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Increasing Resources to Local Government in Ahmedabad, India
PROFILE
Ahmedabad Municipal Corporation (AMC), India
Population: 3,515,361 (2001)
Land Area: 191 km2
Municipal Budget: US$118 million (2000)
STRATEGY
Strengthen Local Government
CHALLENGE
To provide basic services for an expanded urban area and growing population, and improve living conditions in slum neighborhoods in the face of cash losses and a deteriorating financial situation
GOAL
To reform the municipal corporation's finances and to improve human resources so that AMC could be in the position to provide basic services for its expanded urban area and growing population, and improve living conditions in the slum neighborhoods
ACTION
Introduce fiscal and management reforms to enable AMC to improve and expand basic services and initiate urban development projects
ABSTRACT
In the mid 1990s, AMC began instituting significant fiscal and management reforms, including improving tax collection, computerizing the accounting system, strengthening AMC's work force and financial management, and developing a comprehensive capital improvement program. These reforms laid the necessary groundwork for AMC to issue the first municipal bond issued in India without a state guarantee and enabled AMC to partner with the business community, NGOs and other organizations to undertake new development initiatives. The bonds represented the first step toward a fully market-based system of local government finance.
CASE
Ahmedabad, the largest city of the state of Gujarat, is the seventh largest city in India. Situated on the banks of the Sabarmati River and 35 kilometers away from the capital of Gujarat, Ahmedabad is the commercial capital of the state. Known as the textile capital of India, it is also a major industrial and financial city contributing about 14% of the total investments in all stock exchanges in India and 60% of the total productivity of the state.
In the midst of the overall prosperity of the city, a large poor population has suffered from deprivation of basic services and amenities. The proportion of the total population in slums and low-income housing was 41% in 2000. The bulk of the residents in slum areas had a shared water supply and more than a quarter of them had no toilet facilities.
AMC was formed in 1950 under the Bombay Provincial Municipal Corporation Act. The main infrastructure services as provided under the Act include a protected water supply, sewerage and storm water drainage, the construction and maintenance of roads, street-lighting, disease prevention and monitoring, solid and liquid water disposal, public transport, and parks and gardens. The city has 43 wards and the city's Mayor is elected for a term of two-and-a-half years.
Before 1993, AMC was a loss-making urban local body with accumulated cash losses of Rs. 350 million. (US $9.2 million) During a deteriorating financial situation in 1994, AMC launched a major effort to strengthen its capacity to develop commercially viable projects. As a result, AMC was able to turn around its financial position and achieve a closing cash surplus of Rs. 2,142 million (Us $50 million) in March 1999.
The main credit for the financial turnaround of the Corporation and other development initiatives and administrative reforms goes to the dynamic leadership of a municipal commissioner, Mr. Keshav Verma, who remained at the helm from 1994 to 1997. The reforms first initiated under Verma's leadership included restructuring the Corporation and upgrading its workforce, and improving revenue collection, accounting and financial management systems.
Octroi (a tax on goods coming into the city) has traditionally been AMC's major source of revenue, accounting for about 70 to 75% of total revenue. Knowing that the tax was not being collected effectively, AMC increased octroi collection by updating the valuation manual for tax assessment based on current market prices. Octroi collection was further improved through deploying police personnel for controlling touts and catching defaulters; linking all check posts with a wireless network to facilitate 24-hour communication; formating 13 vigilance squads to conduct spot checks of vehicles; and installating weighing machines at the check posts. A system of backtracking of the goods (taxing items that previously went untaxed) was also introduced. Strict action was taken against corrupt and negligent employees. As a result of these measures, annual octroi collection increased by 60%.
Similarly, in 1994, AMC introduced a series of measures to improve property tax collection, which accounts for about 30% of AMC's tax revenues. The tax assessment system is based on annual ratable value, (British system of assessing property tax) which can be subjective and inequitable. A computer database was created to identify defaulters, while attention was focused on recovering major outstanding tax amounts. These measures included issue of notices and warrants, disconnection of water supply and sewerage, publishing of the defaulters' names, attachment of property, and restructuring and strengthening of the property tax department. These steps helped to increase annual property tax collection by 55%. AMC has recently introduced an area-based system for assessment of property tax which will further improve the tax collection.
