Financing Municipal Services

The Municipal Commissioner is the key figure in the local self government and is the executive head. The BMC Act has created seven statutory, collateral authorities: the Corporation, four statutory Committees, the Municipal Commissioner, and the General Manager, B.E.S & T Undertaking, charged with responsibilities of Municipal Government.

The BMC Act envisages a separation of powers between the deliberative and executive functions. The `Corporation' and its four statutory committees (the Standing Committee, the Improvements Committee, the B.E.S & T Committee and the Education Committee) constitute the Deliberative Wing. Apart from the four Statutory Committees, the Corporation also has appointed five special committees:

 

The works Committee (City);

The Works Committee (Suburbs);

The Public Health Committee;

The Markets and Gardens Committee; and

The Law, Revenue and General Purposes Committee.

For administrative purposes, the territory of the Corporation is at present divided into six Zones, which are further divided into 23 Wards. The Ward Officers are the principal officers at the Ward level and are supervised by the Zonal Deputy Municipal Commissioners. There are several other officers for specialised/line Departments, including utility and engineering projects and services, finance and accounts, education, public health, solid waste management and so on. The total strength of officers and employees is about 1,34,000.

Accounting & MIS

The Accounts Department is fairly decentralised, with book-keeping spread over various wings. The accounts are maintained under prescribed statutory formats and account heads. Treasury functions are also carried out by this department. MIS is primarily through Budgets preparation and comparison with actuals and periodic revisions in estimates. Internal audit and vigilance (for accounts and finance matters) are carried out on a continuous basis.

The Department has, of late, been installing Electronic Data Processing, with work being done by a separate EDP sub-department. Given the nature of the organisation, work culture and employee attitudes, significant computerisation of accounting may take some time. Preparation of accounts takes over a year. The accounts available for this study (Aug 96) were upto FY 1994.

Audit functions of the corporation are carried out by the Municipal Chief Auditor (MCA). This post is statutory, under section 78A of the BMC Act. The MCA is not an external agency, but an employee of the corporation. Hence, MCA is an unique office vis-a-vis other organisations, where statutory audits are carried out either by independent firms of chartered accountants or by the office of Comptroller & Auditor General of India (CAG).

The MCA functions independently (of the General Administration represented by the Municipal Commissioner) and reports to the Corporation and the respective standing Committees for the various wings of BMC. Irregularities or improprieties, if any, of BEST Fund are reported to the BEST Committee. For schemes assisted by International Development Assistance (IDA), he reports to the IDA also.

Powers

The general duties and powers of MCA are defined under Schedule EE of the BMC Act. These include the audit of different funds such as Municipal fund, Education fund, BES&T Fund, Water & Sewerage fund and Consolidated Water & Sewerage Disposal Loan fund. The audit of Municipal accounts is carried out and reports made on a monthly basis. Under the terms stipulated by IDA, the MCA is required to submit his report on audit of the Water Supply & Sewerage Department to IDA also. The MCA is required to certify the financial capacity to raise and repay loans before the Corporation can approve further borrowings.

Structure

Functionally, the office of MCA has been divided into four divisions (City, Suburbs, Water supply & Sewerage department and BES&T), with further audit sections under each department.

Borrowing Powers.

In the Case of MCGM, borrowing limits are linked to the various budgets of the municipal corporation, important features of which are given below.

Budget A : This is the principal budget of MCGM. The sources of revenues and expenditure of this Budget are detailed below.

Main Sources of Revenue

Octroi: A levy on entry of goods into the city.

Property tax: This is based on the annual ratable value of property.

User levies like license fees on markets, stalls etc.

Service charges like those for medical and public health services

Government grants-in-aid.

Miscellaneous income (interest, fees, fines, sale proceeds etc.).

Main Expenditure items

Part I : This comprises the following activities: solid waste management, maintenance of roads, traffic and street lighting, maintenance of buildings, markets, slaughter houses, parks and gardens, fire fighting and disaster management services etc.

Part II: This comprises public health, medical care, medical education etc.

Budget B: The is the smallest of the Corporation's Budgets and deals with the income from and expenditure on the very large number of buildings and land transferred to or acquired by the Corporation after dissolution of the Bombay Improvement Trust in 1935 as well as the basic services relating to slums. This budget was separated from Budget A, with view to ensuring proper management of the real estate on self-sustainable basis; a purpose which has been largely defeated because of statutory rent control. The losses of this Budget are being made good by special contributions from Budget A.

Budget E: This budget deals with primary education services provided by the Corporation and depends largely on subventions from Budget A and, to some extent, grant-in-aid from the State Government. Primary education is free, provided through 1,258 schools with eight languages of instruction. Secondary education is also practically free, but is an activity under Budget A.

