Executive Summary

The report “Health Sector Budget Analysis: First Five Years of Federalism” intends to enable the Federal Government (FG), Provincial Governments (PG), Local Level (LL) and their entities to understand the trends in health sector budget allocation in the first five years of federalism in Nepal, including the expenditure pattern for the four years from fiscal year (FY) 2017/18 to FY 2020/21. It further enables policy makers, planners, programme managers and external development partners (EDPs) to grasp how policy commitments are being funded through the annual work plan and budget (AWPB) in the context of federalism. It attempts to capture the spirit of federalism by analysing resource allocation to the health sector from all spheres of government, held against constitutional provisions. The report encompasses resource allocation in health beyond conditional grants from the FG, including other fiscal transfers (such as equalisation, matching and special transfers), and internal sources (revenue sharing and internal revenue) from subnational governments (SNGs). The analysis has been carried out using data from electronic annual work plans and budgets (e-AWPBs), the Government of Nepal’s Red Book, financial monitoring reports (FMRs), TABUCS, the Line Ministry Budget Information System (LMBIS), the Provincial Line Ministry Budget Information System (PLMBIS) and SuTRAs. For comparison, indicators have also been reported since FY 2016/17. Authors have also used statistical estimation through regression to provide completeness to the data, especially for FY 2017/18 and FY 2018/19. The adjusted budgets of consecutive FYs have been used to capture final expenditures. As a result, minor changes from the previous budget analysis (BA) report are possible. For FY 2021/22, the initial budget is used in the analysis.

Findings

In the first five years of federalism, government spending in health as a share of Gross Domestic Product (GDP) slowly increased from 1.5% in FY 2016/17 to 2.4% in FY 2020/21. Evidence suggests that countries should strive to spend 5% of their GDP to progress towards Universal Health Coverage (UHC). This translates to increasing per capita government spending in health from Nepalese Rupee (NPR) 1,821 to NPR 3,432 (United States Dollar 15 to 29) in real terms between FY 2016/17 and FY 2020/21. However, in constant terms (base year fixed to FY 2010/11) within the same period, the share of government spending has increased very little, from NPR 1,080 (USD 7.3) to NPR 1,973 (USD 11.3). Chatham House recommends that low income countries spend USD 86 per capita to ensure universal access to primary care services.

Since the implementation of federalism, both the volume and amount of health budget has dramatically increased, from NPR 46.8 billion in FY 2017/18 to NPR 133.1 billion in FY 2021/22. At the same time, the share of the health sector budget against the national budget rose from 4.6% (NPR 60.4 billion) in FY 2016/17 to 8.6% (NPR 179.6 billion) in FY 2020/21. This clear increase in health sector budget can be attributed to the response to the COVID-19 pandemic and resource allocation in health through internal sources in SNGs rising from 0.5% in FY 2017/18 to 14% by FY 2021/22. This supports the fact that federalism has opened fiscal space for health. Following the implementation of federalism, the largest part of the health sector budget is allocated to the federal Ministry of Health and Population (FMoHP). The proportion of health budget allocated in the form of conditional grants to SNGs declined from 40% in FY 2018/19 to 24% in FY 2021/22. Similarly, the share of administrative budget to SNGs through conditional grants declined from 75% in FY 2017/18 to 26% in FY 2021/22.

