Municipal Finance Challenges and

Prospects A Case of Municipal Corporations of

DISSERTATION PROGRAM 2013 -2014

Gujarat

Student Name: Swapneel Vaijanapurkar

Guide : Prof. Anjana Vyas, (Ph D)

Draft Review (17-01-2014)

F A C U L T Y O F P L A N N I N G , C E P T U N I V E R S I T Y, A H M E D A B A D

Framework for the study

Study Conceptualization
Background Study

Literature Review
Concepts of Municipal Finance Municipal Resource Mobilization

Data Collection & Analysis

Over all financial analysis of municipal corporations of Gujarat Selection of Case City Primary Assessment of City Finances Detail Assessment of City Finances (Sector wise) Level of Under spending Conclusions and Recommendations

Rationale

Research Details
(Research Questions, Objectives and Steps)

Urban Development and Reform Initiatives

Defining Scope and Limitations of Study

Completed

On going

Not yet Started

STUDY CONCEPTUALIZATION

Background Shift in the Indian Economy

Shift from traditional agro based economy to modern economy such as manufacturing and financial services.

Sectoral contribution to the economy

Primary 29.8 32.8 19.6 35.9 21.3 42.8
1970/71-1980/81

Secondary

Tertiary

40.3 22.3 37.3

1980/81-1990/91

45.7

53.7

14.8

23.3
30.9
1990/91-2000/01

55.3

24.5 21.8
2000/01-2010/11

47.6
1960/61-1970/71

Source: Economic survey of India -2011

1950/51-1959/60

Background Shift in the Urban-Rural Economy

A split of Rural and Urban Economies

Rural
46 54

Urban

58

69

54 1990

46 2001

42 2008

31
2030

In 1990 the Rural economy was higher than the Urban, economy. It is expected, by 2030 Urban areas will contribute to almost 70% of the GDP. Economic base of has shifted from villages to the cities. Thus urban areas will act as an engines of economic growth
Source: MGI, India awakening report, 2010

Rationale Importance to Planners

Most of the planners spend their time thinking on technical requirements of the process in which they work. The financial aspects of the planning are generally not well understood by the planners. Planners can improve the chances of getting their plans and programs implemented if they better understand how municipal budgets and related financial mechanisms work. Thus knowledge of municipal finance can act as a bridge between urban infrastructure plans and projects.

PLANS

FINANCE

PROJECTS

Source: http://www.lincolninst.edu/subcenters/teaching-fiscal-dimensions-of-planning/materials/huddleston-plan-budget.pdf

Rationale Why Municipal Corporations

MCs are larger forms of ULBs, (in the form of Area and Population). MCs function as the major Economic Hubs for the State. The Increase in the Population has been demonstrated due to the concentration of Population in Urban Centres and not revealed the increase in the number of towns been steady across the decades. Thus most of the growth has been due to the enlargement of existing cities at every level and not significantly due to the addition of new towns.

AHMEDABAD CITY

Source: CITY Development Plan Ahmedabad and Surat.

SURAT CITY

Source: http://www.stanford.edu/group/siepr/cgi-bin/siepr/?q=system/files/shared/pubs/papers/pdf/SCID231.pdf

Rationale Why Municipal Corporations of Gujarat

Five States most likely to be more than 50 % Urbanised
Scenario - 2008
67 53 44 44 37 36 66 58 57 52

Scenario - 2030

Tamilnadu

Gujarat

Maharastra

Karnataka

Punjab

Gujarat would be having urban GDP of 16494 Billion Rupees by 2030. Second highest in terms of Urban GDP contribution after Maharastra which is 26660 Billion Rupees. Ratio of Urban GDP to the total GDP would be 77%, which would be highest in the country

Source: Urban Awakening India Report, Mckinsey, 2010

Rationale Why Municipal Corporations of Gujarat

GDP by 2030 (Billion USD)
296 265 169 127 76 73 68 67 53 37 35 24 15

Out of Top 13 cities contributing to the GDP of India in 2030, three cities happens to be from Gujarat. Gujarat Presently contributes about 7% to the GDP of India (2013) and the contribution is likely to increase in future. For sustaining this urban based growth, the municipal corporations needs to be more efficient in the service delivery and managing the budgets. Thus Gujarat becomes important case to study.
: http://www.moneycontrol.com/news/care-research/modis-gujarat-contributes-over-7-to-india-gdp-care_843199.html

Source: Urban Awakening India Report, Mckinsey, 2010

Research Problem
Because of 74th CAA functions and responsibilities of MCs have increased considerably without commensurate enhancement of their resource base

Both urbanization and decentralization are mounting strain on the fiscal position
of MCs to provide civic infrastructure facilities and services.

