Exercise in Financial Analysis, Projections and Financial Planning By Dr. Ravikant Joshi ABC city has a population of 0.

251 million per 2001 census. It is an important industrial city with textile base. The decadal growth rate has been declining continuously from 86% in 1961 to 20% in 2001. The declining demographic growth needs serious attention. The average household size in the city and country is 4.5 persons per household. City is likely to grow at decadal growth rate of 20 % and with right kind of investment in urban infrastructure it can grow at the rate of 30%/ The slum population constituted 14.56% of the total population of the city.
Table 1. Actual Overall Financial Performance in Past years (Rs. in Million) Items 2001-02 2002-03 2003-04 2004-05 2005-06 Actual CAGR (%) 5.7 6.15

Opening Balance Revenue Income Revenue Expenditure Surplus/ Deficit Net Rev Surplus Capital Receipts Capital Expenditure Surplus/ Deficit Extra Ordinary Receipts Extra Ordinary Payments Surplus/ Deficit Closing Balance

62 471 347 124 16.7 110.3 -93.6 85.8 97.7 -11.9 80.4

86.1 434.8 373.3 61.5 24.1 122.0 -97.9 55.3 61.1 -5.8 43.8

49.6 547.5 412.0 135.5 18.6 129.8 -111.1 78.8 103.4 -24.6 49.3

56.5 482.1 406.8 75.3 23.4 99.5 -76.1 87.1 86.1 1.0 56.8

62.6 587.9 440.6 147.3 13.8 156.3 -142.6 83.3 78.8 4.6 71.8

-4.69 9.11 79.58 -0.73

Overall finances of ABC city have been provided in the Table 1. This performance is achieved at the following level of peformance indicators Property tax (House tax) has contributed 12% to revenue income and has grown at a CAGR of 19.46%. This is a healthy rate of growth. House tax/property tax is charged on the basis of Annual Rental Value (ARV) Property tax which is the main source of revenue is being charged at rate of 25% Annual Rental Value. Maximum rate charged could be 28%. Property tax revenue, collection efficiency and the number of assessed properties are as follows: The base rates which are utilised to arrive at ARV for different types of properties and for different localities remain valid for four year period since the Act specifies a revision of ARV after every four years. The present rates will remain in application till the year 200708 as last revision assessment was carried out in 2004-05. The last revision assessment led to increase in tax demand by 24.5 millon. Earlier revision assessment was carried out in the year 2000-01.
Table 1. Demand, Recovery and Arrears position of Property Tax/House Tax

Item Demand2 Current Arrears Total Demand Collection Current Arrears Total Collection Against current demand % Against past arrears % Collection performnace-% No. of Assessment Tax per Assessment-Rs.

2001-02

2002-03

2003-04

2004051

2005-06 (Rs. In million)

39.217 6.540 45.757

45.333 7.503 52.836

52.498 14.074 66.572

69.559 20.965 90.524

74.324 31.158 105.482

34.852 6.301 41.153 90.60 94.49 91.15
37,190

38.142 7.496 45.638 83.82 96.56 85.52
37,800

44.902 12.168 57.070 85.74 85.39 85.66
38,502

56.033 10.498 66.531 81.00 47.56 72.75
40,985

63.032 20.640 83.672 83.88 61.17 78.37
41,833

1,102

1,307

1,395

1,910

1,8773

The total number of water connections in 2005-06 in the city were 27,626 against 41,833 assessed households implying that a large number of connections are not covered under water charge. There are only twelve residential metered connections in the city and the number of industrial working metered connections has reduced to 60 over the years.
Table 2. Connection details by type Sl. Connection Description 2001-02 1 Un-Metered Domestic 20,569 Non-Domestic 2,096 Sub-Total 22,665 2 Metered Domestic Non-Domestic 179 Sub-Total 179 Total no. of connections 22,844 Table 3. Water Tariff Structure of ABC MB
1 2

2002-03 21,353 2,113 23,466 288 288 23,754

2003-04 21,964 2,134 24,098 369 369 24,467

2004-05 23,612 2,192 25,804 407 407 26,211

2005-06 24,915 2,261 27,176 12 438 450 27,626

Table 4 illustrates the charges levied by ABC municipal body towards water supply.

