Local service delivery in Nepal

Study on the governance and funding of local services in Nepal

Even though Nepal recently adopted a new federal Constitution, much of the attention of the ongoing public sector reforms has gone to the new provincial level, and the arrangements between the national (federal) government and the provincial government level. The effectiveness of public service delivery, however, depends in large part on the capability, resources and inputs, and the motivation of frontline service providers at the local level.

In Nepal a combination of deconcentrated line agencies and local bodies at the district, municipal, and village level provides inputs which are translated into delivery of service outputs and outcomes. Yet the relationships between line agencies and local bodies in service delivery in Nepal are not well understood.

This study by the World Bank seeks to map out the dynamics of service delivery at the local level through analysis of the institutional framework and actual practices in service delivery in 14 jurisdictions in the two districts of Dhankuta and Dhanusa. The study includes a detailed review of the provision of local roads networks and primary and lower secondary education.

Institutional Framework for Local Bodies. Nepal’s approach to local government has historically emphasized local participation and empowerment rather than creating institutions for service delivery. Over 50 years of sub-national governance reforms have yielded an administrative framework of local bodies (LBs) consisting of 75 District Development Committees (DDCs), 58 Municipalities and 3,915 Village Development Committees (VDCs). As the LBs’ names indicate, their primary role is ‘development’, understood as carrying out small capital works, rather than local governments ensuring a mix of inputs for effective delivery of public services.

LBs presently are run by centrally appointed civil servants. Elected local body councils ceased to operate in 2002, at the height of Nepal’s internal conflict. For the past 12 years seconded civil servants have been responsible for the day-to-day management of LBs, working with unelected councils consisting of representatives from line departments and other local stakeholders. For a short period LBs were required to consult with local representatives of political parties, but this practice was halted after allegations of corruption. Senior LB officers are seconded by the Ministry of Federal Affairs and Local Development (MoFALD), the central agency responsible for decentralization and local development issues.

LBs’ revenues have increased six-fold over the past six years without a corresponding overhaul of their institutional framework. In contrast to other South Asian countries, Nepal’s LBs account for a significant proportion of total public expenditure. Central government grants and transfers to them have accounted for 9 to 12% of total central government expenditures from FY 2009/10 to FY 2012/13.

Coherence in legislation regarding functional assignments could be strengthened. The 1999 Local Self Government Act (LSGA) assigns a wide range of functions including broad responsibilities in the education, roads, water, health, agriculture and other sectors. There is overlap between district and primary level VDC and municipality functions. Most important, the LSGA is not aligned with other Government legislation, particularly the Government of Nepal (Allocation of Business) Rules (2008, amended in 2009). The list of functions is thus a permitted list, rather than mandated responsibilities. LBs’ functional responsibilities effectively follow a principle of ‘supplementarity’ to those of line agencies, rather than subsidiarity whereby responsibilities are assigned to the lowest level with sufficient capability.

Local spending patterns in Dhankuta and Dhanusa show LB involvement in a wide range of sectors. LBs in practice fulfil functions where there is no other entity involved – essentially vital events registration – or for which they receive earmarked grants, such as disbursements of social benefits. In addition to spending on core administration and projects dictated by earmarked grants, LBs fund small projects in a wide range of functional areas, including those which are not indicated in the LSGA, such as the police.

LB revenues are dominated by intergovernmental transfers. Own source revenues (OSR) account for a small and diminishing share of total LB revenues,dropping from 17.5% in FY 2006/07 to 13% in FY 2012/13. LB taxes are mostly nuisance taxes with limitations on setting rates and the tax base. At the same time there has been a six-fold increase in the size of intergovernmental fiscal transfers from FY 2006/7 to 2012/13, driven in part by an even larger eight-fold increase in transfers for social payments for the same period. Overall, the share of transfers in LBs’ budgets has increased from 60% to 83% in the same period. Transfers range from mostly discretionary block grants to strictly earmarked transfers for social security and capital projects. VDCs and municipalities enjoy substantial discretion over roughly 50% of their total revenues; DDCs, on the other hand, are much more dependent on conditional grants, over which they have limited discretion.

Planning for the use of LB resources is empowering to local communities but the process does not facilitate cohesive planning for service delivery. LBs prepare five-year periodic plans which are to inform annual plans and budgets. Annual LB planning involves a bottom-up, fourteen-step process which is often not fully observed. The process has yielded significant involvement at the grassroots level, with 40% of LB financed projects originating via local Ward Citizen Forums, though there is indication of substantial influence on decision-making by local elites. Most importantly, decision-making is rarely informed by technical assessments or a holistic analysis of service needs.

The LB planning cycle is not aligned with the national and deconcentrated line agency planning cycle; linkages between the two processes are ad hoc.

The LB planning process and method of executing projects reflects a priority on widely spreading resources. In Dhanusa and Dhankuta VDCs and municipalities annually fund dozens of small projects averaging as little as NPR 100,000 (US$ 1,000). DDCs have the same spending patterns, only for an even greater number of projects of somewhat higher value. Execution of projects overwhelmingly occurs via User Committees (UCs) which are to be formed among beneficiaries of the proposed project and may receive funding directly for projects up to NPR 6 million.

