CANADA PAPER

Financing Municipalities: Evaluation of Canadian System in Indian Perspective

Submitted By Dr. Krishna Kumar Dwivedi A-14 28th Sept 2011 Financing Municipalities:

Evaluation of Canadian System in Indian Perspective

Introduction: Canada has very efficient and effective municipal governance which manage urban affairs and growth infrastructure in about 400 municipalities. Cities are driving the national growth of Canada and contributing about 50% of its GDP. 80% population of Canada live in cities and agglomeration economies of cities are found to be advantageous in managing transport, housing, water, waste management, policing etc very conveniently. There are three types of government system in Canadian federationFederal, Provincial and Municipalities. Canadian constitution devolves power between federal and provincial governments and does not recognize municipalities. Municipalities are the responsibilities of the provincial governments which can create, merge or eliminate the municipalities. Provincial governments can also authorize municipalities to levy taxes and allow borrowing money with some restrictions. Municipalities are not allowed to run on operating deficit. Provincial governments can also set standard for service delivery. The objective of the paper is to critically evaluate the financing of Canadian municipalities and derive lessons from their experiences and explore and assess their replicability in Indian environment. Financing of Canadian Municipalities: Municipalities have following sources of finance in Canada;
1. Transfer from the Federal Government either conditional or unconditional

2. Grants from the Provincial Governments either conditional or unconditional 3. Own sources- property tax, land transfer tax, amusement tax, hotel tax, vehicle registration tax, poll tax, development charges, user fees etc 4. PPP and Value capture Federal transfer includes gas tax revenue, infrastructure grants and grants for homeless etc. Provincial grants provide matching share or lump sum amount for infrastructure projects. Transfer of fund is largely based on the principal of equalization which is calculated as per following formula.

Process of equalization transfer of fund is based certain parameters including PCI, Population, Fiscal Capacity, Tax Rate etc of municipalities. Unconditional grant formula with weighing factor enthuses fiscal discipline in municipalities and encourage them for better financial management. A threshold of tax rate ensures that municipalities do not levy unreasonably low rate of taxes. There are some variations in some municipality in transfer of fund like Manitoba which transfers the fund to municipalities on Per Capita basis. It also shares its revenue received from Casino, Video Lottery, Fuel Taxes etc with municipalities. Composition of revenue of the municipalities in Canada are as follows:

Main source of revenue of the municipalities are the property tax which accounts 54 % of the total revenue followed by the user fee (22%) and provincial transfer (16%). Federal and provincial transfers are mostly conditional for specific purpose. Unconditional provincial municipal grants are found to be less than 20%. Analysis of trend in revenue receipt shows that the income from property tax and user fee has been increasing while transfer from the governments is decreasing in all the municipalities except Quebec.

There is suitable mechanism to ensure the proper utilization of transferred fund by the municipalities. Audit, regular reporting, program evaluation, performance measuring, oversight committees are some of the tools by which reasonable control is maintained over the municipal expenditure by the governments.

Municipal Expenditure:

Municipalities are responsible to provide following facilities and services:

1. 2. 3. 4.

Water and severs, Roads and streets, Solid waste collection and disposal Public parks and recreation centers Policing and fire service Health, education and social services etc.

5. 6.

Municipalities are also required to carry out planning for urban development. Quebec municipality also incur expenditure for maintain court of law, promotion of tourism, housing etc. In the year 2005 average per capita municipal expenditure in Canada was $ 1814. Ontario spent $2144 per capita which was the highest in Canada. Composition of expenditure by the municipalities in Canada is given below:

Municipalities spend maximum on transport followed by police and garbage disposal. Expenditure trend in municipalities shows that spending on police, housing and solid waste disposal is increasing while expenditure on transport and debt charges is declining. Municipalities in Canada have performed better on fiscal measures. Financial health of the municipalities is sound and all of them are credit worthy with high credit rating. Financial discipline in municipalities has helped them to sustain the quality of the services. However the growing demand for better infrastructure in town areas has raised the requirement of more resources. The gap between what municipalities can afford to deliver and what are expected from them to deliver is widening. Municipalities do not have fiscal tool kits to raise their revenue by expanding taxation. A report of OECD reveals that Canadian municipalities have week powers and resources and they largely depend upon the property taxes which are considered to be the main cause of their growing fiscal challenges.

Indian Urban Local Bodies (ULB): India, the 9th largest economy of the world with $1.632 trillion of GDP is very close to Canada (GDP $1.574 trillion) in terms of national income but other economic indicators of India are poorer than that of Canada. Canadian Per Capita GDP is $ 43100 whereas in India it is only $3390. 37% people in India are BPL but in Canada only 10 % population is poor. 80% Canadian live in cities but urban population in India is only 31.8%. As per Indian Census 2011 there are 7935 towns and cities in India where 37.7 Crores people are living which is more than twelve times of total population of Canada (3.3 Crores ). Out of ten largest cities of the world, three-Mumbai, Kolkata and Delhi are located in India. Numbers of urban local bodies in India are also almost two times of Canada. Urban areas in India contribute 63% to the GDP whereas in Canada such contribution is less than 50%. The infrastructure and delivery of services in Indian urban areas are far behind from Canada. About 50% urban populations in India dont have access to sanitation facilities. 30-40 % of solid waste in India remains uncollected. 20-30% people in Indian cities live in slum areas. Many cities in India are yet to have running water supply. In contrast to Indian scenario Canada has one of the worlds finest urban infrastructures and facilities in its cities. As per The Economist's World's Top 10 Most Liveable Cities 2011 three cities-Vancouver, Toronto and Calgary are from Canada only. As per Quality of Living Survey by Mercer Consulting three cities of Canada find their place in the list of best cities of the world.

