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, their management, 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.
The revenues generated from taxes and other sources of income and the stability of these revenue streams are 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 and project 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 its near term plans are examined critically.
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.
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 also assessed.
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
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.
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.
Track record of Capital Receipts and their application for various asset creation uses.
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.
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.