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, public-
private-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 Matching need for funds Estimating

for funds and capacity to raise capacity to raise
funds funds