Wednesday, November 29, 2006

National

Dr. Meena Acharya; Yubraj Khatiwada; Shankar Aryal

In Nepal , where two-thirds of the development expenditure of the government is foreign aid financed, budget restructuring in favor of pro-people programmes depends very much on the commitment of donors and the flow, structure and utilization of the aid. Only if more foreign aid is oriented towards agriculture, rural infrastructure and social sectors like education, health, and drinking water, quicker achievement of the poverty alleviation goal is feasible. Further, a qualitative development of the social sector is possible only if most of such aid flows to the basic social services like primary education, basic health care, nutrition, drinking water and sanitation, and local development.

In the context of Nepal , large scale skill development must be added to this list. Donor resistance to fund the technical training on the pretext that only the middle class is benefiting from this, overlooks the long-term benefit of the technical training for poverty alleviation. In the context of huge backlog of educated unemployment such a policy is short-sighted. The technical training to this large number of persons should generate adequate secondary effect for poverty alleviation. Unless these groups of middle class youth are employed properly, the danger for new households falling in the poverty trap is serious.

Presently, the foreign aid is directed to a very wide range of activities ranging from economic infrastructure like transportation, communication to social expenditure like education, health, drinking water, family planning etc, besides administrative reforms. Of the social sector aid, only 15 percent goes to human priority concerns (NPC, 1998). There has to be a reorientation of foreign aid in favor of rural infrastructure and priority social sector a stoppage of donor driven seminars and workshops, which fail to achieve much. Enforcing discipline is required at the highest level, and this cannot be achieved by seminars.

To start with, both aid commitment and its allocations to the social sectors are low. The disbursement and absorption capacity of the social sector is lower. This calls for restructuring foreign aid commitment in favour of the social sector, allocating more aid to this sector, and enhancing the aid’ utilization capacity in the social sector along with ensuring the efficiency and sustainability of such aided-projects. In fact, many foreign-aided projects and programmes face problems in sustainability. They are discontinued on termination of the aid agreement, despite their need for continuity (Shrestha, 1996). For ensuring effectiveness and sustainability of the programmes along with prioritization of areas for foreign assistance, foreign-aided programmes aimed at improving social indicators need to be initiated, formulated, and implemented with local participation. Furthermore, technical aid coming in the form of service of technician/consultant, training and seminar abroad, and consultancy services must be reduced to the minimum.

Cost-Recovery from Public Utilities

Cost-recovery from public utilities is a major issue involving sustainability of public spending and allocation of more resources for anti-poverty programmes. As in many countries, utilities like drinking water supply, sewerage, irrigation, electricity, and other services in Nepal are not only poorly served but also that the cost-recovery from these is desperately low. There is a great leakage in public utilities sector. It is estimated that 25 percent of the electricity generated and 40 percent of water are leaked in course of their distribution. The cost-recovery is a problem not only for small but also for large rural water systems. The cost-recovery in irrigation projects range from 9 percent to 33 percent for pumped system and almost zero in many gravity system of irrigation (World Bank, 1996). Similar problems exist in drinking water, rural electricity supply and telecommunication services. Although the poor people would not be able to afford utility prices to the extent of full cost recovery, efforts towards at least operation and maintenance (O&M) cost recovery would ensure proper use of the services.

A vicious circle of cost-recovery problem in the utility services has made the delivery poor and inefficient. While the low cost-recovery leads to low O&M budget for public utilities, insufficient O&M budget allocation does not permit regular O&M activities which subsequently results in inefficient and unreliable delivery of services to the consumers. In order to deal with the cost-recovery problem, particularly for sustaining irrigation and rural water supply projects, the present policy of transferring the completed projects to the beneficiaries and involving them in new projects should be implemented more speedily. The complementary measures such as subsidies for the targeted groups, capacity-building of users’ committees and rigorous enforcement the legal provision for penalizing the utility-users not paying their dues must also be implemented.

In the case of urban water supply and electricity, the serious problem of leakage and over-staffing should be addressed adequately. The raising of prices should be the last resort after eliminating all other inefficiencies and direct graft. A government which does not pay its own dues and cannot force municipalities to pay their dues has no moral ground to raise prices for the public utility services. Donor emphasis, so far, has only been on raising prices which is resented by the public. The issues of subsidy to irrigation needs to be considered in the context of the need for Nepalese agricultural products to compete freely with the Indian agricultural products which are heavily subsidized in terms of free electricity, and cheap water and fertilizers. While insisting on minimum cost-recovery of the public utility services, the issues of externalities cannot be ignored either. The question is that of proper balance and economic efficiency and not only that of financial efficiency.

Fiscal Decentralization

The decentralization and the devaluation of power and authority is an integral element of good governance, as it brings the decision-making process nearer to the people and enhances the efficiency of public spending through direct participation of the beneficiaries. This is particularly so in the provision of public services and local targeting of transfers. Decentralization increases opportunities for the poor to participate in the decision-making process, who can then influence the investment choices to make them pro-poor.

