In accordance with our criteria for government-related entities (GREs), our
rating approach is based on our view of Rand Water’s:
— “Critical” role as the monopoly bulk water provider to the Gauteng
region, the economic heartland of South Africa. Rand Water is the country’s
largest water board and acts in an agency capacity on behalf of the government
in providing an essential commodity to municipalities, the population, and to
large industrial customers. The South African government does not envisage the
corporatization or privatization of any of the water boards for the
foreseeable future.
— “Integral” link as a not-for-profit, fully government-owned entity
that performs a strategic development role and pays neither dividends nor
taxes. The Department of Water Affairs (DWA), which owns all 14 water boards
in South Africa, closely supervises and approves Rand Water’s strategy, its
budget, and its management to ensure the implementation of government policy.
We continue to monitor the development of Rand Water’s role and link to the
government of South Africa. A change in our assessment of an “almost certain”
likelihood of extraordinary government support could result in us no longer
equalizing the rating on Rand Water with that on the sovereign, in which case
the SACP would become an increasingly important driver of the rating.
Rand Water’s SACP of ‘bbb+’ reflects our assessment of the company’s
“satisfactory” business risk profile and “intermediate” financial risk
profile. The business risk profile is supported by Rand Water’s regional
monopoly position, its government ownership and mandate, and its solid
operational track record. The main constraint on Rand Water’s business risk
profile is the lack of independent regulation, with an annual cost recovery
system that is exposed to political influence and does not always provide for
full and timely cost recovery. In addition, the company has significant
customer concentration.
Our view of Rand Water’s “intermediate” financial risk profile reflects the
company’s currently strong credit metrics, supported by a net cash balance.
The implementation of a five-year South African rand (ZAR) 10 billion
investment program including bulk sanitation and cogeneration projects will
require Rand Water to raise new external debt going forward. We believe that
this requirement, combined with an increase in operating costs, is likely to
weaken Rand Water’s financial profile.
Continued…