Beginning in the mid-90s, AMC also introduced a number of management improvements such as computerizating the accounts and upgrading the workforce. AMC had been using a single-entry cash-based accounting system till 1996/97. In April 1996, AMC introduced a computerized double-entry accounting system, purchased new computers, developed a new accounting system and recruited chartered accountants to introduce the new system. AMC's electronic data processing department worked closely with the city's finance department to build in-house capacity. In the first year both single- and double-entry systems were operated on a parallel basis. A local chartered accounting firm was appointed to assist AMC to prepare its first balance sheet in 1996. The new system is now operational.
Traditionally, AMC based promotions on seniority and not merit. There was hardly any recruitment of new talent from outside the organization. Performance was not rewarded and the administration lacked new ideas and a professional culture. The municipal corporation decided to change its resulting negative image. It began by upgrading its workforce by recruiting a group of professional middle level managers. AMC revised its recruitment rules to enable AMC to make such direct recruitment. In 1997, about 40 chartered accountants and business management graduates were recruited. The corporation placed them in key administrative and operational positions. These new officers are improving AMC service delivery, while introducing a new work ethic.
In 1996, AMC prepared a five-year capital investment plan for investing Rs 5,973 million (US $150 million) for water supply, sewerage, roads, bridges and solid waste management projects and allocated Rs. 4,393 million ($US 110 million) for the water supply and sewerage component. It proposed to meet 30% of the total investment requirement from internal sources of financing while mobilizing the remaining amount through municipal bonds and loans from financial institutions. The project was structured within an urban financial framework that was predicated on receipt of significant transfers from general revenues such as octroi and property taxes.
With funds from the bond issue, AMC constructed a new water pumphouse and pipelines to service 60% of the city's population
(photo courtesy of Indo-USAID FIRE Project).
The USAID's Financial Institutions Reform and Expansion Project (FIRE) project played a multifaceted role in assisting Ahmedabad in developing the bond issue. The partnership with the corporation began in 1994 with the preparation of an urban environmental workbook and an environmental risk assessment, where the FIRE staff helped AMC carry out financial analyses and prepare the corporate investment plan. The FIRE project also assisted Credit Rating and Information Services of India (CRISIL), an independent rating agency, to develop methodology for carrying out credit ratings of local governments in India, and Ahmedabad was the first city where this methodology was applied. In addition, the FIRE project helped create the City Mangers Association of Gujarat in 1998 and sponsored participation of AMC staff and elected leaders in training programs and study tours to build their capacity to undertake and sustain reforms.
Ahmedabad became the first city in India to request and receive a credit rating for a municipal bond issue. CRISIL initially assigned a credit rating of "A+" to Ahmedabad's municipal bond. Following this initial rating, AMC revised the financial structure of the bond offering and added several credit enhancement features, including a "no lien" escrow account of octroi taxes collected at ten collection centers. With these modifications to the bond financing structure, AMC received an improved rating to "AA."
In 1998, AMC publicly issued 10,000 secured redeemable bonds registered at the Securities and Exchange Board of India (SEBI). City bonds, as they are popularly known, had a face value Rs. 1,000 (US $25) each (for cash at par) aggregating to a total of Rs. 1,000 million. AMC sold 25% of the bonds to the Indian public and the remaining 75% of the issue to private placement to institutional investors. Indian financial institutions, including the State Bank of India, Unit Trust of India, Housing Development Finance Corporation (Limited) and commercial banks, subscribed to the bond issue.
