The Hindu Business Line : Centre mulls imposing financial discipline on local bodies

Transparency bid
Local BODIES would have to migrate to double entry system of accounting.
Those PREPARING to tap financial markets for long-term resources.
Few local bodies currrently are creditworthy.

Bangalore June 12 In a bid to impose financial discipline on local bodies, the Centre has indicated that support from the Jawaharlal Nehru Urban Renewal Mission (JNURM) would be conditional.

Sources said that the Ministry of Finance and the Ministry of Urban Development have conveyed that among the conditions was that the municipalities and local bodies would have to migrate entirely to the double entry system of accounting.

This was necessary, the sources said, in order to ensure transparency in the operations of the local bodies. Most local bodies in the country are currently functioning with the single entry accounting system, where there was little transparency.

The Centre's stiff stand comes in the wake of a series of local bodies/municipalities preparing to tap financial markets for long term resources, for refurbishing and creating new civic infrastructure in their respective zones under the aegis of the JNURM.

Few municipalities/local bodies on their own are creditworthy. Local bodies are operating under large deficits, since they have neither been able to revise property taxes nor user charges to commensurate with costs.

Consequently, they are dependent on enhancement mechanisms from the State governments for obtaining favourable credit ratings. In fact most of the borrowings made by municipalities such as Ahmedabad have all been on the support of such guarantees or on a revenue assignment basis for debt servicing.

But the State governments themselves were in a fiscal correction mode. As a result, States were curtailing their guarantee support to the local bodies. Moreover institutions Life Insurance Corporation, traditional lenders to local bodies are also insisting on revenue obligation based lending as an alternative to guarantees.

JNURM created in 2006 for urban renewal is meant to address the credit enhancement needs and at the same time ensure financial viability of civic infrastructure projects.

Under the modified guidelines issued in September 2006, states, local bodies and the centre are expected to enter into a memorandum of understanding undertaking to carry out reforms with specific milestones. The assistance from the JNURM would be linked to achieving these reforms. Besides, the changing accounting methods, the reforms also entail states improve the revenue flows of the local bodies/municipalities, and user charges be levied on the basis of cost recovery. So far about 24 municipalities have signed the tripartite MOUs and more are likely to do so in the coming months, the sources said.

The funds under JNURM are provided in the form of directly to a nodal agency/ special purpose vehicle designated by the State, as grants-in-aid.

The funds for identified projects across cities would be disbursed through designated nodal agency as soft loan or grant-cum-loan or grant. So far projects of close to Rs 24,000 crore involving water supply, sanitation, transport, roads and housing have been sanctioned.

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