Weak documentation, accounting delay rating of 63 municipalities

Weak documentation, accounting delay rating of 63 municipalities

Credit ratings agencies that were contracted by the Union urban development ministry to rate service delivery, efficiency and bookkeeping of 63 municipalities across India are finding it hard to make any headway in some states.

As a result, the rating exercise, which was expected to be completed by end-October, is almost certainly going to take a few more months, said executives with Crisil Ltd and Fitch Ratings India Pvt. Ltd, two of the agencies contracted to carry out the task.

Analysts and executives at the ratings firms, however, stressed that time was not a factor in the exercise, which is meant to identify problems in the way cities are run in India.

The urban development ministry had in February signed up with four agencies—Fitch Ratings, Crisil, Icra Ltd and Credit Analysis and Research Ltd—to help cities raise money from the debt markets. The exercise was seen as a move to making cities self-reliant, at a time when budgetary allocations from states and the Centre were being reduced.

“The key practical constraints are weak documentation, cash-based accounts, lack of computerization and inadequate qualified staff, apart from logistic constraints," said Akash Deep Jyoti, who heads Crisil’s corporate and infrastructure sector ratings. Crisil is tasked with rating 20 of the 63 cities with populations of 500,000 and above that are eligible for Central grants under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM).

In order to overcome the hurdles, Crisil is undertaking extensive interactions with municipal officials, holding frequent stakeholder consultations and creating awareness for operating staff so that they can see the big picture, Jyoti added. “The fact that we are instrumental in the urban development exercise of this nature also motivates us to overcome any difficulty."

Further, a rating analyst from Fitch, who is not authorized to speak to the media and hence asked not to be identified, pointed out that the onset of elections to some municipalities is hindering their efforts to gather information. Rating agency executives say the task is especially difficult in states such as Jharkhand, Bihar and those in the North-East. Fitch is rating 21 municipalities in India.

The agencies’ task is made harder because of the fact that some of the North-Eastern states do not even have elected municipal councils that maintain records, despite the 73rd constitutional amendment calling for urban local bodies—elected municipal and city councils—to act as a third layer of government, after the Central and state governments. In fact, some city officials hold the lack of a proper accounting system responsible for the state of city finances. In an earlier interview, former Bangalore city corporation additional commissioner P.K. Srihari said that most problems?arose?because?basic transactions were not recorded.

The JNNURM scheme, which runs from 2005 through 2012, provides grants of as much as 90% of the project cost for cities, provided they undertake reforms outlined by the ministry. The reforms and JNNURM are aimed at making cities self-sufficient, rather than dependent on state and Central government assistance to provide even basic facilities such as water.

Industry officials, however, said the ratings were not meant to be completed in any specified time period. “I was clear in my mind that some cities will not be able to achieve the change," said Anil Baijal, former secretary of urban development, during whose tenure the JNNURM scheme was announced.

“But it sets them (cities and towns) thinking about how to spruce up their financials. I think the credit rating exercise should be ongoing, where cities are continually revisited to see where they are."

The rating exercise was seen as particularly important because, in the absence of any nation-wide municipal accounting manual, many cities and towns continued to cling to outdated accounting methods. “So far, most of it (the accounting system) was cash-based, single-entry system," said the Fitch executive.

“What that means is, an entry would only be made in the register when cities receive or make a payment. People are now moving into the accrual-based double-entry system, where they record what is owed to them also."