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“SMALL IS BEAUTIFUL” EXPERIMENTS OF MUNICIPAL REFORMS IN HYDERABAD

“SMALL IS BEAUTIFUL” EXPERIMENTS OF MUNICIPAL REFORMS IN HYDERABAD. DR .P. K. MOHANTY, IAS EXECUTIVE DIRECTOR CENTRE FOR GOOD GOVERNANCE HYDERABAD. Hyderabad City: Geographical Area & Population.

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“SMALL IS BEAUTIFUL” EXPERIMENTS OF MUNICIPAL REFORMS IN HYDERABAD

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  1. “SMALL IS BEAUTIFUL” EXPERIMENTS OF MUNICIPAL REFORMS IN HYDERABAD DR .P. K. MOHANTY, IAS EXECUTIVE DIRECTOR CENTRE FOR GOOD GOVERNANCE HYDERABAD

  2. Hyderabad City: Geographical Area & Population City Metropolitan District Geographical Area: 69 217 (Square Kms.) Population (Million): 1971 1.62 1.82 1981 2.20 2.61 1991 3.06 4.34 2001 3.63 5.75

  3. Municipal Reforms: Some Guiding Principles • Clarity in municipal functions: Clear jurisdictions & job charts for functionaries; • Clarity in municipal finances: well-defined revenue sources, clear expenditure norms, budgeting and accounting standards; • Matching of municipal finances to functions; • Functional & area cost centres: matching of outputs to funds allocated; • Accountability: upward and downward - of functionaries and processes.

  4. Rationalisation of Functions Restructuring of Municipal Corporation Head Office: Departments Administration Legal Finance Planning Health & Sanitation Community Development Works Traffic & Transportation Zones & Circle Offices: South: Circles 1 & 2 East Circles 3 & 6 West Circles 4 & 5 Secunderabad Secunderabad Division

  5. Rationalisation of Functions Contd… • Municipal “ownership” of new functions: Poverty alleviation, Slum upgradation, Environmental protection, Urban forestry and promotion of ecology; • Cost centres - focus on cost recovery and transparent subsidy to functions; • Salary pegged to no more than 25% of total revenues; • Urban Community Development & Services Fund for poverty alleviation; • City Development Fund for capital projects.

  6. Reforms in Municipal Finances Bahl-Linn Guidelines Benefits identifiable - User Beneficiaries identifiable Charges Benefits broadly identifiable - Benefit Identification of Beneficiaries Taxes costly or difficult Neither Benefits nor Generic Beneficiaries identifiable Taxes Administrative expenses Fees & Charges Long-gestation capital Borrowings/ projects & works Bonds

  7. Reforms in Municipal Finances Contd…. • Broad-basing of taxation –`beneficiaries pay’, `users pay’, and `polluters pay’; • Simple and transparent tax assessment and collection systems; • Focus on direct and indirect cost recovery and user charges; • Use of land and land use planning permission as resources for city development; • Self-assessment principle: applied to property tax, trade licensing and advertisement fees;

  8. Reforms in Municipal Finances Contd…. • Involvement of tax-payers and Resident Welfare Associations in `benchmarking’, fixation of taxes and user charges and in provision of services; • Minimisation of concessions, exemptions and discretionary authority; • Visible linkages of local services to local taxes: creation of geographical cost centres; • Informed tax-payers - organised tax education campaign.

  9. Reforms in Municipal Finances:Some Experiments • Property tax Self-Assessment scheme; • Self-Assessment schemes for trade licensing and advertisement fees; • Land and planning permission as resources; • Hyderabad City Development Fund; • Hyderabad Urban Community Development & Services Fund; • Salary Reserve and Pension Funds; • Hyderabad City Development Bond; • Functional budgeting & accrual-based accounting.

  10. Property Tax Reforms: Self-Assessment Scheme • Historic inequity as a potential resource; • Classification of properties and inter-linking of tax data bases; • Property Tax Identification Number (PTIN) for all properties and computerisation of records; • “Slab” rate for “homogeneous” and case by case levy for “heterogeneous” properties; • Involvement of tax-payers in groups in arriving at slab tax rates and in prioritising services. • Tax camps and dialogue with Resident Welfare Association Presidents and Secretaries.

  11. Self-Assessment Scheme: Key Features • Rationale as to “why” self-assessment; • Legal framework for property taxation; • PTIN – Property Tax Identification Number; • Separate forms for filing of returns in respect of residential and non-residential properties; • Commercial properties divided into 10 groups; • Clarity in filing requirement – who has to file return? • Clarity in filing procedure – by whom returns are to be filed and tax to be paid? • Benchmarking - one month honest rent as reference criterion for acceptance of returns;

  12. Self-Assessment Scheme: Key Features Contd… • Procedure for verification of 25% of tax returns; • Penal action in the event of non-filing of returns; • Assurance from the Municipal Corporation: “there shall not be a single case of harassment or over-taxation to honest taxpayers who file their self assessment returns”; • Assistance available from Municipal Corporation – Tax Assistance Cells; • Development message and appeal to taxpayers on development of “their” city; • Linking of services to taxes paid - broad formulae.

