This PPT examines elements of financial sustainability in Jawaharlal Nehru National Urban Renewal Mission and in Indian Municipal Bodies.

1. Assessing Financial Sustainability –
Elements of financial sustainability in JNNURM
Technical Session – I - Elements of Sustainability
in JNNURM
International Workshop on ‘Planning Partnership
for Sustainability’ – New Delhi 25-26 July, 2013
By Ravikant Joshi

2. Defining Financial Sustainability
• Sustainability – capacity to endure
• Fiscal Sustainability - the ability of a
government to sustain
– its current spending, tax and other policies in the
long run without
– threatening government solvency or defaulting on
some of its liabilities or promised expenditures.
• No consensus on precise definition
• Different studies use their own, often similar,
definitions

3. Defining Financial Sustainability
• FS concept same at generic level, differs in
application to some extent depending upon
subject of study – level of government or
type of organisation or project
• For Example - The financial sustainability of
a non-profit organization gets defined as -
– its capacity to obtain revenues in response to
a demand,
– in order to sustain productive processes at a
steady or growing rate
– to produce results and to obtain a surplus.

4. Assessing Financial Sustainability
of Local Governments - example
• One of the tool for assessing sustainability is
‘financial sustainability indicators
• Example – Local Government Association of
South Australia (www.lga.sa.gov.au)
– 1. Operating Surplus
– 2. Operating Surplus Ratio (the operating surplus
(deficit) expressed as a percentage of general and
other rates net of rate rebates and revenues)
– 3. Net Financial Liability (total liabilities less financial
assets)

5. Assessing Financial Sustainability
of Local Governments - example
– 4. Net financial liability to operating revenue ratio
– 5. Interest cover ratio - extent to which operating
revenues are committed to interest Expenses
– 6. Assets Sustainability Ratio - capital expenditure
on renewal or replacement of assets relative to
the recorded rate of depreciation of assets for the
same period
– 7. Asset Consumption Ratio - the written down
current value of a Council’s depreciable assets
relative to their ‘as new’ value in up to date prices.

6. Assessing Financial Sustainability of
Local Governments - example
• Local Government sustainability studies
commissioned and funded by state local
government associations in NSW, SA and Western
Australia (WA)
– SA – first State to undertake FS study – 2005
– NSW – next state – (May 2006) – 25% of councils found
unsustainable
– WA – study in (August 2006) – 58% of councils found
unsustainable
– Municipal Association of Victoria – Viability index – 10%
of councils unsustainable
• These studies excluded capital grants from the
operating results

7. PWC - National Financial Sustainability
Study of Local Governments – for
Australian LGA – (Nov 2006)
• A survey of the financial viability of 100 councils
ranging the seven size categories covering entire
country
– 36% of councils have an interest coverage ratio
(EBIT/interest) of less than 3
– Median operating surplus of 10% of total revenue
– 16% councils have an operating deficit
– Median assets sustainability ratio (capex /depreciation)
was 1.8 : 1 but 8% council have ratio less than 1
– Median current ratio (current assets/current liability) of
2.6% but 21% councils have ratio less than 1
– Median cost coverage by rates ratio is 48% ranging from
25% to 66%

8. PWC - National Financial Sustainability
Study of Local Governments – for
Australian LGA – (Nov 2006)
• Extrapolation using data of earlier studies –
– approximately 10% to 30% of Australia’s councils have
sustainability issues
– councils with sustainability issues are developing
infrastructure backlogs due to
• service expansions,
• moderate operating cost growth,
• minimal revenue growth giving rise to persistent underlying
operating deficits and constraints on renewal expenditure.
– The estimated funding gap to clear both the backlog and
to cover the annual under-spend on renewals is $3.1
million per council per annum or $2.16 billion nationally.

9. Elements of Financial Sustainability
in JNNURM ?????? …………??????
Any such study before, during and at the end
of JNNURM? - No
Does any one recollects any mechanism for
assessing or ensuring financial sustainability
of ULBs in any Indian Municipal Act, Rule,
Scheme etc. except limited credit rating of
ULBs assessment mandated at the time of
issue of municipal bond ????

