Keywords

Nepal is the youngest federal country in the world. It moved from a unitary system of governance to a federal democratic republican system through a constitution enacted in September 2015. This comprehensive reform created three tiers of governments: federal, provincial, and local. The State power in the previous unitary system was divided into three tiers of government. In terms of functional responsibilities, Nepal’s government structure is devolved, with a generally pyramidal distribution of duties (that is, with more expenditure responsibilities at the provincial and local levels and fewer at the federal). In contrast, the Constitution provides most revenue-raising rights to the federal government. The Constitution provides for intergovernmental fiscal transfers to reduce the gap between functional responsibilities and revenue-raising rights. According to this arrangement, the province and local governments receive four grant types, namely, fiscal equalisation, conditional, special, and matching grants.

The history of local government in Nepal is more than 100 years old. But it is only through the 2015 Constitution that the local level has been constitutionally empowered. The Constitution clearly outlines the authority of local levels, which specify the exclusive as well as concurrent list of authority and functions.

The Constitution provides local government’s ample space within which to safeguard their political, fiscal, and administrative autonomy. It fully recognises them as an integral part of federalism in Nepal. Their powers and functions are broadly outlined in the Constitution, which embraces the principles of federalism, inclusiveness, and republicanism and envisages non-hierarchical relationships among the three levels of government.

The main responsibility of the local level is to deliver essential basic services to the people. The Local Government Operation Act, 2017, provides detailed descriptions of the power and functions of local governments in this regard. They also have some judicial functions.

Local elections are held every five years. At least one-third of women’s representation is ensured by the Constitution. After the promulgation of the new Constitution, the local level election was held in May–September, 2017. Exactly 5 years cycle, the second term election was held in May 2022.

Local governments meet their expenditure needs mainly through tax revenues, fiscal transfers, borrowings, and royalties on natural resources. Citizens have great faith and trust in the local level. Nepali citizens have more confidence in the local government than the federal and provincial governments.

1 Country Overview

The Federal Democratic Republic of Nepal extends for about 800 km along the Himalayas. With an area of 147,516 km2 and a population of about 30 million in 2021, the country is situated in a transitional mountain area between the fertile Gangetic plain of India and the arid plateau of Tibet.Footnote 1 The northern mountain belt is girded by the Himalayas, which contain eight of the world’s highest peaks including Mount Everest (8848.86 m), the highest of them all. The middle hilly region comprises numerous peaks, basins, and fertile valleys, and is home to Kathmandu, the capital city of Nepal, and Pokhara. The southern part, known as Terai, borders India and contains most of the country’s fertile land and dense forests.

Geopolitically, Nepal is landlocked, with the nearest seaport—the Indian city of Calcutta—a thousand kilometres away. Nepal’s population derives mainly from the Indo-Aryan and Tibeto-Burman family. Hinduism and Buddhism, the two major religions, have moulded the country’s cultural and social fabric since the dawn of history: according to the population census of 2021, 81.19 per cent of people follow Hinduism, one of the oldest religions in the world, while about 8.2 per cent follow Buddhism.Footnote 2

Unlike many other developing countries, Nepal commenced modernisation late in the day and under unfavourable circumstances. The pace of economic development has been slow due to limited modern infrastructure in highly rugged and difficult terrain, scarcity of exploitable natural resources, a small skilled labour force, and a landlocked situation. With a meagre per capita income of a predicted sum of USD 1400 in 2023, the country is struggling to bring sustainable prosperity to its people.Footnote 3 In the 2019–2020 financial year (FY), Nepal’s gross domestic product (GDP) was NPR 4266.32 billion (around USD 39 billion). The country has narrow fiscal space, as the tax-to-GDP ratio was just 20 per cent for FY 2020/21. National economic growth has averaged 4 per cent over the last decade (2011–2020); it was 6.4 per cent in FY 2018/19. However, due to the outbreak of Covid-19, it declined to minus 2.1 per cent in FY 2019/20.Footnote 4

Nepal adopted a new Constitution in September 2015 that marks a paradigm shift in the system, mechanism, structure, and functioning of subnational governments (provincial and local). Following the declaration of the federal republic through the Interim Constitution in 2006, elections for the Constituent Assembly (CA) were held in 2008. The first meeting of the CA abolished the 240-year-long monarchy, but it failed to draft a Constitution and was dissolved in 2012. A second CA was elected in 2013 and succeeded in promulgating the Constitution in 2015. This divides state power between the three levels of government, federal, provincial, and local. Structurally, there are seven provinces and 753 local governments. The functional responsibilities of federal units (federal, provincial, and local) are set out in schedules 5, 6, 7, 8, and 9 of the Constitution, which outline the exclusive and concurrent list of functions of federal units.

The federal parliament in Nepal is composed of the House of Representatives (Lower House) and the National Assembly (Upper House). Of the 275 members of the Lower House, 165 come from the first-past-the-post electoral system, and the rest from a proportional electoral system. The Upper House consists of 59 members. Of these, 56 come from an electoral college composed of provincial parliamentary members and chiefs and deputy chiefs of local governments; the president, on the recommendation of the government, nominates the remaining three members.

The provinces have a unicameral parliamentary system. Out of 550 members in all the provinces, 330 come from the first-past-the-post electoral system and the balance from a proportional electoral system. At the local level, all seats come through the first-past-the-post electoral system. At least one-third of representation is guaranteed for women in all electoral systems (local to federal). The head of state is the president, while the prime minister holds the position of the head of the executive. The role of the president is largely ceremonial—the functioning of the government is managed entirely by the prime minister, who is appointed by parliament.

To be a recognised political party according to election law, one must gain 3 per cent of the votes in the proportional representation electoral system and win at least one seat in the first-past-the-post electoral system. The procedures and rules of a political party should be democratic, and party office-bearers should be elected every five years. In the general election held in 2017, five political parties were able to fulfil these criteria.

The legal system in Nepal is based primarily on the common law, which has been largely influenced by the British common law system. The Supreme Court is the highest legal authority in Nepal and has substantial autonomy from other branches of government. Judges are appointed by a judicial committee headed by the chief justice of the Supreme Court.