In the bond prospectus AMC pledged to establish special project sanctioning procedures to reduce project delays and to appoint private project management consultants. AMC did not, however, immediately follow through these pledges. As a rsult, the lack of specialized project management support and AMC's normal approval process partly delayed project implementation. Furthermore, because interest rates dropped after AMC bonds were issued, the income AMC received on invested bond proceeds fell below the level of interest payments on the outstanding bonds (creating a negative arbitrage for AMC).
The availability of the cash, however, permitted AMC to rapidly respond to an impending water crisis. The corporation was able to expend bond proceeds to successfully implement an emergency bulk water supply scheme known as the Raska Project in a record five months. AMC claims that this availability of cash enabled it to obtain highly competitive tenders from the private contractors, which came in at 10 to 15% below the estimated cost. AMC estimates that this more than offset the loss of interest on the debt.
Designed to supply 65 million gallons (246,000 cubic meters) of water a day to the city, the Raska Water Project consisted of constructing a pump house and laying 42 kilometers of pipeline--most more than two meters in diameter--to bring water to the city. The entire project was completed in 130 days, a record for engineering projects in India.
In addition to the water project, the healthy state of municipal finances enabled AMC to partner with the business community, NGOs and other organizations to undertake new initiatives. For example, AMC partnered with a prominent textile company to redevelop an important commercial artery called C. G. Road. The textile company funded the estimated project cost of Rs. 35 million and all additional costs were borne by AMC. The company expects to recover its contribution from advertising and parking revenues. Following recovery of the capital investment, these revenues will go to AMC. AMC also set up a "green partnership" whereby private companies share the cost of upgrading and maintaining parks, gardens and road-side plantation in exchange for advertising rights.
Finally, in the Slum Networking Project the corporation partnered with a prominent textile company, an NGO and the slum community to improve basic infrastructure and provide water and toilets to households. The textile company set up a trust and executed the project while the NGO mobilized the community and AMC acted as facilitator for a pilot community called Sanjay Nagar. The project was completed within the stipulated time and without any cost overruns.
With the success of the first municipal bond issue, AMC has gone ahead with another bond issue of the same amount i.e. Rs. 1,000 million. However, the second bond launched in March 2002, is tax exempt. AMC is again the first municipal corporation in India to issue tax-free municipal bonds. This bond will be used to complete its original water and sewerage infrastructure scheme.
RESULTS
Because of the fiscal and management reforms, Ahmedabad built an extensive water project, improved conditions in slums and enjoys a high level of financial autonomy. Within the limited availability of water in Ahmedabad, the Raska Water Project supplies water to 60% of the city's population. AMC can provide treated water to all residents for two hours in the morning and half-an-hour in the evening. Timely completion of the project not only saved Ahmedabad from severe water shortages during the summer of 2000, but it also provided a permanent and reliable source of surface water for years to come.
C. G. Road now boasts a 100-foot (30-meter) wide thoroughfare for fast-moving vehicles, well-defined footpaths with trees and lights for pedestrian use, a side lane, and a parking bay. It has become a prime shopping street providing an outlet for the sale of various national and multinational brands of goods. The Slum Networking Project resulted in an improved physical environment, a significant consolidation of the housing and a marked improvement in the health of residents. Even thought the textile company opted out of future slum development projects, the initiative was replicated in 20 other slum pockets.
With respect to the capacity of the corporation, AMC enjoys a high level of autonomy in revenue use in that it depends on the state government for only 10% of its total revenue in the form of grant for primary education. In addition, management innovations introduced by the municipal commissioner and supported by staff and elected officials helped AMC to change its image among the local citizenry.
LESSONS LEARNED
One of the main reasons for India's inadequate level of urban infrastructure is the inability to properly tap available capital resources to finance infrastructure projects. Traditionally, urban infrastructure has been financed mainly through budgetary allocations. Other financing has come from financial institutions like Housing and Urban Development Corporation (HUDCO) and limited investments by the local governments themselves through their internal resources. Financial resources from all these sources are significantly short of the urban sector's estimated investment requirements. Financial sector reforms offer opportunities for tapping capital markets to finance urban infrastructure. Capital markets can only be accessed for infrastructure finance, if and when there are projects that are commercially viable.
