Decentralization in Nepal

In Nepal, although political instability imposes challenge on the country’s development, reforms toward improving service delivery and accountability have begun. The Immediate Action Plan (IAP) in 2002 contained three types of reforms:

• Prioritizing public expenditures
• Improving local delivery of social services and
• Fighting corruption and improving accountability.

Poverty Reduction Strategy identify decentralization as one of the priorities for poverty alleviation. The Local Self Government Act (LSGA) of  1999 defines three types of local bodies, and endows them with some revenue powers and expenditure responsibilities.

To move ahead with fiscal decentralization, permanent Local Bodies Fiscal Commission (LBFC) was formed in 2002. One of the main objectives of this commission is to develop the fiscal transfer system from the central government to local governments, that currently lack transparency both in the vertical share and in the horizontal distribution.

Future challenges include:

• The fiscal design needs to be restructured.
• Functions and responsibilities assigned to local bodies are unclear, and overlap with the central Government's.
• Local revenue power is limited.
• The grant system lacks transparency.

Moreover, implementation of decentralization, has been difficult due to the civil conflict. Despite some progress, the internal conflict in the country have stalled and even reversed the process of devolution.

As a part of the strategy to advance the decentralization agenda, the Government has established the Poverty Alleviation Fund (PAF) to finance social investment and public infrastructure projects at the local level throughout Nepal. The Tenth Plan has recognized social exclusion as a serious development issue, and identified the PAF as a promising  instrument for targeted support.

PAF can be particularly effective to strengthen community groups and the local government system, and support decentralization if it is properly designed.

The Bank funded PAF project has been recognized as an effective, and probably only way, to reach the country's poor and the excluded communities. Following the original project, the Bank supported additional financing to scale up the project, and is preparing the second PAF project.