Constitutionally speaking, federal units must be accountable to citizens. However, concerns have been raised about how effective voting is in making the governments accountable to the people, given the low levels of awareness among ordinary citizens about their rights and responsibilities. Parliamentary committees have been formed to exercise oversight of governmental decisions, while constitutional bodies such as the Commission for the Investigation of the Abuse of Authority (CIAA), the Office of Auditors-General, and the National Human Rights Commission play important roles in maintaining the vertical accountability of the executive branch of government, including subnational executives. At the local level, a monitoring committee acts under the coordination of the deputy chiefs of local government.

The journey to federalism as mandated by the 2015 Constitution is proceeding well despite the monumental challenges ahead. The shift to federalism has resolved long-standing political conflicts and brought peace in Nepal; substantial responsibilities in local service delivery have been devolved constitutionally to local governments in an unprecedented manner; and for the time being, the country’s political landscape seems supportive of local government.

2 History, Structures, and Institutions of Local Government

The history of local governance as the formulation and execution of collective action at local level in Nepal goes back to the early Vedic period (probably 1500 BC), when discourses about life and the universe were organised in an open environment under the leadership of the great saint called Rishi. The Kirats, one of the early rulers in Nepal, divided their territory into clusters, known as ‘thumbs’, which for administrative purposes were composed of five elected members. During the Lichhavi period (443–1143 AD) each village had a local government institution called ‘Panchali’. It was empowered to collect taxes for the maintenance of irrigation canals, religious monuments, and burial grounds.

During the mediaeval period (1144–1843 AD), the Malla kings in Kathmandu valley devolved some powers and responsibilities to the Panchayat to resolve local conflicts and implement local development. Rana rulers (1846–1950 AD) established ‘the Bhotahity Municipal Office’, which was the predecessor of Kathmandu metropolitan city, established in 1976. In 1962, King Mahendra promulgated a new constitution that created the elected local governments known as the District Panchayat, Village Panchayat, and Municipal Panchayat. However, the Panchayats served largely as the administrative outposts of the central government and lacked many features of democratic governance.

When the multi-party democratic system was restored in 1990, the Local Self-Governance Act of 1999 laid the foundation for a system of devolved local government in Nepal. At the time, two-tier systems of local government—the Village Development Committee (VDC) in rural areas, the municipality in urban areas, and District Development Committees (DDCs) at the intermediary level—were institutionalised. There were 75 DDC, 217 municipalities, and 3157 VDCs.Footnote 5

The DDCs were the leading development agencies in the district. They were divided into sub-districts, or Ilaka, ranging in number from nine to 17. Each district had a council that served as a district-level parliament. District councils were responsible for approving annual plans and budgets for district development.Footnote 6 The DDC had an executive committee comprising a chairperson, vice chairperson, and members. The VDC and municipalities were the lower tiers of local government. Each VDC was divided into nine wards. Municipalities were divided into nine to 35 wards. Municipalities were categorised into metropolitan, sub-metropolitan, and municipalities.

The Local Self-Governance Act of 1999 provided local governments with greater political, administrative, and financial powers to lead, facilitate, and manage local governance.Footnote 7 However, due to the Maoist conflictFootnote 8 of 1996–2006, the true spirit of this law could not materialise fully. After 2006, there were no local elections until 2017, when local governments were elected in terms of the new federal dispensation.

In 2015, Nepal adopted a federal system of government, and in March 2016, the following year, the government established a local-level restructuring commission (LLRC). The LLRC initially recommended that there be 719 local governments across the country, but some regional parties were opposed to this number and demanded more local governments in Terai. To address this demand, the government increased local governments to 753, a number made up of 460 rural and 293 urban municipalities.

Urban municipalities consist of metropolitan cities (larger urban municipalities), sub-metropolitan cities (medium-size urban municipalities), and municipalities (smaller-size urban municipalities). There are six metropolitan cities,Footnote 9 11 sub-metropolitan cities,Footnote 10 and 276 municipalities in Nepal. Of the country’s total population, nearly 63 per cent of people live in an urban municipality—however, urban municipalities comprise only one-third of Nepal’s geographical area. Depending on population size and other factors, each local government is divided into between five and 35 wards.Footnote 11 Wards are the smallest local government units. There are 6743 such wards across 753 local governments.

At the intermediary level between local governments and provinces, there are 77 District Coordination Committees (DCCs), which are responsible for monitoring and coordinating rural and urban municipalities. The chairpersons and members of these institutions are elected by members of the local government assembly. However, the committees are not as influential as their predecessors, that is, the DDCs. DCCs do not have the same revenue rights as the erstwhile DDCs, and their expenditures are borne by the provincial and federal governments.Footnote 12

Local governments in Nepal vary widely in size and capacity. They range in population size from 538 to about one million, and in land area, from 7 km2 to 2420 km2. The Kathmandu Metropolitan City (the capital) has the largest population, one representing 3.72 per cent of the national population (Census, 2011). However, no matter how large or small the population or land area, there is no difference between local governments in terms of the power they exercise. Nepal has thus adopted a symmetrical system of power distribution for local government.

In the course of implementing administrative federalism, the government enacted the Employees Adjustment Act of 2017 to create the necessary mechanisms for service delivery at subnational levels. The government integrated about 102,991 civil servants into new roles at the federal, provincial, and local levels; as part of this, 43 per cent of public employees were integrated at the local government level.Footnote 13 According to the Department of Personnel Civil Record, there are 138,327 permanent civil service posts in Nepal, of which 66,908 (49 per cent) are in local governments. However, only 44,321 civil servants in the central civil service opted to work under the local governments. The local governments inherited 12,097 staff members from local bodies (their predecessor) and other sectors.Footnote 14

At present, all 753 local governments under the federal structure are fully functional. Most local governments have their own ward-level offices. Each ward has a ward chair and four ward members elected directly from the people. Ward offices are responsible for overall ward-level development. The Local Government Operation Act of 2017 (LGOA) accoutres these offices with dozens of responsibilities.