KEY REPLICATION FACTORS
Municipal bonds are now available as an option for financing urban infrastructure and five other municipal corporations in India have accessed capital markets. While large municipal corporations in India are in better positions to directly access the capital markets, most small and medium-sized local governments do not have the revenue base to do so. As a result, in its 2002-03 budget the Government of India has proposed support for setting up a pooled finance mechanism to provide a cost-effective and efficient approach for smaller and medium-sized municipalities to access the capital markets.
AMC demonstrated that municipal bonds can work in India for raising finances for infrastructure projects. However, according to Chetan Vaidya, the Principal Urban Management Advisor at the FIRE Project Office, before actual issuance of bonds, local governments should have in place the following arrangements: a phased capital investment and financing plan for project implementation; identification of benchmarks for project commencement and completion; final tender documents for proposed projects; and a separate project implementation group and project officer who will monitor the progress of works.
To routinely access capital markets or to form successful partnerships with the private sector, local governments will have to strengthen their capacity to develop commercially viable projects. This will require appropriate pricing of services, improved cost recovery mechanisms, improved accounting and financial management systems, enhanced professionalism of the work force, improved service delivery systems, and development of capital investment plans.
To complement project development, local governments will have to institute efficient project management systems and procedures to reduce time delays and cost overruns. The most critical factor for obtaining market finance will be a healthy municipal revenue base.
Budget and Financing
While this case study has referred to several development projects, the Raska Water Project was the largest and most significant in terms of finances. The estimated total cost of the emergency scheme was Rs. 1,131 million: 80% was covered by the HUDCO loan of Rs. 889 million and 20% by the bond proceeds. AMC fully utilized the bond proceeds to complete this project, as planned, by March 2000.
The transaction cost for AMC bonds, including underwriters, brokers and legal fees, as well as advertising and printing expenses, equalled 2.89% of the bond. This excludes stamp duty cost.
KEY CONTACTS
Mr. P. Panneervel IAS
Municipal Commissioner
Ahmedabad Municipal Corporation
Sardar Patel Bhawan
Ahmedabad 380001
Gujarat, India
Tel:+91-79/5354989, 5351187, 5357718
Fax: +91-79/5350926
Email: mail@ahmedabadcity.org
Website: www.ahmedabadcity.org
Mr. P.U.Asnani
Advisor, AMC and USAEP
School of Planning CEPT
Navrangpura
Ahmedabad, India
Tel: +91-79/6303130
Chetan Vaidya
FIRE Principal Urban Management Advisor
The FIRE(D) Project Office
E 3/4 Vasant Vihar
New Delhi 110 054, India
Tel: +91-11/6143551, 6149836
Fax: +91-11/6141420
Email: fired@vsnl.cam
REFERENCES
Ahmedabad Municipal Corporation. 2002. website [ www.ahmedabadcity.org].
Dutta, Shyam S. April 2000, "Partnerships in Urban development: a review of Ahmedabad's Experience," Environment and Urbanization, Vol. 12, No. 1.
Vaidya, Chetan and Brad Johnson. April 2001. Project Notes: Lessons Learned form Ahmedabad Municipal Bond. Indo-Us Financial Institutions Reform and Expansion Project Debt Market Component FIRE (D), India.
Vaidya, Chetan. 2002. Communication with author.
ACKNOWLEDGEMENTS
Author and Researcher: Reena Lazar
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This case study is part of
Local Strategies for Accelerating Sustainability: Case Studies of Local Government Success.
This series of case studies highlights the diverse ways in which local governments and their partners have instituted strategies for action that are accelerating the transition to sustainable, equitable and secure communities. The series was prepared as part of the local government contribution to the UN World Summit on Sustainable Development (Johannesburg, South Africa, 2002). The case studies were researched, written and produced with financial support from the Ministry of Housing, Spatial Planning and the Environment, The Netherlands. |
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