Fop Analysis Guideline

Guidance note for carrying out critical analysis of Capital Investment Plan and Financial Operating Plan submitted by Urban Local Bodies for availing JnNURM Assistance

The objective of this academic exercise is to ascertain financial feasibility and sustainability of the investment proposed and financial operative plan prepared to finance proposed investment by ULBs under JnNURM. A student may follow following step by step process to achieve above objective of the exercise – First of all put yourself in a position of investor or lender or even as a donor who wish to give his hard earned money for realizing his dream of working for betterment of humanity and assume that a ULB has approached with its investment plan asking your 35 to 80% contribution in proposed investment? Now at each stage of analysis ask yourself following questions Whether my investment will be safe? Whether investment proposed is necessary or essential at first place? If yes how much? Is ULB snatching resources of other ULBs by asking undue amount? Whether approaching ULB has capacity to put in its own share of investment? Whether approaching ULB has capacity to maintain assets (infrastructure) after completion? Etc. To answer these and similar other questions a step by step analysis is required 1. Examine validity of capital investment plan (CAPEX) by looking at the service gap identified and service standards taken to estimate investment requirements and a student should come out clear his opinion (may agree or may not agree) and should record justifications for his observations. Note – Remember accurate Capital Investment Plan indicates what investment is required in a particular city to deliver services at a specific standard/benchmark. It should not be taken as given because it does not indicate ULB has financial strength (money) to fund it. Thus if ULB is not in position to fund it 100% from its own fund then available options like – central, state government grants, borrowing, publicprivate-partnership etc. If all options still do not add to 100% of CIP then only option is to curtail it.Verify CDP document to check whether ULB has followed and explained such a rational process.

2. As there exists institutional fragmentation in delivery of urban infrastructure/services it is possible more than one institution (ULB + Water and Sewerage Board + Development Authority + City Transport

Board) may be party to CDP of a particular city. In such a case CIP and FOP each participating institution in CDP should be checked to determine financial feasibility and sustainability of proposed investment. 3. Financial Operative Plan essentially indicates how CAPEX (CIP) and future OPEX will get funded, so FOP analysis would entail following – a. Look at the economic base of the city and financial profile of a ULB provided in CDP document for understanding. b. Review revenue account (Revenue income less revenue expenditure = revenue surplus) of a ULB in the past, trends identified and future revenue projections done by ULB. c. Check whether a ULB has calculated operational expenditure which will be required to maintain and run increased infrastructure. Its future revenues must be capable of taking care of increased OPEX. d. Also review actions proposed by a ULB to increase its revenue (increasing of tax rate, coverage, collection efficiency, introduction of new tax etc) or to curtail expenditure and form your opinion about their correctness and sustainability and record them clearly with justifications. Remember that it is the revenue surplus which determines capacity to fund and to sustain any investment. Thus review estimates of revenue surplus carefully.

e. Determine how much funds a ULB will able to put in for funding investment proposed and check whether total CIP proposed is in tune with the funding structure set in JnNURM scheme. For example a million plus city is required to put in 30% of total CAPEX and 70% funds to come from Central and State Government then a ULB must have Rs. 30 with it to propose CIP of Rs. 100. Check this basic underlying mathematics/funding structure are observed or not. f. A ULB may have proposed higher investment than simple 30 +70 = 100 formulae by proposing leveraging through borrowing or public private partnership. But borrowing has interest cost and repayment obligation so student should check whether ULB has capacity to pay interest cost and loan installments in future year (Verify Debt Servicing Plan of ULB if it has prepared and submitted) and its FOP has adequately factored this burden or not. g. In PPP option private investor will bring in money but he will have to be paid compensation in one or another manner. A student should see examine whether a concrete plan in this regard is provided by ULB to back its claim to get funds under PPP to finance its future investment.

4. Having done analysis of CIP and FOP as suggested above both the figures are usually put in the context of each other to see holistic picture. Check whether ULB has done such exercise in the CDP, what inference it has drawn and how far realistic are they? 5. Finally remember that this assignment is for internal examination purpose and not a thesis or dissertation for award of final degree. So put in minimal but effective efforts. Copy factual data from original CDP document but do not copy analysis or justification provided by ULB in CDP unless you are presenting critical analysis of it. Student is expected to present his analysis in his own words.

Figure 1 – The CIP – FOP process

Estimating need for funds

Matching need for funds and capacity to raise funds

Estimating capacity to raise funds