PLANNING AND BUDGETING IN THE PROVINCES OF FEDERAL NEPAL PLANNING AND BUDGETING IN THE PROVINCES OF FEDERAL NEPAL i PLANNING AND BUDGETING IN THE ii PROVINCES OF FEDERAL NEPAL PLANNING AND BUDGETING IN THE PROVINCES OF FEDERAL NEPAL PLANNING AND BUDGETING IN THE PROVINCES OF FEDERAL NEPAL iii This report was funded by UKAID and independently commissioned by The Asia Foundation through the Support for Managing Fiscal Federalism in Nepal (SMFFN) Programme. The views expressed here are those of the authors and do not reflect the views of the UK Government, the Foundation or its staff. Study Team: Dr. Khim Lal Devkota, Amrit Shrestha, Abhas Ghimire Editor: Madhu Raman Acharya Preferred Citation: Devkota, Khim Lal, Amrit Shrestha and Abhas Ghimire (2021). Planning and Budgeting in the Provinces of Federal Nepal - A Comparative Analysis. Madhu Ra- man Acharya, ed. Kathmandu: The Asia Foundation. First Edition April 2021 Published Copies 500 The SMFFN project seeks to assist spheres of governments in implementing federal fiscal governance system by providing platforms to key stakeholders for shared understanding of processes in intergovernmental relations and coordination. The Programme is implemented by The Asia Foundation in partnership with the Forum of Federations (FoF), the Nepal Administrative Staff College (NASC) with funding from UKAID. PLANNING AND BUDGETING IN THE iv PROVINCES OF FEDERAL NEPAL FOREWORD Nepal’s Constitution envisions an equitable and peaceful society, good gov- ernance, development and prosperity by ending all forms of discrimination and ensuring social justice based on inclusive and participatory proportional representation. The National Planning Commission is committed to facil- itate the Government of Nepal, provincial and local governments toward fulfilling our national aspiration of “Prosperous Nepal, Happy Nepali”. This national ambition can only be achieved through cooperation, coordination and collaboration among all spheres of government. The Constitution au- thorizes spheres of government to exercise their exclusive and concurrent powers by making laws, policies, plans, and annual budgets within their re- spective jurisdictions. Though it has been nearly four years since the formation of provincial gov- ernments, provinces are still in the early stages of fulfilling their full man- dates. They have largely completed their institutional setup, staffing and leg- islation. Key tenets of fiscal federalism have been institutionalized, as fiscal transfers, revenue sharing, and public financial management are being prac- ticed by all three spheres of government. Provinces have started formulating their own plans and budgets, provincial planning commissions, and resource committees have been formed in almost all provinces. What precisely this looks like within each province at this still early stage of Nepal’s federalism remains largely opaque in the public eye. In this context, it is my pleasure to offer my moral support to The Asia Foundation’s comparative study of provincial planning, budgeting and public financial management systems of all seven provinces. As the key policy PLANNING AND BUDGETING IN THE PROVINCES OF FEDERAL NEPAL v instrument of all levels of government, this study of the provincial planning and budgeting will be useful to all stakeholders involved and interested in the implementation of fiscal federalism in Nepal, including the National Planning Commission, Ministry of Finance, National Natural Resource and Fiscal Commission, provincial planning commissions, and the federal and provincial governments. I would like to congratulate the Foundation for taking this initiative forward and completing this study despite the constraints imposed by the pandemic. I hope that this study will inspire other researches in the realm of fiscal federalism and public financial management in all spheres of government. This is not merely a snapshot of the present moment, but a piece of Nepal’s history being made by those working at all levels of government to realize the ambitions set forth in the nation’s Constitution. The road ahead is long and promising. Prof. Dr. Puspa Raj Kadel Vice Chairperson National Planning Commission PLANNING AND BUDGETING IN THE vi PROVINCES OF FEDERAL NEPAL ACKNOWLEDGEMENTS The most pronounced change within Nepal’s 2015 Constitution was the es- tablishment of provincial governments. The first four years since formation of the seven provincial governments laid the foundation of basic minimum policies, legislations, and institutional framework for their operation and service delivery to the constituencies. Despite these early building blocks, general uncertainty and debate persists on the efficacy of this level of the three-tiered federal governing system. Limited