The Economics of Conditional Grants: Local Health Service Delivery in Nepal's Federal System

Fiscal federalism in Nepal has conditional grants as one of its key features. These grants are a way for the federal government to send money to state and local governments for certain purposes, especially for health and education. This paper explores whether conditional health grants translate into better delivery of local health services, or are mostly an administrative burden for local governments. The analysis, which is based on publicly available data from the National Natural Resources and Fiscal Commission, the Ministry of Health and Population, the Ministry of Finance and international organizations including the World Bank, the Asian Development Bank and the World Health Organization, presents a mixed picture. Conditional health grants have increased local health expenditure and helped to sustain basic health services during Nepal's transition to federalism. For example, local governments now constitute a significant proportion of total public health expenditure and immunization coverage has been sustained in the face of significant institutional reforms. But the grant system also creates a lot of administrative work, limits local flexibility, slows the flow of funds and does not always result in better health outcomes. However, many municipalities have continued to experience low health grant execution rates and key health indicators such as stunting and neonatal mortality have not improved significantly. The paper argues that conditional grants are a transitional mechanism that maintains service continuity while local governments build their own capacity. It proposes reforms to simplify conditional grants, increase local discretion through block grants, strengthen performance-based elements and build local capacity for health planning and financial management. The findings contribute to the larger literature on intergovernmental transfers and local service delivery in decentralized systems.