Many sectoral offices previously managed by the central government have been transferred to local governments. In the course of the implementation of federalism, 27 hospitals, 308 Ayurvedic Pharmacies, 209 primary health centres, 3809 health posts, 753 agriculture service centres, and 999 veterinary centres were transferred to local levels.Footnote 15 There is also progress in increasing the number of these sectoral institutions.

As per the LGOA, the federal government can change the boundary demarcation, number, name, centre, and number of wards of local governments at the recommendation of the respective provincial governments.Footnote 16 Local assemblies must pass the proposal by a two-thirds vote and forward it to the federal government through the provincial government. Changing boundaries and ward numbers at the local level should be based on population, geography, and level of development; in this regard, there is a legal provision that two or more local levels can be merged through an amalgamation process. The LGOA, in short, authorises the federal government to declare a Municipality, Sub-Metropolitan City, or Metropolitan City based on the fulfilment of criteria such as population, revenue, level of development, in consultation with the concerned local governments and provincial government.

The cooperative spirit of the Constitution has opened up various opportunities for local governments to collaborate with each other and manage joint investment in matters such as solid waste management, fire control, pollution control, environment management, and local infrastructure. However, as yet there are no formal institutions to guide such mutual cooperation and investment. Local governments thus have acted on their own initiative on many occasions. For example, municipalities in Kathmandu Valley have entered into a memorandum of understanding to manage solid waste management. Similarly, many local governments across the east–west highways in Terai, the southern plain of Nepal, have made joint investments to manage landfill sites and fire trucks. Some municipalities are busy establishing joint authorities to carry out projects that can work to their mutual benefit thanks to improved efficiency. The Innovative Partnership Fund, a federal initiative to invest innovative proposals of local governments, has the provisions for joint investment in the areas of local economic development, service delivery, and good governance.

Nepal is a country with an abundant stock of social capital generated by the many community organisations that are active in the lives of people and provide them with a cushion of social security. Traditional youth clubs, cultural organisations, mothers’ groups, indigenous tribal organisations, religious groups, community forest groups, and many others have a strong influence on the behaviour of local governments, albeit informally. These groups are active in nature conservation, in resolving conflicts, in providing support, in doing public work, and in promoting participatory development. For example, the Tole Lane Organisation (community organisations formed by the local governments) across the country provide community services to the people, mobilising them for public works and offering them support of different kinds.

3 Constitutional Recognition of Local Government

Local governments in Nepal are the creation of the Constitution, and enjoy unprecedented political, fiscal, and administrative powers and responsibilities that are guaranteed by it; as such, they deliver a wide range of specified services within their geographical jurisdictions. Local governments did not have any such constitutional rights prior to Nepal’s federalisation. Instead, they exercised decentralised power created by law—even elected officials at that time used to seek legitimacy from their political masters in the national capital, which resulted in weak downwards accountability to the local citizenry.

The 2015 Constitution has given considerable functional responsibility to local governments, including the rights of state power. The federalism envisaged by the Constitution treats the federal units as autonomous to all sets of governments. Article 56 states:

The main structure of the Federal Democratic Republic of Nepal shall be of three levels, namely the Federal, Provincial and the Local. The Federal, Provincial and Local levels shall exercise the power of the State of Nepal under this Constitution and law.

Accordingly, the Constitution devolves powers and responsibilities to local government as part of unbundling by the Government of Nepal. As Devotka noted in 2020, most of the federal and subnational governments’ laws and regulations, including the LGOA, have stemmed from these exercises in unbundling.Footnote 17

The Constitution provides local governments ample space within which to safeguard their political, fiscal, and administrative autonomy. It fully recognises them as an integral part of federalism in Nepal. Their powers and functions are broadly outlined in the Constitution, which embraces the principles of federalism, inclusiveness, and republicanism and envisages non-hierarchical relationships among the three levels of government.

The Constitution, on the one hand, ensures the autonomy of local governments through their exclusive functions; on the other, through shared concurrent functions it promotes the cooperative principles of federalism that make all levels of government interdependent upon each other. Local governments thus have extensive powers to prepare annual budgets and formulate and implement laws, policies, and plans on any matters within their respective jurisdictions, as provided by article 59 of the Constitution. The Constitution states that the executive power of the local governments shall be vested in the rural municipality executive or the urban municipality executive. It also broadly lists the exclusive and concurrent sources of revenues of local governments. They may levy tax by law on matters falling within their domain without prejudice to national economic policies, on carriage of goods and services, capital and labour market, and on the neighbouring province or local level, as provided by article 228 of the Constitution.

Notably, while the Constitution gives the federal government the right to dissolve provincial parliaments and governments, there is no such provision in the case of local governments. Neither the federal nor provincial government has any right to dissolve local governments. Similarly, there is no provision to remove local-level representatives for any reason other than corruption. There is hence stability at the local level: elected representatives can work with confidence for up to five years.

Furthermore, the Constitution draws no distinction between the rights of local governments depending on whether they are rural or urban municipalities. All local governments have equal rights. Likewise, there are no differences between metropolitan cities and municipalities.

Finally, the Constitution provides local governments with an important means to influence the decisions of the federal parliament, albeit implicitly. There is a constitutional provision in article 86 of the Constitution for local governments’ representatives to vote for the members of the national assembly, that is, the Upper House of Parliament.

4 Governance Role of Local Government

Local governments in Nepal provide a political space for citizens to participate in public governance at local level. As listed in Schedules 8 and 9 the Constitution grants significant political, administrative, and development roles to local governments in an unprecedented manner, listing 22 exclusive functions and an additional 15 concurrent functions. The exclusive functional responsibilities assigned to the local governments include the city police, management of local services, basic and secondary education, basic health and sanitation, management of local markets, local roads, irrigation, drinking water, small electricity projects, and alternative energy. Some functions are included in the concurrent list of federal, provincial, and local competences. These include education, health, drinking water, irrigation, agriculture, roads, forests, and mines. Local governments have the right to enact laws in the areas of their exclusive functions; however, in the case of concurrent rights, the laws should not contradict federal and provincial laws.

