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
(%)
Opening Balance 62 86.1 49.6 56.5 62.6
Revenue Income 471 434.8 547.5 482.1 587.9 5.7
Revenue Expenditure 347 373.3 412.0 406.8 440.6 6.15
Surplus/ Deficit 124 61.5 135.5 75.3 147.3
Net Rev Surplus
Capital Receipts 16.7 24.1 18.6 23.4 13.8 -4.69
Capital Expenditure 110.3 122.0 129.8 99.5 156.3 9.11
Surplus/ Deficit -93.6 -97.9 -111.1 -76.1 -142.6
Extra Ordinary Receipts 85.8 55.3 78.8 87.1 83.3 79.58
Extra Ordinary Payments 97.7 61.1 103.4 86.1 78.8 -0.73
Surplus/ Deficit -11.9 -5.8 -24.6 1.0 4.6
Closing Balance 80.4 43.8 49.3 56.8 71.8

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 2007-
08 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
 2004-
Item 2001-02 2002-03 2003-04 2005-06
051

Demand2 (Rs. In million)

Current 39.217 45.333 52.498 69.559 74.324

Arrears 6.540 7.503 14.074 20.965 31.158

Total Demand 45.757 52.836 66.572 90.524 105.482

Collection

Current 34.852 38.142 44.902 56.033 63.032

Arrears 6.301 7.496 12.168 10.498 20.640

Total Collection 41.153 45.638 57.070 66.531 83.672

Against current demand % 90.60 83.82 85.74 81.00 83.88

Against past arrears % 94.49 96.56 85.39 47.56 61.17

Collection performnace-% 91.15 85.52 85.66 72.75 78.37

No. of Assessment 37,190 37,800 38,502 40,985 41,833

Tax per Assessment-Rs. 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 2002-03 2003-04 2004-05 2005-06
1 Un-Metered
Domestic 20,569 21,353 21,964 23,612 24,915
Non-Domestic 2,096 2,113 2,134 2,192 2,261
Sub-Total 22,665 23,466 24,098 25,804 27,176
2 Metered
Domestic - - - - 12
Non-Domestic 179 288 369 407 438
Sub-Total 179 288 369 407 450
Total no. of connections 22,844 23,754 24,467 26,211 27,626
Table 4 illustrates the charges levied by ABC municipal body towards water supply.
Table 3. Water Tariff Structure of ABC MB
1
Revision Assessment year, one can observe sizeable increase in the demand figure as result of revision.
2
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.
 Deposits for After Revision
Before After Revision
New (11/10/2000)
S. Type of Revision (11/10/2000)
Connections
No. Consumer
(Rs) Volumetric Rate
Flat Rate (Rs per year)
(Rs per 1000 litres)
1 Domestic Rs 403 Rs 806 Rs1000 Rs1000
Non Rs 3600 Rs 3600
2 Rs 640 Rs 3580
Domestic

Table 4. Water Charges – Demand Collection Balance Statement

2000-01 2001-02 2002-03 2003-04 2004-05
Items
Rs. million
Demand
Arrears 2.436 2756 5288 10.625 12.848
Current 19.816 21.363 21.379 21.477 21.321
Total Demand 22.252 24119 26.667 32.102 34.169
Collection
Arrears 2.165 2.337 4.415 3.295 5.963
Current 18.030 17.011 18.913 16.469 19.347
Total Collection 20.195 19.348 23.328 19.764 25.310
Balance 2.057 4.771 3.339 12.338 8.859
90.76 80.22 74.07
Collection Performance 87.48% 61.57%
% % %
No. of New HSCs 980 741 1798 1410 1446
Growth of HSCs (24)% 36% 13% 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 % 2005-06 % Share
Amount Share Amount

WSSS Total Receipts 31.273 100.0 38.827 100.0

WSSSTotal Expenditure 124.964 100.0 153.280 100.0

Deficit 93.691 114.413

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 2003 - 2004 2004 - 2005
A Income Total:- 10650764 13275318
B Expenditure Total:- 54429739 58565737
C Deficit 43778975 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
 Average
2001- 2002- 2003- 2004- 2005- Share or
Particulars 02 03 04 05 06 CAGR %

Revenue Expenditure:

Establishment 169.5 205.3 217.0 182.9 206.7

As % of Revenue Expenses 49 55 53 45 47 50

As % of Revenue Income 36 47 40 38 35 39

O&M 165.0 122.4 164.6 206.1 188.0

As % of Revenue Expenses 48 33 40 51 43 43

As % of Revenue Income 35 28 30 43 32 34

Debt servicing 12.5 45.7 30.5 17.8 45.9

As % of Revenue Expenses 4 12 7 4 10 8

As % of Revenue Income 3 10 6 4 8 6

Total Revenue Expenditure 347.0 373.3 412.0 406.8 440.6 Cagr 6.15

Capital expenditure 110.3 122.0 129.8 99.5 156.3

Total expenditure 457.3 495.4 541.8 506.3 596.9

Total loan outstanding is Rs. 119.6 million. All its existing loans will be repaid by 2011-
12. Except this there are no liabilities of ABC MB.
Table 7. Outstanding Loans
Sl. Particular LIC Banks OMB4 (FIs)
1 Purpose of Loan W/S & UGD WS & UGD W/S and UGD
2 Original Principal Amount (Rs 55.1 82.275 23.46
in crore)
3 Year in which loan was taken 1979-97 2006 1990-2000
4 Repayment Period (years) 25 10-12
5 Interest Rate 8.5 to 13.0% 10.0% 12.75 to 15.5%
6 Balance outstanding as on 14.5 82.275 22.8
31/10/2006 (Rs in crore)

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)
Recently ABC
Sector Investment till 2012-13 Municipal Body has
Sl Minimum Desirable for the first time
Name of Service prepared long term
Requirement Requirement
1 Water Supply 1,65.9 360.0 capital investment
2 Sewerage & Sanitation 11,46.0 1400.0 plan which provided
Roads & Urban in side table. This is
3 1,46.0 290.0 spread over a six
Transport
year period starting
4 Storm Water Drains 17.0 50.0 from 2007-08 to
5 Street Lights 50.0 100.0 2012-13. In the light
Solid Waste of the background
6 67.8 100.0
Management information provided
7 Urban Poor/ Slums 3,12.3 400.0 earlier you are
8 Others 10.5 100.0 requested to advise
Total 1915.5 2800.0 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 With Govt With

Own Grant @ Borrowing
Source 50% of up to a
Financing CAPEX sustainable
only 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.