ICRA : assigns issuer rating of IrBB-(Stable) to the Rameswaram Municipality

June 06, 2017

Rameswaram Municipality

Summary of rated instruments

Instrument*	Rated Amount (Rs. crore)	Rating Action
Issuer Rating	Nil	IrBB-(Stable) ; assigned

*Instrument details are provided in Annexure-1

Rating action

ICRA has assigned a long-term issuer rating of IrBB- (pronounced I R double B minus) to the Rameswaram Municipality (RWM/municipality).1The outlook on the long-term rating is Stable.

Rationale

The assigned rating takes into account the rule-based transfers of grants from the State Government of Tamil Nadu (GoTN), which assists the council in making non-discretionary payments like salaries and pensions. The rating also factors in the revenue surplus position of the municipality during the past years, which enables it to partly fund its capital expenditure from internal sources. The satisfactory collection efficiency of property tax by the RWM and a steady increase, although at a low rate, in non-tax revenue provides a comfort to the RWM's own revenue base.

However with high floating population, the rating is constrained by the inadequate service standards offered in the areas of water supply, scientific treatment and disposal of municipal solid waste (MSW) and absence of a sewerage system. The rating is further constrained by the relatively small size of the RWM's revenue base and its nominal growth rate during the past years due to lack of timely upward revisions in key taxes, charges and fees. The rating is also constrained by the significantly high slum population in the city (38% of the total population) which exerts a significant pressure on the financials of the municipality as the ability to pay for services by the population amongst this segment is limited. Going forward, a significant amount of capital expenditure will be required by the RWM to improve these services to a desired level.

ICRA notes that the RWM proposes a large outlay (Rs. 45.02 crore2) for the construction of underground sewerage system under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme which could stretch the cash flows of the municipality. Moreover, given the limited track record of the municipality in executing large projects, the timely execution of these projects within the budgeted costs would be critical for the RWMs financial position going forward. ICRA also notes that the financial position of the RWM would be adversely impacted if the project assets, after commissioning, are unable to generate adequate revenues to part fund the Operations & Maintenance (O&M) costs, which are expected to increase significantly going forward. 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.

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

2 100 lakh = 1 crore = 10 million

Key rating drivers Credit strengths

• Revenue surplus position during the last three years; although the same has been supported by the rule-based transfers from the state government, which has an adequate credit quality

• Satisfactory collection efficiency of property tax

  Credit weaknesses

• Lack of scientific treatment and disposal of MSW, inadequate water supply and absence of a sewerage system

• Relatively small size of own revenue base at present, which has remained stagnant during the recent years

• Presence of a high slum population within the municipal limits

• Risk related to execution of large projects

Description of key rating drivers

The RWM receives grant from the GoTN based on the recommendations of the State Finance Commission (SFC), and a share in stamp duty collected in the city by the state government. Together, both the transfers contribute to more than 66% of the RWM's total revenue income in FY2015. The rule- based nature of these transfers provides comfort to the council to an extent. However, the frequency of such transfers has not been regular in the past years, as reflected by inconsistencies in the amounts received. The municipality has maintained the property tax collection efficiency of current and overall demand at above 82% and 38% respectively in FY2015. The collection efficiency improved from 62% (current) and 43% (overall) in FY2013 to current levels on account of effective measures taken by the ULB officials. As a result of grants from the state government and consistent income from own revenues, the municipality has consistently maintained a surplus position during the past years. However, the size of the revenue income remains nominal in absolutes terms.

Over the years, the RWM has incurred expenditure for the construction and maintenance of roads, installation and maintenance of street lights, and collection of MSW. Nevertheless, the Municipality's service levels of key services have remained weak as reflected by low coverage of water supply and lack of sewerage network. The water supply is low as reflected by the supply of 46 litre per capita per day (LPCD). Also, the city lacks an underground sewerage system at present and a majority of the households have individual septic tanks.

ICRA also notes that the RWM has proposed to execute key projects under the AMRUT scheme and other schemes. The total cost of project under the AMRUT scheme is Rs. 45.02 crore, which is funded in the ratio of 50% by the Government of India (GoI), 20% by the GoTN and 30% by the RWM. ICRA notes that some of the gaps in the existing service levels are proposed to be covered under the AMRUT projects. Post completion of the AMRUT projects for the sewerage system and the proposed water supply project (Rs. 54.98 crore), the municipality is expected to limit the periodicity pressure with healthy water supply and established sewerage network. 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 RWM 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 Methodology http://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 RWM, being an urban local body (ULB), it provides civic services to Rameswaram city, which is located in the Ramanathapuram district of Tamil Nadu and at a distance of 55 km from the head-quarters. It is a famous religious destination and is considered to be one of the holiest places for Hindus in India. The ULB in Rameswaram was constituted in 2004 as a Grade - III municipality, which was later upgraded as a Grade - II municipality in 2010. According to the Census 2011, the town had a total population of 44,856 and an area of 53.00 sq. km. It is governed by the Tamil Nadu District Municipalities Act, 1920 (Act). The council of the municipality comprising of 21 Ward Councillors is headed by a Chairman, who is elected by the Councillors. The Councillors also elect a Vice-Chairman among them. The executive wing is headed by a Commissioner, who is appointed by the GoTN and is supported by heads of various departments.

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

In FY2015, the RWM generated a revenue surplus of Rs. 3.16 crore on a total revenue income of Rs. 8.81 crore compared to a revenue surplus of Rs. 3.15 crore on a total revenue income of Rs. 6.74 crore in FY2014.

Status of non-cooperation with previous CRA: Not applicable Any other information: Not applicable Rating history for last three years: Table:

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	IrBB-(Stable)	--	--	--

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