ENHANCING MUNICIPAL FINANCE IN NEPAL 205 Enhancing Municipal EnhancingFinance in Municipal Nepal Finance in Nepal NEPAL TOWN DEVELOPMENT FUND Enhancing Municipal Finance in Nepal TOWN DEVELOPMENT FUND Copyright © 2019 by Town Development Fund, Kathmandu, Nepal Published by Town Development Fund, All rights reserved Kathmandu, Nepal Website: www.tdf.org.np e-mail: [email protected] First published: February 2019 500 copies Design & Printing: Masterpiece with Imagination (9851031259) Liability and Disclaimer: The views and interpretations expressed in this publication are those of the authors and are not necessarily those of the Town Development Fund or any of the organizations that sponsored and contributed to its development. The designation of geographical entities in this publication, and the presentation of the material herein, do not imply the expression of any opinion whatsoever on the part of the publisher, the authors or the participating organizations concerning the legal status of any country, territory or area, or of its authorities, or concerning the delimitation of its frontiers or boundaries. Editor: Roy Kelly Full book available as: TDF Publications Number: 01 ISBN: 978-9937-0-5091-3 Hon'ble Mohammad Ishtiyaq Rayi Phone : 977-1-4200034 (Off.) Minister Fax : 977-1-4200035 (Off.) Ministry of Urban Development Website: www.moud.gov.np Singhadurbar, Kathmandu, Nepal Ref. No.: Message I am pleased to know that Town Development Fund (TDF) is publishing a book on 'Enhancing Municipal Finance in Nepal'. While the Government of Nepal is going through a paradigm shift from rural to urban focus with increasing priority for urban development as growth engines, sub national borrowing through TDF has become more crucial. Currently, more than 60% of the national population lives in 293 municipalities, where the infrastructure is relatively poor and financing needs are tremendously high. The Urban Financing Framework worked out while preparing 'The National Urban Development Strategy of Nepal' estimated that Nepal’s municipalities need NPR 1.23 trillion for infrastructure development during the period 2016 to 2031. However, there is high dependency on capital grants, coming from federal government to finance urban infrastructure projects in municipalities. As such grants are inadequate, non-grant financing options that include borrowing from TDF, municipal bond issue and building Public Private Partnerships could be innovative avenues for municipalities. The Government is committed to enhance financing to the municipalities by streamlining inter- governmental fiscal transfers, assigning clear mandates on expenditures right of sub-national governments, supporting own source revenue mobilization of municipalities and transforming TDF into a strong financial intermediary for enhanced sub- national borrowing. This publication, I believe will bring valuable insights among the readers regarding exploring of non-grant financing in municipalities of Nepal. Mohammad Ishtiyaq Rayi Minister, Ministry of Urban Development, Nepal III Foreword I am delighted to learn of this publication which incorporates the papers presented during the National Conference on Municipal Finance in Nepal which was held on 20 December 2016 in Kathmandu. This publication, Enhancing Municipal Finance in Nepal, is both relevant and timely, as Nepal is implementing fiscal federalism after the promulgation of constitution of Nepal and is going through a paradigm shift from rural to with urban economy now touching a high percentage of Nepal’s population. However, Nepal’s under-performing urban infrastructure is hindering economic growth and social and environmental progress. It is vital for Nepal to excel in the area of urban infrastructure development, making it more efficient and effective towards achieving the Sustainable Development Goals (SDGs) by 2030. This publication effectively captures the principles, ideas, and best practices of municipal finance, including intergovernmental fiscal transfers, municipal own-source revenues, and innovative financing tools, such as public private partnerships (PPPs), public community partnerships (PCPs), land value capture, blended financing and consortium financing. I congratulate the TDF team for their commendable task in publishing this book. Similarly, I would like to extend my sincere thanks to each of the authors whose papers have been included in this book. Last but not the least, I would like to thank Prof. Roy Kelly for his valuable contribution in editing this publication. It is my firm belief that this publication will serve as a valuable reference for all related policy makers, academics, students and professionals alike working in the field of municipal finance in Nepal. Dr. Ramesh Prasad Singh Secretary Ministry of Urban Development Government of Nepal (GoN) V Message It gives me immense pleasure to know that TDF is publishing the book on 'Enhancing Municipal Finance in Nepal', which is a milestone of knowledge management in the area of urban infrastructure finance in Nepal. Town Development Fund (TDF) has been successful in developing local borrowing culture in the country through its loan and grant financing instruments to municipalities and small towns. More importantly, projects financed by TDF have proved to be sustainable since loan financing instruments follow the asset management plans to make the facility operationally efficient and effective. This has often created conducive environment for facility users to pay the required tariff and lead towards making projects sustainable. This publication attempts to explore the possibilities of sustainable financing other than the grant financing, which I believe, will be useful for officials working in the municipal level, development partners, academia and general readers at large. I take this opportunity to thank TDF management, UNCDF, GiZ and writers of the book for making this publication possible. Dhruba Rijal Chairperson Town Development Fund VII Preface Nepal is currently undergoing a phase of rapid urbanization and struggling with under-performing infrastructure that is hindering economic growth and social and environmental progress. This has prompted the Government of Nepal (GoN) to prioritize the filling of the wide gap in urban infrastructure and services. To address this challenge and deliver sustainable and affordable infrastructure, scarce public resources need to be judiciously applied along with alternative and innovative financing methods. Nepalese municipalities require annual financing of about NPR 1.9 trillion to address the urban infrastructure demand, as per the current status, but have managed annually only about NPR 70 billion. Rapid urbanization, while posing many challenges, also indicates the possibility of prosperity, since urban centers are engines of economic growth. Strengthening municipal finance is particularly relevant in realizing the goals of the National Urban Development Strategy of Nepal for 2030, which aim to “make cities and human settlements inclusive, safe, resilient and sustainable”. Well- planned urbanization would help municipalities address the aspirations of its citizens and help Nepal transform itself from a Least Development Country (LDC) to a “developing country” status within the next 4 to 5 years. The new Constitution of Nepal has devolved greater expenditure rights to subnational level governments (provinces and local governments). This devolution of public service responsibilities must be accompanied by adequate financial resources, including locally-generated own-source revenues. A sound public financial management system at the local level is also a prerequisite for achieving sustainable fiscal decentralization and achieving the 2030 Sustainable Development Goals (SDGs). Enhancing the four tenets of financial management (i.e. budgeting, accounting, reporting and auditing) is critical to realizing these objectives. In light of the above concerns, a national conference on "Municipal Finance in Nepal” was jointly organized by the Ministry of Federal Affairs and Local Development (MoFALD) and the Town Development Fund (TDF), with technical support from UNCDF. The conference brought together policy makers and a gamut of experts (academicians, practitioners, and regulators) from across the country to discuss their recent works and good practices on municipal finance, particularly with respect to local taxes, user fees, inter-governmental fiscal transfers and subnational borrowing, including municipal bonds and PPP financing arrangements. This publication aimed to share knowledge among stakeholders on how to draw upon both internal revenue streams (e.g., taxes, user fees, land value capture) and external revenue streams VIII (e.g., intergovernmental transfers, borrowing, bonds, PPPs) to finance sustainable development within urban and rural municipalities. The private sector, despite much skepticism, has an important role to play in infrastructure financing in Nepal. Attracting private sector attention and interest to partner with and invest in infrastructure calls for a strong initiative from both central and local governments. The conference, attended by over 135 participants, included a series of key note addresses, paper presentations and workshop deliberation sessions which focused on contemporary issues of municipal finance. These interactive sessions enabled the participants to formulate options for moving forward in the context of mobilizing resources to help finance urban infrastructures and improve