2 Planning, Budgeting, Fund Flow and Accountability

Planning and Budgeting: In view of the recommendations made on the assignment of additional new tasks to LBs, the study recommends following measures in order to streamline the planning and budgeting process to be applied to LBs:

NPC together with the line Ministries, MLD and MoF will prepare district budget ceiling and national guidelines. The district ceiling will consist of the DDC budget ceiling and lump sum VDC budget. The ceiling will be composed of 3 components, viz. administrative and other unconditional fund, conditional fund to be spent on sector/s within the framework of the Guidelines and equalization fund to be spent for specified purpose.

The MoF will communicate the budget ceiling and guidelines to DDCs through MLD. NPC/MoF will guarantee the resources to the extent of budget ceiling communicated to DDCs.

The MoF will communicate the budget ceiling and guidelines to DDCs though MLD. NPC/MoF will guarantee the resources to the extent of budget ceiling communicated to DDCs.

Within the limitation of budget ceiling provided by the centre, the LBs shall have the full authority in the planning process including prioritization and allocation of funds. They shall not be required to submit their plan and program for approval by the NPC or the line ministries.

All the development activities to be implemented in the district should be incorporated in the annual plan of DDC. The current practice of providing Rs. 1 million as Constituency Development Fund to be spent at the discretion of every Member of Parliament should be discontinued since it distorts the DDC prioritization and give too much burden on the already weak DDC financial management.

DDC will send the budget resources and guidelines to all the VDCs. The resources will consist of fund to be spent on devolved tasks, administrative expenses and fund to implement specific development and poverty programs. The budget ceiling to each VDC shall not be less than Rs. 500,000 which each one of the VDCs is receiving at present.

Thus the existing system of block grant for providing the central budgetary support to VDCs should be discontinued and instead the resources should be sent through DDC as indicated above.

NPC/MoF will provide specific funds to Municipalities to carry out the devolved and new tasks.

Flow of Fund: In view of the planning and budgeting processes proposed above, the study recommends the following mechanism of the flow of funds to LBs:


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MoF will provide expenditure authority to DDC and municipalities directly. The budget will be released to these LBs through DTCO.

The DTCO will release the budget of VDCs to DDC which will then provide funds received to the VDCs.

The LBs will be required to submit the statement of expenditure every month to DTCO. Such a stetement should show the figure of annual budget, budget release, expenditure and balance of budget by budget category (and not by the grant category number in which the budget is shown in the Red Book.)

The MoF should reflect the budget/funds to be provided to LBs under separate budget heading/s instead of showing them under the budget heading of line Ministries including the MLD.

6.3.3 Auditing and Financial Control

With the devolution/delineation of more and more tasks and functions, the local bodies especially the DDCs and Municipalities will be responsible for the implementation of substantial amount of funds as compared to the present situation. This change calls for the restructuring of the present system of auditing to make the LBs more accountable and transparent. It is therefore recommended that:

The Office of the Auditor General should carry out the final audit of DDCs and Municipalities and report it as part of its report to His Majesty's the King and the Parliament for discussion. The audit should cover both internal revenues and central funds.

DDCs and Municipalities should be made to abide by the directives issued by the Parliament in the matters covered in the Auditor General's report.

In order to make changes in the auditing and financial control measures applicable to LBs as suggested above, it is recommended that required changes be brought about in the relevant provisions of LSGA, LSGR and LBFAR.

6.3.4 Standard of services

The minimum standards for services are defined in the currently devolved sectors. However, some of the defined standards lack clarity in terms of quantification. Therefore, the study recommends that, in order to ensure quality services, minimum national standards should be adequately defined considering the availability of resources for all existing devolved services and other services to be devolved in future. The responsible LBs shall be allowed to define their service standards which cannot be lower than the minimum national standards.