The LGOA is the key federal law for local governments, as it elaborates in detail on the structure, power, functions, and responsibilities of local governments. The constitutional rights of the local governments are enshrined in this law. As per the LGOA, local governments should act as a democratic and accountable government at the local level, ensure sustainable and permanent service to the local community, promote social and economic development, create a safe and healthy environment, and involve the community in the local governance system.

Local governments in Nepal also have some agency functions. For example, they have been involved in the distribution of social security allowances, the updating of voter lists, collection of information about natural disasters, distribution of relief goods, and the implementation of federal programmes during emergencies such as the Covid-19 pandemic. Though the primary responsibility for such functions lies with the federal government, local governments have been implementing these agency functions. It is a general tendency for upper-level governments to transfer implementation responsibilities to local governments if they do not have their own agencies at local level.

On the administrative front, local governments in Nepal rely on the central government for employing key public officials. However, this is a temporary provision. The LGOA has the provision that employees at the local government level should be appointed through the Provincial Public Service Commissions. These commissions have been formed in all the provinces by 2021. However, due to the lack of civil service law, they have not been able to function properly. Local governments have the authority to determine the size and structure of their workforce. Local assemblies can decide on the number of posts and the organogram of the civil service apparatus on the basis of management surveys. However, the Chief Administrative Officer (CAO), the bureaucratic head of a local government, is deputed by the federal government. The CAO is responsible for executing decisions made by the executive or legislative organs. There is a dispute over whether to send the CAO from the federal government or from the provincial government.

The federal and provincial governments allocate a substantial quantity of resources to local governments in the form of conditional grants with a list of projects. Often these projects are selected at the centre and sent to local governments for implementation. In the case of conditional grants, local governments are often the administrative outposts of the centre and the provinces.

The main responsibility of the local level is to deliver essential basic services to the people. The LGOA provides detailed descriptions of the power and functions of local governments in this regard. The Act even provides a detailed list of functions of the ward committee. Wards are the constituent units of local governments and the units closest to the people for the purposes of delivering local-level services. Unlike in the past, these constituent units have substantial responsibilities, with most of Nepal’s local-level civil servants working in ward offices.

Local governments also have some judicial functions. The judicial committee, headed by a deputy mayor or chairperson, serves such a judicial function since it has the key role to resolve local disputes within its jurisdiction. The decisions of this committee are similar to court decisions. Provision is made for appeals against the decisions of the judicial committee—such appeals can be lodged with district or higher-level courts.

The rural municipality executive and urban municipality executive serve as the executive organs of local governments, and the rural municipality council and urban municipality council, as their legislative bodies. In each local government, the chief and deputy chief (the mayor and deputy mayor in an urban municipality, and the chairman and deputy chairman in a rural municipality), ward chair, and ward members are elected via the first-past-the-post electoral system. These elected representatives nominate two additional members in the rural municipality and three in the urban municipality. Local assemblies formulate policies, rules, laws, and standards, and approve annual budgets and periodic (that is, multi-year) plans.

5 Financing Local Government

The Constitution assigns local governments the powers to raise tax revenue from local taxes such as property tax, house rent tax, house land registration fees, vehicle tax, service charges, tourism fees, advertisement tax, business tax, land tax, and entertainment tax. Details in regard to financing local governmentFootnote 18 are contained in the LGOA as well as the Intergovernmental Fiscal Arrangement Act of 2017 (IGFA). Local governments meet their expenditure needs mainly through tax revenues, fiscal transfers, borrowings, and royalties on natural resources.

Certain revenue-raising rights at the local level overlap with and duplicate similar rights at the provincial level. The land registration fee, vehicle tax, entertainment tax, and advertisement tax are on the list of exclusive revenue headings at both the provincial and local levels. To resolve this problem, the IGFA provides a ‘single tax administration system’. What this entails is that one level of government collects revenue and distributes it to the other. For example, the provincial government collects vehicle tax and shares 40 per cent of it with the local governments; with the rest of the overlapping taxes, local governments collect and share them with the provinces. Those who collect keep 60 per cent and share the remaining 40 per cent with others.

The IGFA provides the provinces with the right to determine the tax base and rate of these shared taxes. With other tax revenue rights, local governments have the power to choose the tax base, assess the tax base, decide the tax rate, collect the tax, and retain the tax proceeds. They have full autonomy to formulate policies and plans in regard to these non-shared tax sources—it is not necessary to follow the federal or provincial governments’ directives. This is in line with article 60 of the Constitution, which states that ‘the local level may impose taxes on matters falling within their respective jurisdiction and collect revenue from these sources’.

The federal government ‘owns’ more than 80 per cent of all revenue, but this does not mean that it uses all the revenue it raises. Part of this revenue goes to the subnational units through revenue-sharing and fiscal-transfer channels.Footnote 19 Local government’ share of revenue from natural-resource royalties is distributed to local government mostly on the basis of derivation, that is, sharing is based largely on the location where the resource is exploited. Revenue from value-added tax (VAT) and internal excise duties are shared on a grant basis, with the central government distributing such revenue to provinces and local governments on the basis of a formula determined by the National Natural Resources and Fiscal Commission (NNRFC). Local governments have a legal entitlement to receive 15 per cent of fiscal resources from VAT and excise duties from domestic production under the revenue-sharing arrangement. The IGFA has the provision to distribute 25 per cent of royalties from natural resources to local governments. These natural resources include mountaineering, forestry, electricity generation, and mining. The Constitution’s royalty-distribution provisions in regard to natural resources are placed on the concurrent list of all three levels of government. As per the IGFA, the NNRFC sets a formula for the horizontal distribution of VAT, excise duty, and natural-resource royalties.

Article 60 of the Constitution states that the amount of fiscal transfers to subnational entities will be as per the recommendation of the NNRFC and that the entities receive four types of grants: a fiscal equalisation grant, a conditional grant, a special grant, and a matching grant. Local governments in Nepal receive fiscal transfers from all these four sources on a regular basis. Intergovernmental fiscal transfers are important instruments to correct vertical and horizontal fiscal imbalances in the fiscal capacities of local governments. The federal government sets the total grant pool—the NNRFC’s role is to set the formula and criteria for the allocation.

