Return to Previous Page

Financial Strategy for Municipal Corporation*

CASE STUDY, FINANCIAL MANAGEMENT
ET Cases - GSMC, 12 Pages
AUTHOR(S) : Amitava Basu, President, Intercontinental Consultants and Technocrats (P) Limited, Delhi

Case Preview

Financial Strategy for Municipal Corporation

With rapid urbanization, the government at all levels are confronted with urgent demand to improve the city’s infrastructure and services and livelihood of the public for harmonious development of the society. However, under the circumstance of fiscal difficulties, the generous government grants and loans cause great fiscal pressure and debt risk. Funds are always a bottleneck for urban development.

As part of urban reform strategy, it is necessary to strengthen the financial information system, which is an effective tool in achieving organizational goals. It is crucial for the healthy performance and financial status of an organization. Hence, strong steps are required to build the Urban Local Body’s (ULB’s) governance system and to take up reforms in various aspects like – resource mobilization, e-governance, service delivery, disclosure and financial management. The factors that fostered the reforms in accounting are:

  • • Emphasis on information needs: Timely, Accurate, Relevant and Validated information
  • • Changing role of ULBs: Better transparency, Accountability, etc.
  • • Need for Institutional Development: Better Financial management through sound financial information system

 

Thus, for economic development of urban area, which is the engine of economic growth, accounting and financial reform for ULBs has assumed significant importance..........

Local Self-Governance: An Overview

• Local Bodies

Local Bodies are institutions of local self-governance, which look after the administration of an area or small community such as villages, towns, or cities. The Local Bodies in India are broadly classified into two categories. The Local Bodies constituted for local planning, development and administration in the rural areas are referred as Rural Local Bodies (Panchayats) and the local bodies, which are constituted for local planning, development and administration in the urban area, are referred as Urban Local Bodies (ULBs).............

• Urban Local Bodies (ULBs)

As per Article 243Q of the Constitution, every State Government should constitute three types of municipalities (referred to as urban local bodies) in urban areas. Provided that a Municipality may not be constituted in such urban area or part thereof as the Governor may, having regard to the size of the area and the municipal services being provided.............

Initiative for Reform in Municipal Accounting System

Together with the devolution of powers, the accounting systems followed by ULBs were also subjected to reviews and directions for reforms. In 2001, the Supreme Court of India, while deciding on public interest litigation, recognized the defects of cash-based accounting system and directed the Government of India to develop guidelines for an accrual-based accounting system that could capture the full costs of services. Consequently, the Ministry of Finance issued Guidelines for the Utilization of Local Bodies’ Grants in June 2001.............

Cash-Based Accounting System

Most ULBs in India follow a cash basis of accounting wherein cognizance is not given to the timing of event and no distinction is made between revenue and capital items. Revenue items are recognized only when cash is actually received, irrespective of the timing when the revenue is accrued. As a result, accounting consideration is not given to the timing of the event of the transaction. Similarly, expenditure items are recognized only when cash is actually paid, irrespective of the timing when the expenditure is incurred...........

Double-Entry Accrual-Based Accounting System (DEAS)

On the other hand, accrual-based accounting is a method of recording transactions in which revenues, costs, assets, and liabilities are reflected in the books of account of the period in which these accrue and arise, irrespective of actual receipt or payment made during the period. The basic feature of double entry accrualbased accounting system is that it considers timing of each event and also makes a distinction between capital and revenue items. Therefore, accrual-based accounting system helps in accurately determining the financial performance and financial status of a ULB for any period and on any date..................

Main Issues

The Central Finance Commissions observed that providing basic services at the grassroot level makes them the primary interface of the citizens’ interaction with the government. The principle of subsidiarity implies that matters are best handled by the least centralized competent authority. Following this, these institutions need to be adequately empowered – both functionally and financially – to enable them to fulfill the role envisaged for them in the Constitution.............

Hastinapur Municipal Corporation

Municipal Corporation of Hastinapur is spread over an area of 127.237 sq.km. It resembles all the typical characteristics of a Metropolis and is considered the most important industrial and commercial city in Indraprastha State. Hastinapur, a center of Railway Service, now turned into a Railway Division and making mining activities expanded day by day with growth of industrialization in the surroundings...........

