ICRA : assigns issuer rating of IrBBB-(Stable) to Vijayapura City Corporation

June 08, 2017

Vijayapura City Corporation

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 Vijayapura City Corporation (VCC).1The outlook on the long-term rating is stable.

Rationale

The assigned rating takes into account the VCC's importance to the Government of Karnataka (GoK) as a provider of key municipal services to the city of Vijayapura (earlier known as Bijapur). The rating also positively factors in the rule-based transfers of grants from the GoK, which assists the corporation in making non-discretionary payments like salaries, pensions and electricity bills. Moreover, the rating considers the revenue surplus position of the VCC during the last four years, which can mainly be attributed to the grants received from the GoK. A revenue surplus position provides flexibility to the corporation in planning and prioritising its capital expenditure. The rating also derives comfort from the corporation's satisfactory service levels for water supply and street lights.

The rating, however, is constrained by the VCC's weak information management system with instances of inconsistency in data, especially in financial statements. The rating also factors in the less-than- satisfactory service standards in terms of road coverage, storm water drains, solid waste management and sewerage. ICRA notes that the VCC proposes large outlays for various projects under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), which may stretch the cash flows of the corporation. Moreover, given the VCC's limited track record in executing large projects, the timely execution of these projects within the budget would be critical for its financial position, going forward. ICRA notes that the corporation has implemented reforms, 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 VCC's ability to improve its overall performance. An adequate number of staff along 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 transfers of grants from the state government, which has a high credit quality

• Surplus revenue during the last four years, mainly due to grants received from the state government

• Satisfactory service levels in terms of water supply and street lights; significant scope for improvement in other areas

  Credit weaknesses

• Weak information system

• Small size of own revenue sources, growing at a nominal rate

• Less-than-satisfactory service levels in terms of road coverage, storm water drains, solid waste management and sewerage

• Lack of adequate staff in key departments

• Risk related to execution of large projects

Description of key rating drivers:

The corporation 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 source of revenue. In fact, such grants accounted for 68% of the total revenue in FY2016. The corporation has managed to generate revenue surplus to the extent of 69% of the total revenue income in FY2016. This was mainly on account of steady flow of revenue grants from the GoK in proportion to the revenue expenditure incurred by the corporation. The water supply has been adequate at 135 litre per capita per day (lpcd) and the street light coverage has also been satisfactory with 30 street lights per km of road.

However, other service indicators remain moderate as the road length per square km of area is low at 6.1 km and the storm water drains cover only ~2% of the total road length. The collection efficiency of municipal solid waste is moderate at 73% and the sewerage facilities cover only 41% of the total ULB area. The management information system (MIS) of the corporation remains weak with instances of inconsistency in data as the closing cash balance for FY2013 and opening cash balance for FY2014 differ by Rs. 12.77 crore and property tax has not been accounted for in the FY2014 financial statements. ICRA also notes that the VCC has proposed to execute key projects under the AMRUT scheme. The total cost of project under the AMRUT scheme is Rs. 301.78 crore2, which is funded in the ratio of 50% by the Government of India (GoI), 20% by the GoK, and 30% by the VCC. 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 VCC 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.

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 VCC provides civic services to Vijayapura city (earlier known as Bijapur), which is the headquarter of Bijapur district. The city is located in North Karnataka and is around 165 km away from Kalaburagi (Gulbarga) and 525 km away from the state capital, Bengaluru. According to Census 2011, the VCC, which covers an area of 97.50 sq. km., serves a total population of 3.27 lakh. It is governed by the Karnataka Municipalities Act, 1964. The Council of the VCC, comprising 35 Ward Councillors, is headed by a Mayor, who is elected by the Councillors. The executive wing is headed by a 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 VCC generated a revenue surplus of Rs. 34.43 crore on a total revenue income of Rs. 50.06 crore. The company had recorded a revenue surplus of Rs. 33.16 crore on a total revenue income of Rs. 47.72 crore in FY2015.

Status of non-cooperation with previous CRA: Not applicable Any other information: Not applicable Rating history for the 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	IrBBB-(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

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)