ICRA : assigns issuer rating of IrBBB- (Stable) to Bagalkote City Municipal Council

June 08, 2017

Bagalkote 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 Bagalkote City Municipal Council (BCMC).1The outlook on the long-term rating is Stable.

Rationale

The assigned rating takes into account the BCMC's importance to the Government of Karnataka (GoK) as a provider of key municipal services to the city of Bagalkote. The rating also positively factors in the rule- based transfers of 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 BCMC 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. The rating considers healthy current and overall collection efficiency of property tax over the past five years, as well as satisfactory service levels in sewerage and solid waste management (SWM).

The rating, however, is constrained by the BCMC's weak information management systems with instances of inconsistency in data. The rating also factors in the BCMC's relatively small size of own revenue base, low collection efficiency of user charges (water charges), and less-than-satisfactory service standards in road coverage, storm water drains and street lights. ICRA notes that the BCMC proposes large outlays for various projects under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), which could stretch its cash flows. 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 its financial position going forward. ICRA notes that the council has implemented reforms like the accrual-based accounting system. However, the 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 BCMC'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 the 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.

Key rating drivers Credit strengths

• Rule-based transfer of grants from the state government, which has a high credit quality

• Revenue surplus position during the last four years, mainly due to grants received from the state government

• High collection efficiency of property tax during the previous five years

• Satisfactory service levels in terms of sewerage and solid waste management

  Credit weaknesses

• Weak information system

• Relatively small size of own revenue base

• Less-than-satisfactory service levels in key municipal functions, including road coverage, storm water drains, street lights, etc.

• Lack of adequate staff in key departments

• Risk related to execution of large projects

Description of key rating drivers:

The council receives rule-based grants from the GoK on recommendation by the State Finance Commission (SFC). The grants from the GoK have been regular and are the main sources of revenues for the council as it accounted for 68% of the total revenue income in FY2016. The council has managed to generate revenue surplus to the extent of 45% of the total revenue income in FY2016. 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 overall collection efficiency of property tax has remained high at more than 90% over the past five years. The collection efficiency of municipal solid waste (MSW) has been satisfactory at ~96% and the sewerage facilities are satisfactory with 85% coverage.

However, other service indicators remain moderate as every square km of area has only 7.1 km of road length and less than 50% of the roads are surfaced. The street light coverage is low at 18 per km and the storm water drain covers only ~9% of the total road length. The water supply by the council is also moderate at 89.3 litres per capita per day (lpcd). The management information system (MIS) of the council is weak with instances of inconsistency in data. The size of the council's own revenue is low on account of a low base of property tax and low collection efficiency of user charges. The number of properties registered for property tax has not increased in FY2016 and FY2017 due to the ongoing relocation and rehabilitation activities, following the submergence of a part of the city due to the Alamatti dam. However, a hike in the property tax rates with effect from April 2017 is expected to improve tax revenues going forward.

ICRA also notes that the BCMC has proposed to execute key projects under the AMRUT scheme. The total cost of project under the AMRUT scheme is Rs. 113.84 crore2, which is funded in the ratio of 50% by the Government of India (GoI), 20% by the GoK, and 30% by the BCMC. 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 outlay towards projects, the financial position of the BCMC would be affected if the project assets after commissioning are unable to generate adequate revenues to partially fund operations and maintenance (O&M) costs, which are expected to increase significantly, going forward.

2 100 lakh = 1 crore = 10 million

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.pdf

Assessing Credit Quality of State Government Finances

http://www.icra.in/Files/Articles/Rating%20Methodology%20Aug%202015.pdf

About the entity

The urban local body (ULB) in Bagalkote was established as a Town Municipal Council in 1964 and was upgraded to a City Municipal Council in 1987. The BCMC provides civic services to the Bagalkote city, the headquarters of the Bagalkote district. The city is in North Karnataka and is around 123 km away from Hubli-Dharwad, and 475 km away from the state capital, Bengaluru. Bagalkote is divided into three parts - Navanagar (new town), Vidyagiri and the old Bagalkote town. According to Census 2011, the BCMC, which covers an area of 48.25 sq. km., serves a total population of 1.12 lakh. It is governed by the Karnataka Municipalities Act, 1964. The BCMC council, comprising 31 Ward Councillors, is headed by a President who is elected by the 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.

The key services extended by the ULB include water supply, sewerage, 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 others.

In FY2016, the BCMC generated a revenue surplus of Rs. 11.15 crore on a total revenue income of Rs. 24.92 crore. The council had reported a revenue surplus of Rs. 5.99 crore on a total revenue income of Rs. 17.90 crore in FY2015.

Status of non-cooperation with previous CRA: Not applicable Any other information: 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)	--	--	--

Rating 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