Financial Information of the Municipal Corporation of Hastinapur

Mode of Maintaining Accounts

The accounts are maintained manually. The staff of the Municipal Corporation of Hastinapur is not familiar and conversant with computer application........

Accounting Process

The accounting process followed by the Municipal Corporation of Hastinapur has the features as presented in Exhibit I...........

Bank Accounts

According to the Indraprastha Municipal Corporation Act, 1993 and the Municipal Corporation Finance Rules of the Government of Indraprastha, every ULB in the State has to open current account(s) with any nationalized bank, generally in treasury-linked branch of the concerned bank.............

Physical Assets

As cash-basis accounting is followed and no distinction is made of capital and revenue expenditure, there are no records of physical assets owned by the Municipal Corporation in terms of asset description, location, value, etc...............

Revenue

The revenue base of Municipal Corporations can be broadly categorized into: (a) tax revenues, (b) non-tax revenues, (c) assigned (shared) revenue, and (d) grants-in-aid............

Expenditure

The expenditure of the Municipal Corporation of Hastinapur can be broadly categorized under –

• Salary (Establishment)
• Administration Expenses
• Works (i.e., Physical Assets like water supply system, sewerage system, parks and playgrounds, etc.)
Expenditure
• ...........

Payroll

Thirteen (13) Drawing and Disbursement Officers are engaged to handle the payroll system independently. Nearly 20% of the total accounting entries relate to salary expenditure............

Financial Status

Revenue from property tax and service charges on central government buildings are declining due to delayed service of demand by the Municipal Corporation; and poor collection efficiency. New sources of revenue are not explored..............

Improvement Initiative

To strengthen Municipal Corporation of Hastinapur in its financial management, the State Government appointed a new Municipal Commissioner primarily with the intention of addressing the current situation and improving the financial status and services of the Municipal Corporation.............

Experiences of Other ULBs

The new Municipal Commissioner ascertained the measures taken by ULBs in other States, and these are listed below:

• ULBs in other States developed an accounting manual for DEAS based on the National Municipal Accounts Manual as guiding direction for maintenance of accounts, preparation of budget and financial statements and MIS
• ULBs in the States introduced simple and off-the shelf computer system customized to meet the specific requirements of the respective ULBs
•...........

The Requirement

The new Municipal Commissioner planned to draw up a strategy to improve the financial position of the Municipal Corporation of Hastinapur, through identification and accessing new sources of revenue such as user fees, parking charges, vending fees, improving collection efficiency through timely billing; and customer friendly
payment mechanism such as online payment, payment at designated bank branches, payment by credit card, mobile collection vans, etc...............

Exhibits

Exhibit I: Accounting Features of the Municipal Corporation of Hastinapur

Exhibit II: Year-Wise Bank Details of the Municipal Corporation of Hastinapur

Exhibit III: Composition of Municipal Revenue and Trends

Exhibit IV: Composition and Trends of Municipal Expenditure

Annexure

Annexure I: Organization Chart of Municipal Corporation of Hastinapur

Teaching Note Preview

Financial Strategy for Municipal Corporation

 

Synopsis

The case study is premised on the fact that urbanization is rapidly increasing in India; but, the civic services are not coping up with the needs and demands of the city residents, and are deteriorating in service quality delivery. A major reason for such state of affairs is the poor financial health of Urban Local Bodies (ULBs) and maintenance of accounts on cash-based system that does not provide comprehensive financial information for appropriate decision making. Hence, to improve the situation and strengthen the ULBs so as to enable them to provide adequate and quality civic services, Government of India and the State Governments have initiated municipal accounting and financial reforms. As a result, there is urgent need for professionals who can assist the ULBs in their capacity building through directing accounting and financial reforms in right perspective.

This case study is developed based on data, information and figures from different ULBs and synchronized into one municipal body. The summary of the case is given below for the understanding of the faculty.

