Government of NepalMinistry of Urban Development

Chakravarti KanthProject Director

Secondary Town Integrated Urban Environmental Improvement Project (STIUEIP)

Integrated Urban Development Project (IUDP)

Regional Urban Development Project (RUDP)

Municipal Public Finance in Nepal

Outline• Urban Scenario in Nepal• Overview of Municipal Public Finance in Nepal• Analysis of Past experience & Lessons• Way Forward

• 293 Municipalities (6 Metropolitan Cities + 11 Sub-metropolitan Cities + 276

Municipalities)

• 60 percent urban population (Municipal population?)

• 70 % of 293 municipalities are dominantly rural character with population

density less than 5 persons per hectare.

• Urban Infrastructure Condition Index (UICI) of majority (32) of previous 58

established municipalities is less than 50 of a possible 100.

Urban Scenario in Nepal

0

20

40

60

80

100

120

2013-14 2015-16 2016-17 2017-18

MoUD MWSS MoFAGA MoPIT IGFT

20.07 39.13 59.11 117.90

Amount in NPR in Billion

Trend of Central Resource Allocation in Urban Sector

• Intergovernmental Fiscal Management Act 2017• National Natural Resources & Fiscal Commission Act 2017• Local Government Operation Act 2017• National Urban Development Strategy 2017

Legal Documents Related to Municipal Finance

• Fiscal Equalization Grant• Conditional Grant (project based fund)• Supplementary Grant (matching fund) • Special Grant (Special Fund)

Government Grant to Municipalities

• Policy, legal, regulation, standard & implementation of Property, Rental, Land registration, Vehicle, Service, Tourism, Advertisement, Business, Land revenue, Entertainment• Fixation, collection & management of fee of Local infrastructure & services• New touristic service & adventure• Enlarging the scope & promotion of local revenue • Collection of fee from sale & export of natural & mine resources• Incentive for local revenue promotion• Policy, legal, regulation, standard & implementation of control of revenue

leakage• Collection of land revenue• Other services related to tax & service

Scope of Municipalities in Own Source Revenue

• Urban infrastructure demand 21.18 Billions USD till 2031 (2329.92 Billions NPR) Whereas budget provision 0.64 Billion USD (70 Billion NPR) TDF study, 2015

• 70 percent of the demand is expected to be fulfilled by PPP/Private sector.

• US$ 47 per capita expenditure in urban infrastructure development (Very Low) NUDS, 2017

Urban Finance Gap in Nepal

Past Experiences & Lesson• Local Self Governance Act 1999• Local Self Governance Regulation 2000• Local Finance Business Regulation 2000• Local Level Fiscal Commission• Implementation of Minimum Condition & Performance Measure (MCPM)• Establishment of Town Development Fund (TDF)

Urban FinanceMunicipal Revenue

Breakdown of Taxes as per % Contributions

7.5117.16

65.93

2.97 6.44

;jf/L ;fwg s/ Joj;fo s/ 3/ hUufs//PsLs[t ;Dklt s/

jxfn s/ cGo s/

In total Own Source Revenue, the share of Local Tax revenue is 47.6% (Highest), followed by Service chargeand fees (non tax ) is 42.4 % & Property rental contribution is 7.6%

Source: Municipal Finance Framework for NUDS of Nepal, 2015

Vehicle Tax Business Tax Land and property Tax

Rental Tax Other Tax

30 % Own source revenue (OSR) &

70 % from the central grant

Cluster city program- 21

UIIP (AIIB TA Grant)-7RUDP- 4

IUDP- 4

STIUEIP- 6

Smart Cities - 13

UGDP- 6

(UGIIP 2 )– 16

New Town - 27

Mega City- 3

Mountainous town/settlement- 16

Government direct Funding to municipalities

ADB with highest portfolio of 400M USD (14 municipalities)

World Bank targeting for 250M USD (21 municipalities)

AIIB expecting to invest with 100 M USD (7 municipalities)

Our Approach and actions

• LSGA envisioned broader scope of local revenue.• Municipalities were powerful but were collecting routine taxes.• They were hesitant to broaden the scope of own source revenue.• MCPM acted as administrative rather than developmental approach.• Existence of “Free riders” tendency is prevailing.• They are reluctant to pay back their loan to TDF.• External & private sector investment in urban area is at lower level.

Lessons

• Elected body has taken responsibility almost after 2 decades.• Institutional capacity of municipalities is still not strengthened.• Due to federal restructuring, multitudes of reform is going on.• Local revenue base is weak.• Role of Provinces in infrastructure investment and land development

is still to be explored for local level economy.• Municipal governance is still focused to administrative approach

rather to development approach.• Weak database & Low collection efficiency.• Invoice is raised only at the time of payment & they are not issued to

the clients (for payment).

Challenges

• Political Vision of Municipalities towards strong own source revenue is must.• Paradigm shift is necessary from administrative approach to development.• Function of 3 tiers of government based on cooperation & coexistence, as

enunciated in Constitution of Nepal.• “Free Riders” approach should be avoided.• Widening municipal finance base by

Strengthening revenue system, improving database, raising revenue collection efficiency.• Paradigm shift for Central government

To invest in cities & land transformation rather than to invest in projects.• Development partners & private sectors should be attracted.• Immediate operation of National Natural Resource & Fiscal Commission in full

swing on evidence based is must.Mindset of Municipal bodies should be changed from dependency to centralgovernment towards implementing local government operation act.

Way Forward

ercvkanth@gmail.com