Budget G: This is the Utility Budget of the Corporation and the most recent among all the Budgets and was formed primarily for fulfilling the requirements for securing funding from the World Bank. Budget G deals with water supply, sewerage and storm water drainage in the metropolis. The main sources of revenue are:

Water charges based on volumetric measurement.

Water tax based on ratable values of properties (for unmetered connections):

Water benefit tax based on ratable values of properties.

Sewerage charges, Sewerage tax and Sewerage benefit tax. Sewerage charges are usually a fixed proportion (generally 50 per cent) of the corresponding water levies.

The main items of expenditure in this budget are on operation and maintenance of these utilities and their augmentation or upgradation.

Budget T: This is a budget of the Tree Authority which has the responsibility of planting and preservation of trees. This is a relatively small budget with a total expenditure of less than Rs 50 million.

Budget C: This is the budget of the Brihanmumbai Electric Supply & Transport (BES&T) undertaking, an undertaking of the Corporation dealing with metropolis-wide public road transport and electricity supply in what is termed as the Island City. Since BES&T is a separate profit centre, with no linkages to the general revenues of MCGM, Budget C has not been considered in our analysis.

As per BMC Act, MCGM is permitted to borrow or re-borrow funds and take up at interest from the Central or the State Government, or with the sanction of the State Government from any other person, any sum necessary for the purpose of:

defraying any costs, charges or expenses incurred or to be incurred by them in the execution of this Act.

discharging any loan contracted under this Act or any other loan or debt for the repayment of which they are liable.

The exercise of the powers of borrowing conferred by this Act shall be subject to the following provisions:

money shall not be borrowed for the execution of any work other than one of a permanent nature.

The borrowings, inclusive of the balances of all the outstanding loans and debts borrowed for these purposes, permissible for activities under Budget A and E shall not exceed three times the ratable value of the premises assessable for property taxes. The ratable value of land or building is computed as the annual rent of such land or building less 10 per cent of the said annual rent in lieu of all allowances for repairs or any other account. The current aggregate ratable value of the MCGM is approximately Rs. 5 billion.

The borrowings, inclusive of the balances of all the outstanding loans and debts borrowed for these purposes, permissible for activities under Budget C (acquisition, extension, administration, operation and maintenance of the Brihanmumbai Electric Supply and Transport Undertaking) shall not exceed three times the ratable value of the premises assessable for property taxes.

The borrowings, inclusive of the balances of all the outstanding loans and debts borrowed for these purposes, permissible for activities under Budget G (Drains & Drains work and Water Supply) shall not exceed two times the ratable value of the premises assessable for property taxes.

Money may be borrowed for periods not exceeding 60 years.

The total borrowings of MCGM cannot exceed eight times the ratable value (i.e. Rs. 40 billion approximately) subject to the separate limits for each budget.

Powers for Taxation

Determination of Tax rates: The maximum rates leviable for various taxes are specified in the BMC Act.

Property taxes comprise the following:

Water tax: This is levied on the basis of ratable value. The Standing Committee fixes the rate depending on what it considers necessary for providing water supply. The current rate for water tax is 26 per cent of ratable value for residential users and 55 per cent for non-residential consumers.

Water benefit tax: This is an additional water tax levied on the basis of ratable value and is fixed by the Standing Committee depending on what it considers necessary for meeting the whole or part of the expenditure incurred or to be incurred on capital works for making and improving the facilities of water supply and for maintaining and operating such works. The current rates for water benefit tax are 10 per cent for residential consumers and 20 per cent for non-residential consumers.

Sewerage tax: This is levied on the basis of ratable value. The Standing Committee fixes the rate depending on what it considers necessary for collection, removal and disposal of human and other wastes. The current rate for sewerage tax is 13 per cent for residential consumers and 20 per cent for non-residential consumers.

Sewerage benefit tax: This is an additional sewerage tax levied on the basis of ratable value and is fixed by the Standing Committee depending on what it considers necessary for meeting the whole or part of the expenditure incurred or to be incurred on capital works for making and improving the facilities for the collection, removal and disposal of human waste and other wastes. The current rates for sewerage benefit tax is 6 per cent for residential consumers and 12 per cent for non-residential consumers.

General tax: This is a tax levied on the basis of ratable value primarily for the purpose of maintenance of fire-brigade services and the protection of life and property in case of fire.

Currently, general taxes is at the maximum permissible limit of 26 per cent. Street tax is at 5 per cent with a maximum limit of 15 per cent. Amendments to the BMC Act, that are necessary to revise the maximum permissible limits, require the sanction of the State government and approval of the State Legislature. However, revision of water/sewerage charges require only the sanction of the Standing Committee.