Financing Indian Urban Local Bodies: Financial health of Indian ULBs is very pathetic. Financial management, accounting, fiscal discipline and tax collection in Indian ULBs are extremely poor. Most of them have meager source of revenue and largely depend on the grants from the governments. Due to their financial mismanagement and poor revenue planning most of them are not credit worthiness. Though some of them have taken measures to rationalize taxation, user charges, accounting system, introduction of e-governance but most of them are facing severe financial crunch. Due to lack of professionalism and inadequate capacity the Indian urban local bodies are

struggling to cope with the new challenges to manage the growth and development in urban areas. Sources of finance of Indian ULBs are as follows:
1. Transfer of fund by the central government through the states as

recommended by the Central Finance Commission and specific purpose grants against the centrally sponsored schemes.
2. Transfer of fund by the state government as recommended by the State

Finance Commission and also against the specific projects .

3. ULBs own sources like property tax, user charge, development charge etc.

4. Borrowing and Bonds.

5. Income from Public Private Partnership.

Government of India has several programs for development of urban infrastructure, water and sanitation, urban transport etc. Some of them are given. 1.Jawahar Lal Nehru National Urban Renewal Mission 2. Integrated Housing & Slum Development Program 3. Urban Infrastructure Development Scheme for Small & Medium Towns 4. Basic Services to the Urban Poor 5. Urban Infrastructure and Governance 6. Tax Free Municipal Bonds for Urban Local Bodies 7. ADB Assisted North Eastern Region Urban Development Program 8. Improving urban services through Service Level Benchmarking 9. Scheme for Support to Public Private Partnerships in Infrastructure Projects (Viability Gap Funding) The block transfers given to ULBs by the State and Central governments are wholly inadequate and bear no relationship to their requirements. As per report of the High Powered Expert Committee for estimating investment requirements for urban infrastructure services, the urban population in India will increase from present 337 million to 600 million

by 2031and Rs 40 lakhs crores will be required for developing of urban infrastructure to face the challenges of urbanization in India. Canadian Experience and Their Replicability : Critical analysis and comparison of financing of Canadian and Indian municipalities/ULBs reveals some interesting facts:1. Financial health of Canadian municipalities is better than Indian ULBs. Financial management and revenue planning are more effective and efficient in municipalities of Canada than Indian ULBs. 2. Source of revenue of municipalities in both the countries are largely similar but quantum of fund received by Canadian municipalities are much more than the Indian ULBs. 3. Outsourcing of services is more prevalent in Canada whereas most of the services are still delivered directly by the Indian ULBs. As a result Indian ULBs remain over engaged in service delivery and fail to focus on issues related to collection of taxes and planning for improving the revenue. 4. PPP model is very much in use in Canada but the same is yet to pick up in India. Canadian municipalities get a lot of revenues through PPP initiatives whereas Indian ULBs are yet to harness the potential under PPP model. 5. Taxation system and other municipal services are computerized and well integrated in Canada. It reduces processing time and costs and also prevents corrupt practices. E-governance and computerized integrated delivery of services are yet to be started in most of the Indian ULBs . 6. Canada strategically markets it cities to attract businessmen, tourists, students and professionals. They contribute a lot to the Canadian economy. City marketing is still a new concept to Indian cities. 7. Canadian cities have best credit ratings in the world. They get easy and competitive credit from banks whereas most of the Indian ULBs have no rating and hardly get loan from financial institutions. 8. Good governance and efficient revenue planning in the Canadian municipalities have resulted in better revenue earning. Inefficient governance, poor capacity, corruption, strike etc in Indian ULBs are affecting the overall service delivery and poor revenue to them. Indian ULBs may learn a lot from Canadian municipalities. Financial management, revenue planning, good governance, computerized and integrated delivery of services, online collection of user charge, taxes, fee etc, city marketing, use of PPP model for revenue earning, rationalization of taxation, credit rating and borrowing at lower rate of interest are some of the

areas which may be adopted and replicated in Indian context with necessary customization. Conclusion: India being the one of the fastest growing economy of the world will witness rapid urbanization in coming years. Huge infrastructure and facilities will be required to cope up with the challenges of urbanization. The present financing system of ULBs is inefficient and not capable to manage the growth and development in urban areas. Immediate reforms and initiatives are required to tone up the ULBs and improve their financial management. Canada having the experience of developing and managing the finest cities of the world can be a role model to learn several lessons. Many of the initiatives and actions which improved the financial health of Canadian municipalities and got the best credit rating may be replicated in India with proper customization with local needs. It may pave the way to Indian cities to be one of the finest and best cities of the world.