The World Bank Group in Nepal, 2014-23
Chapter 3 | Federalism
Highlights
The World Bank Group did not prepare a strategy to support Nepal’s transition to federalism, and there was a delay between the Peace Accords and Nepal’s passage of a federal constitution in 2015 and the World Bank’s mobilization of staff and resources to support it. This contributed to shortcomings in the World Bank’s support during federalism’s early years and the perception of bias.
World Bank projects approved after 2018 supported the implementation of federalism, but the World Bank did not always effectively navigate the institutional dynamics created by federalism. Some projects supported local governments, but very few supported the provincial governments or public sector institutions that would advance federalism.
Investment project financing flowed disproportionately to two better-off provinces, Bagmati and Gandaki, compared with disadvantaged provinces.
This chapter reviews the World Bank’s effectiveness in preparing for, supporting, and adapting to Nepal’s transition to federalism. The chapter finds that the World Bank missed opportunities to shape federalism before political resistance to federalism hardened. The World Bank mainstreamed federalism support in its new projects after 2018, but its staff at times lacked technical capacity on the subject, which in part contributed to the World Bank’s unsuccessfully managing the complex governance and political economy issues surrounding federalism.
Context
In Nepal, federalism was envisioned as a political solution to the failure to decentralize power and resources and forge a more inclusive social contract. The 2006 Comprehensive Peace Accord ended Nepal’s armed conflict, setting the stage for a new constitution and a change to a federal political structure. The shift to federalism was meant to share central power and resources with underdeveloped areas and break up a sociopolitical system that favored a small elite. The 2007 Interim Constitution of Nepal sought to create a more inclusive political system for groups that were historically marginalized based on caste, class, gender, ethnicity, and regional identity. This was followed by a political stalemate that spanned seven years and two Constituent Assemblies. In 2015, Nepal adopted a new constitution that enshrined federalism.
Nepal’s federalism transition is complex and ongoing, with continued debate and incomplete legislation affecting subnational governance. Federalism replaced a unitary system that consisted of 75 administrative districts with a three-tiered system of seven provinces and 753 local administrative levels. The new system required creating and merging ministries, restructuring the civil service and intergovernmental fiscal relations, and enacting or amending laws to implement the 2015 Constitution of Nepal. The constitution assigned exclusive and concurrent powers that often overlapped, resulting in unclear roles and responsibilities and the federal government retaining control over many areas by default. There were also concerns about costs, inefficiency, and corruption that led to resistance to delegating power and responsibilities to lower tiers of government.
Strategy and Internal Readiness
The World Bank engaged in Nepal’s peace process and began engaging with federalism after the Comprehensive Peace Accord was signed in 2006. A World Bank team provided ASA on aspects of federalism to the Constituent Assembly and executive government from 2009 to 2014, including advice on public administration and civil service reform financed by a global trust fund. The FY14–18 CPF mentioned federalism as a risk and as a potential research area. Without a clear strategy on support to federalism, the World Bank was inadequately prepared to support Nepal’s transition to federalism. Projects approved after the adoption of the 2015 constitution refer to the anticipated federal transition but do not address all of its implications.
The World Bank did not mobilize enough expertise to inform the World Bank’s federalism engagement. After 2015, Nepal began an ambitious state reform, yet it took the World Bank time to fully mobilize technical staff with the required skills to advise the government on federalism’s implementation and adapt the program accordingly. The World Bank compensated for the shortfall in in-country international technical staff by drawing on other staff to lead its support on federalism and governance, coupled with some support from headquarters. However, this arrangement contributed to putting some staff with close ties to senior civil servants in charge of the World Bank’s engagement, without the expected oversight and quality assurance by internationally recruited staff and managers. This led to perceived lack of impartiality of the World Bank’s support.
There was little evidence that the country team attempted to systematically understand Nepal’s political economy dynamics or the implementation risks arising from federalism.1 Knowledge sharing, political economy analysis, and adaptive programming were affected by the frequent turnover of international staff.
Portfolio and Engagements
The World Bank’s ASA has systematically incorporated federalism since 2018. In this year, the World Bank coled the federal capacity needs assessment and assumed a leadership role on the topic among development partners. The World Bank released annual Fiscal Federalism Updates in 2023 and 2024. The World Bank also conducted two Risk and Resilience Assessments over the CPE period to analyze the causes of ethnic and geographic exclusion and their links to fragility. The first Risk and Resilience Assessment, in 2017, was a prerequisite for an additional $300 million allocation from the 18th Replenishment of IDA’s Risk Mitigation Regime. It included several recommendations related to federalism, such as establishing a subnational support program; enhancing transition planning and citizen engagement; addressing spatial and horizontal inequities based on caste, class, gender, ethnicity, and regional identity; increasing governance and political economy analysis; promoting adaptive planning and implementation; and expanding citizen engagement (World Bank 2017c). The 2021 Risk and Resilience Assessment reemphasized several of these points.
World Bank projects approved after 2018 aligned with the new federal structures and supported the implementation of federalism. World Bank project documents approved after 2018 consistently addressed federalism and the significance of collaborating with subnational governments. As required under Nepali law, World Bank financing is routed through the central government. That said, the World Bank increased its subnational engagements after 2018 and contacted provincial governments. The World Bank also supported the legislative framework for federalism through DPOs and in public financial management through trust fund–financed technical assistance. However, gaps in support for federalism included the following:
- The portfolio could have focused more on support for public sector institutions and capacity building, especially subnational support, and civil service reform.2
- The World Bank’s citizen engagement with civil society organizations, think tanks, and actors outside of Kathmandu could have been stronger.