LB financial management practices could be reviewed to improve the coherence of spending on sectors and accountability. Although there are required formats, there is wide variance among actual LB financial reports. Reporting on expenditure is organized according to revenue source devoted to that expenditure; this leads to unusual expenditure items appearing in financial reports, such as ‘land registration fees’. The breakdown by revenue source indicates that multiple revenue sources are not used for the same expenditure item. There is no breakdown of expenditures by function or sector, with the partial exception of showing expenditures on target beneficiary groups, such as women or children, for block grant spending. Consolidated financial reports are not aggregated at any level. The Auditor General’s Office audits DDCs while private auditors are used for municipalities and VDCs; there appears to be limited follow up on audit findings.

the oLBs are broadly responsible for the local roads network. The local roads network is defined as roads which are not part of the national Strategic Road Network (SRN). Although the
Department of Roads is in some instances involved with the local roads sector, most construction, upgrading and maintenance of the Local Road Network (LRN) is undertaken by LBs. However, the central Department of Local Infrastructure Development and Agricultural Roads in MoFALD exercises substantial guidance through the provision of conditional grants and supervision of local District Technical Offices.

LBs work on local roads is funded out of their discretionary resources and conditional grants. Only DDCs and municipalities receive conditional grants. The extent to which LBs spend their discretionary resources in the local roads sector varies: municipalities spend the highest proportion, followed by DDCs and then VDCs.

Annual roads sector planning at the district level is guided by District Transport Master Plans (DTMPs). DTMPs only provide a framework for the District Road Core Network (DRCN), for which DDCs are responsible. However, they do not govern planning of village or municipal roads which can account for up to 50% of the length of all registered local roads. Moreover, DDCs when using their discretionary revenues follow the annual LB planning process with little reference to their DTMPs. This results in diffuse spending on a large number of relatively small projects, most of which are implemented by so called User Committees rather than contractors.

The flow of funds from conditional grants can complicate integrated planning for the roads network. There are a large number of conditional grants for items involving the local roads network, including separate grants for local roads, agricultural roads, suspension bridges, and bridges. Frequent end-of-year budget reallocations by the central government and ad hoc funding make planning difficult. Delays in fund release are common and result in impromptu adjustments to local roads sector plans.

Technical capacity at the local level is limited. VDCs almost never have full-time technical staff and the District Technical Offices (DTOs) lack the resources to service all local needs. There are about 1,150 total staff in all DTOs which handle all local infrastructure projects, including local roads, while there are annually in excess of 100,000 small local projects in all LBs. Providing engineering oversight for the over 100 annual works projects in DDCs alone stretches capacity.

Frontline Service Delivery in the Basic (Primary and Lower Secondary) Education Sector. Planning, supervision of delivery, and quality control in the basic education sector (grades 1-8) is the responsibility of the Ministry of Education (MoE) and its Department of Education (DoE). Sub-nationally, District Education Offices (DEOs) supervise, monitor and channel funds to schools. At the local level, School Management Committees (SMCs, elected by parents)ensure day-to-day management functions, including expenditure.

The sector has decentralized most operational issues to the School Management Committees. SMCs are expected to provide regular financial and progress reports to their respective DOEs. These financial reports presently are limited to grants received from the central government and currently do not include other sources of income, such as from rents or grants from LBs which are referred to as ‘off-budget’ income. In principle, school financial accounts are audited every year by private sector auditors; in practice, 40% of schools do not undergo regular annual audits though they continue to receive grants.

LBs have a formal but unrealized role in education through Education Committees. Each VEC, MEC, and DEC is to be chaired by the head of the corresponding LB. They have a mandate to engage in planning, resource mobilization, and monitoring. However, these bodies rarely meet. Planning and execution of school budgets occurs via SMCs and the offices of the Ministry of Education.

Primary and lower secondary schools receive most of their funding through grants from the central government. Well over 90% of schools budgets are from central government grants. The per student amounts provided to districts and then passed on to schools vary considerably between districts, with Dhankuta district receiving twice as much as Dhanusa.

LB contributions to schools’ financing are a small and declining proportion of total school income. While reports from 2008 and 2009 indicated as much as 13% of total school expenditures being financed by LBs, data from schools in Dhankuta and Dhanusa showed LBs contributing less than 2% of total revenues in the three years from 2009/10 to 2012/13. These figures are consistent with the larger schools public expenditure tracking survey completed in 2013. In addition to providing schools with operating grants, LBs spend directly on the construction of school buildings and facilities, the purchase of books and equipment, and on a range of other items or activities. Regulations prohibit LBs from directly contracting with teachers, though grants once received by schools can be utilized by SMCs for any type of expenditure. LB direct spending on school education is dispersed among numerous small items.

The decline in LB spending in the basic education sector is due to a perception of relatively lower needs of schools, though not to perceptions of lower importance of education.

Many schools are currently carrying over significant unspent balances from one year to the next. This implies that schools do not need (or are not seen to need) supplementary funding from LBs. In the case of Dhankuta, this has been compounded by an overall 25% drop in enrolment between 2009/10 and 2012/13. At the same time, survey results show that education is rated among the most important public services by local citizens.

There are aspects of education outside of operating schools where the Education Committees should, but do not presently play a role. These include issues of getting out-of-school children into schools, reconfiguring local schools as a response to declining enrolment rates, and addressing the factors underlying drop-out rates. LBs do not appear to address such education issues in their own planning processes or through their leadership of local Education Committees.

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