Electricity hikes a challenge for municipalities

The latest electricity tariff increases announced in South Africa will likely add to the liquidity pressures on the country's municipalities, as they purchase electricity from national utility Eskom and sell it on to consumers, Moody's Investors Service said on Thursday.

"While Moody's does not envisage any immediate rating implications for the 24 municipalities it rates in the country, downward rating pressure may occur for those issuers that fail to maintain solid revenue collections from customers and manage the increased expenditure pressure," Moody's said in a report on how the electricity tariff hike may add liquidity pressure on South African municipalities.

The National Energy Regulator of South Africa (Nersa) on Wednesday announced a 24.8% increase in electricity tariffs as from April 2010, and subsequent increases of 25.8% and 25.9% for 2011 and 2012 respectively.

"The new tariff regime will impact South African municipalities directly, as they will need to increase expenditures for electricity purchases and pass on the higher costs to consumers, which will create revenue collection difficulties - a key area of attention for credit analysis in the sector," explained the report's authors Francesco Soldi and Leon Claassen.

Moody's believes that the municipalities' attempt to pass on the tariff increase to consumers may not fully translate into increased cash flows for them.

"Lower-income groups of consumers, in particular, may have difficulties in meeting any tariff increase for core public services such as electricity, in the context of a challenging socio-economic environment.

"We therefore expect municipalities to suffer an increase in bad debts and write-offs of irrecoverable debts," the analysts cautioned.

Moody's said while there should be no immediate rating implications for the municipalities it rates in South Africa, these municipalities will need to adopt an even greater focus on revenue collections and expenditure discipline in order to manage the resulting increased liquidity pressures.

"Liquidity will continue to play a pivotal role in Moody's rating determinations," the ratings agency said.

Inet-Bridge

Posted at 10:10AM Feb 26, 2010 by Editor in Residential  |  Comments[2]