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Financial Operating Plan

Vadodara Municipal Corporation


Structure of presentation

• Introduction
• Process of developing FOP
• Case Study – CDP Vadodara Municipal Corporation

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Introduction

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Introduction

• Financial Operating Plan


– A multi-year forecast of finances of the local body for the medium-
term
– Salient feature
 Forecast based on past trends
 Forecast considering capital investment plans for the term of CDP
 Takes in to account: all outstanding dues, including debt and non-debt
liabilities

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Process of developing FOP

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Methodology

Developing accounts database –For past five years


–Identify growth trends

Generation prioritized project shelf –Project shelf for each sector


–Develop priority

Projections of revenue and capital –Consider past trends


accounts –Adding capital investments proposed
under the CIP

Defining improvement scenarios –Define improvements in the revenue and


expenditure trends considering reform
agenda
–Targets to servicing liabilities

Run pass scenarios over projected


accounts’ model

Select the most appropriate –Achieving surplus account


scenario –Service all debts (DSCR > 1.25)
–Reasonable increase in service charges
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Generating Project Shelf

• Capital investment Plan


– Multi year scheduling of physical investments
– Prioritization of investments
– Demand-gap analysis of physical infrastructure
– Time period – generally 5 years

• CIP is an estimate of the level of investment needed to


implement CDP along with options and strategies for financing
it

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Projections of revenue and capital accounts

• Categories of FOP Projections


– Revenue Account Receipts:
 Octroi, Taxes, Non-Tax Sources
 Grants, Contribution and Subsidies

– Revenue Account Expenditure:


 Establishment
 Operation and Maintenance
 Debt Servicing - Existing and New Loans
 Phasing of Non-Debt Liabilities
 Additional O&M

– Capital Income
– Capital Expenditure
• Adding up capital investments proposed under CIP

8.
Developing Scenarios

• Estimates/forecast for revenue and expenditure for the term of


FOP
• Two sets of assumptions
– General/common
 Forecast of revenue and expenditure on the basis of past trends and

– Improvement scenario (alternates)


 Revenue improvement that may be achieved considering improved
municipal administration; i.e. improving collection efficiency, revision in
taxation rate, etc.

9.
Selection of improvement scenario

• Run pass the improvement assumptions over financial database


model
• Discuss outcomes with local body for each improvement
scenario
• Select the most achievable scenario
• Selection with the consent of local body
• Develop definite plan to achieve the improvement/reform
assumptions

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Case Study – CDP: Vadodara Municipal Corporation

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Develop Accounts database

• Present data sheet of VMC accounts – Excel model

• Generate trends for forecast parameters – Excel model

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Define improvement Scenario

• Financial forecast for VMC – four scenarios


– assuming differing policy changes with respect to taxes or charges being
levied,
– collection efficiency
– growth and share of Public Private Partnership (PPP) in the proposed
scheme of JNNURM

• Some forecast parameters remain common for all scenarios


• Some forecast parameters for different for each of scenarios

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Define improvement Scenario – common assumptions
No Parameter Assumption
1. Octrio Income Based on historical growth Octrio Income is estimated to grow at the rate of 10% per annum
2. Other Direct Taxes Based on historical growth Other Direct Taxes are estimated to grow at the rate of 5% per annum
3. Non-Tax Income Based on historical growth Non-Tax Income are estimated to grow at the rate of 5% per annum
4. Revenue Grants Based on historical growth Revenue Grants are estimated to grow at the rate of 5% per annum
5. Establishment Expenses Based on historical growth Establishment Expenses will grow at the rate of 3.75% per annum
6. Repairs & MaintenanceBased on historical growth Repairs & Maintenance Expenses are estimated to grow at the rate of 5% per
Expenses annum
7. Contingency Expenses Based on historical growth Contingency Expenses are estimated to grow at the rate of 5% per annum
8. Primary Education ExpensesBased on historical growth Primary Education Expenses are estimated to grow at the rate of 5% per annum

9. Provision for LocalProvision for Local Developmental Works are considered be 3% of revenue income
Developmental Works
10. Additional Operations &Additional Operations & Maintenance Expenses are considered at 5% of Capital Cost
Maintenance Expenses
11. Operations & MaintenanceOperations & Maintenance Expenditure for Solid Waste Management for the year 2006-07 is considered at
Expenditure for Solid WasteRs 2,700 lakhs and thereafter assumed to grow at the rate of 5% per annum
Management

