51817 African Water Utilities Regional Comparative Utility Creditworthiness Assessment Report Individual credit assessment reports for seven African water utilities by Global Credit Rating Co. GCR T NG GLOBAL CREDI RATI CO. l ts Loca Exper i e obalPr nce Gl ese Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 African Water Utilities Regional Comparative Utility Creditworthiness Assessment Report Compiled by: Marc Joffe Richard Hoffman Melanie Brown This report was commissioned by the Water and Sanitation Program at the request of the African Water Association, and co-funded by the Private-Public Infrastructure Advisory Facility (PPIAF) and the African Development Bank. Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 December 2008 A credit assessment report by the Global Credit Rating Co. (GCR) GCR AfWA First Floor, Block A, Avenue 8 Prolongée Wierda Mews, 4 A la montée du pont Félix Houphouët Boigny, 05 Wierda Road West, Wierda Valley, B.P. 90 Abidjan 05 Sandton, South Africa Côte d'Ivoire AfDB PPIAF Program Management Unit African Development Bank Angle des trois rues: c/o The World Bank, Avenue du Ghana, Rue Pierre de Coubertin, Rue Hedi Nouira, 88 H Street NW, BP. 323 002, Tunis Belvedère, Tunisia Washington, DC 20433 USA. Tel: +-202-458-5588 Water and Sanitation Program - Africa Region Fax: +-202-522-7466 Hill Park Building, World Bank, www.ppiaf.org P.O. Box 30577, ppiaf@ppiaf.org Nairobi, Kenya Phone: (254-20) 322-6334 Fax: (254-20)-322-6386 www.wsp.org wspaf@worldbank.org © Water and Sanitation Program-Africa Region, December 2008 (Revised in October 2009) Credit reports as specified Boxes, tables and figures as specified Photographs courtesy of WSP-Africa All rights reserved. The contents of this publication may be quoted with due credit to the authors and publishing partners, but may not be reproduced, all or in part, without the permission from one of the copyright holders. The Water and Sanitation Program (WSP) is a trust-funded program administered by the World Bank to bring water and sanitation services to the poor. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to WSP or its donors, the World Bank, or its affiliated organizations, or to members of its board of executive directors or the countries they represent. Neither WSP nor the World Bank guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, other information shown on any map in this volume do not imply on the part of WSP or the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The credit ratings and other opinions contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information is given or made by Global Credit Rating Co. ("GCR") in any form or manner whatsoever. Task Team Thomas Fugelsnes, Kameel Virjee, Meera Mehta, Johan Kruger and Chimere Diop (WSP-Africa), Joel Kolker (PPIAF), Christian Lim (AfDB) and Sylvain Usher (AfWA) 2 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 Table of contents Page Number Acknowledgement and Foreword 4-5 SECTION 1: An economic and regulatory overview of water utilities 7 . The economy and human development indicators 7 .2 Water utility business models 4 .3 Performance agreements 5 .4 Management 5 .5 Availability of water and sanitation 5 .6 Regulatory environment, performance agreements and tariff structure 7 .7 Banking system and capital markets 24 SECTION 2: Comparative water utility analysis 31 2.1 Size and profitability statistics 31 2.2 Operating statistics 35 2.3 Efficiency statistics 39 2.4 Debt & liquidity levels and associated credit protection statistics 4 2.5 Capital expenditure and operating estimates 46 2.6 Conclusion 49 SECTION 3: List of ratings assigned and individual rating reports 53 - Athi Water Services Board (AWSB) 55 - Nairobi City Water and Sewerage Company Limited (NCWSC) 63 - National Water and Sewerage Corporation (NWSC) 70 - Office National de L'eau et de L'assainissement (ONEA) 77 - Sènègalaise des Eaux (SDE) 85 - Sociètè Nationale des Eaux du Sènègal (SONES) 93 - Societe Nationale d'Exploitation et de Distribution des Eaux (SONEDE) 0 APPENDIX: Ratiodefinitions 109 3 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 Foreword The gap between funds available to water utilities 2. Nairobi City Water and Sewerage Company and the demand for water infrastructure has grown. (Kenya) There is therefore a need to facilitate the process 3. National Water and Sewerage Corporation of mobilizing additional funding for developing the (Uganda) water sector and ensuring that these investments result