Doing Business in Federated Nepal - Global Experience & Lessons to Nepal

PROCEEDINGS REPORT

DOING BUSINESS IN FEDERATED NEPAL: GLOBAL EXPERIENCE AND LESSONS TO NEPAL With the completion of local, provincial and federal elections, Nepal has moved into a new political realm of federal structure. While much of the discussion to date has been focused on the political process, Nepal Economic Forum (NEF) along with Adam Smith International and Jindal School of Government and Public Policy held a neftalk about what federalism means from an economics perspective. The neftalk brought together experts in economics and public finance to discuss the models that have worked and those that have not from countries that have tried and, in some cases, succeeded in moving to a decentralized model. The neftalk was a moderated panel discussion, bringing together a diverse panel of speakers.

Speakers:  Lejla Catic, Public Finance and Governance Expert who has also been advisor to Government of Bosnia Herzegovina  Rajeev Malhotra, Professor, Jindal School of Government and Public Policy, India  Shankar P. Sharma, Former Vice Chairperson, National Planning Commission, Nepal The session was moderated by Sujeev Shakya, Chairperson, Nepal Economic Forum.

LEJLA CATIC In Bosnia, fiscal decentralization was used as a way to stop war but it resulted in a highly decentralized country.

Asymmetrical federalism was in practice but constitutional laws about financial competencies were weak. In addition, states were not clear on their responsibilities on policy making which created an explosion of civil service and public spending. There were imbalances between state expenditure and revenue assignment. Many tax authorities were created, which resulted in leakages in the system and loss of revenues.

Nepal should not make hasty decisions in implementing decentralization. It should take its time, bring in specific set of advisors to look at functional competencies sector by sector and experiment on things that people agree on. The system should also be flexible to allow necessary changes. Nepal can set up a fiscal council, comprising of representatives from financial departments, who can be tasked with preparing a fiscal forecast which can be used by all tiers of government while preparing their annual budgets.

It is necessary for Nepal to keep a check on corruption through proper revenue management and a better taxation system. Government of Nepal should prioritize improving service delivery to citizens which needs to be accompanied by both upward and downward accountability . Transparency in participation in the government process is also crucial factor. Civil society organizations should be pro-active in informing the general public regarding the responsibilities of the government and represent interests of citizens in general. Nepal thus needs to take into consideration the soft side of fiscal decentralization.

RAJEEV MALHOTRA India has a robust electoral democracy. A lesson this provides for the people of Nepal is: be reasonably flexible in responding to tradeoffs and conflicts that are bound to arise in a federated structure. Unlike India, Nepal should empower and capacitate the lowest tier of government. Functions, funding and functionaries are the three key elements in order to deliver the designated roles and responsibilities devolved in federated structure and functionaries can be challenging to Nepal. Law and order and administrative justice should also be prioritized for Nepal to deliver on its potential.

The representation structure in Nepal with 60:40 ratio for direct and proportional representation is correct at the political level but to decipher it at the administrative level remains a challenge. Mirroring the situation in India, quotas and reservations can serve as an obstruction in Nepal.

There is also the danger of sub-national feelings getting voiced and creating an insular way of looking at the developed strands of the country. It is critical to address these issues in advance. The central government can come up with clearly articulated guidelines and disperse them to municipalities, hence assisting them to be on the right track. In addition, various donor communities can propose their development plans to municipalities. This will result in local bodies having a plethora of models to try out while simultaneously creating their own dissonance.

SHANKAR P. SHARMA In federated Nepal, it is necessary to develop three years medium term expenditure framework. On one hand, all tiers of government need to draft and finalize different acts and bills related to private sector development, service delivery and infrastructure with the approval of the local assembly. On the other hand, the capacity development is a matter of concern as most qualified people are confined to the central government. Thus, the government should prioritize clearly defining roles, responsibilities and competencies of staffs in all tiers of government.

Due to the absence of good governance, financing federalism can be a challenge.

The government should simplify business and industry registration processes and promote economic activities for improving ease of doing business at the provincial level. The provincial Bills and Acts should be framed accordingly so that each province can develop by prioritizing on their competitive strength in the areas of infrastructure, tourism and small-scale industries. There is ambiguity regarding collection of taxes and revenue sharing among the three tiers of government. The private sector greatly fears that there could be double or even triple taxation. The government should create enabling environment for the movement of goods, services and capital within the country.

CONCLUDING REMARKS Sujeev Shakya, summed up the talk by echoing the speakers’ sentiment that federalism is a long journey for Nepal and that the people of Nepal need to understand that there are no quick solutions. If the local governments compete for development, change can be expected. However, competition in Nepal remains challenge since Nepal’s economy is rife with cartels and syndicates whose practices are an antithesis to competition.

Hence, a new approach will be required.

Nepal Economic Forum is a not-for-profit organization initiated by beed and aimed at becoming Nepal’s premier private sector led economic policy and research institution. neftalk is a platform for policy discourse and discussion on pertinent economic issues

For more information visit our website: http://nepaleconomicforum.org/

ABOUT THE SPEAKERS

LEJLA CATIC Lejla Catic is a public finance expert on decentralised budgeting, public finance and economic policy. She has been working with the UK government in Syria to build service delivery mechanisms that can channel money into the emerging local governance structures. This year Lejla was awarded the ‘Order of the British Empire’ for her outstanding contribution to developing public finance models for local governance in Bosnia-Herzegovina, Syria and Afghanistan.

RAJEEV MALHOTRA

Rajeev Malhotra is a Professor and Executive Director at Center for Development and Finance, Jindal School of Government and Public Policy, Delhi NCR, India. Professor Malhotra has worked as Economic Advisor to the Union Finance Minister, Government of India. He has also worked as a consultant to several international organizations and has the expertise in macroeconomic issues in development policy, fiscal policy and budgeting.

SHANKAR P. SHARMA Shankar P. Sharma is an eminent economist of Nepal. Prior to working as a consultant to constitution committee, Dr. Sharma was appointed as the Ambassador of Nepal to US and has also served as a vice chairperson of the National Planning Commission, Nepal. Dr. Sharma has extensively worked in the areas of policy dialogue, foreign aid, peace building and development of the country.