Revision Assessment year, one can observe sizeable increase in the demand figure as result of revision. Both figures under demand (past and current) are taken on net basis that is gross demand less demand under objection, litigation or under appeal. 3 Tax per assessment is calculated on basis of gross current tax demand and not on net tax demand.

S. No. 1 2

Type of Consumer Domestic Non Domestic

Before Revision

After Revision (11/10/2000)

Flat Rate (Rs per year) Rs 403 Rs 640 Rs 806 Rs 3580

Deposits for New Connections (Rs) Rs1000 Rs 3600

After Revision (11/10/2000) Volumetric Rate (Rs per 1000 litres) Rs1000 Rs 3600

Table 4. Water Charges – Demand Collection Balance Statement 2000-01 2001-02 2002-03 Items Rs. million Demand Arrears 2.436 2756 5288 Current 19.816 21.363 21.379 Total Demand 22.252 24119 26.667 Collection Arrears 2.165 2.337 4.415 Current 18.030 17.011 18.913 Total Collection 20.195 19.348 23.328 Balance 2.057 4.771 3.339 90.76 80.22 Collection Performance 87.48% % % No. of New HSCs 980 741 1798 Growth of HSCs (24)% 36%

2003-04

2004-05

10.625 21.477 32.102 3.295 16.469 19.764 12.338 61.57% 1410 13%

12.848 21.321 34.169 5.963 19.347 25.310 8.859 74.07 % 1446 10%

Water supply and sewerage service of ABC municipal body is in a sizeable deficit and which is escalating. Receipts from water charges are just 25% of the expenditures carried on WSSS by ABC MB.
Table 5. Water and Sewerage Service – Income and Expenditure Statement (Rs. in million)

Sr.

Particulars 2004-05 Amount WSSS Total Receipts 31.273

% Share 100.0 100.0

2005-06 Amount 38.827 153.280 114.413

% Share 100.0 100.0

WSSSTotal Expenditure 124.964 Deficit 93.691

Sanitation (Solid Waste Management) service of ABC MB is in heavy loss as there is no separate charge for solid waste collection. Only 19 to 23 % expenditure can be recovered from the existing sources of income.
Table 2. Sanitation service income and expenditure A Income B Expenditure C Deficit
2003 - 2004 2004 - 2005

Total:Total:-

10650764 54429739 43778975

13275318 58565737 45290419

The group-wise revenue expenditure from 2001-02 through 2005-06 are presented below in Table 8.
Table 6. Group-wise Revenue Expenditure of ABC MB - Rs in million

Particulars Revenue Expenditure: Establishment As % of Revenue Expenses As % of Revenue Income O&M As % of Revenue Expenses As % of Revenue Income Debt servicing As % of Revenue Expenses As % of Revenue Income Total Revenue Expenditure Capital expenditure Total expenditure

200102

200203

200304

200405

200506

Average Share or CAGR %

169.5 49 36 165.0 48 35 12.5 4 3 347.0 110.3 457.3

205.3 55 47 122.4 33 28 45.7 12 10 373.3 122.0 495.4

217.0 53 40 164.6 40 30 30.5 7 6 412.0 129.8 541.8

182.9 45 38 206.1 51 43 17.8 4 4 406.8 99.5 506.3

206.7 47 35 188.0 43 32 45.9 10 8 440.6 156.3 596.9 8 6 Cagr 6.15 43 34 50 39

Total loan outstanding is Rs. 119.6 million. All its existing loans will be repaid by 201112. Except this there are no liabilities of ABC MB.
Table 7. Outstanding Loans Sl. Particular 1 Purpose of Loan 2 Original Principal Amount (Rs in crore) 3 Year in which loan was taken 4 Repayment Period (years) 5 Interest Rate 6 Balance outstanding as on 31/10/2006 (Rs in crore) LIC W/S & UGD 55.1 1979-97 25 8.5 to 13.0% 14.5 Banks WS & UGD 82.275 2006 10.0% 82.275 OMB4 (FIs) W/S and UGD 23.46 1990-2000 10-12 12.75 to 15.5% 22.8

4

Under earlier centralized planning and capital rationing regime ULBs and State Parastatals were allowed to raise government guaranteed bond from the Market and therefore these bonds were called Open Market Borrowing (OMB) loans. These bonds had nothing to do with concept of ‘Municipal Bond’ or credit rating etc. The bonds qualified for SLR and therefore were invested by Banks. Under structural reforms these bonds have become history.