in sustainable service delivery. One of the key 4. Office National de L'eau et de L'assainissement actions taken in this regard has been to conduct (Burkina Faso) credit ratings so as to develop a better understanding of the credit worthiness water utilities in Africa. The 5. Sènègalaise des Eaux (Senegal) findings from a sample study are presented in this 6. Sociètè Nationale des Eaux du Sènègal regional report. (Senegal) The analysis is based on data sourced from seven 7. Société Nationale d'Exploitation et de participating water utilities across five African Distribution des Eaux (Tunisia) countries ­ Burkina Faso, Kenya, Senegal, Tunisia and Uganda. The data is then used to calculate proxies for industry statistics. It is expected that the ratings process will be The bulletin's three main sections are: extended to include additional water utilities across the continent, with a view to improving each entity's · An economic and regulatory overview of financial viability. This is a very important step that water utilities. we hope will ultimately result in an extension of · A comparative water utility analysis - this water and sanitation services to all. compares the relative position of the water utilities included in the analysis in terms of their size, efficiency, debt and liquidity measures, Sylvain Usher and detailed credit protection measures. Secretary General African Water Association · Individual water utility ratings and reports - a summary of rating reports undertaken by Global Credit Ratings (GCR). The seven participating water utilities for the credit assessment exercise are: . Athi Water Service Board (Kenya) 4 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 Acknowledgement T his African Water Utilities Regional Comparative Utility Creditworthiness Assessment report was commissioned by the Water and Sanitation Program (WSP) on request by the African Water Association (AfWA), and co-funded by the Private-Public Infrastructure Advisory Facility (PPIAF) and the African Development Bank (AfDB). The report was reviewed at a regional utility workshop held in Dakar, Senegal, in November 2008. The report was compiled by Marc Joffe, Richard Hoffman and Melanie Brown (GCR). Global Credit Ratings would like to take this opportunity to thank the task team, comprised of Thomas Fugelsnes, Kameel Virjee, Meera Mehta, Johan Kruger and Chimere Diop (WSP-Africa), Joel Kolker (PPIAF), Christian Lim (AfDB) and Sylvain Usher (AfWA). The contributions and pivotal role of all the institutions and individuals who supported the preparation of this report is gratefully acknowledged. 5 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 6 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 SECTION 1: AN ECONOMIC AND REGULATORY OVERVIEW OF WATER UTILITIES 1.1 The economy and human services, and in turn to ascertain a utility's capacity to extend services to its target population. development indicators Among the parameters we examine is the nature of the labour market. The key aspects looked at are Our analysis of the economic structure of a water unemployment levels, income levels (measured by utility, for the purpose of according the utility a credit per capita income and per capita gross domestic rating, revolves around a fundamental understanding product (GDP)), the stability of the employment of the utility's key economic drivers. We therefore market, and employment growth trends. In general, examine the magnitude, diversification and other higher per capita income levels translate into key characteristics of the economic base within increased flexibility to raise taxes. which the utility operates in order to ascertain the Factors that are taken into account when according utility's fiscal health and stability of revenue growth. credit ratings include: Sound economies are typically underpinned by a · The absolute size and density of the growing revenue and output base, private and public population. investment, construction activity and a diversified retail sales sector. Economies that grow too rapidly · The historical and projected growth rate ­ usually place excessive strain on their infrastructure, stable or moderately growing populations while declining economies are viewed unfavorably are considered optimal, while declining for credit rating purposes, due to diminished revenue populations or rapidly growing populations receipts and increased concentration levels. are generally viewed unfavourably. We have analysed the demographic composition · The stratification of the age profile, including in conjunction with economic and infrastructural an analysis of the dependent population. development in order to gain a thorough understanding of the socio-economic status of · The prosperity of the local population, each water utility's area of jurisdiction. In emerging measured by per capita GDP and income or under-developed economies such an integrated levels, relative to regional and national analysis is particularly important for ascertaining the averages. ability of a population to influence demand for water 7 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 BURKINA FASO country has attained this economic accomplishment while keeping its inflation rate at an efficient level: 2007 realised inflation of 2 percent (2006: 2.4 Economic overview percent), a number significantly lower than the 6.4 percent recorded in 2005, mainly due to healthy Burkina Faso has experienced fairly healthy long- food-crop production and sufficient supply to the term economic growth, as evidenced by its average markets. annual GDP growth of 5.9 percent over the period 997-2006. The economic growth rate for 2006 The monetary indicators for Burkina Faso are was 6. percent (2005: 7. percent), although the reflective of its economic improvement. The estimated figure for 2007 equates to 4.3 percent. low inflationary measures mentioned above are Projections, however, indicate a modest recovery, projected] to remain subdued for both 2008 as 2008's growth rate stands at a forecast 4.7 and 2009, and this maintenance of purchasing percent. It is noted that Burkina Faso's growth for power has been aided by currency appreciation. 2006 surpasses the rate achieved by the West As a member of the West African Economic and African Economic and Monetary Union (WAEMU) for Monetary Union, Burkina Faso's monetary policy, the same period, which averaged 3. percent. The defined by the Central Bank of West African States Social, demographic and economic indicators 2007 Burkina Faso Population: Total 15.3 million Density 55.7 per sq. km Human development: Life expectancy 52.6 Population living below the poverty line 46.4% Human development index 0.37 Adult literacy (2005) 51.4% Infant mortality (under one year) 86.1 per 1,000 Economic data: Nominal GDP (CFA) 3,076bn Nominal GDP (US$) 6.8bn GDP per capita (CFA) 201,388 GDP per capita (US$) 443 GDP growth 4.3% Average CPIX inflation 2.0% Unemployment rate n.a. Gini coefficient 45.4% Source: CIA Fact File 8 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 (Banque Centrale des États de l'Afrique de l'Ouest KENYA (BCEAO)), has the primary objective of controlling inflation. This objective is strongly influenced by the Euro Zone, since the CFA franc, (the common Economic overview currency of the African Financial Community, a group of 4 west and central African countries that The Kenyan economy, which is the regional hub incorporates WAEMU) is pegged to the Euro. The for trade and finance in East Africa, has witnessed exchange rate for 2007 against the United States accelerating GDP growth over the past five- dollar was CFA 492.9, representing a 9 percent yearreaching 6.5 percent growth in 2007 (in 2006, appreciation against CFA 539.9 for 2006 (2005: growth was 6. percent). Tourism and agriculture have CFA 527.5). The current account deficit amounted been at the forefront of this economic expansion, but to a high 4.9 percent of GDP in 2007 (2006: 5.2 strong performances from the financial sector and percent), although the privatisation of the national the growing telecommunications sector have also telecommunications bureau, ONATEL, led to a contributed to GDP growth. Whilst the economy's transaction of US$ 336m, allowing for a balance of outlook remains positive, growth estimates for payments surplus of US$ 379m (2006: US$ 84m). 