Grants-in-aid

Currently, grants-in-aid provided by the Maharashtra government are primarily for educational purposes. For secondary education, 100 per cent of expenditure is provided, while for primary education, the current rate is 20 per cent of expenditure. The State Government has prescribed expenditure norms for education, based on which grants-in-aid are provided. The actual expenditure incurred by the municipal corporate tends to be much higher than the figure computed, on the basis of State Government norms. Thus, the grants-in-aid for primary education work out to only 10-12 per cent of actual expenditure.

The main shared tax for MCGM is entertainment tax.

Financial Analysis

Accounting concepts and practices

Accounts are maintained as per statutory provisions, loan covenants (as per World Bank requirements) and operational convenience (in that order).

In our analysis, Budget C of the BES&T undertaking has not been considered as it is a separate profit centre.

While accounts of Budget G are maintained on accrual basis (primarily as per World Bank requirements), the accounts of other Budgets A (General expenses), B (Improvement schemes), E(Primary Education) and T(Tree Authority)}, are maintained on cash basis.

All incomes and expenses are treated on cash basis. No depreciation is charged on assets. A Sinking fund account is maintained as a reserve for servicing debt in the nature of a Debenture Redemption Reserve.

Accounting practices of Budget G

Accounts are maintained on accrual basis. Depreciation is provided at SLM rates over the estimated life of the asset. Interest and operating expenses relating to ongoing projects are capitalised.

A consolidated Loan fund account is maintained as a reserve for servicing of debt (in the nature of Sinking Fund). Interest (not capitalised) and principal repayments are appropriated from the operating surpluses of the revenue account of Budget G.

Common Accounting practices

All expenses towards regular maintenance are treated as revenue expenses, while expense on new projects are treated as capital expenses. The Standing Committee exercises strict control over the projects that require capitalisation.

Direct expenses are appropriated directly to the user department. General supervision and establishment charges are apportioned to the user departments in set proportions.

For our analysis, to maintain a common basis, we have incorporated figures of Budget G after matching the accounting policies followed by other Budgets (i.e. cash basis of accounting with no provision for depreciation)

Trends in Revenues

Revenue Account

The total revenue income of the MCGM (Budgets A,B,E, G& T) has increased from Rs. 838 Crore in 1990-91 to Rs. 1371 Crore in 1993-94. Octroi and property taxes together constituted 55.4 per cent of total revenue in 1993-94, except for Budget G, for which the results for 1994-95 were available. The share of octroi in the total revenue of MCGM has consistently been over 47 per cent, over the last four years.

Property tax, which comprises of general tax, water and sewerage tax, water and sewerage benefit tax and education cess, is roughly 30 per cent of total revenue. The share of general tax has been around 8 per cent over the four years, while water and sewerage taxes have contributed between 20-25 per cent of total revenues. The significant increase of 65 per cent in water and sewerage taxes and charges in 1993-94 over the preceding year was the result of an upward revision of the charges. Recoveries of expenses on various heads have increased substantially over the period.

The total revenues of MCGM have grown in real terms at a CARG of 6.7 per cent over the four years exhibiting stability in income flows. However, the growth in total expenditure was higher at 8.1 per cent during the period.

Revenue, per capital increased in real terms from Rs 758 (in FY1991) to Rs. 880 (in FY 1994) at a CARG of 5.1 per cent, showing buoyancy even after adjusting for inflation and population growth. Growth in expenditure, in real terms, has been higher, increasing from Rs 686 (in FY1991) to Rs 830 (FY1994) at a CARG of 6.5 per cent. Octroi, the largest item, has shown consistent growth. However, per capita water and sewerage revenues have declined over the first three years before attaining their present level following the rate revision mentioned earlier.

Trends in Expenditure Patterns

Revenue Account

The total revenue expenditure of MCGM grew from Rs. 7593 mn in 1990-91 to Rs. 12927mn in 1993-94 at a CARG of 19 per cent. Salaries and Wages

(Rs. 7341 mn) and Debt servicing (Rs. 1426mn) constituted 68 per cent of total revenue expenditure in 1993-94. Expenditure, per capita in real terms, has outpaced revenues.

Capital Account.

Direct Capital Expenditure (not including capitalised operating overheads and interest) of MCGM showed an increasing trend from FY 1991 to FY 1993 and then dipped sharply in FY 1994. Loans (from external sources and from internal sources like Employee Provident Fund and Sinking funds) have been the major source of financing capital expenditure. In FY 1993, there was a significant draw-down of reserves.

