Perennially, the ULBs has been dependent on the State government for financial support. Infomerics believes that because of weak fiscal position of the State governments generally, budgetary allocations to municipal bodies cannot be expected to increase substantially and may even decrease, with fiscal deficit becoming a critical area of economic management. Concessional funding from financial institutions may also be ruled out. Access to multilateral and bilateral funding is also going to be difficult, as there is increasing pressure from the donor countries to bring greater accountability and market orientation in the projects financed by them. Accordingly, Infomerics feels that it becomes very imperative for the ULBs to explore alternative sources of funds to meet their funding requirements. ULBs in India generally issue General Obligation Bonds and Revenue Obligation Bonds. In this backdrop, an independent assessment of the creditworthiness of the ULBs has become vital from point of view of the lenders.
In rating of debt instrument/facility of Urban Local Bodies, many factors are considered and looked into encompassing various qualitative and quantitative parameters. A brief synopsis of the rating parameters is furnished below:
MANAGEMENT & ADMINISTRATION
- Policies & Procedures (if SoPs are available).
- Organisation structure & Personnel Policy.
- Division of responsibilities between the Administrative and Political wings.
- Quality and continuity of management.
- Depth of management - extent of delegation.
- Extent of autonomy enjoyed by the ULB.
- Track record in project/programme implementation.
- Billing for taxes & other user charges and enforcement mechanism.
- E-governance system.
- Industrial relations.
- Management Information System.
- Relationship with the State Government.
- Structure of the ULB macro-economy
- Coverage of street lighting, piped water supply, underground sewerage, etc.
- Frequency & regularity of water supply.
- Per capita expenditure on public health and primary education.
- Adequacy of sewerage treatment plants.
- Adequacy of storm water drainage system.
- Effectiveness & the depth of Public – Private Partnership projects.
- Level of discretionary services.
- Grievance Redressal Mechanism.
- Labour dependency of the industrial and service sectors.
- Demonstrated leadership of the ULB in charting a growth course.
- Systems of accounting.
- Compliance with applicable Accounting Standards.
- Nature and quality of audit.
- Budgetary and planning processes.
- Tax base and past trends.
- Composition and timing of revenue and expenditure - past trends.
- Trends in tax rates and user charges.
- Extent of cost recovery on various urban services.
- Financial flexibility to meet unforeseen contingencies.
- Revenue surplus/deficit.
- Revenue buoyancy.
- Extent of State budgetary support.
- Operating and collection efficiency for taxes and user charges.
- Sources and allocation of capital expenditure – trend as well.
- Extent of borrowings, if any, from non-governmental sources and the degree of compliance with the covenants.
- Composition of current debt burden.
- Interest and debt service coverage ratios.
- Past debt service performance.
- Interaction with lenders.
- Evaluation of credit enhancement mechanisms, if any.
- Commitments/encumbrances on cash flows.
- Degree of reliance on short term borrowings.
- Cash flow adequacy vis-à-vis debt maturity profile;
- Recourse available to lenders, in case of default, as per the Act.
- Status of state government finance;
- Trends of revenue surplus/deficit, revenue deficit/Gross Fiscal Deficit;
- Interest payment/Revenue expenditure; Debt servicing/Gross transfers;
- Interest Payments / Revenue Receipts
- Non-development expenses/Aggregate disbursement; Tax revenues/Revenue exp.
- Internal Debt / Revenue Receipts
- Gross transfers/Aggregate disbursements;
- Trends in overall deficits and Gross Fiscal Deficits.
- Debt / NSDP.
- Timeliness of devolution of grants and taxes from the State Government to ULB.
ECONOMY & DEMOGRAPHY
- Nature of local economy.
- Local employment & income.
- Development indicators and current availability of urban services.
- Proportion of working age population to the overall population of the ULB.
- Crude Birth Rate.
- Crude Death rate.
- Population proportion by age group.
- Average literacy levels as a whole and by gender.
- Gender ratio.
- Decadal population growth rate.
- Constitution of the project as a departmental project or an SPV (Special Purpose Vehicle).
- Sources and uses of funds pertaining to the project being financed.
- Analysis of projected revenue and expenditure for the tenure of the loan and the underlying assumptions.
- Revenue flow pattern from the project and extent of cost recovery.
- Committed budgetary support and other credit enhancement measures.
- Sensitivity analysis to user charge hikes, cost of borrowing, etc.
- Borrowing powers and limits.
- Pending litigations or disputes.
- Powers of taxation.
- Powers to levy user charges.
- Actual control over revenue sources considering the political implications of tax and user charge hikes.
- Collection enforcement mechanisms under the Act and restrictions on operations.