The financial requirements for bridging the existing gaps in the provisioning of basic services are quite huge which has led to marked deterioration in the standard and quality of life in cities.

This for provisioning and maintenance of basic services & civic infrastructure; the municipal corporations need to have a stable financial system.

There is a need to understand and critically examine the municipal finances

of the cities and the factors affecting the same

Research Details
Research Questions

Objectives

How is the performance of municipal 1. To examine the trends in major revenue corporations of Gujarat in terms of fiscal sources and expenditures of municipalities efficiency indicators? and assess their fiscal position. Is there any under spending in 2. To analyse performance of Municipal provisioning of basic infrastructural Corporation with respect to provision of civic services and what are the factors infrastructure. responsible for this? 3. To examine major constraints that could influence the overall performance of Municipal Corporation in the provision of civic infrastructure. What should be the measures to improve 4. To suggest measures for improvement in the fiscal performance financial position.

Research Details
Objectives
1. To examine the trends in major sources of income and expenditures of Municipal Corporation and assess their fiscal position for the period of seven years.

Steps
Calculating the revenue balance, fiscal balance, expenditure performance and debt sustainability.

Sources
Secondary Data (Gujarat State finance commission documents and data from websites of respective municipal corporations)

2. To analyze the performance of Municipal corporation with respect to provision of civic infrastructure

To compare the per capita Reviewing the norms laid down spending on core services by Zakaria committee and with the indicators given by HPEC. various studies.

Research Details
Objectives
3. To examine major constraints that could influence the overall performance of Municipal Corporation in the provision of civic infrastructure.

Steps

Sources

Assessing the Exogenous Secondary data from Municipal and Endogenous factors corporations and literature responsible for the level of review. under spending

4. To suggest measures for improvement in financial position.

To recommend strategies Analysis of data from selected for strengthening the cases and inferences from financial position and literature better fiscal performance of ULBs

Hypothesis, Scope and Limitation

Hypothesis The high per capita revenue surplus is infrastructural services. due to under spending on core

Scope: The proposed study will focus on one municipal corporation of Gujarat state.

Limitation:
The study assumes that the growth will be due to the enlargement of existing cities at every level and not significantly due to the addition of new towns. Thus present study doesnt consider finances of other urban local bodies such as Class I, II, III and IV municipalities in the state. The study will be limited to the data availability from different agencies of State and Municipal Corporation.

LITERATURE REVIEW

Framework for Literature Review

Concepts of Municipal Finance
Classification of receipts and payment Income and Expenditure sources Intergovernmental Fiscal Transfers Principles of Tax Assignment, Choice of Local taxes Indian studies on Municipal Finance
Completed

Municipal Resource Mobilization

Urban Development and Reform Initiatives

Loan Financing Central Government Schemes Private Sector Participation

Pricing and User Charges Accessing Capital Markets State Government Initiatives

On going

Not yet Started

Classification of Receipt and Payment

Classification of receipts and payments Revenue
Revenue Income All types of recurring incomes coming from assets owned, goods produced and sold, services rendered, and unconditional grants received Revenue Expenditure

Capital
Capital Income All types of one time receipts collected towards capital cost, assets sold, new loans raised and conditional grants received Capital Expenditure

Extra-ordinary
EO Income All receipts received on behalf of others or against advances given to others which does not affect finances of an organization EO Expenditure

All types of recurring expenses incurred for running assets owned, or for producing and selling goods /services, and all types of interest and financial costs

All types of expenditure incurred to create assets, to enhances life of existing assets greatly or to repay loans or any other liability

All payment made to others against the receipts received on behalf of others which does not affect finances of an organization
Source: Class Presentation-UMG, 2013

Income Sources
Revenue Income Tax revenue Non-tax Revenue Other receipts Sources of Revenue Income Property tax, advertisement tax, tax on water, property, light, sanitation, vehicle, drainage, etc; User charges, Municipal fees, Sale & hire charges, lease amounts Law charges cost recovered, Lapsed deposits, fees, fines & fortitudes, rent on tools & plants, miscellaneous sales, Sundry receipts, etc

Assigned or shared Entertainment tax, Motor vehicle tax, Surcharge on Stamp duty, revenue Professional tax, Education Cess, etc Grant in Aid i). Plan grants made available through planned transfers from upper tier of government under various projects, programmes & schemes ii). Non-plan grants made available to compensate against loss of income or some specific transfers (Grant in lieu of Octroi) Capital Income Grants Sources of Capital Income Various scheme-based grants for capital formation from state govt.