Local governments in Nepal are also entitled to receive fiscal transfers from their respective provinces. The provinces have demonstrated commitment to the spirit of the Constitution in this regard in that they have been duly providing fiscal equalisation grants to their local governments on the basis of a formula set by the NNRFC. They also provide conditional grants, special grants, and matching grants to local governments.

The NNRFC is the key institution to design intergovernmental fiscal transfer mechanisms that reduce instances of vertical and horizontal fiscal imbalance. Based on its roles and responsibilities as stipulated in article 251 of the Constitution, the commission makes recommendations for the implementation of fiscal federalism and for the mobilisation of natural resources to all tiers of government. In particular, the NNRFC’s role is crucial in designing and implementing a balanced and transparent intergovernmental fiscal transfer mechanism and in resolving potential disputes that could arise between the tiers of government, especially in the areas of fiscal-sharing and natural-resource mobilisation. The NNRFC is the custodian of fiscal federalism in Nepal.

The IGFA states that local governments cannot obtain any kind of foreign grant or assistance without prior approval of the federal government, and nor can they implement any plan or programme with foreign grant or assistance without written permission from the federal Ministry of Finance. Similarly, in the case of internal loans the legal provision is that they may take out such loans only provided that they obtain the consent of the central government before doing so. As per the IGFA of 2017, the NNRFC sets the maximum threshold of internal loans. As decided by the NNRFC, local governments may borrow up to 12 per cent of their revenue from own-source revenues and revenue-sharing.Footnote 20

For purposes of local borrowing, there exists an old entity called the Town Development Fund (TDF).Footnote 21 To borrow from it, local governments do not need any approval from the federal government. The TDF is a specialised agency of the federal government that provides loans to local governments and mainly so to urban municipalities.

To look at the revenue basket of local governments, their total revenue in FY 2018/19 amounted to NPR 343 billion. Of this revenue, grant transfers, revenue-sharing, tax revenue, and cash balancesFootnote 22 amounted to NPR 226 billion (65.89 per cent), NPR 49 billion (14.29 per cent), NPR 27 billion (7.87 per cent), and NPR 41 billion (11.95 per cent), respectively.Footnote 23 In regard to revenue-sharing, the revenue above includes vehicle-tax-sharing with provinces. Similarly, in regard to fiscal transfers, grant transfers from provinces are also included. It is not clear, though, how much of the total revenue at the local level comes from the provinces, given that the provinces’ revenue base has not been established properly yet. The provincial contribution to local-level revenue can be estimated at roughly 10 per cent.Footnote 24

Local-level expenditure in FY 2018/19 amounted to NPR 269 billion, or 24.23 per cent of national expenditure. Furthermore, the share of local government expenditure in GDP for FY 2018/19 amounted to about 8 per cent. The local level spent about 79 per cent of the total revenue of NPR 343 billion in FY 2018/19. There is no official breakdown of sectoral expenditure in the total expenditure at local level. Going by newspaper reports, however, the lion’s share of it would appear to have been on road infrastructure.

The budget of the federal government for FY 2020/21 was NPR 1474 billion. Of this budget, the local level received NPR 324 billion (about 22 per cent) in fiscal transfers including revenue-sharing. By contrast, the provinces received only NPR 161 billion (10.92 per cent). Of the NPR 324 billion transferred to the local level, NPR 161 billion (about 50 per cent) includes conditional grants, most of which were for school teachers’ salaries. The fiscal equalisation grant (unconditional) contributed 28 per cent.Footnote 25 Similarly, out of the total provincial budget of NPR 264 billion for FY 2020/21, the provinces transferred about 11 per cent of it to the local level.Footnote 26

Whatever the category of grants, fiscal transfers to the local level reveal that vertical allocation is smooth and well balanced. There are no complaints among local-level representatives about the grants allocated to them. Indeed, the fiscal equalisation grant, revenue-sharing, and natural-resource royalty-sharing are formula-based—the NNRFC designs the need-based formula and recommends it to the federal and provincial governments.Footnote 27

As per the IGFA, the local level has to follow the federal government’s prescribed revenue and expenditure tools, including in regard to accounting and reporting of financial transactions. The local level must follow the chart of accounts set by the federal government for recording income and expenditure. The Office of Auditors-General, a constitutional body noted earlier, is responsible for auditing the financial records of all levels of government, including those of local governments.

6 Supervising Local Government

Local government in Nepal is based on the principle of subsidiarity and interrelationship without subordination. However, there remain plenty of areas where superior levels of government can override the laws and decisions of local governments, given that they are empowered to issue recommendations and instructions to local governments not to go beyond the Constitution and the law—recommendations and instructions with which the local level must abide. In this regard, article 232(8) of the Constitution states that

the Government of Nepal may, directly or through the provincial government, render necessary assistance to, and give necessary directives to, any local governments, under this Constitution and the federal law. It shall be the duty of local governments to abide by such directives.

On the basis of this provision, the federal government’s liaising ministry, the Ministry of Federal Affairs and General Administration, issues circulars to local governments on matters such as staff management and service facilities, financial statements, and planning and budgeting. In turn, local governments have complained that the federal government has not paid much attention to capacitating them in the years since the local elections of 2017.

Article 56 of the Constitution divides state power between the federal, provincial, and local levels. Under the Constitution, the executive power of the federal and provincial governments is vested in the federal and provincial council of ministers, respectively. However, the provision that executive power at the local level is, as per article 214(1), also subject to federal law has led to speculation that the local level must abide by all laws issued by the federal government. In drafting laws, local governments have to follow the law-making process provided by their provincial government, as stipulated by article 226(2). The local government assembly’s meeting procedures and rules, the formation of committees, and facilities receivable by members of local government levels shall be based on provincial laws, as provided by article 227 of the Constitution.

Moreover, as regards concurrent rights, the Constitution states that local government laws shall not contradict those of the federal and provincial governments; in the case of exclusive functions, they have been given autonomy. However, the Coordination and Intergovernmental Relationships Act of 2020 stipulates that any law at the local level should not contradict the laws of the federal and the provincial governments. Local government officials are of the view that this law, too, has interfered with the exclusive rights of the local level.

