Student Name: Swapneel Vaijanapurkar Guide : Prof. Anjana Vyas, (Ph D)

Draft Review (17-01-2014)

F A C U LT 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

Municipal Finance – Challenges and

Prospects

A Case of Municipal Corporations of

GujaratDISSERTATION PROGRAM 2013-2014

Framework for the study

Study Conceptualization

Background Study

Rationale

Research Details(Research Questions, Objectives and Steps)

Defining Scope and Limitations of Study

Literature Review

Municipal Resource Mobilization

Urban Development and Reform Initiatives

Data Collection & Analysis

Selection of Case City

Detail Assessment of City Finances

(Sector wise)

Level of Under spending

Conclusions and Recommendations

Concepts of Municipal Finance

Over all financial analysis of municipal corporations of Gujarat

Completed On going Not yet Started

Primary Assessment of City Finances

STUDY CONCEPTUALIZATION

Background – Shift in the Indian Economy

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

1950

/51-

1959

/60

1960

/61-

1970

/71

1970

/71-

1980

/81

1980

/81-

1990

/91

1990

/91-

2000

/01

2000

/01-

2010

/11

55.3 47.6 42.8 37.3 30.9 21.8

14.8 19.6 21.3 22.323.3

24.5

29.8 32.8 35.9 40.3 45.7 53.7

Sectoral contribution to the economy

Primary Secondary Tertiary

Source: Economic survey of India -2011

Background – Shift in the Urban-Rural Economy

1990 2001 2008 2030

54 46 42 31

46 54 58 69

A split of Rural and Urban Economies

Rural Urban

Source: MGI, India awakening report, 2010

» 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

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 PROJECTSFINANCE

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.

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

AHMEDABAD CITY

Source: CITY Development Plan Ahmedabad and Surat.

Rationale – Why Municipal Corporations of Gujarat

Tamilnadu Gujarat Maharastra Karnataka Punjab

53

44 4437 36

67 6658 57

52

Five States most likely to be more than 50 % Urbanised

Scenario - 2008 Scenario - 2030

Source: Urban Awakening India Report, Mckinsey, 2010

» 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

Rationale – Why Municipal Corporations of Gujarat

Delhi

Mumbai

Kolkata

BanglorePune

Chennai

Ahmedabad

HyderabadSurat

Nagpur

VadodaraJaipur

Kanpur

296265

169127

76 73 68 67 53 37 35 24 15

GDP by 2030 (Billion USD)

Source: Urban Awakening India Report, Mckinsey, 2010

» 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

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 corporations of Gujarat in terms of fiscal efficiency indicators?

1. To examine the trends in major revenue sources and expenditures of municipalities and assess their fiscal position.

» Is there any under spending in provisioning of basic infrastructural services and what are the factors responsible for this?

2. To analyse performance of Municipal Corporation with respect to provision of civic infrastructure.

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 the fiscal performance

4. To suggest measures for improvement in financial position.

Research Details

Objectives Steps Sources

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.

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

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 spending on core services with the indicators given by various studies.

Reviewing the norms laid down by Zakaria committee and HPEC.

Research Details

Objectives Steps Sources

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

» Assessing the Exogenous and Endogenous factors responsible for the level of under spending

Secondary data from Municipal corporations and literature review.

4. To suggest measures for improvement in financial position.

» To recommend strategies for strengthening the financial position and better fiscal performance of ULBs

Analysis of data from selected cases and inferences from literature

Hypothesis, Scope and Limitation

Hypothesis

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

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 doesn’t 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

Resource of Local Bodies

Revenue Base and Expenditure Domain of

ULBs

Principles of Tax Assignment, Choice of

Local taxes

Sources of Local Body Finances

Inter-Governmental Fiscal Transfers

Methods for Financing Urban Infrastructure

Loan Financing

Private Sector Participation

Pricing and User Charges

Accessing Capital Markets

Urban Development and Reform Initiatives

Central Government Schemes

State Government Initiatives

Completed On going Not yet Started

Classification of Receipt and Payment

Classification of receipts and payments

Revenue Extra-ordinaryCapital

Revenue Income

All types of recurring incomes coming from assets owned, goods produced and sold, services rendered, and unconditional grants received

EO Income

All receipts received on behalf of others or against advances given to others which does not affect finances of an organization

Capital Income

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

Revenue 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

Capital Expenditure

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

EO Expenditure

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 Sources of Revenue IncomeTax revenue Property tax, advertisement tax, tax on water, property, light, sanitation,

vehicle, drainage, etc;

Non-tax Revenue User charges, Municipal fees, Sale & hire charges, lease amounts

Other receipts Law charges cost recovered, Lapsed deposits, fees, fines & fortitudes, rent on tools & plants, miscellaneous sales, Sundry receipts, etc

Assigned or shared revenue

Entertainment tax, Motor vehicle tax, Surcharge on Stamp duty, 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)

Source: Mohanty (2007)

Capital Income Sources of Capital Income Grants 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

