Criteria For Rating Instruments Issued By Urban Local Bodies
10th October 2019 (Version 2)

The Urban Local Bodies (ULBs) operating in the country have been vested with the authority and responsibility of rendering civic services to the residents of their jurisdiction. For effective discharge of its function, the municipality hasto raise adequate resources from the various avenues, including but not restricted to budgetary supports.   

The governmental character of the ULBs,theirmanagement, their objectives, roles, revenue streams and funding avenues differ significantly from commercial entities, hence making it imperative that the credit profiles of these players are evaluated on a different framework.

Acuité evaluates ULBs on the following mix of qualitative and quantitative parameters.

  • QUALITATIVE FACTORS
    • Governing Framework
      • Methodology for deciding the key management personnel,key decision making committees, tenures of these committees and the processes laid down for critical decisions.
      • Delineation of functional responsibilities into 'Obligatory' serviceand  'Discretionary' service. Obligatory service includes those which are mandatorily required to be discharged by the ULB as per its statute. Discretionary service means those functions which can be outsourced or which can be discharged by private parties at the behest of the ULB individually or jointly. The bifurcation of the above services is necessary to understand the extent of future funding requirements. Since the pool of resources with a ULB is limited,it is expected that higher priority will be accorded for the revenue & capital expenditure regarding essential services like water supply or sewerage services rather than relatively non-essential services such as maintenance of gardens.

    • Revenue Generation Potential
    • The revenues generated from taxes and other sources of income and the stability of these revenue streamsare examined here. The breakup of revenues into Own Revenues (Property Taxes, Water Taxes, etc.) & Other Revenues (Grants/ Allocations) is critically examined under this parameter. Since the provision of services is based on cost recovery basis, the efficiency of recovery is also examined by studying the deficits.

      The funds/ grants received from various governments are examined in terms of their (i) source i.e.the central and State Governments and (ii) their nature such as revenue grants, capital grants,recurring grants, one time grants andproject oriented grants. Acuité also looks at the methodology for computing the quantum of such funds/ grants. The stability and other related factors are evaluated under this head.The performance of the ULB vis-a-vis the budgetary expectations and itsnear term plans are examined critically.

    • Current Population Coverage
    • The larger the population coverage of the ULB's services,lower will be its future capex requirements and larger will be the tax base for levying of various taxes.The demographic profile is also considered in the evaluation process. The per capita income is a useful metric in this regard as it indicates the level of affluence and the tax paying propensity.

    • Debt Raising Flexibility
    • Under this head, Acuité will examine the debt raising plans, regulatory limits to borrowings and ability to raise funds through innovative instruments.The previous borrowing programs of the ULBs, adherence to the laid down/ accepted covenants, meeting the debt repayment schedules as well as the refinancing capabilities are alsoassessed.

    • Drivers of Economic Activity
    • The drivers of economic activity in a region depend on factors like size of the city, presence of SEZs, smart city/ies present/ identified,health of the State Govt. and its stage/ philosophy for development,incentives available for industrialisation, levels of industrial/commercial activity,level of value addition by the industry and commerce, job opportunities, availability and adequacy of social and other infrastructure availability and other such factors. 

      The sustainability of these economic drivers is critical as development of alternative pockets of economic activity can influence the level of activity in an existing place. For instance, the development of satellite towns on the periphery of existing metropolitan regions could cause a shift in residential and commercial activity due to reasons like affordability of real estate. This in turn has implications for the future earnings stream of the ULB.

       

    B.   FINANCIAL INDICATORS

    1. Key Operating Metrics
    2. The key aspects to be considered here are 
      Breakup into Tax Revenues & Non Tax Revenues
      Grants received from State Government and stability of the same.

    3. Revenue Expenditures
    4. Revenue expenditures and their rate of growth 
      Nature of revenue expenditure- committed (wages, interest, etc.) or discretionary spends. Higher the proportion of Committed Expenditure lower is the flexibility available to the ULB.

    5. Capital Account
    6. Track record of Capital Receipts and their application for various asset creation uses.

    7. Key Metrics
    8. Operating Revenue Surplus/ Deficit as a percentage of Net debt
      Operating Revenue surplus/ Deficit + Interest as a percentage of Interest Expense
      Operating Revenue Surplus/Deficit+ Interest as a fraction of principal repayment and interest obligation.

    9. Liquidity 
    10. The availability of unencumbered cash/ cash equivalents which can be easily tapped to meet certain operational/financial commitments. The quantum of such liquidity vis-a-vis the annual commitments is reckoned while arriving at the parametric assessment.

 

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