Table 8. Proposed CAPEX of ABC MB during 2007-08 to 2012-13 (Rs. in million)

Sector Sl 1 2 3 4 5 6 7 8

Investment till 2012-13 Minimum Desirable Name of Service Requirement Requirement Water Supply 1,65.9 360.0 Sewerage & Sanitation 11,46.0 1400.0 Roads & Urban 1,46.0 290.0 Transport Storm Water Drains 17.0 50.0 Street Lights 50.0 100.0 Solid Waste 67.8 100.0 Management Urban Poor/ Slums 3,12.3 400.0 Others 10.5 100.0 Total 1915.5 2800.0

Recently ABC Municipal Body has for the first time prepared long term capital investment plan which provided in side table. This is spread over a six year period starting from 2007-08 to 2012-13. In the light of the background information provided earlier you are requested to advise ABC MB on following aspects –

• •

How much investment (CAPEX) MB will be able to undertake on its own (internal resources) without any additional (extra-ordinary) grant or any additional borrowing? How much investment (CAPEX) MB will be able to undertake with borrowing option? How much borrowing it can sustain? The loans will be available for the 10 years period at the rate of 9% p.a. if municipal body demonstrates repayment capacity. If higher level governments make grant available at the 50% of CAPEX without any cap on amount and if the municipal body can put in rest of 50% matching amount under its national urban renewal program, then how much will be the investment capacity of the MB? And how much grant it should ask from Government?

Special Note – any additional CAPEX will increase operations & maintenance cost by 5% of the value of capital stock created. Special Note - The investment capacity under borrowing option should be calculated using the debt service coverage ratio (amount of surplus available to pay interest and to repay principal that is due) and year-on-year surplus. In case of new debt, the debt service coverage ratio (DSCR) is to be maintained at an average of 1.75 (cushion of 75% higher inflows after accounting for all committed outflows) i.e. from 2006/07 to 2011/12. Property tax and user charges are the only two sources available to improve financial health of MB to undertake proposed CAPEX. Similarly reduction in expenditure is another viable measure as generally MB are found cost ineffective. National government

is pushing these three reforms in MB. Infact these will be mandatory reforms if MB wish to avail grant at the rate of 50% of CAPEX There are not many examples of PPP in urban services in the country but in other sectors PPP initiatives have reaped good reasults. Country has put in place PPP facilitation legislative framework and through unbundling of urban services it is possible to go for PPP for certain part of total CAPEX. One estimate shows that 25% of Proposed CAPEX is conducive for PPP initiatives. Private Partner will expect minimum 15% rate of return on his investment in such PPP initiatives. Please advise MB whether it should go for PPPand if yes for how much amount. You are requested to work out financial operation plan for ABC MB (in the matrix of 3X3 )of assumptions and financing option as follows Scenarios/Options Through Own Source Financing only With Govt Grant @ 50% of CAPEX With Borrowing up to a sustainable level

‘As it is’ basis/At existing Level of Performance (On the basis of CAGR of past years) – Property coverage, Water Connection coverage and recovery efficiency at 80%; tax rate at 25% of ARV, increase in water charges by 15% and revision assessment with 15% increase in base rates in next six year period Moderate reforms implementation scenario or middle level performance – property coverage, water connection coverage and recovery performance at 90%, tax rate at 28% and water charge increase by 30 % and property tax base rate (revision assessment) increase by 20%. Introduction of user charges for other services and cost reduction measures to some extent Under full scale reforms – Property and water connections coverage and recovery efficiency at 95%, Property tax rate at 28 % Water Charges by 50%, revision assessment of properties with 25% increase in base rates. Introduction of other user charges and cost reduction measures. To these basic projections you may add PPP and any other financing solutions which you think appropriate and provide additional scenario of financial operating plan.

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