The rating is constrained by SMB's weak financial profile, inadequate institutional, technical and managerial capacities, inefficient cost recovery systems and its slow progress on important reforms mandated by the Jawaharlal National Urban Renewal mission (JNNURM) programme.
SMB's limitations in providing expected levels of core civic amenities, poor financial management and reporting systems as well as limited potential in raising taxes and harnessing its own sources of income also constrain the ratings.
Additionally, the municipality has a mammoth capex plan of INR25.44bn, which is grossly disproportionate to its revenue base; Fitch does not consider this as having an adverse rating impact since the entire investment is planned under the JNNURM programme and will come as a grant from state and central governments.
Fitch views this arrangement favourably, as it allows SMB the opportunity to create civic infrastructure and build assets that could potentially serve as long-term revenue sources with practically no investment of its own. However, execution challenges in implementing such a large-sized plan remain very high.
The Government of Meghalaya (GoME) and the Meghalaya Urban Development Authority have also proposed to incur costs of operation and maintenance on the existing and proposed civic assets, which is a positive, considering SMB's strained finances.
Shillong, the capital of the state of Meghalaya, is geographically isolated on a mountaineous terrain and poorly connected with the rest of India; Guwahati is the only gateway to Shillong by road and there is neither rail connectivity nor frequent air services. This has impeded the city's economic growth as compared to cities of a similar size and profile, therefore straining the municipal's financials and operating performance.
However, the tourism potential is immense and remains untapped. Fitch believes that tourism could provide a positive impetus to the city's economic growth.
The 74th constitutional amendment, relating to urban local bodies (ULBs), marks a new generation in the history of Indian ULBs as 12 functions will have to be transferred to them. Meghalaya however is governed by the sixth schedule to the Constitution, which supercedes the 74th Constitutional amendment.
As with several other local bodies of similar size, SMB is plagued by several accounting deficiencies, including the misclassification of revenue and capital items, the adoption of a cash-based accounting system and a backlog in finalising its accounts; the most recent data is available only up to FY07.
Fitch expects that implementation of the JNNURM-mandated reforms would redress some of these lacunae in the medium term. SMB's total revenue stood at INR55.63m for FY07 (FY06: INR53.3m), generating a surplus of INR2.67m (FY06: INR0.69m).
The tax revenue to total revenue income ratio was 53% in FY07 (FY06: 59%) and its establishment expenses to total revenue income ratio was 72% in FY07 (FY06: 68%). The agency also notes that repayment of a loan of INR100m from the GoME has reportedly been waived off, though this does not bear any documentary evidence.