10. Elements of Financial Sustainability in
JNNURM ??????
• JNNURM Mission Statement –
–The aim is to encourage reforms and fast track
planned development of identified cities. Focus is
to be on efficiency in urban infrastructure and
service delivery mechanisms, community
participation, and accountability of ULBs /
Parastatal agencies towards citizens
–No direct mention but objective statement and
reforms may be aiming it

11. Elements of Financial Sustainability in
JNNURM ??????
• Objectives of JNNURM
–Yes there exists indirect reference to financial
sustainability in statement of objectives -
• Establishment of linkages between asset-creation and
asset-management through a slew of reforms for
long-term project sustainability;.
• (c) Ensuring adequate funds to meet the deficiencies
in urban infrastructural services;
–Objectives have indirect reference of
sustainability but outcomes may have direct refe

12. Elements of Financial Sustainability in
JNNURM ??????
• Expected Outcomes of the JNNURM
– Yes there is direct reference to financial sustainability
as follows –
Financially self-sustaining agencies for urban
governance and service delivery will be established,
through reforms to major revenue instruments
• Reforms mandated for creating sustainability
– Property tax ,
– User Charge reforms
• But no estimates of potential of these two
resources to improve financial sustainability

13. Elements of Financial Sustainability in
JNNURM ??????
• Financial sustainability was very weakly
conceived in JNNURM, as a result
–No operational mechanism existed to ensure
financial sustainability, and
–In actual practice till date it has not been
ensured – DPRs were sanctioned without
financial closure or sustainability aspect
• No corrective measures were taken even after
one-off indirect financial assessment from
credit rating agencies

14. MOUD – Credit Rating of 63 JNNURM
Cities (mid-2008)
Rating
Category
No.
Cities
Financial health implication
AA 10
A 10
BBB 18 weak financial profile, high dependence
on government grants/transfers
BB 17 negative operating surpluses, limited
ability to borrow or service debt
B 07 inadequate and volatile grant support
C 01 no position to repay debt.

15. Elements of Financial Sustainability in
JNNURM ??????
• Neglect of financial sustainability may have
resulted in deterioration of financial health of
JNNURM cities but
• JNNURM’s increased cost impact is still not
apparent as only 196 (36%) out of 551 UIG projects
have got completed.
• In amount terms Rs. 11614 crore (19%) projects out
of Rs. 61701 crore UIG projects have got completed
• In financially robust sample cities stagnancy and
deterioration is visible in spite of revenue
mobilisation

16. Impact of JNNURM on Sustainability
Indicator Vadodara Rajkot Kalyan -Dom
Pre JN Post PreJN Post PreJN Post
Operating Ratio 0.94 0.93 0.75 0.93 0.82 0.82
Avg Reve Growth 10% 9% 10% 16% 8% 18%
Avg Expe Growth 35% 17% 17% 17% 9% 16%
Own Source Reve 81% 47% 75% 43% 96% 98%
CDP Proposed
Rs. crore
1896 2591 764 2631 1550 18185
DPR Sanctioned 1287 690 1235
Revised CDP/
sustainable CDP
1814 1841 1070

17. Impact of JNNURM on Sustainability
Indicator PCMC Nashik Faridabad
Pre JN Post PreJN Post PreJN Post
Operating Ratio 0.58 0.50 0.51 0.51 0.63 0.63
Avg Reve Growth 21% 15% 12.6% 13.6% 14% 8%
Avg Expe Growth 9% 17% 5.9% 16% 11% 18%
Own Source Reve 80% 72% 96% 98% 99% 98%
CDP Proposed
Rs. crore
3963 ----- 1796 ---- 2049 ---
DPR Sanctioned 2571 ----- 1133 ---- 768 ---
Revised CDP/
sustainable CDP
4125 1500 1137 796

18. Summing up
• JNNURM has many historically progressive
elements and has many positives /
achievements
• But JNNURM had very weak element of
financial sustainability
• Simple dolling out of large capital funds to
ULBs is not sufficient, rather it is detrimental if
sustainability issues are not addressed upfront
• If Financial Sustainability ignored be ready for
higher operating grant to ULBs

19. Summing UP
• Policy option document for JNNURM 2 also lacks
policy and mechanism for financial sustainability
• Not only JNNURM but entire municipal system of
India lacks concept and mechanism to assess
financial sustainability.
• Even while lending ULB’s financial sustainability is
not assessed fully by lending agencies.
• Urgent need to adopt concept and robust
mechanism for financial sustainability

20. Way forward
• Need to address local public finance issues – ‘ability to
pay’ based and expenditure based taxes need to be
given to ULBs
• Need to adopt independent system of annual financial
sustainability assessment of ULBs
• Introduction of Financial Responsibility and Budgetary
Mechanism (FRBM) for ULBs
• Each funding of urban project must be on the basis of
project related and overall financial closure
(sustainability)
• Accounting reforms, building up data base, opinion and
capacity building, strict public disclosure etc.

21. Assessing Financial Sustainability –
Elements of Financial Sustainability in JNNURM
Thank You