  13. Figure 1 Municipal Corporation of Hyderabad Property Tax Collected: 1991-92 - 2002-03

  14. Direct & Indirect Cost Recovery: Fee/User Charge Reforms • Self-Assessment of trade licensing fee; • Self-Assessment of advertisement fee – distinction between hoarding & advertisement; • Bulk garbage collection charges; • Administrative charges for littering – enforcement through Nuisance Detection Squad; • Rationalisation of development and betterment (including external betterment) charges; • Introduction of new town planning charges: open space contribution, impact fee, etc.

  15. Figure 2 Municipal Corporation of Hyderabad Trade Licensing Fee Collected: 1991-92 - 2002-03

  16. Figure 3 Municipal Corporation of Hyderabad Advertisement Fee Collected: 1991-92 - 2002-03

  17. Figure 4 Municipal Corporation of Hyderabad Public Works Department Charges:1994-95 - 2002-03

  18. Figure 5 Municipal Corporation of Hyderabad Parks & Plantation Charges: 1994-95 - 2002-03

  19. City Planning as a Resource:Planning-related Fees & Charges • Building permit fee; • Sub-division/Layout charges; • Development charges; • Betterment charges; • External betterment charges; • 5% open space contribution; • Impact fee;

  20. City Planning as a Resource:Planning-related Fees & Charges Contd…. • Road cutting charges; • Storm-water drainage charges; • Parking contribution; • Use of planning permission as a resource; (Road-widening scheme); • Transferable Development Right; • Advertisement charges;

  21. City Planning as a Resource:Planning-related Fees & Charges Contd…. • Forfeiture of security deposit; • Penal amounts for violation; • Demolition charges; • Projection charges; • Building regularisation fee; • Empanelment of licensed personnel; • Sale of bits & pieces of land; • Leasehold to freehold (proposed).

  22. Figure 6 Municipal Corporation of Hyderabad Town Planning Charges: 1992-93 - 2002-03

  23. Figure 7 Municipal Corporation of Hyderabad Betterment (including External Betterment) Charges 1992-93 - 2002-03

  24. City Planning as a Resource:New Town Planning Charges: 1998-99-2001-02 • 5% open space contribution; • Impact fee; • Forfeiture of security deposit; • Penal amount for violations; • Empanelment of licensed personnel. • (Rs. in lakhs) • 1999-2000 2000-2001 2001-2002 • 5% open space 13.25 72.02 71.38 • contribution • Impact fee - 169.21 203.71 • Forfeiture of 59.07 107.39 27.70 • security deposit

  25. City Planning as a Resource:Road Widening Scheme In cases of land freely surrendered for road widening, Commissioner, Municipal Corporation of Hyderabad is authorised to: • grant permission for construction over and above that permitted by prevailing FSI; • permit minor relaxations to building setbacks; • rebuild compound walls and other structures demolished at the Corporation’s cost ; • grant Transferable Development Rights where permitted FSI cannot be used.

  26. City Planning as a Resource:Road Widening Scheme: Achievements Contd….

  27. City Planning as a Resource:Road Widening Scheme: Achievements Contd…. Land taken over free by Municipal Corporation of Hyderabad under Road Widening Scheme while granting building permissions or taking up widening of roads: 1996-2002 Extent taken over: 821,253 Sq. Yards Approximate Market Value of Land taken over: Rs.811.51 Crores

  28. Hyderabad City Development Fund Earmarking city planning-related charges to create a fund for important capital improvement works of city-wide importance • Development charges; • Receipts towards internal/on-site/local amenities including betterment charges; • Receipts towards external/off-site amenities including external betterment charges; • Layout/sub-division/building permit fees;

  29. Hyderabad City Development Fund Contd… • Building regularisation fees; • Impact fees; • Compounding fees; • Projection charges; • Proceeds from purchasable development rights (incentive zoning); • Open space contribution; • Other town planning charges/fees.

  30. Hyderabad Urban Community Development & Services Fund • 20 percent of property tax; • 30 percent of per capita grant; • Receipts under Centrally–sponsored schemes of: Swarna Jayanthi Shahri Rozgar Yojana (SJSRY), National Slum Development Scheme (NSDP), Balika Samrudhi Yojana (BSY), Chief Minister’s Empowerment of Youth (CMEY), Adarsh Basthi Scheme, etc.; • Receipts under other poverty alleviation schemes.

  31. Salary Reserve Fund & Pension Fund • Objectives: • Creation of adequate reserve for salaries and • pension of municipal corporation staff; • Escrowing and using the escrowed funds • as collateral for municipal bonds. • Salary Reserve : Rs. 75.60 Crores • (= One year salary) • Pension Fund : Rs. 25 Crores

  32. Hyderabad City Development Bond Bond size : Rs.82.50 crores Offer opening : March 21, 2002 Offer closing : March 31, 2002 Instrument : Un-secured (no state guarantee), non-convertible, redeemable, tax- free bonds Credit rating : CRISIL AA+SO, ICRA LAA+(SO) Interest rate : 8.5% Tenor : 7 years Escrow : Non-residential property tax, mechanism professional tax, advertisement fee, entertainment tax, stamp duty & town planning charges.

