This document discusses comprehensive municipal finance reforms and good practices. It proposes reforms across six areas: municipal revenue, inter-governmental fiscal transfers, municipal financial management, municipal accounting and auditing, municipal legislative and borrowing powers, and public disclosure, credit ratings and budget management. It notes that while some cities have implemented reforms in areas like property taxes, more widespread reforms are needed and existing examples have often not been sustained. A wider view of reforms is needed beyond cities' own revenues to also include central and state devolutions and support systems. Overall, there remain few well-documented examples of municipal finance reforms and many attempts at reforms have been abandoned or failed to replicate at scale.

1. ©2013CRISILLtd.Allrightsreserved.
Municipal Finance Reforms – Good Practices
Dr. Ravikant Joshi
Advisor – Urban
CRISIL Risk and Infrastructure Solutions Limited - Mumbai
1
Consultative Workshop on Urban Governance, MOUD - GOI
Administrative Staff College of India, Hyderabad, 5th January, 2015

2. ©2013CRISILLtd.Allrightsreserved.
Comprehensive Municipal Finance Reforms Vision
2
Municipal
Revenue
(Tax & Non-
tax)
Reforms
Inter-
governmental
fiscal transfer
Reforms
Municipal
Financial
(expenditure)
Management
Reforms
Municipal
Accounting &
Audit System
Reforms
Municipal
Legislative
and Municipal
Borrowing
Reforms
Municipal
Public
Disclosure,
Independent
financial
rating &
Fiscal
Responsibility
& Budgetary
Management
Reforms
Comprehensive
Municipal
Finance
Reforms
Vision

3. ©2013CRISILLtd.Allrightsreserved.
Comprehensive Municipal Finance Reforms vision,
its linkage with recent efforts
3
- Property Tax Reform
- User Charge Reforms
Improving Financial
Viability of a Urban Local
Body- Earmarking of internal resources for BSUP
- Provision of Basic Services for Urban Poor
- Citizens Participation Law
Improving equity in
raising and spending of
ULB resources
- Municipal Accounting Reforms
- E – Governance Reforms
- Public Disclosure Law
Improving accountability
and transparency of
ULBs
Mandatory Reforms under JNNURM
and 13th Central Finance Commission
Larger Financial
Objective
13th CFC Conditionalities for Incentive Grant
- Municipal Audit System Reforms
- Service delivery benchmarks
- Appointment of local ombudsmen
J
N
N
U
R
M
Reforms yet not covered / prescribed
- Financial management systems
- Independent Financial Rating of ULBs
- Fiscal Responsibility and Budgetary
Management Law for ULBs

4. ©2013CRISILLtd.Allrightsreserved.
Supply-Demand Side of Comprehensive Municipal
Finance Reforms Vision
4
Supply Side
Initiatives Needed
The System
Reform
Vision
Component
Demand Side Initiatives /
Implementation tool
Municipal
Accounting
System Reforms
- Model National Municipal
Accounting Manual
-State Level Municipal
Accounting Manual
- Bringing together the Civil Society
to demand from the ULB a timely
publication, and dissemination of -
- Annual accounts
- Budget Document
- Audit Report
- Financial Indicators
based financial
performance report
- Credit Rating Report
- Setting up of an independent
Web-Portal dedicated for disclosing
municipal financial and operational
performance & its analysis.
-Formulation and running of
capacity building program for civil
society groups and individual
citizens to engage in this municipal
fiscal accountability, transparency
and efficiency drive.
- Bringing together various
academic and professional
institutions and various types of
print and electronic media to
undertake and to publish financial
analysis of the ULBs performance.
- Instituting and giving away of
awards to ULBs for their
achievements in municipal financial
Municipal
Budgeting
System Reforms
-Model National Municipal
Budgeting Manual
-State Level Municipal
Budgeting Manual
Municipal Audit
System
Reforms
-Model National Municipal
Auditing Manual
-State Level Municipal Auditing
Manual to be put in place by
C&AGFinancial
(expenditure)
Management
Reforms
Legislative / Administrative
Action – Implementation
- Prescribing Accounting Standards
and Audit System for ULBs by
C&AG and ICAI
-Amendments to Municipal Acts by
the State regarding all municipal
finance reforms
-Amendment to State Muni Account
Code and accounting rules for
- Accounting System
- Accounting Standards
- Budgeting System
- Auditing System
- Fin Magt Systems
- Model FRBM and financial
indicators for ULBs by MOUD
- Amendment of Municipal Act to
incorporate FRBM for ULBs by
States
-Model Public Disclosure Law,
MOUD
-Amendment of Municipal Acts to
incorporate PDLaw
- Credit Rating on overall basis and
on annual basis of all ULBs above
5 lacks population
- ICAI and academic institutions to
run professional course in
Municipal Accounting and Finance
to professionalize the sector
-Model National Municipal
Financial Management Manual
-State Level Municipal Financial
Mgt. Manual
Initiatives/reforms already undertaken/ completed
Initiatives/reforms initiated but partially achieved
Public
Disclosure &
FRBM
-Model Public Disclosure Law
Model Fiscal Responsibility and
Budgetary Management Act
Credit Rating System
Municipal
Revenue (Tax &
Non-tax)
Reforms
- Devolution of New Taxes
- Devolution of powers for
existing taxes