The same applies to capital budgets. EDPs predominantly fund the activities of the federal government. SNG activities are heavily reliant on funding from government sources. Line items, salaries and wages are key cost drivers for SNGs, followed by capacity building. Similarly, by the Chart of Activities, the majority of the Reproductive Maternal, Newborn, Child and Adolescent Health (RMNCAH) and nutrition programmes, as well as Female Community Health Volunteer (FCHV) and other community programmes are allocated to SNGs. In the first five years of federalism, SNGs were found to have spent between 0.3% to 2.9% of GDP on the health sector. Similarly, per capita spending on health for provinces was found to be between NPR 384 and NPR 3,338 in real terms. At the same time, health sector allocation against provincial budgets (Province and Palika) were observed to be between 5.8% and 10%. These differences across provinces can be attributed to provinces’ share of GDP, population, and volume of provincial budgets. Over the years, the share of health budget in PG budgetary allocations is increasing. In addition to the fiscal transfer from the FG, PGs have started to increasingly allocate their health budgets through internal sources, which rose from 34% in FY 2018/19 to 63% in FY 2021/22. Most of the PG health budget is spent under recurrent headings. Line item-wise, more than one third of the health budget is spent on programmes. LLs follow a similar trend in health budget allocation, though there was a slight decline in FY 2021/22. However, fiscal transfers from the FG and PGs are the key funding source for LL health budgets.

In the early days of federalism, most of the budget was spent on administrative headings. Later, this shifted to programme spending. Line item-wise, two fifths of the health budget is now spent on salaries and wages. However, the absorptive capacity of LLs has decreased in recent years while PG expenditure does not follow a definitive pattern. Most activities by NHSS outcome indicator, namely rebuilt and strengthened health system, improved sustainability of health sector financing, and strengthened management of public health emergencies, are allocated to the FG.

Since the implementation of federalism, the FMoHP budget has tripled from NPR 33.3 billion in FY 2017/18 to NPR 101 billion in FY 2021/22. The increase in FMoHP budget volume can be attributed to the COVID-19 response. At the same time, the increase in budget does not corroborate with an improvement in budget absorption, which declined from 82% in FY 2017/18 to 67% in FY 2020/21.

Only 50% of the capital budget and 72% of the recurrent budget could be spent in FY 2020/21, while only 43% of pool fund activities could be implemented last year. From the very beginning of federalism, almost all the EDP budget channelled through the treasury has funded the activities of FMoHP. In FY 2020/21, more than 62% of FMoHP’s budget was funded by EDPs, which dropped to 48% in FY 2021/22. Budget to FMoHP as a spending unit increased drastically, from NPR 4.2 billion to NPR 74.3 billion between FY 2017/18 and FY 2021/22. In the same period, grants to hospitals almost doubled, from NPR 14.6 billion to NPR 37.8 billion. However, the budget for wages and salaries and capacity building is decreasing, mainly because activities under these line items are devolved to SNGs. Over the years, FMoHP has allocated more than half of its budget to programmes that directly contribute to women and to poverty reduction activities. The actual budget absorption for FMoHP has been weak, demonstrated by the fact that FMoHP surrenders some budget towards the end of the FY.
The Constitution of Nepal has provisioned health as a fundamental right of citizens and mandated all spheres of government to ensure that right. As is evident, federalism has opened avenues for increased fiscal space in health. Some SNGs have been able to tap into those avenues while others need to be capacitated. A coherent health policy that is acceptable to all spheres of government would help in prioritising health and securing resource allocation. At the same time, a
comprehensive policy framework advocating the consideration of health issues in all policies would facilitate in harmonising evidence based AWPB at all levels of government. A discussion around transitioning away from health conditional grants for PGs and making PGs responsible for planning conditional grants for their LLs should be initiated to facilitate proper planning and budgeting as well as capacity building. A costed health financing strategy that is applicable to all levels of government needs to be formulated.

This strategy should set out a roadmap for achieving a target of at least USD 86 per capita for improving access to primary care or spending 5% of GDP for progressing towards UHC. Finally, health accounts applicable to federal, provincial, and local government are required to capture the total health expenditure in the country.

