The Diagnostic Study of Local Governance in Federal Nepal assesses the extent to which institutional, legal, political, and fiscal frameworks are in place as well as the critical issues that must be addressed in establishing these frameworks to enable local governments to discharge their constitutional mandates. This study examines key challenges that local governments currently face in this early phase of the transition and draws out a set of indicators to assess on an ongoing basis in the coming years that will provide insight into the progress being made as the transition to federalism unfolds.