2008 have had to be revised downwards to around 4 percent (previously around 7 percent) as a direct Social, demographic and economic indicators 2007 Kenya Population: Total 32.0 million Density 65.1 per sq. km Human development: Life expectancy 56.6 Population living below the poverty line 50.0% Human development index 0.52 Adult literacy (2005) 73.6% Infant mortality (under one year) 56.0 per 1,000 Economic data: Nominal GDP (KShs) 1,986bn Nominal GDP (US$) 29.3bn GDP per capita (KShs) 52,337 GDP per capita (US$) 772 GDP growth 6.5% Average CPIX inflation 9.8% Unemployment rate 40.0 Gini coefficient 48.6% Source: CIA Fact File 9 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 consequence of the disruptions caused by the SENEGAL post-election violence. The Kenyan economy, being heavily reliant on rain-fed agriculture with limited agricultural exports Economic overview exposed to world price fluctuations, will continue Senegal saw average GDP growth rates of around to be vulnerable to alternating periods of prosperity 5percent over the last five years on the back of and depression. In addition, poor governance and sound macroeconomic policies and structural corruption have had a negative impact on growth, reforms. However, this rate of growth is considered making it expensive to do business in Kenya, to be insufficient to fulfill the country's long term goal while HIV/AIDS remains an economic burden. "to reduce poverty by half and raise the country Other risks to continuing robust growth include above the group of the world's least-advanced weak infrastructure, drought, and the diminution economies by 205". Therefore, the government of donor funding because of corruption allegations has decided to put in place an accelerated growth levelled against the government. Notwithstanding strategy, officially called the Stratégie de Croissance these setbacks, the formation of the coalition Accélérée (SCA). This aims to complement the government has gone a long way towards allaying country's poverty reduction strategy, which identifies the international finance community's fears about five promising industry clusters as providing the the country, and 2008 saw a reversal in the stance bedrock for faster economic growth, namely agro- of several international bodies with regard to their industry, fishing, tourism, textiles, and information financial involvement in Kenya. and communication technology (ICT). Kenya's annual inflation reflected a steady climb Of major concern to the success of the reform throughout 2007, buoyed by higher food, transport programme is the restructuring of large state- and energy prices. This was despite a marked owned companies in the industrial and energy decline in the first quarter of 2007, when the year-on- sectors: Senelec, the Société Africaine de Raffinage year growth in consumer price index (CPI) reduced (SAR) and Industries Chimiques du Sénégal (ICS). to 5.9 percent, from 5.6 percent in March 2006. The economy is widely believed to have rebounded Inflation soared to 12 percent in December 2007. in 2007, supported by more construction activity, Overall, average inflation for 2007 amounted to an increase in phosphate production (as ICS was 9.8 percent. The inflation outlook for 2008 remains recapitalised) and growth in the service sector. In bleakand was worsened by the post-election 2008, growth is likely to remain sustained and should violence. Energy imports, rising food prices, and be in the range of 5.5 percent to 6., powered by bottlenecks resulting from the economic impasse the public sector's large infrastructure projects. in the first quarter of 2008, continued to drive the month-on month CPI inflation to over 31 percent Inflation was low in the 10-year period to the end of by May 2008, leading to a revision of fiscal and 2007, largely due to the prudent monetary policy of monetary policy strategies. BCEAO (the Central Bank of West African States) and the overhaul of the region's banking system. The fact that the CFA currency, shared by WAEMU 0 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 Social, demographic and economic indicators 2007 Senegal Population: Total 12.2 million Density 65.5 per sq. km Human development: Life expectancy 57.1 Population living below the poverty line 54.0% Human development index 0.50 Adult literacy (2005) 39.3% Infant mortality (under one year) 58.9 per 1,000 Economic data: Nominal GDP (CFA) 5,069.2bn Nominal GDP (US$) 11.2bn GDP per capita (CFA) 394,593 GDP per capita (US$) 868 GDP growth 5.0% Average CPIX inflation 5.9% Unemployment rate 48.0% Gini coefficient 41.3% Source: CIA Fact File countries, is pegged against the Euro, has facilitated Relief Initiative, writing off all Senegal's loans considerable economic stability for these countries from multilateral institutions that were made (with the last major revaluation occurring in 993). before January 2005. Until recently foreign direct Accordingly, the currency has strengthened against investment (FDI) remained at low levels, but this the US dollar in line with the Euro, from an average of trend began to change in during [give time period] CFA 540/US$ in 2006 to CFA 