5. ©2013CRISILLtd.Allrightsreserved.
Municipal Finance Reforms Good Practices –
Reported /Documented Examples
 Municipal Taxes –
– Property tax – Ahmedabad, Hyderabad, Bangalore, Lukhnow, Kanpur, Mumbai, many
other cities
– Local Body Tax (LBT) in place of Octroi – Aurangabad and other cities of Maharashtra
 Municipal Non Tax Revenue
– User charge for water supply – Pune, Surat
– User charge for Sewerage – BWSSB, HMWSB
– Value based Development Charge – Mumbai
– Trade licenses – Bangalore
 Municipal Borrowing - Vadodara, Ahmedabad, some other cities, Pooled
Municipal Bonds by TNUIFSL and KUIDFC
 Municipal and Private Partnership – Nagpur, Belgaum, Hubali-Dharwad,
Gulbarga (Water supply), Bangalore, Vadodara, Indore (Municipal Transport)
etc. Alandoor (STP), SWM in various cities
5

6. ©2013CRISILLtd.Allrightsreserved.
Municipal Finance Reforms Good Practices –
Reported / Documented Examples
 Municipal Financial (Expenditure) Management Reforms - Vadodara,
Bhubaneswar
 Municipal Accounting Reforms - Tamil Nadu and Gujarat (all ULBs), Karnataka,
AP, West Bengal, Maharashtra, sporadic cities in other states,
 Municipal Budgeting Reforms - Vadodara, Pune (Participative Budgeting),
Pimpri-Chinchwad (P Budget)
 Municipal Auditing Reforms – Hyderabad, Vishakhapatnam
 Municipal Public Disclosure Reforms - Hyderabad, Vishakhapatnam,
Coimbatore, other cities
6

7. ©2013CRISILLtd.Allrightsreserved.
Municipal Finance Reforms Good Practices – General
Observations
 The list speaks for itself,
 There can be doubts about the validity of these reported cases,
 Even if accepted on face of these case studies,
 Very few documented good practices of municipal finance,
 There may be some undocumented municipal finance good practices, but
 In all there have been very few attempts to improve municipal finance and many of
them were abandoned or failed.
 Most of the municipal finance good practices have been short lived or deteriorated
with passage of time (failed to sustain)
 Most of the good practices have failed to replicate
 Municipal finance good practices – led by individualistic approach rather than system
approach
7

8. ©2013CRISILLtd.Allrightsreserved.
Municipal Finance Reforms Good Practices – Reality
Check
 Property Tax – Almost each of the city claims undertaking of property tax reforms
– some positive results have been achieved – none case is good practice in
todays context - ULBs collect one fourth of total property tax potential – 13th CFC
/ HPEC Report
 Local Body Tax – its continuation and existence itself is in grave danger
 Advertisement Tax – no reforms no good practice
 Professional Tax – only Gujarat Government has partly allowed Muni. Corp to
levy
 Water User charge – there exists wrong notion that water user charges are
invariably low so tendency to increase rates – real culprit technical loss, revenue
loss and very low collection efficiency - no rationalization of tariff structures
 Sewerage User charge – only few have piggy backed it on water user charge
which itself suffers from structural and operational deficiencies
 Solid waste User charge – most of states/cities have not introduced, those who
have introduced have introduced simplistic flat rate and have not evolved correct
structure taking into account direct and indirect cost
8

9. ©2013CRISILLtd.Allrightsreserved.
Municipal Finance Reforms Good Practices – Reality
Check
 Municipal Borrowing – No recent example of good practices – across the India
borrowing by municipal bodies has gone down drastically
 Municipal and Private Partnership – some promising examples but mostly in
the form of outsourcing or management contract, not much coming in or
investment of private funding – less than 100 projects having some sort of PPP
under JNNURM – most of them stalled, failed or running inadequately
 Municipal Financial Management Reforms – no good practice - there does not
exist even a concept of financial management – lack of capacity - own sources
forming less than 30 % kills all incentive to improve on this front
 Municipal Accounting Reforms – no recent example - lost the steam and focus
– earlier examples hailed as good practice have deteriorated
 Municipal Budgeting Reforms – no recent example – no good practice on
adopting performance budgeting and outcome budgeting
 Municipal Auditing Reforms – totally ignored – no good practice to quote except
Hyderabad and Vishakhapatnam getting their annual accounts audited
independently
9

