June 01, 2017

Gadag-Betgeri City Municipal Council

Summary of rated instruments

Instrument*

Rated Amount (Rs. crore)

Rating Action

Issuer Rating

Nil

IrBBB-(Stable); assigned

*Instrument details are provided in Annexure-1

Rating action

ICRA has assigned a long-term issuer rating of IrBBB- (pronounced I R triple B minus) to the Gadag- Betgeri City Municipal Council (GBCMC).1The outlook on the long-term rating is Stable.

Rationale

The assigned rating takes into account the GBCMC's importance to the Government of Karnataka (GoK) as a provider of key municipal services to the twin cities of Gadag-Betgeri. The rating also positively factors in the rule-based transfer of the grants from the GoK, which assists the council in making non- discretionary payments like salaries, pensions and electricity bills. The rating further factors in the revenue surplus position of the GBCMC during the last four years, which can be attributed mainly to the grants received from the GoK. A revenue surplus position provides flexibility to the council in planning and prioritising its capital expenditure to that extent.

The rating, however, is constrained by the relatively small size of the council's own revenue base and the low collection efficiency of property tax and water charges. The rating also factors in the GBCMC's less- than-satisfactory service standards in the areas of water supply, sewerage and surfaced roads. ICRA notes that the GBCMC proposes large outlay for various projects under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) as well as other urban infrastructure schemes, which could stretch the cash flows of the council. Moreover, given the limited track record of the council in executing large projects, the timely execution of these projects within the budgeted costs would be critical for the GBCMC's financial position, going forward. ICRA notes that the council has implemented reform such as accrual-based accounting system. However, effective implementation of other key reforms such as introduction of e-governance in key functions and revenue enhancement measures would be important determinants of the GBCMC's ability to improve its overall performance. Finally, adequate number of staff coupled with continuity of such staff especially in critical functions would be crucial for timely implementation of key projects and reforms, going forward.

Key rating drivers Credit strengths
  • Revenue surplus position during the last four years mainly on account of rule-based grants received from the State Government

  • High credit quality of the State Government

1For complete rating scale and definitions, please refer to ICRA's website www.icra.in or other ICRA Rating Publications.

Credit weaknesses
  • Relatively small size of own revenue base

  • Low collection efficiency in property tax and key user charges/fees

  • Less-than-satisfactory services levels in key municipal functions

  • Lack of adequate staff in key departments

  • Risk related to execution of large projects

Description of key rating drivers:

The council receives grants from the GoK on recommendation by the State Finance Commission (SFC). The grants from the GoK have been regular in nature and it is the main source of revenue for the council as it accounts for 80% of the total revenue income. The council has managed to generate 16% of the total revenue income as revenue surplus in the past four years. This was mainly on account of the steady flow of revenue grants from the GoK in proportion to the revenue expenditure incurred by the council.

The size of the council's own revenue base has remained relatively low on account of a low base of property tax and key charges. Moreover, the overall collection efficiency of property tax has remained at a moderate level between FY2013 and FY2015 and even declined during FY2016 due to inclusion of a significant number of un-assessed properties under tax register. The service levels of the key services, water supply, roads and drainage are less than satisfactory standard. The water supply is low as reflected by supply of 80 litre per capita per day (LPCD). However, the collection efficiency of municipal solid waste (MSW) is satisfactory at 92% and covers the entire city.

ICRA also notes that the GBCMC has proposed to execute key projects under the AMRUT and other schemes, within which sewerage project is major. The total cost of the sewerage project under the AMRUT scheme is Rs. 188.42 crore2, which is funded 50% by the Government of India (GoI), 20% by the GoK and 30% by the GBCMC. ICRA notes that some of the gaps in the existing service levels are proposed to be covered under the AMRUT projects. However, adequate staff in key functions and timely execution of these projects within the budgeted costs will remain critical. Also, given the large outlays towards projects, the financial position of the GBCMC would be adversely impacted if the project assets after commissioning are unable to generate adequate revenues to part fund the operations and maintenance (O&M) costs, which are expected to increase significantly, going forward.

Analytical approach:

For arriving at the ratings, ICRA has applied its rating methodologies as indicated below:

Links to applicable criteria:

Urban Local Body Rating Methodologyhttp://www.icra.in/Files/Articles/Urban%20Local%20Bodies-%20Aug%202016.pdfAssessing Credit Quality of State Government Financeshttp://www.icra.in/Files/Articles/Rating%20Methodology%20Aug%202015.pdf

About the entity

The GBCMC, being an urban local body (ULB), provides services to the twin city of Gadag-Betgeri. Gadag is the district headquarters and is located at a distance of 390 km from the state capital, Bengaluru. The GBCMC was constituted in 1974 as a city municipal council. According to Census 2011, the GBCMC, covering an area of 54.09 sq. km., serves a total population of 1.73 lakh. It is governed by the Karnataka Municipalities Act, 1964. The GBCMC council, comprising 35 ward councillors, is headed by a President, who is elected by the Ward Councillors. The executive wing is headed by a Municipal Commissioner, who is appointed by the GoK and is supported by the head of various departments.

2 100 lakh = 1 crore = 10 million

The key services extended by the ULB are water supply, construction and maintenance of roads and drains, solid waste collection, street lights and amenities such as shopping stalls, community hall, playgrounds, and parks/gardens, among other civic amenities.

In FY2016, GBCMC generated a revenue surplus of Rs. 7.68 crore on a total revenue income of Rs. 45.97 crore compared to a revenue surplus of Rs. 11.22 crore on a total revenue income of Rs. 39.47 crore in FY2015.

Status of non-cooperation with previous CRA: Not applicable

S.

No.

Instrument

Current Rating (2017)

Chronology of Rating History for the past 3 years

Type

Rated amount (Rs. crore)

FY2018

FY2017

FY2016

FY2015

June 2017

--

--

--

1

Issuer Rating

Long Term

NA

IrBBB-(Stable)

--

--

--

Any other information: Not applicableRating history for last three years: Table: Complexity level of the rated instrument:

ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in

Annexure-1 Instrument Details

Name of the instrument

Date of Issuance/ Sanction

Coupon rate

Maturity

Amount Rated

(Rs. crore)

Current Rating and Outlook

Issuer rating on long-term scale

-

-

-

NA

IrBBB-(Stable)

ICRA Limited published this content on 01 June 2017 and is solely responsible for the information contained herein.
Distributed by Public, unedited and unaltered, on 05 June 2017 07:56:15 UTC.

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