Reassessing fiscal federalization: policy assessment of forestry sector royalty revenue-sharing in Nepal

The paper reviews the Constitution, the Intergovernmental Fiscal Management Act, the National Natural Resource Fiscal Commission Act, the Forest Act, and the Conservation Act of Nepal. It examines the principles, basis, indicators, and royalty sources concerning royalty revenue sharing. Reviewing the fiscal federalization experiences from Asia and elsewhere, the paper examines Nepal's forest royalty revenue-sharing and its strategic alignment with the principle of derivation-based revenue-sharing. Qualitative research tools were used to analyze the effectiveness of performance indicators in revenue-sharing formulas and their implications for policy relevance. An argument is proposed that few indicators are binary, proxy and ad hoc in nature because relying on such indicators leads to criticism of being reductionist, action-focused, but not result-oriented, and risking low policy relevance. Moreover, enabling seven provinces to receive an equal proportion of royalty revenue, as granted, is not a good practice. Two immediate policy actions are suggested: revisiting the royalty sharing ratios and replacing binary and proxy indicators with strong evidence-based metrics. The paper proposes considering the adoption of a uniform, formula-based royalty sharing in provinces for national forest royalty sharing. These policy measures contribute to ensuring rewards for demonstrable performance by applying the derivation-based approach. It is recommended that the fiscal commission waits before adopting ecological criteria and indicators at the subnational level until they are capable of generating the required input data.