6.3.5 Human resource deployment

Devolved service delivery mode of operation demands that the implementing staff will have to be with the DDCs and not with the line agencies. The staff with the LBs should be fully responsible and accountable to the LBs themselves. Experience has proven that dual subordination and shared loyalty, which is there with some staff at LBs, is not an effective system, which is more likely to appear seriously when more sectoral services, functions and responsibilities are devolved to LBs. The LBs should have authority to hire and manage their staffs. Options and mechanisms have to be worked out to fulfill the staff needs of LBs through transfer of services from central to local or creating new LB service system or any other appropriate ways. MLD is working out a HR system for local bodies, which is expected to address these issues.


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6.3.6 Monitoring, supervision and evaluation

While the monitoring of the programs and plans implemented by LBs will be done by LBs themselves, the monitoring of the LBs themselves should be made more effective. The monitoring should focus on planning process and quality of plans, budget allocation to various sectors, financial processes and fund use, and service satisfaction of citizens. Moreover, the organizational capacity and performance should also be a major area of monitoring.

Monitoring should be designed in such a way that while this process ensures effectiveness of service provision, on another hand it also gives valuable information about the capacity building needs of the LBs. Monitoring, supervision and capacity strengthening of the LBs shall be one of the important on-going activities of MLD.

6.3.7 Links with citizen and downward accountability

The various forms of existing mechanisms to link with the citizens (as discussed in 5.5) need to be strengthened and monitored in order to facilitate citizens access to services, and achieve responsiveness and increased downward accountability of LBs. Furthermore measures such as system of performance based incentive provision, performance audit and publication of comparative status are some tools recommended for improving downward accountability of LBs.

6.4 Implementation of expenditure assignment and service devolution

Putting the recommendations, made in the previous sections, in operation will demand efforts, groundwork and initiation before the system takes off. This section discusses these aspects.

6.4.1 Responsible agency to take up the devolution plan

The implementation of the expenditure assignment and sectoral devolution would not happen systematically and coherently without an agency that takes up and pushes the cause. The experience of service devolution of three sectors since two years ago supports the statement. The National Planning Commission is considering experimenting „full devolution‟ in selected districts. This move also needs a strong organizational support and backup (and a “driver” of the process) for success. The study recommends that the DIMC and its working committee – DIMWC – should play the role. However, it should be noted that DIMC has not met since the last two years, and DIMWC is also not active as observed by stakeholders. In such a situation there is need to find alternate ways.

An option is to form a special Task Force under DIMC/DIMWC to identify the pertinent issues, and other recommendations made by the study. Some identified tasks for the agencies will be to categorize LBs by their capacity; match functions appropriate to capacity; pointing out areas for taking administrative decisions for line ministries; drafting legal instruments; making the sector devolution guidelines uniform across the line ministries; and defining and establishing functional relationships between central agencies and local bodies (in areas such as setting and defining service standards, reporting and quality control, mechanisms to access expertise and information, planning and programming, capacity building, define roles and development of modality for implementing national programs in LB areas and monitoring and supervision).


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6.4.2 Developing phasing plan

It is recommended that the devolution should be implemented gradually in a phased way. This is so considering the varied capacity of LBs, nature of the services, and implications related to organization and management on the part of central agencies. Broad outline of the scope of work for implementing the recommendations is given in the following sections.

a) Time frame for implementation

The phasing of the implementation of recommendation should be planned and carried out within a fixed time frame. The study recommends the timeframe to be 5 years.

b) Identification of sectors / local body for devolution

The study recommends adopting the principle of phased implementation of the devolution process. There are two dimensions for phasing out. One important dimension is the capacity of the LBs – the more capacity they possess the more the functions and responsibilities. Another dimension is the complexity of the functions – the less complex tasks and responsibilities the first to be devolved.

The framework can be schematically shown as below:

Weak local bodies Capable local bodies

Easy functions

Initiate devolution along with capacity development measures

Devolve immediately

Complex functions

Wait devolution till LBs are ready Gradually increase along with

capacity development measures

The general frame provides a more objective guide for phasing out the devolution of services to the LBs at present. This framework helps one to develop guidelines for phasing devolution process, for example:

Phasing devolution by capacity of local bodies: The first phase of devolution should start from assigning most of the recommended functions and expenditures to organizationally capable local bodies such as the Kathmandu Metropolis, all Sub-Metropolises and Municipalities such as Hetauda, Dhulikhel, Butwal and Siddharthanagar; and DDCs such as Kavre, Morang, and Rupandehi.

