This PPT delivered in a course organised by Administrative Staff College of India - Hyderabad explains Financial and Operating Plan and how to prepare it and used it as a tool for strategic municipal investment and financial planning

1. Financial & Operating Plan
A tool for Strategic Municipal
Investment & Financial Planning

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Structure of the Presentation
Section A – The JnNURM Context and Experience
Section B - Need for Capital Investment and Financial
Planning
Section C - FOP as a Tool for Capital Investment and
Financial Planning
Section D - Working of the FOP

3. The JnNURM Context -
Though need for medium and long term CIP and FOP
existed since inception, ULBs hardly adopted these
tools
JnNURM has made preparation of CDP comprising
CIP and FOP mandatory for receiving assistance
This can be termed as dawn of medium and long
term infrastructure planning and management
In long run adoption of these practices will lead to
professional management of ULBs
But in short run it has created lot of mess
Most of the CIPs/FOPs submitted by ULBs for
JnNURM have been found absurd and skewed
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4. Experience about CIP/FOP submitted for JnNURM
63 cities have proposed investment of Rs. 300000
crore against Rs. 120000 crore envisaged under
JNNURM scheme.
Sustainable investment estimates 108000 crore.
ULBs with financial capacity have proposed
investment at 1.33 times of their capacity
ULBs with low or no financial capacity have proposed
investment ranging from 5 times to 170 times.
Per capita investment proposed ranges from Rs.
19369 to Rs. 32100 to Rs.44083 as we move from
high to low to no financial capacity ULBs
Proposed leveraging through borrowing is around 5%
and through PPP is around 6% only.
Though skewed/absurd all CDPs received approval &
MOAs has been signed
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Section A
Need for Medium/ Long Term Capital Investment and
Financial Planning

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Capital Investment and Financial Planning- Need
Key Functions of ULBs;
Provision and maintenance of urban basic services and
maintenance of infrastructure systems
Management of the Municipal Fund
Issues w.r.t provision of urban basic services
Huge costs are involved for creating infrastructure systems
Pay-back period is very long
Absence of planning for city-wide infrastructure projects-
primarily due to lack appropriate technical, managerial and
financial capacities to plan, design and execute large-scale
infrastructure projects

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Capital Investment and Financial Planning- Need
Projects/ Capital works are generally planned based on
availability of funds (generally under special Govt.
Schemes)- a Funds --> Projects approach rather than a
Projects (Need) --> Funds approach
Issues w.r.t management of the Municipal Fund
The practice of budgeting by indexing previous years’
receipts and expenses diminishes the scope for planned
revenue enhancement and expenditure & liability
management initiatives.
In the absence of a capital investment plan, the planning for
revenue realisation is limited to meeting recurring expenses,
as the budget enforces planning for a minimum positive
closing balance

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Section B
FOP as a Tool for Capital Investment and Financial
Planning

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FOP as a Tool for Capital Investment & Financial Planning
The FOP is a financial and operating plan catering to the
city’s long/ medium-term needs
Benefits of the FOP:
Appraise Institution’s priorities for fund allocation
Appraise the finances and revenue base of the ULB
Identify potential means of resource mobilisation &
expenditure management, and
Appraise financial feasibility and sustainability of planned
infrastructure development

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The Financial & Operating Plan
Features of the FOP
Determines ULB’s priority objectives in terms of resources,
service provisioning and management aspects in the
medium to long term
Objective is to reach a level wherein there is an optimisation
of what the local financial situation can permit in terms of
raising levels of services
Components of the FOP
Multi-Year Investment Plan
Income & Expenditure Plan
Capital Investment Plan
Debt-servicing Plan

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Multi-year Investment Plan
Multi-Year scheduling of public physical improvements
and investments- with associated O&M expenditure plans
Derived from a demand-supply gap analysis hinged on city
VISION/ GOALS
A long list of projects that the ULB intends to take up for the
City
Phased based on City priorities
Would facilitate annual capital budgeting exercise, that is
responsive to city needs
Would form the base for planning for prudent fund allocation
and revenue enhancement

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Income & Expenditure Plan
Features of Income & Expenditure Plan
Projection of revenue income
based on assumptions w.r.t base, basis and rules of taxation &
charges, efficiency in revenue realisation and nominal growth
rates
incorporates additional revenue from remunerative projects of the
MIP
Projection of capital income
based on scheme-based grants from State/ Central Government
based on funding pattern (loan-grant mix) adopted for the MIP

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Income & Expenditure Plan
Features of Income & Expenditure Plan … continued
Projection of revenue expenditure
based on past trends/ rules for salary and other establishment
expenses, estimated charges for O&M of infrastructure
services, past trends, clearing of overdue and regular liabilities
incorporating additional O&M expenditure due to the MIP
incorporating additional debt-servicing burden due to borrowing
plan for funding the MIP
Projection of capital expenditure
based on the scheme-based grants received from State/
Central Governments
based on the MIP

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Capital Investment Plan (CIP)
Features of the CIP
Sized MIP for public capital facilities catering to city’s needs/
priorities based on investment sustaining capacity
Arrived through an iterative process of Income &
Expenditure Plan and and MIP sizing/ prioritizing
Objective is to reach a level wherein there is an optimisation
of what the ULB’s Fund can sustain in terms enabling
capital investments/ raising levels of services
CIP provides a framework for annual budgeting and hence
requires constant updating
CIP is based on
Investment sustaining capacity
Choice of specific improvements to be made

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Debt Servicing Plan
Features of the Debt Servicing Plan
Annual borrowing plan- linked to ULB borrowing powers
Annual debt-servicing commitment
Ratios/ indicators of debt-burden
Significance of the Debt Servicing Plan
Indicates the credit-worthiness of the ULB
Lenders’ requirement- to assess the risks on lending
Helps ULB & Lenders to structure the debt
Helps ULB to restrict debt exposure to safe levels

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Section C
Working of the FOP

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Working of the FOP
1- Service Levels
Contains details of existing
levels of service prevalent in
the town/ city
4- Service Norms- based on
sectoral strategies
Compares the indicators of
the current service levels in
the town/ city with the
recommended levels/ norms
6- Project Costing (MIP)
Determines capital
investments (based on unit
costs) and associated O&M
for achieving desired service
standards
2- Actual Financial Data
Basic input sheet with provisions
for entry of the actual financial
data as made available with the
ULB in the Municipal Accounting
Code format
7- FOP Assumptions
Provides for entry of the assumptions for:
• projecting the income & expenditure of the
ULB- current items & new items due to CIP
• funding pattern for the CIP and the debt
terms.
3- Municipal Finances
Contains the summary of the
Municipal Fund and consists of
consolidated income &
expenditure statement under
revenue & capital accounts;
analysis of income & expenditure-
sectoral contributions; growth
trends; per capita levels
8- Income & Expenditure Plan (5-10
Years)
Contains the item-wise projected income
and expenditure of the Municipal fund
under different budgeting heads
9- Capital Investment Plan (5-10 Years)
Contains the Capital Investment Plan for
the ULB based on investment sustaining
capacity of the ULB.
10- Debt Servicing Plan (5-10 Years
Contains the debt drawl and servicing plan
of the ULB based on the o/s debt liabilities
and the funding pattern for the CIP
5- Demand-Supply Gap
Analysis
Estimates at the macro level,
the gaps in service levels,
which need to be converted
into projects

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Strategic Budgeting & FOP
Thank you for your time and attention