Way Forward

The Constitution of Nepal mandates health as a fundamental right of the people (GoN, 2015) and the National Health Policy 2014 aims to deliver these rights by ensuring equitable access to quality health care services for all (GoN, 2014). The evidence of other countries suggests that institutionalising the budget formulation process alone is not enough to respond to health needs. It should be coordinated with other important elements of overall public financial management reform, including MTEF, budget tracking system, cash management, financial information and progress reporting systems. The classification and organisation of a budget are centrally important issues when preparing sector budgets. Budget classifications serve to present and categorise public expenditure in finance law and thereby “structure” the budget presentation. They provide a normative framework for both policy development and accountability. While budget execution rules influence how money flows to the health system, the choice of budget classifications often preempts the underlying rules for budget implementation and thereby plays a pivotal role in actual spending. This BA of the health sector for the first five years of federalism has highlighted some key concerns in health federalism, which if timely addressed could support proper implementation.

The following major policy areas should be further discussed at all level of governments, with FMoHP taking the lead role to kickstart the process:

• GoN needs to take the initiative to develop a national health policy framework to be utilised at the federal, provincial and local level. This will help in fostering coherent policies, reduce duplications in resource allocation and improve health outcomes. During this process a clear set of outcomes and output and input indicators needs to be defined.These indicators should inform one another and be compatible across governmental levels. A financing mechanism that assures funding for all levels of indicators should also be defined in both health policy and strategy. This requires the assurance of budget inclusion against each of the indicators while finalising respective AWPBs.
• A costed national health financing strategy needs to be formulated through intensive and comprehensive discussions with provincial and local governments. This analysis revealed that provincial and local governments have increased their budgetary commitment in the first five years of federalism. Thus, a health financing strategic framework that is relevant to all spheres of government needs to be formulated.
• A conditional grant transitional plan should be prepared to sustain achievements and prevent widening disparity in health care delivery. It should clearly outline where additional support can be sought in securing required resources by provinces and Palikas that require the most resources. It should be noted that PGs and LLs with higher levels of revenue can allocate additional resources for health, which may not be possible for Palikas and provinces with lower levels of revenue. This may bring some level of equality to health care delivery. At the same time, a discussion should be initiated around capacitating PGs to plan for conditional grant activities for their Palikas. This should facilitate the resolution of planning and budgeting issues with regard to health conditional grants.
• A new national health sector strategy needs to be developed based on a comprehensive analysis of the policies, guidelines and standard operating procedures used across the health sector. Clear outcome and output indicators related to disaster response, epidemics, public financial management and public procurement should be reflected in the new NHSS. It should be able to provide clear indicators and targets for the health sector at the SNG level, including targets for budget allocation.
• A comprehensive policy framework and standard operating procedures that support the preparation of budgets under equalisation, matching and special grants that is acceptable and applicable to all spheres of government need to be developed and endorsed. A specific institution with clear terms of reference at FMoHP and province level would help in initiating and institutionalising the process. In the future, this practise can be harmonised at local level.
• An electronic financial management information system that is able to track and consolidate health budget and expenditure at all spheres of governments is essential. Moreover, the tracking tool should be able to provide information on key health markers, such as gender and social inclusion (GESI), and maternal and child health. This type of system is important to capture actual government spending in health and also ascertain total health expenditure.
• An already existing FMIS tool such as TABUCS can be updated to capture income, budget and expenditure at all levels of government.
• FMoHP needs to shift from incremental line item-based budgeting to a goal-oriented performance-based or programme-based budgeting system. FMoHP needs to develop a better understanding of the efficiency of its different programmes and increase allocations for cost-effective interventions. An immediate step would be to institutionalise the existing performance-based grant agreement being piloted by FMoHP. A performance based grant agreement policy with a monitoring framework that is applicable across all government hospitals is needed. The steering and technical committees can help to monitor the process of PBGA implementation and also determine the scope of scalability in both public and private hospitals. They will also standardise methodology, processes, indicators and agreements.
• The practice of delayed approval of annual health budgets because of the delay in sending budgets to SUs (especially in the provinces) remains a key challenge in the devolved context.
• As a result, there is a risk of failing to maintain financial discipline and providing timely health services to people. FMoHP should ensure complete implementation of the annual budget calendars which may help address the issue.