Other capital Income Grants plus, proceeds from land sale, Capital donations, Advances from municipal properties (pagdi) Government Loan Loans taken from Government with interest Other Loan Loans taken from other bilateral/multilateral institutions
Source: Mohanty (2007)

Expenditure of ULBs
Category Expenditure Items

Revenue Expenditure
Establishment
Administrative Operations

Staff salary, allowances, wages, pensions & retirement benefits, etc

Rents, rates & taxes, office maintenance, communication, travel expenses, printing & stationary, law charges, etc & Power & fuel, Bulk purchases, Stores, Hire charges, repairs & expenditure

maintenance

maintenance and interest payment made on loans

Capital Expenditure
Capital expenditure Buildings, water & sewerage, Energy / lighting, solid waste management, roads, bridges, culverts, causeways, health & sanitation, parks &

recreation spaces, furniture & fittings, tools & plant equipment, etc,
Principal repayment of loans

Other Expenditure
Other Expenditure
Source: Mohanty (2007)

Miscellaneous expenses not included in the above

Municipal Resource Mobilization

Financing urban infrastructure is plagued with several problems. Several initiatives addressing municipal finance issues have been taken up by Central, State and by municipal bodies themselves in several countries in world. Resource Mobilization means raising or providing Adequate & continuous supply of funds From appropriate sources At minimum possible cost Why alternative sources of financing? Inadequacy of conventional sources. Bridging of resource gap. Improving the financial and project management capabilities. Inculcating financial discipline. Attaining objectives of accountability, transparency and efficiency.
Source: Class Presentation-UMG, 2013

Municipal Resource Mobilization

Sources
I Loan Financing
Commercial Banks
Infrastructure Banks Municipal Development Fund Specialised Intermediaries Leasing

II Private Sector Participation

Contracting Franchising

III Pricing
BOO, BOOT, BOLT

IV Accessing Capital Market

Equity Market Debt Market Municipal Bond Infrastructure Bond Pooled Finance

Concession Service Management

User Charges Tariff Reforms

Completed

On going

Not yet Started Source: Class Presentation-UMG, 2013

DATA COLLECTION AND ANALYSIS

Combined Revenue Income and Expenditure

4500 4000 3500 RS (In Crores) 3000 2500 2000 1500

11% CAGR 15% Revenue Income Revenue Expenditure

1000
500 0 2006-07 2007-08 2008-09 2009-10 2010-11

Over the period of Five years Combined Revenue Income of all the municipal corporations of Gujarat increased by 50% Revenue Expenditure Increased by 72% Expenditures is growing faster than income
Source : Gujarat State Finance Commission

Revenue Income (Percentage) - Gujarat

Tax Income 9 13 26 16 78 57 60 Non Tax Grants

60

56

The share of grants has increased over the period of time. The largest share is contributed by Octroi Abolishment Grant.

16 24

14 26 2009-10

17 27 2010-11

2006-07

2007-08

2008-09

85 76

85

80

The octroi Abolishment Grants contributes to more than 80% in the income through Grants.
0 2006-07
Source : Gujarat State Finance Commission

2007-08

2008-09

2009-10

2010-11

Revenue Surplus of Municipal corporations (Per Capita)

1600 1400 1200

Per capita Revenue Surplus

1000 800 600 400 200 0 -200 -400 -600 2006-07 2007-08 2008-09 2009-10 2010-11

Ahmedabad

Surat
Vadodara Rajkot Bhavnagar Jamnagar Junagadh

Years

Revenue Surplus = Revenue Income Revenue Expenditure (on per capita basis) Vadodara Municipal Corporation posted a highest average per Capita Revenue Surplus for the period of five years. 1. Vadodara 2. Ahmedabad 3. Surat : : : 1004 Rs/Capita 1000 Rs/Capita 608 Rs/Capita

Source

: Gujarat State Finance Commission

Selection of Case City: Vadodara

Revenue surplus of a Municipal Corporation happens in two situations 1. City is well able to manage its expenses 2. City is under spending on its core Infrastructural Services. Vadodara Municipal Corporation posted a highest average per capita revenue surplus for the period of five years.