In addition, there are 13 different constitutional commissions in Nepal, among them the CIAA, Office of Auditor General, and NNRFC. These bodies play crucial roles in holding the three levels of government accountable to the Constitution and the rule of law; in particular, they have the right to provide advice and instruction to local governments on their thematic areas. For example, the CIAA gives instructions on corruption-related issues, the Office of Auditor General on accounting, auditing, and fiscal discipline issues, and the NNRFC on aspects of fiscal federalism. There are also various sectoral committees in the federal and provincial parliaments. These committees likewise have the power to draw attention to local-level issues and direct local governments to improve their governance.

That having been said, the court is the most powerful body for giving instructions when decisions are made outside the Constitution and law. In October 2019, the Supreme Court ordered local governments not to provide the monthly salary for elected local government representatives. There is no provision for providing the salary to local representatives in the Constitution. However, local representatives are entitled to get some allowances and other basic facilities as per the law made by the respective provinces.

The Ministry of Federal Affairs and General Administration is the focal ministry of local government. The Chief Administrative Officer of local government is deputed by this Ministry. Their main roles are to administer local staff and execute the decisions of their respective local government. Though the local governments are the creatures of the Constitution, Nepal has largely adopted the Dillion’s rule whereby local governments have the power only to do what is expressly authorised by the Constitution.

One of the fundamental features of local governments in Nepal is that they enjoy security and predictability of tenure. There is no provision in the Constitution for dissolving local governments, nor is there any provision to impeach locally elected officials. The posts of locally elected officials become vacant only when they die, resign, or are officially charged with corruption in court by the CIAA.

The umbrella law for local government, that is the LGOA, stipulates that local governments’ periodic, annual, and strategic sectoral plans should be consistent with the policies, goals, objectives, timelines, and processes of the federal and provincial governments’ plans. Similarly, the IGFA states that local governments’ expenditure and accounting systems should be in line with that of the federal government.

The federal government recently rolled out the local government institutional self-assessment (LISA) framework to assess the performance of local governments. A monitoring tool driven by the federal government, the framework contains 100 performance-related indicators. Each local government is to carry out an annual self-assessment, discuss the scores in its assembly meeting, and report its achievements to the federal and provincial government. The Ministry of Federal Affairs and General Administration is to publish an annual consolidated report that ranks local governments on the basis of their scores. The objective of the framework is to foster positive competition among local governments in improving service delivery and governance.

7 Intergovernmental Relations

Nepal has adopted a model of cooperative federalism in which all three levels of government are bound to support each other, interact with each other, and develop effective relationships among themselves in order to fulfil their roles and responsibilities for the benefit of citizens at large. Article 232 of the Constitution stipulates that relations between the federation, the provinces, and the local level are based on the principles of cooperation, coordination, and co-existence. The Constitution makes several provisions for vertical and horizontal coordination in order to foster a non-hierarchical relationship between the three levels of government. A range of institutional mechanisms are established to this end, on the basis that strengthening intergovernmental relationships is crucial for the functioning of political, fiscal, and administrative federalism.

Local government associations are important vehicles for consolidating horizontal coordination among local governments. These institutions have provided the political space for local governments to discuss common issues and exercise their rights collectively. Currently, there are three such associations: the Municipal Association of Nepal (MuAN), the National Association of Rural Municipalities in Nepal (NARMIN), and the Association of District Coordination Committees of Nepal (ADCCN). The MuAN coordinates municipalities, while the NARMIN does so for rural municipalities; the ADCCNFootnote 28 works at the intermediary level and was established in 1995. As the DCCs do not have a significant role under the federal Constitution, their presence is almost negligible. However, the MuAN and NARMIN have been influential in advocating for the rights of local governments. During the drafting of the LGOA, local government associations made concerted efforts to convince political elites to spell out their roles and responsibilities clearly in the Constitution, particularly given that some of these elites were in favour of keeping local governments under the shadow of the provinces.

The Ministry of Federal Affairs and General Administration is the local government’s contact point with the federal government. Under the former system of unitary government, it was influential in providing strategic guidelines to the then local governments, but in the federal system its role has changed significantly in that it no longer has any fiscal power over them; nevertheless, it can now influence local governments through the Chief Administrative Officers which it deputies. At the provincial level, the Office of the Chief Minister and Council of Ministers is the contact point for local governments. In practice, they have been in contact with any of the ministries as per their requirements, though there is a legal provision in the LGOA that have to make such contact through the Ministry of Federal Affairs and General Administration.

The Constitution has given state power to the local level and established the latter’s relationship with the federal and provincial levels on a non-hierarchical basis. However, as in a hierarchical order, the federal government—whether directly, or indirectly through the provincial government—may give necessary directives to local governments. Article 235 of the Constitution states that the federal parliament shall make the necessary laws to maintain coordination between the federal, provincial, and local levels. Accordingly, the federal government enacted the Intergovernmental Relation (IGR) Act of 2020. This law governs vertical and horizontal coordination among the three tiers of government in the areas of planning, budgeting, legislation, and public financial management, among many others. It stipulates that the local level shall not pass any law that contradicts the laws of the federal and provincial governments. The IGR Act also provides some broad guidelines for the federal government. For example, its article 3 states that the federal and provincial government shall not encroach upon the exclusive rights of the local level.

In a similar vein, the provincial parliament has the authority to draft a coordination law to settle political disputes between provincial and local governments and between local governments. As of October 2021, no provinces had enacted this law—all the provinces were waiting for a federal coordination law.

On the operational front, the LGOA requires that local governments’ plans and programmes must be aligned with those of the federal and provincial levels: local governments have to formulate and implement periodic, annual, strategic, and sectoral medium-term development plans in pursuance of the policies, targets, goals, timelines, and processes of the federal and provincial governments. On the fiscal front, the IGFA has devised several cooperation and coordination mechanisms for the three tiers of government. The deadline for the submission of budgets by the local levels is provided in this federal law, which states that local governments should follow federal economic and fiscal policies as well as prepare a periodic statement of income and expenditures in a framework prescribed by the federal government. In particular, they should submit quarterly statements of their income and expenditures to the federal finance ministry within 30 days of the end of each quarter.