Phasing of devolution by sector or service: The devolution process should start with relatively easy functions and responsibilities. Such sector or services include intra-district roads, cooperatives, urban services, and operation and management of drinking water supply.

A proposed matrix of functions in line with this notion is presented in the following table.

Functional area and Activities to be devolved

Agencies to be made

responsible

Presently Responsible line Ministry/

Institution

Time Frame Remarks

1. Road Transport

Road Construction and Maintenance DDC MOHPP

July 2004 Eliminate duplication of work between line agency and municipality/ DDC. DoR be confined to the strategic roads and highways

Inter District/ Rural Roads DDC/VDC

Urban Road/drainage Municipality

Food for work program DDC MLD July 2005

2. Drinking Water

Municipal area DW management and supply

Municipality

MOHPP/ NDWC

July 2004

Need redefinition of NDWC structure and role


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Agencies to be made

responsible


Institution

Time Frame Remarks

Construction, management and supply of drinking water in VDC/Mun

VDC/User's Committee

MOHPP

July 2004

3. Education

Primary/Lower-Sec/Sec School management/ supervision

SMC VDC/ Mun

MOE

Started since July 2003

District Education office's role confine to quality of education, monitoring/supervision, training facilitator and text book distribution. DC/HMG should support special education program

School Management financing and fund flow

DDC MOE July, 2004

Informal education Scholarship programs/ Grant in kind/ mid-day meal program

VDC/ Mun/ DDC

MOE

July, 2005 July, 2004 July, 2004

Special education DDC Mun/ VDC

MOE July, 2005

4. Health

Sub-Health post/ Health Post Management

HMC/ VDC / Mun/ DDC

MOH

Started since July 2003

District Hospital DDC MOH July, 2005

Sanitation Program Family Planning Awareness and Control

DDC/VDC/ Municipality

MOH July, 2005

5. Environment

Solid Waste Management/ Disposal Sewerage

Mun/ VDC MLD July, 2004 Municipality may work jointly with private sector.

Environment Promotion Mun/VDC/ DDC

MOHPP/ NDWC

July, 2004

Air Pollution Control Municipality MOPE July, 2004

6. Tourism and Cultural Promotion

Licensing for non-star hotel/resort DDC MOTCA July, 2004

Heritage Protection/ Conservation Monastery Rehabilitation/ Maintenance

DDC DDC

MOTC MLD

July, 2005

8. Social Welfare

Safety nets for disabled, old age and widows

VDC/ Mun DDC

MLD

July, 2004

PAF should work closely with LBs.

Child, Youth and Women development program

DDC/VDC/ Municipality

MWSW MLD

July, 2005

Safety nets for Indigenous and marginalized backward community development

Poverty/ income/ employment program

Define Role for DDC/ VDC/ Mun

PAF/NPC July, 2005

9. Agriculture and Cooperatives

District Agriculture/ Livestock program Cooperatives Registration and monitoring

DDC

MOAC

July, 2005

10. Industry

Cottage, Small Industry registration Micro, cottage and small industries promotion

DDC MOICS July, 2004

11. Natural resource / Electricity

Micro hydro power registration DDC MOWR July, 2004

Electricity distribution in municipal area

Municipality NEA

Management and operation of small irrigation

VDC/ User's group

MOWR


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Agencies to be made

responsible


Institution

Time Frame Remarks

Watershed Management DDC/ VDC/ User's group DDC

MFSC July, 2005

Coordination in CFUG formation and for leasehold forestry

VDC/DDC MFSC July, 2004

12. Central agency and system improvement

Role definition and organizational restructuring (refer 6.4.2 b below)

DIMWC and respective ministries

Start from July 2004

NPC/LMs budget ceiling and guidelines and grants should authorize DDC/ VDC / Mun to prioritize and implement projects/ programs. No need for further Approval, limit only to legality check

Planning, prioritization and resource allocation on district level programs/ projects

DDC/ Municipality

NPC/Line Ministry

July, 2004

Direct fund flow and expenditure authority from Ministry of finance to district development fund (DDF) and Municipality Fund (MF)

DDC (DDF)/ Municipality (MF)

MOF/ Line Ministry

July, 2004

Auditing

Auditing (and internal audit) all district and municipality expenses and reporting it as a separate part of AG's report.