Expenditure of ULBs

Category Expenditure Items

Revenue Expenditure

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

Administrative Rents, rates & taxes, office maintenance, communication, travel expenses,

printing & stationary, law charges, etc

Operations &

maintenance

Power & fuel, Bulk purchases, Stores, Hire charges, repairs & expenditure

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 Miscellaneous expenses not included in the above

Source: Mohanty (2007)

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

Loan Financing

Private Sector Participation Pricing Accessing

Capital Market

Commercial Banks

InfrastructureBanks

Municipal Development

Fund

Specialised Intermediaries

Leasing Contracting Franchising BOO, BOOT, BOLT

Concession

Service

Management

User Charges

Tariff Reforms

Equity Market

Debt Market

Municipal Bond

Infrastructure Bond

Pooled Finance

I II III IV

Completed On going Not yet Started

Source: Class Presentation-UMG, 2013

DATA COLLECTION AND ANALYSIS

Combined Revenue Income and Expenditure

2006-07 2007-08 2008-09 2009-10 2010-110

500

1000

1500

2000

2500

3000

3500

4000

4500

Revenue IncomeRevenue Expenditure

RS (I

n Cr

ores

)

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

11%

15%

CAGR

Source : Gujarat State Finance Commission

Revenue Income (Percentage) - Gujarat

The share of grants has increased over the period of time.

The largest share is contributed by Octroi Abolishment Grant.

2006-07 2007-08 2008-09 2009-10 2010-11

7857

24 26 27

13

16

16 14 17

926

60 60 56

Tax Income Non Tax Grants

2006-07 2007-08 2008-09 2009-10 2010-110

7685 85

80

The octroi Abolishment Grants contributes to more than 80% in the income through Grants.

Source : Gujarat State Finance Commission

Revenue Surplus of Municipal corporations (Per Capita)

2006-07 2007-08 2008-09 2009-10 2010-11

-500

0

500

1000

1500

2000

AhmedabadSuratVadodaraRajkotBhavnagarJamnagarJunagadh

Years

Per

capi

ta R

even

ue S

urpl

us

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 : 1004 Rs/Capita2. Ahmedabad : 1000 Rs/Capita3. Surat : 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

19501955

19601965

19701975

19801985

19901995

20002005

20102015

20202025

0

2000000

4000000

6000000

8000000

10000000

12000000

Population Projections of Cities of Gujarat

AhmedabadSuratVadodara

Popu

latio

n

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.

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

» 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: Location Disadvantage

Kutch

Jamnagar

Porbandar

JunagadhAmreli

Bhavnagar

Rajkot

Surendranagar

Banaskantha

PatanMehsana

Himmatnagar

Kheda Panchmahal

Dahod

Vadodara

BharuchNarmada

Surat

Navsari

Valsad

Anand

Gandhinagar

Ahmedabad

Source : GIDC - Industrial Estates and Clusters : City Development Plan, Vadodara

Vadodara has its limitations, which will define the possible role and scope of its economy.

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

2008-09 2009-10 2010-11 2011-12 2012-130

100

200

300

400

500

600

700

800

Revenue IncomeRevenue Expenditure

Rs (I

n Cr

ores

)

8%

16%

CAGR

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

2008-09 2009-10 2010-11 2011-12 2012-13

32 29 31 33 33

11 12 911

24

57 60 60 5644

Tax Income Non Tax Income Grant Income

Source : VMC Budget Documents, 2012-13

Revenue Income – Tax Income (Percentage)

2008-09 2009-10 2010-11 2011-12 2012-13

54.5 52.8 48.2 51.0 50.7

23.5 22.321.6 18.0 18.4

10.99.0

12.8 13.5 13.9

0.11.6 2.2 2.3 2.4

9.9 13.6 14.6 14.5 14.1

1.1 0.7 0.7 0.6 0.5

General Water Conservancy Solid waste management Charge Professional Other

Source : VMC Budget Documents, 2012-13

Revenue Expenditure (Percentage)

2008-09 2009-10 2010-11 2011-12 2012-13

50.356.5 57.8 57.1 58.7

1.00.4 0.3 0.5 0.5

32.5 25.9 23.9 24.6 27.8

15.8 16.7 17.5 16.5 11.1

Establishment Contigency Maintenance Primary Education Loan Charges (interest & Repayment)

Source : VMC Budget Documents, 2012-13

Capital Account (Absolute Terms – Lacs)

2008-09 2009-10 2010-11 2011-12 2012-13

3586439049

30853

46237

53602

4111344435

38564 39871

50635

Total Capital Income Total Capital Expenditure

The total capital income includes income from the

1. Internal sources and grants2. capital income from JNNURM

receipts

Over the period, the later one has Decreased substantially.

2008-09 2009-10 2010-11 2011-12 2012-13

1934

5769

82

8166

4331

18

Break up of Capital IncomeInternal sources and Grants JNNURM Receipt

Source : VMC Budget Documents, 2012-13

Thank You

Laxmi Vilas Palace- Vadodara

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