Case 046Operating cases and estimationCore
A city spends Rs 600 crore a year more than it collects and wants to issue municipal bonds. How would you close the gap, and how much could it borrow once it has?
1The situation
Port Kaviri Municipal Corporation spends Rs 4,600 crore a year, of which Rs 500 crore is interest and principal on existing loans. Its revenue is Rs 4,000 crore: 40% property tax, 35% grants from the state, and 25% fees and charges for water, parking, licences and building permits.
The city collects only 55% of the property tax it bills; peer cities of its size collect about 85%. Its commissioner wants to issue municipal bonds to fund a new drainage system and asks how to close the gap first.
2Your task
How would you close the Rs 600 crore gap, in what order, and how much could Port Kaviri borrow once it has?
Quick check
If Port Kaviri collected property tax at the peer rate of 85%, how much extra revenue would that bring?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Fix collection first: moving property tax collection from 55% to 70% brings in Rs 436 crore, a 10% fee revision Rs 100 crore and a 2% cut in non-debt spending Rs 82 crore, closing the gap with Rs 18 crore to spare. At the peer rate of 85% the surplus before debt service reaches Rs 955 crore, 1.9x existing debt service, and at a 1.25x cover test the city could carry about Rs 264 crore of new annual debt service, roughly Rs 1,693 crore of ten-year bonds at 9%. Until collection is fixed it cannot borrow at all.
Step 1Where does the Rs 600 crore actually leak?
A shopkeeper who writes bills for Rs 100 but is paid for Rs 55 does not have a pricing problem; he has a collection problem. Port Kaviri bills about Rs 2,909 crore of property tax and collects Rs 1,600 crore; the Rs 1,309 crore it fails to collect is more than twice the gap. The arithmetic matters: candidates who multiply Rs 1,600 crore by 30 points get Rs 480 crore and undersize the fix, because Rs 1,600 crore is already the post-leak figure. Grants are the state's money and cannot be grown by the city; fees can be raised but are politically visible; spending cuts hurt services. Collection is the one lever that costs nothing in services and nothing in new rates.
Step 2In what order do you close it, and how much does each step give?
Sequence by what the city controls and how fast it works. First, collection: moving from 55% to a realistic 70% within two years, through updated property records, online payment and enforcement on the largest defaulters, brings Rs 436 crore. Second, a 10% fee revision on Rs 1,000 crore of fees brings Rs 100 crore. Third, a 2% cut in the Rs 4,100 crore of non-debt spending brings Rs 82 crore. Together that is Rs 618 crore against a Rs 600 crore gap. Collection does most of the work and is the step a rating agency will believe only once it sees two years of improving numbers.
Step 3How much can the city borrow, and why not before the fix?
Lenders to a city size debt the way lenders to a company do: on cash available for debt service, with a cover cushion. Today revenue of Rs 4,000 crore less Rs 4,100 crore of non-debt spending leaves nothing for the existing Rs 500 crore of debt service, so there is no capacity at all; at 70% collection the surplus of Rs 518 crore covers existing debt service 1.04x, still no room; at 85% the surplus is Rs 955 crore, 1.9x. Using a debt service coverage ratioCash available for debt service divided by the interest and principal due in the year; lenders set a minimum, often 1.25x or more, before they will lend. of 1.25x, total debt service can be Rs 764 crore, so new debt service of Rs 264 crore a year. At 9% over ten years that supports about Rs 1,693 crore of bonds. The 1.25x cover and the 9% coupon are the framework; confirm the current rating agency thresholds and the municipal bond rules in force before quoting them.
| Case | Revenue | Non-debt spending | Surplus for debt service | Cover on Rs 500 crore | New bonds at 1.25x |
|---|---|---|---|---|---|
| Today, 55% | 4,000 | 4,100 | -100 | none | none |
| 70% collection, fees, cuts | 4,536 | 4,018 | 518 | 1.04x | none |
| 85% collection, fees, cuts | 4,973 | 4,018 | 955 | 1.91x | about 1,693 |
Close with the order and the honesty. Collection first, because every other lever is smaller and every lender will size the bonds on revenue the city actually receives, not on what it bills. Fees second, cuts third, bonds last. The limit: Rs 1,693 crore is capacity, not a recommendation to borrow all of it, and it depends on the 85% being sustained through a change of commissioner. A credible answer says the drainage project should be sized to the capacity the city has demonstrated, not the capacity it has promised.
Where candidates lose it
The common loss is sizing the collection gain on the Rs 1,600 crore collected rather than the Rs 2,909 crore billed. That halves the biggest lever and makes the gap look harder than it is.
The second is jumping to the bonds. A city with no surplus after existing debt service has no capacity, and proposing Rs 1,700 crore of borrowing before the collection fix is exactly what the commissioner should not be told.
What the interviewer asks next
- What would you want to see in the city's accounts before trusting the 85% target?
- How does a grant that is cut by the state change the borrowing capacity?
- Why might lenders exclude grants from the revenue they size debt on?
- What security could the city offer bondholders, and how would it affect the coupon?
Asked at Morgan Stanley, Utilities, Baltimore, 2025 (Wall Street Oasis): How would you fix the city of baltimore
Company names and figures are illustrative.