Auditor General's Office

DDC/Municipality/ MLD

July, 2005 Auditor General's office capacity needs to be enhanced.

13. Supervision/ Monitoring and Evaluation

Supervising Local Bodies e.g. Planning / Priotization, adherence towards line agency's guidelines in formulating programs, projects and in allocation of resources.

MLD

NPC/ Line Agencies

July, 2005

MLD should closely monitor and supervise activities of local bodies/

Monitoring and evaluating performance of local bodies Develop and implement to reward and penalize local bodies.

MLD

July, 2005

16. Vital Registration

Authorize Vital Registration, (birth/date) marriage certification Design reporting system so that the information could be used by Central Bureau of Statistics

Municipality/ VDC

MLD/ VDC and MLD staff in Municipality

July, 2004 As vital registration updates population census, CBs should receive information on a regular basis.

c) Restructuring of central agencies

As more function and responsibility are devolved to local bodies, the district and sub-district level central offices will become redundant; as mentioned above sub-regional offices of line agency offices will have to be formed with changed mandates. Thorough orientation on the changed roles and responsibilities to these offices are imperative.

The following table gives the list of key central agency that will undergo such changes.

Ministry Concerned agency

Remarks

MLD DOLIDAR

The implementing functions of DOLIDAR are appropriate for DDCs themselves to undertake. In such a situation DOLIDAR can focus on norms setting, technology development and transfer, capacity building of LBs, and focus on policy formulation. In this sense the district offices of DOLIDAR should be merged to DDC as its technical wing.

MLD RCIW

The functions related to RCIW are appropriate to devolve to LBs (particularly to DDC), and since technical wing of DDC can provide technical support the program needs to revise its role in the devolved context – either find appropriate roles and tasks or completely change its existence.


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Ministry Concerned agency

Remarks

MLD Gumba Development Committee

The service provision related functions done by DDC will be devolved to local bodies. In this context the committee must shed off such functions, and concentrate on functions such as policy feedback, advocacy and capacity building of local bodies.

MLD RADC Same as above

MLD Solid waste and resource mobilization company

The functions of the company will be undertaken by Municipalities therefore it is needed to examine the rationale to keep this agency, and if it exists then its roles and functions should be revisited.

MLD The MLD needs to act as lead agency for decentralization. The MLD then will have to focus itself on policy and acts; coordination of the LBs with parliament, government and donors; monitoring and supervision, and; capacity building and transfer of know-how and technology. Massive restructuring of the ministry is obvious.

MOAC

Cooperative department

The cooperative registration, audit, and training functions are identified as suited for devolution to DDCs. The department and the district level offices should be restructured and appropriate functions or roles should be mandated

MHPP Town Development Committee

The jurisdiction of the Town development committee overlaps with that of Municipalities. Since Municipalities are capable of doing what it is doing now, TDC jurisdiction should be confined in the potential (emerging) VDCs to prepare planning and basic infrastructure required for upgradation to Municipality.

Ministry of Finance

MOF needs to expand its capacity to administer the budget preparation and expenditure authorization system directly to DDCs and Municipalities. The restructuring is evident.

AG's Office

AG's office needs to be expanded18

and a separate unit dealing with local bodies auditing needs to be established.

Line ministries

District level offices

All the district (and sub-district) level implementing offices of the line ministries have to be transferred to DDC as a unit in the devolved context, in which case the LMs have to review their organization structure and functions. LMs should opt to sub-regional level offices as technical office to support LBs. They should also work as national programs/projects implementers and monitor/evaluate district level performance. The number of sub-regional offices is to be determined and the staff reoriented to the new context.