Decentralization can be a powerful instrument to the delivery of public goods and services in an effective way when the present highly centralized system of development programming has over-stretched the government with numerous petty projects, mainly in infrastructure that are scattered in many areas with little success. Some of the central level projects accounting for economic services amount to as low as a few hundred thousand rupees. On the other hand, non-involvement of the local people in the execution of such projects has delayed the commencement of the projects, led to severe time and cost overruns, and seriously effected the quality of construction. In this context, the local government has to be entrusted with necessary authority and responsibility, resources, and technical support to formulate, implement, supervise, and maintain local-level development projects.

Emphasizing resource mobilization at the local level for smaller development activities would spare some resources for basic social services at the central level. The government needs speeding up fiscal decentralization and empowering local government and other communities to undertake small development projects on their own strength. The devolution of authority to impose local development tax, collection of property tax, vehicle tax, and land and property registration tax to the local authorities, and evolution of cost- sharing schemes between the central government and the local governments in development projects would relieve the central government of the responsibility for petty projects. This would also enhance participation in and ownership of development projects resulting in better output.

Issues and Challenges

The allocation of higher budget to any area aimed at poverty alleviation does not necessarily ensure the desired result so far as the budget is not efficiently utilized for the proposed programme. The analysis of the actual budget spending in proportion to the allocation shows that there is a need for enhancing the spending capacity and ensuring desired output.

The allocation of more public resources to pro-poor programmes is only a necessary condition for poverty alleviation through public spending programmes; the sufficient condition would call for an efficient management of such resources. This would encompass issues such as the devolution of power to local government, degree of local participation and ownership, the formulation of effective programmes and improvement in the capacity of the program me-implementing agencies, efficiency of financial governance, and the effectiveness of the monitoring and evaluation system.

The transfer of decision-making powers, resources and management of the development activities related directly to people’s lives at the local level to the local government is a necessary condition for a participatory and decentralized development and hence for pro-people orientation of public spending. The initiatives towards this direction have been taken with the introduction of Local Self-Governance Act in 1999. The local government bodies have been empowered to undertake economic and social development activities for the benefit of the local people.

However, fiscal decentralization is yet to be effected with higher budget allocation to local governments. Four-fifth of the budget is still spent by the central authorities through vertically managed programmes. Only one-fifth is spent through the involvement of the DDCs. The proportion of budget allocation for district managed programmes has been found very low in health and education sectors (12.7 percent and 15.7 percent respectively). An effective decentralization calls for higher revenue mobilization and expenditure programmes at the district and the VDC levels.

The allocation of more resources to the VDC and DDC managed programmes/projects would not necessarily result in higher spending and better service delivery, unless their technical and management capacities are strengthened with the transfer of supporting technical manpower as well. The capacity-building efforts at the VDC and DDC level are essential to utilize the available resources for poverty alleviation and human development at the local level. In the absence of such efforts, most of the VDC resources have been observed to have been spent on recurrent activities and the capital formation has been low with little effect on output growth and poverty alleviation. A survey of 32 VDCs in Local Government Fiscal Commission Report (NHDR, 2001) shows that about 40 percent of the VDC budget has gone for recurring expenses.

Notwithstanding the level of spending made at the central, district or the VDC level, delivery of services has been inefficient and people’s perception about the basic services provided by the central and local governments has remained poor. A survey of 1005 households in 15 districts, covering the three ecological regions, reveals that only one-fifth of the service-users perceive existing school facility as ‘good’ while two fifth perceive it as ‘average’ and the rest do not have any positive response to school facility. Quite similar is the perception about the health services. Nearly half of the households perceive drinking water service as good and nearly one-fifth still rate it as ‘bad’. More than one-fifth of the households in the rural areas still prefer the traditional health Scare system (NPC, 1998). Unless the service delivery system is strengthened with local participation and better governance, the creation of social infrastructure alone would not relieve human poverty (see NHDR, 2001).

So far, the efficiency of local development grant of the central government to the DDCs and VDCs also has remained low from the perspective of poverty alleviation. Several factors are responsible for such low efficiency. So far the technical and management capacity-building efforts at the local level through transfer of local-level but centrally controlled bureaucracy has received very low priority. The detailed procedures and guidelines about the projects to be financed and the allocation criteria and processes are not adhered to. The project selection is not based on rational criteria or cost benefit analysis.

There is little awareness of the need for targeting funds to the poor or deprived sections of the population at the DDC and VDC levels. The resource allocations are not linked to community needs as budget is equally divided among the VDCs and often among Wards also within the VDC. No effective mechanism is in place for incorporating the concerns of the poorer sections of the population, disadvantaged groups and the women in programming and its implementation.

