Performance based funding in lical bodies with reference to district development committees of Nepal

Abstract

The essence of decentralization is the transfer of the responsibility of public service delivery to the local governments (LGs). While decentralizing the function of service delivery, resources or finances necessary for such function should also be provided for in conformity with the powers of decentralization i.e. revenue generation and expenditure assignment. In addition, for the perfect decentralization and empowerment of LGs, central government must allocate grants to the LGs in the form of conditional and unconditional grant besides the power decentralization. Resources are provided in different ways in different countries. Like in some countries major part of local revenue is derived from own resources and in few others the bulk of resources are obtained from central grant. However, inter-governmental fiscal transfers are one of the main revenue sources of LGs in developing countries. It is of utmost important for the success of the overall decentralization process, that the transfers achieve their objectives and promote the right incentives. In Nepal, however, the process of reflecting local resources in the public finance was not developed until 2004. According to the Clause 221 of the Local Self Governance Act (LSGA) 1999, there is provision of District Development Fund (DDF) whose sources are from various fiscal transfers from the central government, local revenue collections, central revenue sharing and other loans and borrowings. It is observed that in the total resources of LGs, the part of their own local resources are different on account of the difference in the quantity and quality of service delivered to the people. There is another practice of allocating funds in Nepal which is done through the sittings of the Member of Parliament (MP). Each MP is entitled to a certain amount (NRs. one million) every year which is spent on supporting the development activities in the respective constituencies. The general public and development partners (DPs) had hoped that the euphoric jubilation that marked the afterglow of the 1990 democratic restoration in Nepal would have ushered in an era of improved justice and fair distribution of resources like grants. But, the governments before 1990 had not met the expectations of the people and LGs. They had distributed grants equally but without providing any logic behind its equal distribution. Even after restoration of democracy in the country (1990), distribution of grants was not fair and people’s representation was absent in LGs after termination of the tenure in 2002. Since 2002 the LGs have been mostly run by the bureaucrats due to period of insurgency in the country and the inability to hold local level election. Therefore, it was difficult to deliver resources directly to the local people and distribution from the centre was also not scientific. Similarly, donors’ budget that was diverted to the LGs through various (government and non government) channels was also not expended as expected, and DPs raised questions on the expenditure practices as well as fiduciary risk on the LG support. In recent years, a wide range of Nepali stakeholders, governance experts, political scientists, bureaucrats, development partners and civil society groups have voiced their concerns about the causes and process of unscientific distribution of grants to the LGs. Based on Nepal’s political situation and the unscientific distribution of funds, the DPs and Government of Nepal (GoN) is looking for the establishment of performance monitoring system and funding to the LGs accordingly. This study on "PERFORMANCE BASED FUNDING IN LOCAL BODIES WITH REFERENCE TO DISTRICT DEVELOPMENT COMMITTEES OF NEPAL" is also undertaken keeping this view in mind and to contribute towards the understanding of the effectiveness and creation of sustainability of LGs. It deals with ways to empower and institutionalize LGs so as to make them responsible, accountable and good service providers. Furthermore, GoN has made a commitment to enhance the safeguard and incentives for development through the application of a set of indicators for allocating funds to the LGs. In line with the Local Self Governance Regulations (LSGR) and budget speech of FY 2061/62 BS of GoN, the Ministry of Federal Affairs and Local Development (MoFALD) (then the Ministry of Local Development (MoLD) has developed a formula to allocate funds to the District Development Committees (DDCs) based on population, poverty and cost index. In the context of Nepal, LG financing is implemented on the basis of these set criteria and formula. Since the formula based grant system started, performance based grant system (PBGS) was also initiated in capital development grant component which is the cornerstone of any PBGS. These grants need to be of a sufficient size to give LGs a real incentive to improve their performance. Although the aggregate transfer amount will obviously be partially determined by the total number of LGs targeted and the total available funding pool, each LG needs to benefit meaningfully if it is to comply with the system. Till now, no study has focused on PBF to LGs and its effectiveness in Nepal. Hence, this study is conducted to investigate the effectiveness of the PBF in LGs of Nepal, especially at the DDC level. For the effective monitoring of the system, the responsibility for LG financing monitoring is provided to local body fiscal commission (LBFC) by the government. The aim of this study is to understand the effectiveness of PBF in LGs of Nepal with specific objectives to analyze the funding system; review the Monitoring and Evaluation (M&E) system; map the linkages of funding system; and explore the status of institutional capacity of LGs. The study is based on qualitative research and has adapted descriptive and explanatory methods. The primary information was gathered mainly through Key Informants Interview (KII) and observation. Similarly, books, reports, seminar papers, articles and donor and government programme documents were thoroughly reviewed for secondary information. The collected data were analysed through content analysis. During the analysis of data, views on LG, experience of PBF, M&E practices as well as prospects and challenges of PBF in relation with capacity building of LGs were identified. After a series of descriptive analysis for a period of four years, this study reveals various