NDWC Detail assessment should be made regarding the viability/new role of Nepal Drinking Water Corporation.

The restructuring of central agency must follow a systematic pattern and clearly define or delineate roles and responsibilities under the devolved context where a significant amount of citizen services are delivered by the local bodies. The following table gives the broad framework while defining the roles of different level of government.

Level Key functions and responsibilities

Ministry Policy initiatives; Linkages and coordination (national and international level); Monitoring and evaluation

Department National priority program implementation; Human resource development; Planning and budgeting Sectoral program / project coordination

Regional and sub-regional offices

Regional and sub-regional level coordination; Planning and program development; Implementation monitoring; Technical support for planning and implementation; National program/ project coordination and implementation; Human resource development; Capacity building; Monitoring

DDC Planning, prioritization and budgeting; District program coordination; Resource allocation; Human resource development and capacity

18 Alternate to this recommendation is a modality suggested in LAFC Report 2000


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building; Monitoring and supervision; District level program implementation

VDC/Municipality Planning and budgeting; Program implementation; Service delivery; Resource mobilization

6.4.3 Systematizing devolution of sectoral services

Preparing sector service devolution guidelines

In the process of devolution of tasks and functions to local bodies/management

committees, their agreement/understanding was neither sought nor received. In addition,

the guidelines were prepared without consultation with all the stakeholders. As a result, a

number of inconsistencies and inadequacies were noted in these guidelines. While

devolving the services, methodology for determining financial compensation in respect of

devolved tasks has also not been thought out and prescribed in the guidelines.

Furthermore, the guidelines have failed to provide any mechanism for the resolution of

disputes, if any, arising in the course of implementation of devolved functions. The

devolution exercise was not properly planned since the orientation and devolution process

went together. These situations indicate for the need of carrying out sectoral service

devolution exercise in future in a more methodological and systematic manner.

It is therefore suggested that future devolution exercise should be planned in such a way that it should be preceded by the preparation of Sector Devolution Guidelines and proper orientation of the stakeholders on their roles and responsibilities. It is suggested that the input of a team of consultants be procured for the purpose of developing model Sectoral Guidelines including the Standardized Operation Manual for discharging the sectoral services. The consultants should also suggest related institutional framework for a better coordination of the devolution process. The Terms of Reference of the team of consultants to provide input for these tasks is included Annex VI - 1.

Further elaboration of functions/services

Each sector (and sub-sector) has to prepare detailed breakdown of tasks related to sectoral services. The delineation of tasks recommended in section 6.1.3 is relatively broader, but based on the logic used in delineating tasks and services have to be prepared and responsibilities clearly defined. Examples of detailed breakdown in the three devolved sub-sectors are given in Annex VI - 2. The respective sectoral agency should prepare similar matrix and work out the roles and responsibilities. The matrix will become important input for preparing implementing guidelines.

Guidelines for implementation

Sectoral ministry should detail the services, tasks and functions related to the sector, determine the roles and responsibilities, prepare manual for implementation and orient the concerned local body about the arrangement. A suggested content/outline for preparing sector devolution guideline is presented in annex VI - 3.

6.4.4 Required changes in the legislation

A study of the legislative implication of the suggested institutional set-up was made. The problems relating to legal environment are not a problem of inadequate provisions of law rather of effective implementation of the existing law in a true spirit. Majority of the problems continue to exist because of non-resolution of the confusion and disagreements among the actors. However, the following legislative means are suggested to ensure clear delineation of functions across level of governance.

Improvement in HMG Work Division Regulation: the HMG Work Division Regulation has made the provisions of allocation of business in the ministry level only, which covers all the state functions related to the sectors and there is no limit defined for central government functions. In this context the Regulation should limit its scope to functions not assigned for local governments. It is equally important to define the role of all sectoral Ministries to provide technical support to build capacity of local bodies.