Case Summary

The Municipal Corporation of Hastinapur faced severe financial strains during 2010–2014, resulting from diminishing streams of revenue, poor collection efficiency, and rising establishment costs. Besides, the accounts of the Municipal Corporation of Hastinapur were in arrears and timely and proper financial information were not available for appropriate decision-making.

As a cumulative result of these deficiencies, the municipal infrastructure and services deteriorated and could not cope up with citizens‘ needs and demands.

The State Government appointed a new Municipal Commissioner primarily with the intention of addressing the current situation and improving the financial status and services of the Municipal Corporation of Hastinapur.

The new Municipal Commissioner planned to draw up a strategy to improve the financial position of the Municipal Corporation of Hastinapur through identifying and accessing new sources of revenue such as user fees, parking charges, vending fees; improving collection efficiency through timely billing, and customer friendly payment mechanism such as online payment, payment at designated bank branches, payment by credit card, mobile collection vans, etc. Also, rationalization of expenditure through outsourcing, public-private partnership needs to be explored......................

Expected Learning Outcomes

  • • Familiarize with the municipal accounting and financial management system
  • • Make conversant with cash- based and double-entry accrual-based accounting system and their differences
  • • Understand the sources of municipal revenue and identify potential sources of revenue that have hitherto been not explored
  • • Develop means of expenditure rationalization

 

In the process, it will facilitate the students to familiarize with the development of accounting and financial strategic planning that could be helpful for application in financial revamping of other organizations as well.

Assignment Questions

  • I. What is the difference between cash based and double-entry accrual-based accounting system?
  • II. What are the main features of budget preparation on incremental approach and past trend basis?
  • III. ............................

$5.48
Rs 0
Product code: FIN-1-0025, FIN-1-0025A

Abstract

The Municipal Corporation of Hastinapur faced severe financial strains during 2010-2014, resulting from diminishing streams of revenue, poor collection, and rising establishment costs. Besides, the accounts of the Municipal Corporation were in arrears and timely and proper financial information were not available for appropriate decision-making. As a cumulative result of these deficiencies, funding became a challenge and the municipal infrastructure and services deteriorated and could not cope up with citizens' needs and demands.

The State Government appointed a new Municipal Commissioner primarily with the intention of addressing the current situation and improving the financial status and services of the Municipal Corporation of Hastinapur. The new Municipal Commissioner planned to draw up a strategy to improve the financial position of the Municipal Corporation through identifying and accessing new sources of revenue such as user fees, parking charges, vending fees; improving collection efficiency through timely billing, and customer friendly payment mechanism such as online payment, payment at designated bank branches, payment by credit card, mobile collection vans, etc. Also, rationalization of expenditure through outsourcing, public-private partnership was explored. The new Municipal Commissioner also considered the need for simple but adequate financial reporting system for proper and timely decision making; and requirement of training and capacity building of staff to implement the financial strategy on a sustainable basis. To assist him in developing a financial strategic plan for revamping of the municipal corporation; the new Municipal Commissioner sought expert advice from an external agency. This case study deals with scope, opportunities and way forward for municipal accounting and financial reform.



Pedagogical Objectives

  • To familiarize with the municipal accounting and financial management system
  • To make conversant with cash- based and double-entry accrual-based accounting system and their differences
  • To understand the sources of municipal revenue and identify potential sources of revenue that have hitherto been not explored
  • To develop means of expenditure rationalization

Case Positioning and Setting
This case study can be used in MBA Programs in Financial Management course to discuss the Financial Strategies module


* GSMC 2016, IIM Raipur

This Case Pack Includes:
- Abstract
- Case Study
- Teaching Note (**ONLY for Academicians)


** If you need to make copies, you must purchase the corresponding number of permissions based on the number of participants. Electronic downloadable links (PDFs, PPTs, Supplements etc.) are available immediately after purchase. Single copy can be used only for evaluation purpose. Unauthorized distribution of these files is prohibited pursuant to term of use of this website.

No. of Copies
$5.48
Rs 0

Related products




Request for an Inspection Copy

(Strictly for Review Purpose, Not to be Used for Classroom Discussion/Trainings)