information and data about provincial governments make for an opaque picture of their performance. These discussions of provincial gov- ernment utility typically occur in private spheres largely given the roots of public demand for federalism across the country as part of the negotiated Comprehensive Peace Agreement that concluded Nepal’s decade-long armed conflict. Nepal’s still very young Constitution and visioned governing sys- tems are to be made ever better through dynamic dialogue, which is hindered by the provincial information and data gap. No more critical information is needed in public dialogue than that related to the management of public finances. The Asia Foundation took this as a departure point to contribute to the collective understanding of provincial management of their finances disag- gregated by province. This study captures a picture of provincial planning and budgeting processes. The intention is to not judge, but to understand a more complete set of variables, acknowledging achievements and challenges of provincial governments. The management of public finances focuses on the people who are navigating systems and processes within the first term implementation of Nepal’s federalism. Included herein is a review of legal and institutional arrangements, the sys- tems, and practices in fiscal federalism and public financial management in the provinces. While the report analyzes the practice of fiscal federalism including expenditure and revenue assignment, fiscal transfers, and reve- nue-sharing applicable to the provinces, it also provides a brief overview PLANNING AND BUDGETING IN THE PROVINCES OF FEDERAL NEPAL vii of the provincial planning and budgeting systems and practices as well as a comparative study of the budgets and plans of the provinces along with a review of public financial management. I hope that this preliminary exercise will provide some factual basis to the ongoing discussion on the performance of the provincial governments while also inspiring further research in similar areas of public financial manage- ment. The study started in February 2020, when Covid-19 was only beginning to impact Nepal and South Asia. Like so much, the study methodology and approach, which was envisioned to be largely rooted in field research and in-person interviews, necessarily adapted in light of the pandemic and as- sociated lockdowns and regulations. This resulted in the study being almost completely desk based. In this difficult situation, information needed for the study was collected from email, telephone and virtual discussions with rele- vant agencies of the federal and province governments. I express my gratitude to Dr. Khim Lal Devkota, Amrit Shrestha and Abhas Ghimire, who prepared a detailed study report by gathering vast amount of information despite the constraints imposed by the pandemic, analyzing the information in detail, and consulting with relevant stakeholders. Likewise, I thank Mr. Madhu Raman Acharya for preparing and editing this summary report on the basis of the detailed study report. I acknowledge Jean-Louis Van Belle for developing the preliminary framework for this study, as well as Bishnu Adhikari, Parshuram Upadhyay and Amol Acharya for conceptualiz- ing the study and managing it throughout. Finally, I express my sincere appreciation to representatives of the Govern- ment of Nepal, province governments, local governments, donor agencies, and other subject experts for their valuable suggestions and validation of the findings of the study. In particular, I am grateful to Dr. Puspa Raj Kadel, Vice Chairperson of the National Planning Commission, for taking time to read this report and providing his encouragement through the Foreword. Meghan Nalbo Country Representative PLANNING AND BUDGETING IN THE viii PROVINCES OF FEDERAL NEPAL CONTENTS Acronyms and Abbreviations ..................................................................... xiv 1 INTRODUCTION ................................................................................1 1.1. Background ...................................................................................1 1.2. Objectives and Methodology ......................................................2 1.3. Comparative Features of the Provinces ....................................3 2. LEGAL AND INSTITUTIONAL ARRANGEMENT .................7 2.1. Constitutional and Legal Arrangement .....................................7 2.2. Organisation of the Provinces ................................................ 12 2.3. Institutional Framework for Fiscal Federalism ..................... 13 2.4. Public Financial Management Institutions ............................ 14 2.5. Planning and Budgeting Institutions ...................................... 14 2.6. Audit and