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Review and effective implementation of the LSGA: The LSGA itself needs to be reviewed in light of the devolved context. This requires streamlining the functions and responsibilities along with harmonizing of the duplications or overlaps. Many recommendations of this study can be applied by revision and improvements in the by-laws and guidelines.

Improvement in contradictory Acts: Provisions of the sectoral Acts either limit the authorities of LBs in effective implementation of their functions as provisioned in the LSGA or allocates similar functions to other institutions at implementation level. Various contradicting Acts are reviewed in Chapter III apart from the twenty three Acts that have already been identified. These Acts should be amended.

Negotiation with Local Bodies before allocating functions through other laws: Various functions are either traditionally defined or assigned to local bodies by other Acts apart from the LSGA, without prior consultation with local bodies. Appropriateness of such functions in the context of LSGA should be rethought and a practice of assigning such functions in consultation with local bodies should be established. Such a practice of negotiated assignment is expected to contribute for effective implementation of laws.

6.5 Capacity enhancement of local bodies

It is widely accepted that the capacity of most LBs is inadequate to undertake the tasks and responsibilities in a devolved context. However, the process of decentralization need not stop because of inadequate capacity of LBs, for two reasons. The first is that there are quite a number of LBs who have already demonstrated capacity, so it is injustice to them if they are put in the same basket as others. Secondly the inadequacy of the capacity of LBs has continued due to the fact that they have not been given good opportunity to develop – many believe that local capacity does not emerge on its own until there is something real to manage. In sum it is observed that capacity can be created.

The immediate capacity development needs of the LBs are in general in areas of resource mobilization, accounting, auditing and financial management, and information management. However, all these are not uniform across the LBs. The VDCs would need one additional staff (accountant) apart from the VDC secretary along with increase in their

Different capacity development needs of different LBs

The VDCs: Additional staff especially financial management and accounting; formation and strengthening of accounts and finance committee; The Municipalities: Strengthening of accounts and finance committee and organizational strengthening; The DDCs: Information management and internal audit.

and that not all LBs in a category have the same needs at the same level!

tasks and responsibilities; the Municipalities need to develop appropriate systems and processes along with organizational restructuring. The DDC need improve their effectiveness in database information management and internal audit.

Again neither all VDCs nor all Municipalities and DDCs have similar capacity development needs. The implementation of capacity development program should therefore be demand driven and the package should be developed in such a way that unique needs of different LBs are addressed. For this capacity development „package and programs‟ should be developed encompassing areas of comprehensive organizational development model. The following table summarizes the areas for capacity building of LBs

Dimensions Area for capacity building

Institutional /System Legal framework; supporting policies; supportive institutions (including creating such under aegis of LBs as well)

Organizational System; procedures; structure; resources; MIS; decision-making

Human resource competency Knowledge; technical skills; work ethics; motivation and incentives

Logistics Equipments and technology; space and buildings; machinery

Technical competency Planning and programming; standards setting; organizing service delivery; partnering; monitoring

The framework of capacity can be used for several purposes. It serves as areas of indicator for assessing capacity of local bodies and categorizing them, as input for


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assessing capacity gaps and as guideline for preparing comprehensive capacity development plans.

There is a need to develop capacity building road map and action plan covering the above dimensions and areas in a balanced manner. The general action plan should be supplemented by sector specific capacity building plans. The MLD should be responsible for overall capacity building of LBs in general, and the respective line ministries for developing technical competencies.

6.6 Other arrangements

Establish a formal assignment of expenditure responsibilities: The LBs should be given with clear and formal assignment of expenditure responsibilities in a formal way through appropriate legal instrument. Since the assignment of responsibilities might be adjusted according to development in the social and technical arena the legal base should not be too rigid and difficult to revise.

Follow-up study: Monitoring of the impact and process of devolution should be made an integral component of the design of expenditure assignment. It is recommended to conduct periodic assessment of the status, review of the situation and make necessary improvements.

Provide financial and human resources along with expenditure responsibility. Experience of devolution of responsibility should be backed fully with resources. The LBs should be supported with financial resources justified by the expenditure needs and human resource.

