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

June 05, 2017

Bhadravathi 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

Bhadravathi 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 Bhadravathi. 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 primarily 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 takes comfort from the collection efficiency of property tax and water charges. The rating also factors in the satisfactory service levels in the areas of water supply and solid waste management (SWM).

The rating, however, is constrained by the BCMC's less-than-satisfactory service standards in the areas of surfaced roads, street lighting, drainage and sewerage. ICRA notes that the BCMC proposes large outlays 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 BCMC's financial position going forward. ICRA notes that the council 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 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.

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

• Satisfactory service levels in the areas of water supply and SWM

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 at present; though the collection efficiency in property tax and key user charges remained high

• Lack of a scientific treatment facility for municipal solid waste (MSW) and a low coverage of sewerage network and street lights indicate substantial requirement of investment

• 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 Government of Karnataka (GoK) on recommendation by the State Finance Commission (SFC). The grants from the GoK have been regular in nature and it is the major source of revenue for the council as it accounts for ~75% of the total revenue income. The council's own revenue base in the form of tax and non-tax revenues remained low at 20% despite high collection efficiency in property tax and key user charges. The council has managed to generate ~30% of the total revenue income as revenue surplus in the past four years. This was primarily on account of 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 satisfactory at about 90% for the last four years and the collection efficiency of the water charges has been improving over the years.

The collection efficiency of MSW is satisfactory at 92% and covers the entire city. The water supply is at a moderate level as reflected by 135 litre per capita per day (LPCD) of water supplied. However, the service levels of the other key services, surfaced roads, sewerage, street lights and drainage are less-than- satisfactory. Also, the city lacks an underground sewerage system at present and most of the households have individual septic tanks.

ICRA also notes that the BCMC has proposed to execute key projects under the AMRUT and other schemes primarily towards universal coverage of water supply and sewerage and construction of storm water drains. The total cost of project under the AMRUT scheme is Rs. 206.39 crore2, which is funded in the ratio of 50% by the Government of India (GoI), 30% by the GoK and 20% 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 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

2 100 lakh = 1 crore = 10 million

About the entity

The BCMC, being an urban local body (ULB), provides civic services to the Bhadravathi city. The city is situated in the Shimoga district, at a distance of 250 km from the state capital, Bengaluru. According to Census 2011, the BCMC, covering an area of 67.08 sq. km., serves a total population of 1.51 lakh. The ULB was constituted in 1920 as a city municipal council and is governed by the Karnataka Municipalities Act, 1964. The council of the BCMC comprises 35 Ward Councillors and 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.

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, the BCMC generated a revenue surplus of Rs. 12.49 crore on a total revenue income of Rs.

31.81 crore compared to a revenue surplus of Rs. 3.69 crore on a total revenue income of Rs. 19.19 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)