Thus, effective use of resources at the local level demands enhancing technical capabilities at the same local level for project preparation, design, implementation and monitoring, ensuring transparency by proper record- keeping. The technical capacity at the local level can be attained immediately by transfer of the HMG offices and personnel functioning at the local level to the local government. Local people or users must be involved in the programme/project from the very beginning of its formulation, design, and costing, to implementation and maintenance, It also requires a strong participatory monitoring and supervisory mechanism at all levels.

Along with the competition, market and free entry for multiple agents, effective service delivery to the poor also requires efficient mechanisms for their full participation in planning and reorienting the service delivery system. Community involvement in planning and managing local infrastructure services can greatly enhance the ownership and sustainability, and involving beneficiaries in decision-making is the starting point in creating local ownership of infrastructure projects. Requiring beneficiaries to share in the cost of project can also improve the ownership. Balancing a bottom-up identification of projects with carefully selected supply side inputs will enhance the prospects for sustainable infrastructure services for the poor. The public private partnership can contribute to expanding the access of the poor to infrastructure facilities only within a pro-poor programming framework.

The strengthening of monitoring and evaluation system is a must for establishing accountability and ensuring the efficiency of pro-poor spending programmes. This implies first and foremost development of participatory monitoring mechanisms besides enhancing monitoring and evaluation capacity at the NPC, in the line ministries and also at the DDC level. Controlling corruption and leakages at all the levels of governance is equally important for ensuring the benefit of public resources to the poor. Strengthening institutional capacity for carrying out development activities at all levels of the government through civil service reform would help ensure delivery of public services to the poor more efficiently.

The public financing of services is a core element of poverty alleviation policy and practice. But the experience suggests that higher public spending on social services and infrastructure may not translate into more or better service for the poor people because programmes for the poor are often of low quality and unresponsive to their needs and even when health, education, and infrastructure services are publicly financed, they face constraints that limit their ability to benefit from them.

The increasing size of social sector expenditure should be in no way a point for complacency towards our efforts to poverty alleviation. Presently, although social priority allocation in relation to the social sector allocation meets the international prescribed norm on proportions, the size of social priority spending is much less than the prescribed level. The distribution of little resources among so many activities has undermined the effectiveness of the social programmes. Accordingly, the emphasis should be not only on restructuring the budget for meeting the social priority spending norms but also enlarging the size of the budget itself with higher revenue efforts and enhancing institutional capacity to absorb public resources.

The social sector spending of the government alone would not ensure effective service of public goods to the poor. When the economic welfare and poverty alleviation is at the center of public finance, the state has to ensure that people have access to productive resources, employment opportunities, education, health and a clean and safe environment. Twenty-first century democratic ethos and rising expectations, in the face of the limited resources, require that all communities and groups of people participate and have control over the management of public resources.

In the last decade, some positive developments have been observed in terms of government budgetary allocations and people’s participation in development activities. The social sector budget allocation has increased significantly. This has definitely increased intermediate outputs in the social sector in terms of widened social service infrastructure. But this has not necessarily served towards poverty alleviation when access of the poor to these services is severely limited by their in-capabilities created by the social inequalities and low income levels. In fact, positive relationship between increased public spending on the social sector for improved educational or health status of the poor cannot be generalized so far for Nepal .

Further, the social spending is not the only budgetary allocation to address the accessibility problem of the poor. Along with targeting the social sector programmes, orientation of the budgetary allocation towards rural economic activities, infrastructure, and environment would be necessary if the direct impact of budgetary policy on poverty alleviation has to be realized in the immediate run, The empirical research shows that while households with higher education levels have’ higher returns to irrigation, with the largest benefit going to the poor, rural electrification increases the returns to education while the access to better rural roads leads to higher primary school enrollment (WB, 2001). The delivery of social services in the rural and poverty stricken areas has to be supported by infrastructure development and creation of income earning opportunities.

The improvement in fiscal governance is the key to poverty alleviation. Good fiscal governance in this context encompasses not only reforms in administrative processes and procedures, privatization, market penetration etc, only but also developing a more participatory governance system, which is more responsive to people’s needs and aspirations, which allows for a better feedback system from the grassroots and hence facilitates quicker conflict- resolution and which enables people to take collective action when required. The current governance structures of Nepal , though democratic in form, is far from participatory in practice. This is clearly illustrated by the over-centralized fiscal structure and the decision-making process.

A major challenge, therefore, is the decentralization and devolution of decision-making authority and power to the grassroots level. The private sector and the market can serve the interest of the poorer sections of the population only within a participatory democratic framework reaching the grassroots. Without such a framework, the marketization and privatization will accelerate impoverishment of the masses rather than reduce it, as has happened so far in Nepal .

Excerpts from the author's article published in IIDS Publication 2003. Thanks the authors and the IIDS-ed.