- The World Bank could have enhanced its attention to projects’ spatial footprints. According to IEG’s geospatial analysis, two better-off provinces disproportionately benefited from World Bank commitments, and disadvantaged provinces received less funding (box 3.1).
Box 3.1. Geographic Inequities of World Bank Investments
World Bank assistance has been disproportionally concentrated in two provinces, Bagmati and Gandaki, whereas less advantaged provinces have received fewer funds. Projects located in Bagmati and Gandaki received more than four times as much in per capita financing as did projects in Madhesh, the area that received the least, despite its easy accessibility (figure 3.1). Appendix C shows the negative relationship between provinces’ development needs and the World Bank’s commitments. The provinces that received the highest amounts of per capita financing from investment project financing projects with geolocation data had the lowest levels of multidimensional poverty, but the geographic distribution of World Bank commitments became more equitable in the second half of the evaluation period (figure 3.2), with the concentration of World Bank financing in Bagmati declining from half of total commitments during FY14–18 to 21 percent during FY19–23. Disproportionate support favoring the poorer provinces would have been more in line with federalism’s intent to address horizontal and spatial inequalities.
Source: Independent Evaluation Group.
Figure 3.1. Distribution of World Bank Per Capita Commitments, FY14–23

Source: Independent Evaluation Group.
Note: This map has been cleared by the World Bank Group cartography unit.
Figure 3.2. Multidimensional Poverty and World Bank Per Capita Commitments

Sources: Alkire et al. 2023; Independent Evaluation Group based on World Bank data.
Note: Dollar values and bubble sizes represent the commitments per capita for each province approved in each five-year period of the Country Program Evaluation, FY14–18 and FY19–23.
The World Bank supported the fiscal equalization grant formula with technical assistance and a DPO. Under the constitution, subnational governments manage spending, whereas the central government retains revenue authority. To address this vertical fiscal imbalance, the constitution mandates fiscal transfers. The Intergovernmental Fiscal Arrangement Act created the formula for these fiscal transfers and is therefore one of federalism’s foundational pieces of legislation. It was supported in the early years of the federal transition by senior civil servants with World Bank technical assistance. However, it has shortcomings and does not match grant resources with the constitution’s allocation of administrative responsibilities, leading to a mismatch of revenue and expenditures across different tiers of government and weakening the overall federal transition. The World Bank’s analytic support has since stepped up, for example, with ASA in 2020 and 2023 on ways to improve the system.3
The World Bank could have supported the passage of the Civil Service Act in a DPO (World Bank 2023d). The Civil Service Act is another piece of foundational legislation for federalism that allows the provinces to hire staff. The Civil Service Act remains pending as of 2024, resulting in shortfalls in the subnational governments’ staffing and capacity to perform and deliver essential services. Stakeholders interviewed for this evaluation pointed to the World Bank’s limited involvement in the Civil Service Act reform process as a missed opportunity to influence legislative reform at a critical juncture around 2018.4
The World Bank’s early staffing decisions led to some perception of bias. During federalism’s crucial early days, the World Bank relied on staff with close ties to senior civil servants, some of whom were seen as opposed to decentralization and aligned with a Kathmandu-centric stance. The result of this arrangement was the perception of an antifederalism bias and questions about how deeply World Bank management understood the political aspects of the reforms.
Overall, the World Bank made significant progress toward the CPF objectives of citizen engagement and greater gender inclusion. The CPF intended to integrate inclusion and citizen engagement at the subnational level as cross-cutting issues. A main achievement has been the adoption of citizen engagement guidelines by 700 local governments (World Bank 2024a) but falling short of the goal of mainstreaming citizen engagement across the World Bank’s portfolio. Another success was the establishment of a comprehensive system to address gender-based violence, supported by the first programmatic fiscal and public financial management development policy credit (DPC), which ensures that survivors have access to shelter, health care, legal aid, psychosocial support, and enhanced service delivery. The DPC also supported gender-responsive budgeting in all three tiers of government (World Bank 2023d).
- Governance and institutional assessments became more common starting in FY23, when the country team made a new “federalism filter” a mandatory part of project preparation.
- A proposed IDA-financed operation to build subnational capacity did not proceed because the government received alternate grant financing from other donors for this purpose. The World Bank’s federalism program did not secure any major trust funds for subnational capacity building or project implementation, despite the potential availability of financing from the State and Peacebuilding Fund.
- The 2020 Fiscal Gap Analysis report advised the National Natural Resources and Fiscal Commission on improving the methodology of the fiscal equalization grant formula. The 2023 Nepal Fiscal Federalism Update suggested legislative and policy amendments to clarify responsibilities across government tiers, a revision of the grant calculation methodology, a transition to sectoral block grants with limited earmarking, and improvements to the intergovernmental coordination mechanisms (World Bank 2023c).
- The World Bank’s room for influence was arguably higher around 2018 when the politics around federalism were more fluid. Resistance to the Civil Service Act has since become more entrenched.