Post on 21-Oct-2015
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/