For its part, the IGR Act establishes a Provincial Coordinating Council to enable provincial and local governments to discuss issues of planning and implementation. The Chief Minister chairs the council, and provision is duly made for local governments to be represented in this body. Similarly, the IGFA provides for an Intergovernmental Fiscal Relations Council to discuss financial management issues. The federal finance minister chairs this council. All the provincial finance ministers, including some of the local-level representatives, are its members. The federal government nominates each one of the local-level representatives from the provinces. In addition, as per the IGR Act, local-level representatives are entitled to participation in the National Coordination Council and other thematic Committees, as a result of which local-level voices also heard in these forums.Footnote 29

8 Political Culture of Local Governance

Nepal has adopted a multi-party federal system to steer its governance. Articles 269–72 of the Constitution outline the structure and functions of political parties; at an individual level, any person eligible in terms of the relevant laws can stand for election, but there is little prospect of independent candidates winning elections. However, in the local election of 2022, independent candidates won seats in key cities like Kathmandu, Dharan, Dhangadi, and Janakpur. Local executives and local assemblies are strongly influenced by party politics, with the result that electoral success depends largely on affiliation with a popular political party. In areas dominated by particular ethnic communities, a candidate’s ethnicity is also an important factor, given that ethnic and minority communities generally prefer candidates from their own communities.

Local elections are dominated by both the general local-level development agenda and the area-specific service delivery agenda. Local roads, sanitation, local employment, drinking water, irrigation, local health, and education—these are the key priorities among local-level voters in Nepal. Incurring campaign expenditures in pleasing voters before election day is something that matters in rural constituencies, and candidates often vie among each other to attract voters through informal channels.

Local elections are held every five years. At least one-third of the seats in local executive and local assemblies are reserved for women representatives. In nominating two candidates (mayor/chairman and deputy mayor/deputy chairman) for election, each political party must nominate at least one woman. The country’s first local elections under the federal system were held in 2017 in three rounds: on 14 May, 28 June, and 18 September. According to the Election Commission of Nepal, voter turnout was 73.81 per cent for the first round, 73.38 per cent for the second, and 77 per cent for the third.Footnote 30 A total of 35,041 local representatives were elected, of whom 14,352, or 40.96 per cent, were women.Footnote 31 In the 2022 election, the women ratio is 41.22 per cent. As noted, there is a mandatory provision in the law that party-political nominees for chief and deputy chief must be gender-representative—if a party nominates a man as chief, the nominee for deputy chief must be a woman, and vice versa. As a result of this affirmative action, most of the deputy chiefs of local governments are women.

9 Covid-19’s Impact on the Role of Local Government

A 31-year-old Nepali student who came to Nepal on 9 January 2020 from the Chinese city of Wuhan and was diagnosed with Covid-19 on 23 January 2020 was the country’s first recorded coronavirus case; the first death occurred on 14 May 2020. A countrywide lockdown came into effect on 24 March 2020 and ended on 21 July 2020. In response to the second wave of the pandemic, the country was again locked down for about 60 days (in April–June 2021).

The outbreak of Covid-19 has had a serious impact on Nepal’s economy. In FY 2018/19 the country’s economic growth stood at 6.4 per cent, with the government projecting 8.5 per cent in FY 2019/20, but it declined to negative 2.1 per cent.Footnote 32 According to the Central Bank of Nepal, 61 per cent of industries and businesses were completely closedFootnote 33 during the pandemic period, while, according to government sources, Nepal lost about NPR 200 billionFootnote 34 in GDP in FY 2019/20.

On 29 February 2020, the government formed a high-level committee under the leadership of the Deputy Prime Minister to prevent and control the spread of Covid-19. A month later, it was disbanded and another powerful organisation, the Covid-19 Crisis Management Centre (CCMC), was established. At the subnational level, provincial-level crisis management committees (PLCMCs) were formed, with the mayors of provincial capitals serving as ex-officio members. The PLCMCs were responsible for coordinating local governments and mobilising resources to control the pandemic. Local governments worked closely with the people to implement the federal and provincial governments’ policies, rules, and directives.

Local governments were in direct, daily contact with the people in the prevention and control of the outbreak of Covid-19, playing an important role in the medical and non-medical sectors. Many of the steps taken by local governments were common ones, but some were original and creative. During the pandemic, they facilitated the implementation of the federal government’s nationwide blockade in their localities, mobilised local communities to raise awareness, and spent their own resources for prevention, control, and treatment. They also mobilised resources from various sectors and conducted public awareness campaigns and health programmes.

Local governments in Nepal operated frontline health desks, managed quarantines, ran isolation centres, set up swab collection booths, identified infected areas, conducted contact tracing, helped to collect swabs, facilitated health care by purchasing PCR (polymerase chain reaction) testing equipment and other equipment, and formulated guidelines and procedures on various issues, including isolation centres. They regularly fed information about the disease transmission to provincial and federal health information systems. They also worked to boost the morale of infected people, provided necessary equipment and medicines, and delivered food and other relief items to targeted groups, including the poor and vulnerable. They identified and collected information about people who arrived from inside or outside of the country, provided door-to-door health care, helped schools run virtual classes, assisted in the collection and distribution of farm products such as milk, fruit, and vegetables, and provided risk allowances as an incentive for staff directly involved in combatting the pandemic, including security personnel.

Each local government set up a separate fund to distribute relief packages. The federal and provincial governments also assisted in the distribution of relief and the management of quarantines and isolation centres by local governments. Local governments were authorised by the federal and provincial governments to spend the amount of the fiscal equalisation grant and revenue-sharing on pandemic-related tasks.Footnote 35 Some local governments ran food banks for relief distribution; a few even set up ‘labour banks’ to aid the employment of marginalised people. In addition, local governments brought tax-exemption programmes to citizens, and issued incentive grants so as to increase agricultural production.

