Provision of Grants (Fiscal Equalization, Conditional, Complementary and Special) in Nepal

Generally in federal countries, Sub-national governments (SNGs) receives intergovernmental grants to finance their assigned activities and implement national policies. Grants are used to subsidies of services and equalization of the grants. However, the allocation of grants is found to be complex in its governance (OECD, 2006).  

According to the world bank, the government introduces intergovernmental transfers for four reasons. First one is to maintain the vertical balance. Vertical imbalances arise between the SNGs due to the imbalance between the expenditure responsibilities and revenue raising power, this may cause to a deficiency in service delivery made by SNGs. The second reason is to equalize the capacities of the resources while in SNGs, their revenue raising capacity varies. Third one is the externalities. Due to the low revenue capacity SNGs under-spend where substantial external benefits ensure-like spending on health and education by their own resources. And the last reason shows that intergovernmental is needed for the public financing system Bahl (2000).

In Nepal, grants stand for the most important source of financing for the SNGs-State and Local Levels. There are four types of grants namely: Fiscal Equalization, Conditional, Complementary and Special Grants. These grants are allocated by the National Natural Resources and Fiscal Commission(NNRFC) with a certain basis and criteria. The objectives and criterion for distribution of these grants are presented in the table.

S.N	Types of Grants	Objective of Grants	Criterion of Distribution
1	Fiscal Equalization	To minimize the Vertical Fiscal Imbalances.	Distribute fiscal equalization grants to the State and Local Level on the basis of their need for expenditures and revenue capacity.
2	Conditional	To implement any project of the State or Local Level or the Government of Nepal on the basis as prescribed by the Commission.	Specify necessary terms and conditions in relation to the implementation of the project and the concerned State and Local Level shall abide by such terms and conditions.
3	Complementary	To implement any project related to infrastructure development in the State and Local Level.	While providing complementary grants the following criteria shall be taken into account: Feasibility of the project Project cost Outputs or benefits to be achieved from the project Financial and physical capacity or human resources for the implementation of the project Need and priority of the project
4	Special	To operate the specific project by the State or Local Level.	Special grants have any of the following objectives: To develop and deliver basic services like education, health and drinking water To achieve balanced development of inter-State or inter-local level To uplift or develop the class or community discriminated economically, socially or in any other form

References:

Bahl, Roy (2000). Intergovernmental transfers in developing and transition countries: Principles and practice. Municipal Finance. The World Bank

OECD (2006). Intergovernmental transfers and decentralized public spending.  WP No 3.

IGFAA (2074). Intergovernmental Fiscal Arrangement Act, 2074