  33. Economics ofHyderabad City Development Bond Earmarking of bond proceeds for development of key infrastructure projects - augmentation of economic growth - economies of scale, scope & agglomeration - enhanced business & trade - capitalisation into land values - growth in tax base - servicing of bonds through the tapping of tax increment – matching of debt-raising & debt-servicing capacities – upward movement on city development spiral.

  34. Expenditure Management & Service Delivery Reforms • Unit rate system of public works; • Out-sourcing of sanitation; • Voluntary garbage disposal scheme; • Community contracting with women’s groups; • NGOs in heath care service delivery; • Co-ordinated service delivery – City Level Co-ordination Committee; • Citizen’s Charter and citizen’s service centre;

  35. Expenditure Management & Service Delivery Reforms Contd… • Building Committee for sanction of permission to major buildings; • Budgeting reforms; • Modified accrual-based accounting; • 100% computerisation of budget, accounts, property tax, works, etc.; • Selected services through e-Seva counters; • e-Hyderabad; • Face-to-Face with Public.

  36. Municipal Reforms: Some Important Results Contd… • Trends in: • Expenditures • Works • Projects • Salary Ratio

  37. Figure 8 Municipal Corporation of Hyderabad Capital Expenditure 1994-95 - 2002-03

  38. Figure 9 Municipal Corporation of Hyderabad Expenditure on Public Works (Capital + Maintenance) 1994-95 - 2001-02

  39. Municipal Corporation of Hyderabad Modern Lighting Programme - No of Points

  40. Municipal Corporation of Hyderabad Modern Lighting Programme - Expenditure (Rs. Crore)

  41. Figure 10 Municipal Corporation of Hyderabad Trends in Salary Ratio as % of Expenditure: 1991-92 - 2002-03

  42. Results of Reforms • Buoyancy in revenue collection: property tax, advertisement fee, trade licensing fee, town planning fees, user charges, etc.; • Reduction in salary expenditure as percentage of total revenues to below 25%; • Significant jump in expenditure on public works (capital + maintenance); • Sizable increase in capital budget; • Highest credit-rating accorded to any municipal bond in the country so far;

  43. Results of Reforms Contd… • Conspicuous improvements in civic amenities & services; • Rise in tax-payers’ confidence & significant increase in the peoples’ willingness to pay; • Close participation of Resident Welfare Associations in both service delivery and tax payment; • Citizen-centric orientation of the Municipal Corporation staff - “People First”;

  44. Results of Reforms Contd… • High ‘visible’ image of the Municipal Corporation as a responsive institution; • Clean & Green City Award for 4 consecutive years at the national level - a unique distinction for any city in India; • Lighting Society of North America Award for street lighting; • Hyderabad rated as “best” destination for IT- enabled services; • Visits by more than 15 Mayors and many dignitaries to Hyderabad to study reforms.

  45. Municipal Reforms: Lessons from Hyderabad Experience • Infrastructure & services: key to city economic • development; • Two major planks of city development policy: • Maximising agglomeration benefits; • Minimising congestion diseconomies; • Agglomeration and congestion are potential • hidden sources of finance in mega cities; • Broadening tax base ought to be a major reform • priority;

  46. Municipal Reforms:Lessons from Hyderabad Experience Contd… • Pre-reform conditions are critically important for designing a reform strategy; • Historic inefficiencies and inequities can be important sources of tax mobilisation in cities; • Land is a potential revenue source for city development - unexploited in many cities; • “Low tax rate – effective tax enforcement” strategy works; • Visibility of tax reform process & results from reform in terms of services important;

  47. Municipal Reforms:Lessons from Hyderabad Experience Contd…. • Application of “known” principles and “best” practices help making reforms acceptable; • Involvement of tax-payers; • Demonstration of tax-service linkage; • Choice of tax calculation to tax-payer - self-assessment; • Incentives for filing and penalties for non-filing of returns; • Simplification of assessment and payment procedures;

  48. Municipal Reforms:Lessons from Hyderabad Experience Contd … • “Mega” city - “small” experiment strategy works; • “Not only is it remarkable that all this has • happened, but that it has happened so fast.” • “Vast schemes, grandiose theories can never • achieve the same benefits as the accumulation • of smaller, consistent, attainable goals. • Hyderabad is one example of what the sum • looks like when the many smaller parts that • actually work are added up”. • ‘Hyderabad, India: the next Silicon Valley?’ • National Geographic, November 2002

  49. THANK YOU DR. P. K. MOHANTY, I. A. S. EXECUTIVE DIRECTOR CENTRE FOR GOOD GOVERNANCE ROAD NO. 25, JUBILEE HILLS, HYDERABAD, ANDHRA PRADESH (INDIA) Tel. No. (+91- 40- 23541952), FAX NO.(+91- 40- 23541953) E-Mail: pkmohanty@cgg.gov.in pkmohanty_cgg@yahoo.com, www.cgg.gov.in

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