Regulate sub-national borrowing. The central government agencies should facilitate and regulate borrowing local bodies. Establishment of a sub-national development fund to support capital requirement of LBs, with appropriate modality is to be worked out.

Carry out financial needs and gap assessment and develop system of transfers. Avail provision for current and capital investment authority (including operation and management of services) to LBs.

6.7 Conclusion

The expenditure assignment study has focused on the division of tasks and functions across levels of government considering the existing institutional and legislative framework, the existing system and responsibility for providing key public services and the services the local bodies in Nepal are providing to citizens. Considering the paradigm shift in relation to the role of government in provision of public services and in view of future direction to make the local bodies more responsible the capacity of the local bodies, their working system and processes and the overall institutional set-up was also reviewed as part of the study. The study also involved extensive consultation with stakeholders at the local and central level and made thorough review of the related literature and international practice. Taking the background information as input the study team has delineated the tasks and functions to different levels of government including the central agency, local bodies, civil society and private sector.

The study has also designed appropriate institutional system and processes for an effective operationalizing the delineation of the expenditures. The study concludes that the role of the central agencies should change to limiting implementation of functions delineated for central agencies and to provide technical support and guidance to local bodies, which will also demand restructuring of the central administration. Similarly the local bodies should also be provisionary rather than producers of services as far as possible and restructure their organization along the same line. The programmatic and operational linkages between the central government and local bodies as well need to be redesigned.

In light of the increased amount and nature of functions to be devolved to the local bodies the study points out capacity building, financial control of local bodies and human resource management as some major areas of action. The study also recommends phasing the implementation of devolution and having a periodic and regular follow up and reviewing of the status of devolution and its effectiveness and making necessary improvements as they come.


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Acts Reviewed:-

Animal Health and Animal Services Act, 2055 (1998)

Animal Slaughterhouse and Meat Examination Act, 2055 (1998)

Births, Death and Other Personal Events (Registration) Act, 2033 (1976)

Building Act, 2055 (1999)

Cinema (Production, Show and Distribution) Act, 2026 (1969)

Construction Enterprise Act, 2055 (1998)

Consumers Protection Act, 2054 (1997)

Disable Protection and Welfare Act, 2039

Education (seventh amendment) Act, 2028

Electricity Act, 2049

Environment Conservation Act, 2053 (1996)

Forest Act, 2049 (1992)

Immovable Property Acquisition Act, 2013

Indigenous/Ethnic Promotion National Academy (IEPNA) Act, 2058

Land Revenue Act, 2034 (1977)

Local Administration Act, 2028 (1971)

Mines and Minerals Act, 2042 (1985)

National parks and Wild life conservation Act, 2029

Necessary Goods Protection Act, 2012

Poverty Alleviation Fund Act (2004), by laws and regulation

Public Roads Act, 2031 (1974)


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Regional Development Plans (implementing) Act,2013

Social Behavior Reform Act, 2033

Solid Waste (Management and Resources Mobilization) Act, 2044 (1987

Sports Development Act, 2048

The Vehicles and Transport Management Act,

The Construction Enterprises Act, 2055

The consumer Protection Act, 2055

The Financial Procedural Act, 2055

The Forest Act, 2049

The HMG Work Division Regulation, 2057

The Local Bodies (Financial Administration) Regulation, 1999

The Mines and Minerals Act, 2042

The Soil Conservation and Watershed Management Act,

The Statistics Act, 2015

Waste (Management and resource mobilization) Act, 2044

Water Resource Act, 2049

Water Resources Act, 2049 (1991)


Study Management Committee Members

Mr. Som Lal Subedi Coordinator

Mr. Ganga Dutta Awasthi Member

Mr. Murari Uphadahayay Representative, ADDCN

Mr. Mahesh Raj Dahal Member

Mr. Anand Raj Dhakal Member

Dr. Hikmat Bista Member, DASU/DANIDA

Mr. Purushottam Nepal Member Secretary

Mr. Henrik Westerby Permanent Invitee, DASU/DANIDA