12. Operations & MaintenanceOperations & Maintenance Expenditure for Street Lighting for the year 2006-07 is considered at Rs 1,122
Expenditure for Streetlakhs and thereafter assumed to grow at the rate of 5% per annum
Lighting
13. Income from Street Lighting Income from Street Lighting for the year 2006-07 is considered at Rs 300 lakhs and thereafter assumed to
grow at the rate of 36.7% per annum
14. Revolving Fund Contribution to revolving fund begins from the year 2008-09 and reaches the required level by 2011-12
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VMC FOP - Scenario – 1 – Assumptions & Results
• Collection efficiency of Property Tax to remain the same
• Number of Properties to increase at the rate of increase in
population (past decadal growth rate) i.e. 2.39%
• Collection efficiency of Water Charge to remain the same
• Number of water connections to increase at 5% per annum
Collection Average Tax orIncrease in numberRs / Month /
Efficiency (inCharge rateof properties orHousehold (in 2010-
2010-11) increase connections 11)
Property Tax 80% 0% 2.39% 114.44
Water Charge 63% 0% 5% 93.28
Solid Waste Charge - 0% - -
• Total Requirement of funds (in six years) for own share towards
capital investment – Rs.57000 lacs
• Total Availability of funds (in Six Years) for own share towards
capital investment – Rs. 37000 lacs
• VMC shall not be in a position to fund its CDP
15. • Scenario 1 shall be avoided
VMC FOP - Scenario – 2 Assumptions & Results
• PPP is assumed at 20% of overall funding requirements of VMC.
• Collection efficiency of Property Tax to remain the same.
• Number of Properties to increase at the rate of increase in
population (past decadal growth rate) i.e. 2.39%.
• Collection efficiency of Water Charge to remain the same
• Number of water connections to increase at 5% per annum
Collection Average Tax orIncrease in number ofRs / Month /
Efficiency (inCharge rateproperties orHousehold (in
2010-11) increase connections 2010-11)
Property Tax 80% 0% 2.39% 114.44
Water Charge 63% 0% 5% 93.28
Solid Waste Charge - 0% - -

• Own share fund requirement is Rs. 57000 lacs


• VMC shall not be in a position to funds its CDP (Rs. 3700 lacs +
Rs. 10500 PPP share = Rs. 47500 lacs
• Scenario 2 shall be avoided
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VMC FOP - Scenario – 3 - Assumptions

• PPP is assumed at 30% of overall funding requirements of VMC


• Collection efficiency of Property Tax reaches a peak of 90% in the
forecast period
• Number of Properties is expected to increase at the rate of increase in
population (past decadal growth rate) i.e. 2.39%.
• Average Property Tax increases at the rate of 5% per annum.
• Collection efficiency of Water Charge reaches a peak of 80% in the
forecast period.
• Number of water connections will increase at 10% per annum.
• Average Water Charge increases at the rate of 10% per annum.
• Collection efficiency and increase in the number of properties of Solid
Waste Management Charge move in line with the Property Tax.
• Average Solid Waste Management Charge increases at the rate of 25%
per annum.

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VMC FOP - Scenario – 3 results

Collection Average Tax orIncrease in number ofRs / Month /


Efficiency (inCharge rateproperties orHousehold (in
2010-11) increase connections 2010-11)
Property Tax 90% 5% 2.39% 153.36
Water Charge 80% 10% 5% 165.25
Solid Waste 90% 25% 2.39% 30.52
Management Charge

• VMC enjoys a surplus in each year of the forecast period.


• NPV of such surplus (at the rate of 9%) suggests an increased
investment capacity of VMC to the extent of 127% as compared
to the current capital expenditure of Rs 1,896.5 lakhs.
• Total Requirement of funds (in six years) for own share towards
capital investment – Rs.57000 lacs
• Total Availability of funds (in Six Years) for own share towards
capital investment – Rs. 63300 lacs
• This scenario is considered to be favourable for VMC.
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VMC FOP - Scenario – 4 - Assumptions

• PPP is assumed at 40% of overall funding requirements of VMC.


• Collection efficiency of property tax reaches a peak of 90% in the
forecast period.
• Number of Properties is expected to increase at the rate of increase in
population (past decadal growth rate) i.e. 2.39%.
• Average property tax increases at the rate of 7.5% per annum.
• Collection efficiency of water charge reaches a peak of 80% in the
forecast period.
• Number of water connections will increase at 10% per annum.
• Average water charge is considered at Rs 200 per month per
household.
• Collection efficiency and increase in number of properties of Solid
waste management charge move in line with property tax.
• Average solid waste management charge is considered at Rs 50 per
month per household.

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VMC FOP Scenario – 4 - Results
Collection Average Tax orIncrease in numberRs / Month /
Efficiency (inCharge rate increase of properties orHousehold (in
2010-11) connections 2010-11)
Property Tax 90% 7.5% 2.39% 176.61
Water Charge 80% 13.5% 5% 200.00
Solid Waste 90 38% 2.39% 50.00
Management Charge

• VMC shall enjoy a surplus in each year of the forecast period


• NPV of such surplus (at the rate of 9%) suggests an increased
investment capacity of VMC to the extent of 134% as compared to the
current capital expenditure of Rs 1,896.5 lakhs.
• Total Requirement of funds (in six years) for own share towards capital
investment – Rs.57000 lacs
• Total Availability of funds (in Six Years) for own share towards capital
investment – Rs. 72200 lacs
• The amount of average property taxes, water supply and solid waste
management charges proposed to be levied do not seem reasonable.
• Even though this scenario makes economic sense it is not desirable as
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it would pressurise citizens to pay more than reasonable charges
Thanks

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