Federalism in Nepal, enshrined in the 2015 Constitution, marked a historic shift in governance. Despite early scepticism—particularly about the relevance of provinces—the federal system has steadily progressed, achieving notable milestones in political restructuring, inclusion and service delivery. Federalism has strengthened political inclusion by recognising regional demands through constitutional guarantees and formal representation. The restructuring of local governments has empowered local authorities.

This unbundling of functions among federal, provincial and local levels clarified roles, even as overlaps persist. Democratic accountability was restored through local elections in 2017 and 2022—after a two-decade gap—ensuring grassroots participation. Seven provincial governments and a bicameral federal legislature have since been operationalised, creating a robust multi-level governance framework.

Fiscally, fiscal federalism mechanisms have been institutionalised. The laws allocate 15 percent each of VAT and excise duty and 25 percent of natural resource royalties to provincial and local governments. Institutions like the National Natural Resources and Fiscal Commission and the Inter-Governmental Fiscal Council ensure equity and coordination in fiscal federalism.

Capacity-building efforts, such as the Provincial and Local Governance Support Programme (PLGSP), have improved institutional and human resources at the subnational level. Local governments now play key roles in service delivery and infrastructure. Over the years, provinces have also shown progress—Karnali built 215 kilometres of blacktopped roads, Sudurpaschim 550 km and Lumbini over 1,160 km. Bagmati’s “One Public School, One Staff Nurse” initiative showcases provincial innovation. Similar functions have been carried out by provinces across dozens of sectors, with visible results on the ground.

Despite these outcomes, the road to effective federalism remains challenging. There is an ambiguity around functional responsibilities despite the initial unbundling exercise. This lack of clarity has led to duplication of efforts and institutional inefficiencies. Inadequate human resources at subnational levels is particularly glaring. Currently, about 200 local governments lack executive officers. In the Madhesh, Karnali and Sudurpaschim provinces, 31 percent, 39 percent and 48 percent of local governments, respectively, are without executive heads, impeding governance and service delivery.

Furthermore, the federal government has delayed key legislation necessary for the smooth functioning of subnational levels—such as the Federal Civil Service Act and Education Act—hindering the structural autonomy of subnational units. The adjustment of security forces, especially the police, remains unresolved, weakening provincial control over law enforcement. Intergovernmental relations (IGR), though formally institutionalised, often lack effectiveness due to poor implementation of decisions made by the Inter Province Council, National Coordination Council, Intergovernmental Fiscal Council, and other sectoral committees. Vertical and horizontal coordination continues to be weak, affecting joint planning and execution.

Another concern is the inconsistent application of the core principles of fiscal federalism, particularly the “finance follows function” principle. Many federal ministries continue to implement small-scale projects directly, bypassing subnational governments. This not only violates the subsidiarity principle but also promotes inefficiency. The centralised mindset among federal institutions, political elites and civil service leadership remains a formidable barrier to the full realisation of federalism. Institutional arrangements are often seen as formalities rather than mechanisms for collaboration and mutual reinforcement.

Moreover, local governments, although relatively active, often lack the technical and financial capacities to undertake larger development projects. Delays in land acquisition, lack of project readiness and insufficient alignment between functions, finance and personnel continue to obstruct effective public service delivery. The absence of strong advocacy mechanisms for provincial governments—unlike local governments, which well-organised associations represent—has resulted in a political imbalance in the federal structure. This asymmetry exacerbates the marginalisation of provincial governments in national policy discourse and resource allocation.

Nevertheless, amid these challenges, positive institutional signals have emerged. The federal parliament has formed a permanent Federalism Committee in the National Assembly. This committee is expected to monitor federal implementation, guide legislation and safeguard subnational interests.

The unbundling of responsibilities is under review by the Office of the Prime Minister and Council of Ministers. The Civil Service Bill, long delayed, has seen progress through a sub-committee of the State Affairs Committee, while the Education Bill is under active deliberation by a parliamentary committee. Moreover, intergovernmental entities such as the National Coordination Council, Province Coordination Council and sectoral committees have begun to meet regularly, creating platforms for dialogue and conflict resolution. The increased share of fiscal transfers to local governments and the enforcement of the Rs300 million ceiling on direct federal implementation signal a policy shift towards respecting subnational autonomy.

Furthermore, the Provincial and Local Governance Support Programme (PLGSP) continues to build subnational capacities, focusing on planning, budgeting and service delivery. One of the most promising developments is the recent submission of a comprehensive report on economic reform. The report includes 16 key recommendations aligned with the Federalism Implementation Monitoring Special Committee (2022) findings and has been handed over to the finance minister.

Its major proposals are a better alignment of functional responsibilities, a more robust fiscal equalisation mechanism, and more explicit rules for intergovernmental transfers. These initiatives reflect a broader shift towards refining the federal framework rather than dismantling it. The ongoing discussions around constitutional amendments are also noteworthy. They aim to provide greater stability and efficiency at the provincial level, while public debate has opened up on matters such as term limits for ministers and appointing non-member of parliament professionals to executive posts.

Nepal must prioritise actionable reforms to solidify its federal experiment. The immediate focus should be on resolving land acquisition problems, addressing staff shortages and rectifying duplication in planning and implementation. Fiscal transfer mechanisms need urgent recalibration to uphold the principles of equity, need and performance. A strong political commitment to the ideals of federalism, the rule of law and transparency must underpin these adjustments.

Strengthening governance at all levels requires the practical application of the “3F Principle”—function, finance and functionaries. Equitable resource mobilisation must ensure both vertical and horizontal balance across provinces and local governments. Intergovernmental relations tools must be revitalised. The rights of provincial and local governments in law-making must be safeguarded by ensuring their involvement in the drafting and reviewing of legislation that affects them.

Moreover, empowering provinces through advocacy structures is crucial. While local governments benefit from active and vocal associations, provinces remain largely voiceless, and the federal government rarely heeds their concerns. For example, in FY 2023-24, the federal government released the reduced final instalment of 26 percent—of the fiscal equalisation grant for local levels, but no such release was made for the provinces.

Public service delivery must be continuously improved. This entails greater investment in local infrastructure, digital governance and human resources. Constitutional and political clarity is also essential for the long-term success of federalism. Discussions around provincial stability, potential term limits for ministers and the depoliticisation of executive appointments should be encouraged in the public domain. Lastly, the 99 recommendations from the National Assembly Special Committee on Federalism must be implemented, which touches on everything from administrative efficiency and fiscal federalism to IGR and service delivery.

All three tiers of government are in the same federal boat. Their commitment to peace, good governance, development and prosperity—as envisioned in the Constitution’s preamble—must guide the ongoing federal journey. Federalism is not a finished project but a dynamic and adaptive process. With political will, legal reforms and administrative coordination, Nepal can transform its federal structure into a functional model of inclusive and democratic governance.