This slide specifically talks about how the grant assignment is made and its challenges in federal Nepal.

1. Fiscal Federalism:
Grant Assignment
Prepared by: Avinash Jha

2. Expenditure assignment
Components
of Fiscal
Federalism
Revenue assignment
Sub-national borrowing
Inter-governmental fiscal transfer

3. INTER-GOVERNMENTAL
FISCAL TRANSFERS
(IGFTs)
Inter-governmental fiscal transfers (IGFTs) are transfers of
funds from one level of government to another. This may be
to fund general government operations or for specific
purposes.

4. Revenue adequacy
Transfers are often necessary to assure revenue adequacy.
Funding government activities
Transfers are grants from one level of government to another (often from higher to lower)
for the purpose of funding government activities.
Dominant revenue source
Inter-governmental fiscal transfers are the dominant sources of revenue for both sub-
national governments in most developing countries.

5. The design of these transfers is of critical
importance for efficiency and equity of local
public services provision and the fiscal health
of sub-national governments (Shah, 1994).
Efficiency &
Equity

6. Inter-
governmental
fiscal
transfers
Close the budgetary gap
Every country faces the problem of
fundamental imbalance between
expenditures and revenues.
Differnet pattern of transfers
No simple and uniform pattern of transfers
will be suitable for all circumstances.
Alternative to tax devolution
Fiscal transfers are important in fiscal
federalism that does not have extensive tax
sharing.

7. Classification
of Fiscal
Transfers
(Grants)

8. 1
Grants may be general (also called block
grant or unconditional grant) or selective
(also called restricted, categorical or
conditional). Types of
grants
Three types of grants may be
distinguished.
2
Grants may be matching or non-
matching.
3
Grants may or may not be related to the
fiscal needs of the recipients.

9. A conditional transfer from a federal
government to sub- national government
involves a certain set of conditions and rules. It
is compulsory to agree to the spending
instructions of the federal government.
Conditional
transfer (grants)

10. An unconditional grant is one, which a higher
government gives to a lower government
without imposing any conditions regarding
how it should be used.
Unconditional
transfer (grants)

11. As per the Article 60, four types of
Grants to be transferred
Fiscal Equalization Grants
Conditional Grants
Complementary Grants
Special Grants
1.
2.
3.
4.
Provisions of
Grants

12. Section 8: Intergovernmental Fiscal Arrangement Act 2017
Fiscal Equalization Grants
To fill the gap between resource potential and needs of a local or a state
government. The same grants to be transferred by a state government to a
local government. The National Natural Resources and Fiscal Commission
develops the formula and recommends to the government.

13. Section 9: Intergovernmental Fiscal Arrangement Act 2017
Conditional Grants
This type of grant is Earmarked for specific programs, projects or activities
that used to be carried out by the federal government, which now would be
carried out by the local or state governments as per the schedule 6 and 8 of
the Constitution. The federal government transfers the program and resources
to the lower tiers of the government under this grant.

14. Section 10: Intergovernmental Fiscal Arrangement Act 2017
Complementary Grants
This type of grant is provided to the State and Local Level to implement any
project related to infrastructure development. Following criteria shall be taken
into account: (a) Feasibility of the project; (b) Project cost; (c) Outputs or benefits
to be achieved from the project; (d) Financial and physical capacity or human
resources for the implementation of the project; (e) Need and priority of the
project.

15. Section 11: Intergovernmental Fiscal Arrangement Act 2017
Special Grants
This grant is transferred for a specific purpose for a specific local or state
government. This grant does not have a blanket approach.

16. M&F Architects 2020
Criteria for Fiscal
Equalization Grants
HDI incorporating Education, health, drinking water
Comparative development of other province and local
level
Socio-economic and other discrimination
Infrastructure status and needs
Service to be delivered
Status of revenue and its potential
Expenditure needs

17. Criteria for
Fiscal
Equalization
Grants
NNRFC ACT

18. The Ministry of Finance (MoF) directly provides fiscal
transfer as a grant to provinces, and local levels. The
grant allocation methodology is:
Y = a+bX (Total grant = Minimum grant + Additional
grant)
Where,
a = Minimum grant
X = Explanatory/expenditure need variables used in
grant distribution such as population, area, poverty,
etc. (X applies only in additional grant)
b = Coefficient of expenditure need variables.
Grant calculation

19. Minimum
Fiscal
Equalization
Grants
For Provinces
50-50% weightage to both population and
area.
For Local Levels
Population size is the main factor.

20. For Province (FY 2077/78)
Source: Fiscal Fiscal Equalization Grants FY 2077/78

21. For Local Level (FY 2077/78)
Source: Fiscal Fiscal Equalization Grants FY 2077/78

22. For LL from Province (FY 2077/78)
Source: Fiscal Fiscal Equalization Grants FY 2077/78

23. Gap between
aspirations and
resources
CHALLENGES AHEAD
Capacity
constraints at all
level
Centralized
mindset – not only
at the center but
also at the
subnational levels
Dispute resolution
among the tiers of
government – both
horizontally and
vertically
Increasing fiscal
indiscipline

24. Perceptions on Fiscal Transfer in
LDCs
(A SHAH)
FEDERAL/CENTRAL
VIEW
Giving money and power
to sub-national
governments is like giving
whiskey and car keys to
teenagers.
PROVINCIAL AND
LOCAL VIEW
We need more grant
monies to demonstrate that
“money does not buy
anything”.
CITIZENS
The magical art of passing
money from one
government to another and
seeing it vanish in thin air.

25. REFERENCES
1. Constitution of Nepal 2015
2. Broadway. R, Shah. A. Fiscal Federalism: Principles and
Practices of Multiorder Governance. Cambridge. 2009.
3. Intergovernmental Fiscal Arrangement Act 2017.
Government of Nepal.
4. National Natural Resources and Fiscal Commission Act 2017.
Government of Nepal.
5. Shah. R.K. Fiscal Federalism Model in Nepal: an Analytical
Study. 2015
6. नेपाल सरकारबाट देश र ानीय सरकारलाई दान गररने व ीय
समानीकरण अनुदान 2077
7. देश सरकारबाट ानीय तहमा दान गररने व ीय समानीकरण अनुदान
2077