Vadodara Municipal Corporation is also faced to variety of other problems like 1. Poised population growth 2. Location disadvantage. 3. Industrial slow down
Thus Vadodara Municipal Corporation is selected for this Study

Vadodara: Growth Poised

Population Projections of Cities of Gujarat
12000000 10000000 Population 8000000

6000000
4000000 2000000 0

Ahmedabad Surat Vadodara

2010

Source: United Nations, Department of Economic and Social Affairs, Population Division

Vadodara and Surat had a population of about similar (4.7 lakhs & 4.9 lakhs) as per 1971. Then on every Census has revealed higher and higher growth of population in Surat than in Vadodara.

2025

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2015

2020

Vadodara: Location Disadvantage

Sandwiched between two giant growth magnets of Gujarat .

Ahmedabad & Surat

Vadodara has more popular for Education Institutions and University. It could not get benefit of the larger cities Ahmedabad and Surat.

Vadodara hinterland on its east gets constrained due to tribal areas and hilly terrain in the border districts of Madhya Pradesh.

Vadodara has its limitations, which will define the possible role and scope of its economy.
Source : GIDC - Industrial Estates and Clusters : City Development Plan, Vadodara

Vadodara: Industrial Slowdown

The GIDC industrial estate was set up at Makarpura in 1970 and had currently around 2000 operational industries However, about 40% of these industrial undertakings have closed down in the last decade. The reasons can be attributed to: Poor infrastructure support Ageing workforce Pressure of local taxation, Lack of skilled manpower Lack of entrepreneurship

The work participation rate of Vadodara in 2001 was 32% as against 38% of Surat.
Vadodara city has a low workforce ratio, which may be due to the slack in the economic growth of the city in the last decade.

Source: City Development Plan, Vadodara

Primary assessment of City Finance

Revenue Income and Expenditure Revenue Income Breakup Break up of Revenue Income from TAX Sources Revenue Expenditure Break up Overview of Capital Account

Combined Revenue Income and Expenditure

800 700 600 500 400 300 200 100 0 2008-09 2009-10 2010-11 2011-12 2012-13 8% CAGR

Rs (In Crores)

16%
Revenue Income Revenue Expenditure

Over the period of Five years from 2008-09 to 2012-13 Revenue Income of Vadodara Municipal Corporation increased by by 35% Revenue Expenditure Increased by 84% Expenditures is growing at much faster than income

CAGR of Expenditure is double than that of Income

Source

: VMC Budget Documents, 2012-13

Revenue Income (Percentage) - Vadodara

Tax Income Non Tax Income Grant Income

44 57 60 60 56

24 11 12 9 11

32

29

31

33

33

2008-09
Source

2009-10

2010-11

2011-12

2012-13

: VMC Budget Documents, 2012-13

Revenue Income Tax Income (Percentage)

General
1.1

Water

Conservancy
0.7

Solid waste management Charge

0.7 0.6

Professional

Other
0.5

9.9 0.1
10.9

13.6 1.6
9.0

14.6 2.2
12.8

14.5 2.3
13.5

14.1 2.4
13.9

23.5

22.3 21.6

18.0

18.4

54.5

52.8

48.2

51.0

50.7

2008-09
Source

2009-10

2010-11

2011-12

2012-13

: VMC Budget Documents, 2012-13

Revenue Expenditure (Percentage)

Establishment Maintenance Loan Charges (interest & Repayment)
15.8 16.7 17.5

Contigency Primary Education

16.5

11.1

32.5
1.0

25.9
0.4

23.9
0.3

24.6
0.5

27.8
0.5

50.3

56.5

57.8

57.1

58.7

2008-09
Source

2009-10

2010-11

2011-12

2012-13

: VMC Budget Documents, 2012-13

Capital Account (Absolute Terms Lacs)

Source : VMC Budget Documents, 2012-13

Total Capital Income

Total Capital Expenditure

53602 50635

41113 35864

44435 39049 30853 38564

46237 39871

2008-09

2009-10

2010-11

2011-12

2012-13

Break up of Capital Income The total capital income includes income from the 1. Internal sources and grants 2. capital income from JNNURM receipts Over the period, the later one has Decreased substantially.
81
Internal sources and Grants JNNURM Receipt

43 66

31

18

57
19
2008-09

69

82

34
2009-10 2010-11 2011-12 2012-13

Thank You

Laxmi Vilas Palace- Vadodara

Source: http://www.marilag.org/top-10-vadodara/