USAID Sajhedari – Support to Federalism Year 2 Annual Performance Report

This shift away from a highly centralized model of power inherited from the country's absolutist past could see Nepal gradually move towards a more decentralized system. The country has chosen federalism as a way of managing the tensions that led to conflict, with a heightened risk of repression or violent conflict if power remains in the hands of a small ruling elite. Federalism could provide mechanisms for the peaceful resolution of conflicts, such as collective bargaining between local, provincial, and federal governments. Devolving political power may also help address political and developmental marginalization and accelerate development outside Kathmandu. This could provide opportunities for a new generation of more reform-minded political leaders and entrepreneurs to emerge. However, federalism is contested, including by some in Kathmandu who fear losing control, and there are huge risks around weak systems and limited capacity leading to the failure of service delivery and the spread of corruption. The roll out of federalism is progressing, albeit unevenly. Elections took place in all three spheres of government as planned, and the foundational laws were put in place. The intergovernmental fiscal system was established, giving considerable discretionary funding to municipalities. Administrative staff were beginning to be reassigned. Despite this progress, significant challenges remain. The past year has seen a clear trend towards recentralization by the federal government and a shift away from devolution to a more decentralized unitary system. The pandemic response has seen the use of panchayat-era legislation and bypassing of local and provincial governments in favor of the district. Federal control is being exercised through the increasing use of conditional grants, which remove the discretion of elected governments to respond to local priorities. Political instability and tensions within and between the main political parties have fueled instability in provincial governments and expanded the space for the bureaucracy. The provinces continue to search for a role in the overall development process by implementing policy reforms. The pandemic has had major impacts on municipalities, both in terms of how they are perceived by citizens and their response to and management of the pandemic. Sajhedari's conceptual framework is based on the Constitution of Nepal, which aims to institutionalize a more open, inclusive, and democratic federal system in Nepal. The evidence suggests that three types of institutions are critical for democracy and inclusion to flourish: institutions that foster the rule of law, not rule by law; institutions that foster open political decision-making in the public interest based on evidence and reasoning; and institutions that produce and assess public information and data. Sajhedari adopts a holistic approach, supporting positive change across all three sets of institutions at the same time, so the sum of the program's contribution is greater than its parts. Sajhedari is providing support to improve the policy-making process and the budget and planning process. This includes facilitating more open and participatory decision-making where budget allocation decisions by Mayors and the relevant budget and planning committees are informed by data and the priorities are identified by ward members through a civil society-led engagement process. A ward-level citizen-feedback mechanism is also being implemented, where the elected governments receive data on citizen perceptions of the quality and access to services. These are used to inform the six-monthly public hearings, which take place with the elected governments. The program is also supporting the development of institutions that foster the rule of law, not rule by law. This includes providing support to improve the capacity of local governments to implement laws and policies, and to enhance the accountability of public servants. Sajhedari is also working to strengthen the capacity of civil society organizations to demand information and share their views, and to promote a free media. The program is also supporting the development of institutions that produce and assess public information and data, including the development of a geographic information system (GIS) to support decision-making. Overall, Sajhedari's approach is to support the institutionalization of a more open, inclusive, and democratic federal system in Nepal. The program is working to strengthen the capacity of local governments, civil society organizations, and the media to promote transparency, accountability, and good governance. By supporting positive change across all three sets of institutions, Sajhedari aims to contribute to a more stable and prosperous Nepal.