MCGM has maintained a surplus on the revenue account) in three out of the four years (i.e. except FY 1993). The surplus on revenue account in FY 1994, was mainly on account of the widening the coverage of items under octroi and hikes in water and sewerage charges and taxes.

Borrowing Pattern of MCGM

The largest source of borrowing for MCGM was internal. By March 1995, internal loans, public borrowing, World Bank loan assistance and State Government loans constituted around 41.2 per cent, 21.5 per cent, 19.2 per cent and 17.5 per cent respectively of total outstanding borrowings.

With important accounting concepts like period matching and cost-revenue matching not in practice and the statutory requirement to show a revenue surplus, deferment of payments to under-report expenses is possible. However, the corporation makes provision for payment of bills submitted before the end of the year and payable by it. This amounted to Rs. 39 crore as on March 31, 1994.

Except for Budget G, there is no writing-off of assets not in use or not yielding any revenues. Hence, the actual value of some of the assets may be much lower than the book value.

A Sinking Fund Account is maintained as a reserve for serving debt (in the nature of a Debenture Redemption Reserve). Amounts are transferred to sinking fund in equal installments over the tenure of the loans taken and charged to the user department for whose purposes the loans were taken. The Sinking Fund investments are made in approved `Public Securities'. This is intended to ensure that sufficient surpluses are generated for repayment of borrowings.

However, Debentures and debt instruments issued by the Corporation are also classified as `Public Securities' (after due permission of the state Government is obtained). Thus, MCGM is allowed to invest its sinking funds and provident funds in such instruments. This creates a balance sheet anomaly, with the Corporation lending money to itself. These appear as "internal Loans". Such loans would defeat the objective behind the creation of the Sinking Fund. Borrowings, whether internal of external, are allowed only for capital expenditure programmes. This is a healthy practice.

Retirement benefits are being accounted for on cash basis and no provisions are made for the liabilities to be incurred for retirement benefits. With the current strength of about 1.34 lakh employees, the unrecognised liabilities on this account are substantial.

For any fruitful analysis of the corporation's financial strength, a thorough estimate of the value of the revenue generating and other assets (like real estate) needs to be made. Unrecognised income (which can actually be realised, such as arrears of property tax) and unreported liabilities (such as retirement benefits) should be recognised in full. Further, adequate provisions need to be made against unrealisable assets (such as bad debts on receivable, etc.).

Extent of cost recovery through user fees for water supply, sewerage and health services

The share of non-tax revenues in total revenues needs to increase ultimately, so as to bring down the reliance of municipal corporations on State Governments and to enable municipal corporations to operate on a self-sustaining basis. Municipal corporations need to increase cost recovery on various services to reduce the extent of subsidy in the services provided.

Extent of Cost Recovery in Water Supply and Sewerage Services

Revenues from both services are adequately covering the expenses incurred on their provision. As per the Annual Accounts of 1994-95 of budget G, the surplus generated on water supply and sewerage were Rs 39.1 crore and Rs 26.6 crore respectively. Appropriate adjustments were made to provide for bad debts (20 per cent of tariff revenue) and interest payments. In FY 1995, MCGM made an ad-hoc provision of Rs 10 MN for bad debts on the receivable account (Rs 2400 mn as on 31.3.1995)

MCGM accounts for its income on cash basis, except for Budget G (Water Supply & Sewerage division). Hence, figures for demands made and actual receipts are not available for the other divisions. Of the total demand of the Water supply and Sewerage division of Rs. 639 crore for FY 1995 (including previous years overdues of Rs 209 crore), MCGM recovered Rs 398 crore (62 per cent of demands) during the year. However, around Rs 320 crore recovered was on account of demands raised during the year (about 80 per cent of current demands). Thus, the recovery on previous years overdues was at a low rate of about 25 per cent.

Extent of Cost Recovery on health Services

Over the years, MCGM has not been able to increase the level of various services significantly. One cause has been the delay in implementation of capital expenditure programmes. Shortfall in actual capital expenditure, as compared to the budgeted programmes, has been significant. This was caused primarily due to lack of adequate funds. The shortfall in actual capital expenditure (other than for Water Supply & Sewerage department) as compared to budgeted expenditure was 40 per cent for FY1994, amounting to about Rs 90-100 crore.

Debt service coverage ratio is computed on the basis of surplus of revenue income over revenue expenditure and the payments falling due on account of interest and principal.

Average collection period is given for Water Supply & Sewerage department's demands only, as data on receivables is available only for Budget G. In 1992-93, there was a deficit of Rs. 94.4 crore on the revenue account reflected in the debt service coverage ratio of 0.21 in that year.

Reproduced with permission from CARE.