changes and effects in service delivery as well as the performance of LGs as envisaged in LSGA and associated regulations. The study revealed that Nepal’s LGs are a means of providing service to the people in a responsible and accountable manner. In this context, LGs are facing difficulties in their functioning due to the absence of elected representatives in line with LSGA and associated regulations. Besides, the LGs have inadequate capacity to perform their responsibilities. Similarly, the LGs who are active and people oriented are discouraged due to the lack of linkage between LG monitoring mechanism and its funding system. They are unable to fulfill demand of local people due to lack of resources. Despite much hue and cry, the LGs have been relegated to the backseat but if monitored closely, the performance of these LGs would improve and proper management will also be possible. The LSGA and associated regulations have not been implemented in the right spirit and direction in Nepal as the study shows. Furthermore, the political party alliances and bureaucrats assigned by the Central Government to run the LGs are mainly distributing resources rather than performing in line with expected results envisaged in laws and regulations of LGs. However, the LGs should be viewed as powerful representative of government at the local level because LGSA and interim constitution explained it is a unit of devolution of power. As indicated by the study analysis, the sustainability of effective PBF system seems to be very crucial to promote local governance in Nepal. Thus, PBFS in Nepal is needed to make the LGs more committed and result oriented. Under the PBF there are two areas that need monitoring i.e. Minimum Conditions (MCs) and Performance Measures (PMs). LGs are able to demonstrate compliance with MCs which are designed to ensure a minimum capacity to handle grants as well as becoming eligible to receive the allocated grants. MCs are designed as basic safeguards to bring down fiduciary risks to an acceptable level. However, PMs are designed to get more incentive to strengthen LGs in performing their roles and responsibilities in line with regulations. PBF system, however, goes one step further by either increasing or decreasing the size of basic LG grants in relation to the assessed performance of LGs. This assessment is made on pre-determined and agreed upon MCs and PMs indicators. PMs are assessed for all LGs, but assessment results will have impact only on LGs that are eligible to receive grants. The present unstable political context in Nepal is not seen as favorable to sustain the PBF system. It is necessary to review the system and encourage work in line with downward accountability. It can be further stated that the unscientific distribution of grants did not promote local governance. Therefore, Decentralized Financing and Development Programme (DFDP) piloted performance based budget allocation system found good opportunity to build a framework for strengthening good governance. The PBF system in general was praised by the stakeholders as an interesting and useful tool to foster good local governance and accountability. Only about seven percent (Rs. 14 billion) of total government budget is allocated to the local governments, of which Rs. 3.4 billion was allocated to DDCs in FY 2010/11. However about 48 % of allocated budget for DDCs are assigned with performance monitoring. It is good signal to include allocated budget in performance system. Institutional capacity of the DDCs is found very weak because there is no strong leadership in the DDCs due to the absence of people’s representatives and could not compete with the requirement of PBF system. The impact of PBGSs on efficiency of service delivery and on poverty alleviation is harder to document, but anecdotal evidence and some audits from several countries do depict that PBGSs are effective. It has been found that the existing monitoring committees and networks formed under the various laws and regulations are not functioning in line with provided terms of references. Since the PBF system is a part of performance monitoring mechanism, reform in the practices and structure of monitoring at the local level is essential. Until and unless the strong monitoring mechanism is in place, PBF system will not be effective. At MoFALD, the line ministry of LG, there is an inbuilt monitoring mechanism but that has not been able to guide LGs for proper monitoring. The three years (2006/7 to 2008/9) results of the MCPM assessment showed the mixed results, for example the DDC that passed in one year is not able to pass in another year. It is one example of the institutional capacity that does not meet the requirement of MCPM assessment. For the sustainability of the funding system, linkage of project cycle with PBF system is most important. If the linkage does not exist and if it is not maintained properly, PBF system in LGs will be difficult to sustain. The PBF system of LG is an innovative action for overall reforms of intergovernmental fiscal relations, and has the potential to create a positive impact in the reform process. Based on primary and secondary information, it can be concluded that due to the political context of Nepal is comparatively less favorable to implement decentralization reforms and local government functioning. Based on the holistic model has been developed (see figure above) that concludes the concept of PBF system and its effectiveness by describing different component and section of good governance and PBF system. This is the first extensive academic study which covers details of this discourse providing practical dimensions. Thus, it is hoped that, the study findings will be fruitful to the planner and policymakers in the related field by providing a critical review of funding system. Some recommendations of this research, which may add some value for academic undertakings in future, are: • Further study on the PBF system incorporation either other units of local governments like Municipalities and VDCs or other sectors of the government; • Application of PBF system in other sectoral ministries; • Strengthening of Local Body Fiscal Commission (LBFC); • Development of measurement indicators that are SMART (Specific, Measurable, Achievable, Relevant and Time Bound) and that should be reviewed in 3-4 years intervals; and • Consideration of geographical situation and resources during formation of district clusters for the performance assessment of DDCs.