10. ©2013CRISILLtd.Allrightsreserved.
Need to adopt wider definition of Municipal Finance
Reforms
 Municipal Own Resource Revenue – constitutes 20 to 30 % share , it is state
and central devolutions which constitute 70 to 80% so there is a greater
need for adopting Good Practices – initiatives at these levels
 Municipal Finance Good Practice review should comprise initiatives -
– Multilateral Agency Funds
– Central Finance Commission Devolutions,
– Government of India- Central Schemes, Centrally Sponsored Schemes MP Funds
– State Finance Commission Devolutions ,
– State Government – Urban Development Schemes, MLA Funds, other dept. schemes
– Rule based multi-option – broad-based municipal borrowing system
– Initiatives to create independent municipal finance assessment structures, FRBM
– Municipal Bodies tax, non-tax resources
– Municipal Finance Support Systems – accounting, budgeting, treasury, auditing systems
10

11. ©2013CRISILLtd.Allrightsreserved.
Need to adopt wider definition of Municipal Finance
Reforms
11
Multilateral
Agencies
Central govt.
State govt.
Govt.
nodal agencies
ULBs
Multilateral
funds
State share
Consolidated
funds
MP/MLA
funds
Centrally
sponsored
schemes
Central
schemes
FC
devolutions
Financial
Intermediary
Levelsofgovernment
External sources of revenue
District
collectorate
Stale level
nodal agency
Directorate of
Municipal Admn.
Utilities /
Parastatal
Own
revenues
State schemes
(Urban Dept.)
State schemes
(Other dept.)

12. ©2013CRISILLtd.Allrightsreserved.
Municipal Finance Reforms - Good Practices by non-
municipal agencies – Reality Check
 Devolution of New Tax – One example – Maharashtra – Local Body Tax in lieu of
Octroi – but it is likely to be withdrawn
 Reinstating or operationalizing of existing Tax - Gujarat - Professional Tax
 Devolution of powers with regard to existing Tax – No example, No Good
Practice
 Reforming existing Tax Structure – few states – amendment of municipal laws
to introduce area based and / or capital value system, self assessment system for
property tax – Maharashtra, Gujarat, Karnataka to name few
 Introduction of New User Charge - No good practice - Solid Waste Service
Charge - Karnataka, UP and some states – but on a simplistic, flat basis -
 Increase in User Charges – No good practice - water charge increase by many
states but inadequately
 Municipal Borrowing – No recent good practice – non introduction of rule based
municipal borrowing – case by case system continues – no devolution of powers
12

13. ©2013CRISILLtd.Allrightsreserved.
Municipal Finance Reforms - Good Practices by non-
municipal agencies – Reality Check
 Recommendation to Devolve funds to Municipal Bodies on basis of Global
Sharing and % of Divisible pool – Good Practice – 13th CFC, Tamil Nadu,
Karnataka, UP and few other SFCs
 Recommendation to Devolve new tax or taxation powers to Municipal Bodies
– No Good Practice -
 Implementation of Recommendations of CFCs – Good Practice – GOI
 Implementation of Recommendation of SFCs – No Good Practice
 Improving structure of Devolutions / Grant-in-aids / Scheme funds – No
Good Practice - % of tide grants in total grants is continuously increasing –
presence of large number of adhoc grants - grant structure lack equalization role –
grant structure lack performance orientation and positive – negative incentive
structure
 Creating independent municipal finance assessment structures – No Good
Practice – only once in 2008 JNNURM mission cities were rated – No FRBM
13

14. ©2013CRISILLtd.Allrightsreserved.
Municipal Finance Reforms Good Practices –
Summing Up
 Municipal Finance has still remained highly neglected
 Very few good practices in the field of municipal finance
 Big issue of sustainability and replicability of good practice – alarming
examples of slipping the ground (loosing progress achieved)
 Comprehensive Municipal Finance Reforms Vision is missing and so the
efforts
 Need to focus on municipal finance good practices by non-municipal
agencies – central and state governments and their apparatus
14

15. ©2013CRISILLtd.Allrightsreserved.
CRISIL Risk & Infrastructure Solutions Limited
A Subsidiary of CRISIL Limited, a Standard & Poor’s Company
www.crisil.com
LinkedIn YouTube FacebookStay Connected | | | |Twitter
Municipal Finance Reforms – Good Practices