Since the pandemic broke out, the health sector’s physical and human infrastructure at local levels has improved significantly. At first, Nepal had no laboratory facilities to test for Covid-19; at the time of writing, it had about a hundred such facilities throughout the country.Footnote 36 Similarly, the first Covid-19 patient had to be taken to the capital city of Kathmandu for treatment—even there, only one or two government hospitals could provide treatment; currently, more than six dozen hospitals across the country can treat Covid-19. Of the country’s 753 local authorities, 349 have had no access to any kind of hospital within their geographical boundaries.Footnote 37 To fill this gap, the federal government launched a programme to establish at least one health facility in every local government. The pandemic, in short, has provided the impetus for improving local-level self-reliance in terms of health infrastructure and for increasing Nepal’s decentralisation of health services.

When the catastrophic earthquake of 2015 hit Nepal, there were no elected representatives at the local level. The local governments run by civil servants provided services, including relief distribution, in coordination with local political parties, but there were some structural problems in managing relief, rescue, and post-earthquake reconstruction in the absence of elected representatives. Elected local governments have been relatively more successful in handling the Covid-19 pandemic. Indeed, when there is a crisis in a country, citizens appreciate the importance of having an elected government at their doorsteps. In the case of Covid-19, elected local governments have demonstrably been the drivers of Nepal’s frontline response to the pandemic. Among other things, they were instrumental in enabling foreigners to reach their homes safely during the lockdown. Overall, the pandemic and its challenges have seen a sense of self-worth develop at the local level.

10 Emerging Issues and Trends

With the promulgation of the Constitution in 2015, Nepal has embarked on the journey of federalism as the roadway of its politics. Despite some contested views about the federal system among political actors, federalism has become an integral part of governance in the country. Contemporary political forces are bound to consolidate this system of governance despite the likelihood of a few bumps in the road ahead towards the actualisation of its full benefits. The elections held in 2017 erected the very foundations of federalism in Nepal. All levels of government from centre to local now have elected officials; the provinces have begun to emerge as strong presences; and local governments have been functional in many ways, enabling them to become the proximate government of the people.

As is the case elsewhere, Nepal is urbanising at an increasing pace, and this transformation is irreversible. With about 66.8 per cent of its population living in urban municipalities, the country has reached a critical point in the need to generate economic opportunities and provide access to basic urban services such as infrastructure, sanitation, education, housing, and health care in a planned and coordinated manner. Of a total of 753 local-level entities, 293 are urban municipalitiesFootnote 38 and 23 of them have a population of more than 100,000. But given the pace of urbanisation, local governments have not been able to keep up with the demand for urban services, and nor have they been successful in creating employment and income opportunities, as a result of which job-seeking youths are forced to go abroad. Managing urbanisation and financing urban services will be the challenging issues for local governments in the time to come.

Many local governments are facing an acute shortage of the human resources they require in order to carry out their day-to-day business. Most of the former local-level units have now been transformed into wards, with the offices of ward committees becoming the backbone of the local governments that are responsible for delivering the majority of local services. These offices do not have a sufficient number of critical human resources, including ward secretaries—some ward offices do not even have their own office buildings.

Despite their security of position under the Constitution and the unprecedented level of power and authority vested in them, local governments are struggling to become vibrant, dynamic institutions that serve the interests of the local citizenry sustainably and inclusively. A persistent problem is elite capture at local level, as a result of which local bureaucrats and politicians are inclined to serve their own interests rather than those of the local public. These Leviathanesque tendencies are often criticised in Nepal. De jure, local governments are autonomous in their jurisdictions; de facto, they are controlled by political bosses at the regional and/or central level.

The Constitution of Nepal does not permit the local level to seek direct cooperation with foreign development partners such as international NGOs. Instead, this has to be sought with the permission of the federal government—the prior consent of the federal government is required to maintain relations with the international community. However, a substantial number of local governments in Nepal have sister relations with local governments in foreign countries, relations which have helped many local governments to mobilise foreign cooperation for mutual benefit on an informal basis. For example, Kathmandu Metropolitan City has relations with 16 cities,Footnote 39 among them the American cities of Boulder, Fredericksburg, and Rochester. Likewise, MuAN is a member of CITYNET and United Cities and Local Governments, with its president having been elected in 2021 as president of the latter’s Asia–Pacific chapter.Footnote 40 Nevertheless, the federal government has not been flexible when it comes to the growing interaction that local governments enjoy with the outside world. Balancing the forces of localisation and globalisation will be challenging tasks in the future.

When the Constitution was being drafted, there was talk of keeping the local level under the thumb of the provinces, but by the time it was promulgated, local government had been given its own constitutionally enshrined autonomous identity. Now such talk has begun to return, with provincial authorities believing that the local level should be under their control. There is thus a problem in the coordination of the provinces and the local levels. A further, or perhaps underlying, problem is that the provinces tend to discount the local levels, while the local levels tend to undermine the provinces.

There are significant overlaps and duplications in functional assignments among the three levels of government. The Government of Nepal needs to update the unbundling report and implement it accordingly. The federal and provincial governments should enact all laws related to the concurrent lists of the Constitution. This would enable local governments to pass laws in accordance with the provisions of federal and provincial laws. A comparison of the laws drafted by different levels of government shows that certain of them have overlapping, even conflicting, provisions. For example, some provisions of the Industrial Enterprise Act not only contradict the LGOA but violate the very principle of subsidiarity embedded in the Constitution.

Fiscal federalism is the lifeblood of federal governance, yet it is weakened by the horizontal and vertical fiscal gaps that are evident among local governments. In particular, the fiscal dependency of rural local governments on the centre is very high. While relatively urban municipalities are in a better position than them to mobilise own-source revenues, the majority of the rural municipalities depend on central transfers to meet their current expenditures. The federal and provincial governments should thus seek to build local capacity through initiatives such as the Provincial and Local Governance Support Programme.

Lastly, the Constitution has mandated the NNRFC as the custodian of fiscal federalism and given it the task of slicing up and sharing the fiscal cake according to the expenditure needs of subnational governments. The efficacy of fiscal federalism will thus be determined largely by the effectiveness of this independent constitutional institution. As such, it will have to be strengthened to ensure a rational allocation of fiscal resources to local governments.