493/US$ in 2007 and and FDI is projected to increase significantly in the further to CFA 437/US$ in the first half of 2008. coming years While the fixed exchange rate policy brought price stability to the sub-region and Senegal in 2007, the economy deviated somewhat on the back of high TUNISIA global energy and food prices. These threats have not subsided, and inflation remained high in 2008. Economic overview The economy received a major boost in 2006 with the decision by G8 countries to adopt the Tunisia's conservative macroeconomic policies International Monetary Fund's Multilateral Debt and commitment to structural reform has steered Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 Social, demographic and economic indicators 2007 Tunisia Population: Total 10.4 million Density 63.5 per sq. km Human development: Life expectancy 75.6 Population living below the poverty line 7.4% Human development index 0.77 Adult literacy (2005) 74.3% Infant mortality (under one year) 23.4 per 1,000 Economic data: Nominal GDP (TD) 43.4bn Nominal GDP (US$) 35.0bn GDP per capita (TD) 4,183 GDP per capita (US$) 3,373 GDP growth 6.3% Average CPIX inflation 3.1% Unemployment rate 14.1% Gini coefficient 39.8% Source: CIA Fact File it in the direction of economic stability. The Tunisian percent); as well as progression in the secondary economy continued to grow in 2007, achieving sectors of machinery and electricity (8 percent), and a growth rate of 6.3 percent of GDP, the highest construction and civil engineering (4.3 percent). The figure in a decade. Tunisia has shown that it is well-diversified Tunisian economy has witnessed capable of maintaining this high degree of economic a decline of the primary sector's contribution to growth over the long term, as demonstrated by the GDP, from 3. percent in 2005 to 2.3 percent average GDP growth rate over the period 999 to in 2006Services are the mainstay of the economy, 2007, amounting to 5 percent. This growth was accounting for 63 percent of GDP , with trade, hotels accompanied by restrained inflation of 3.1 percent and restaurants constituting the largest portion of in 2007 (2006: 4.5 percent). While the external this bracket, with an input to GDP of 7 percent environment is positive, the economy remains over- .Manufacturing contributed 9 percent to GDP reliant on the European Union and more efforts in , while government expenditure in the form of need to be made to diversify. public administration, represented the third-largest portion of GDP in at 4.4 percent. However, despite At sectoral level, economic development has been the prevalence of the service industry within the driven by advancement of the services division, framework of the economy, this sector employed particularly growth in telecommunications (20 2 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 only 22 percent of the working population in , while UGANDA the waning agricultural sector was responsible for the employment of just over half the work force. Unemployment is running at around 4. percent. Economic overview Several major investment projects, were announced Uganda has reflected strong growth over the past by foreign of late, primarily by countries in the Persian few years, with GDP growing at an estimated 6.8 Gulf; and the government is continuously investing in percent in 2007 (2006: 5. percent). Economic infrastructure. The government continues to divest growth was largely driven by an upswing in the itself of state-owned enterprises and is focusing on transport and communications sectors, both of expanding the tax base but still wants to alleviate which have been growing at an annual average rate the fiscal burden on companies. A 10 percent of 9.2 percent since 2002. During this period, the corporate tax on offshore companies, which was country diversified from its strong reliance on the meant to start in 2008, has been postponed to agricultural sector, which contributed 30 percent to 200. GDP in 2006 (200: 4 percent). It is anticipated that future economic growth will be driven by the Social, demographic and economic indicators 2007 Uganda Population: Total 31.4 million Density 132.9 per sq. km Human development: Life expectancy 52.3 Population living below the poverty line 35.0% Human development index 0.51 Adult literacy (2005) 66.8% Infant mortality (under one year) 66.0 per 1,000 Economic data: Nominal GDP (Ushs) 19,097.1bn Nominal GDP (US$) 11.2bn GDP per capita (Ushs) 608,958 GDP per capita (US$) 358 GDP growth 6.8% Average CPIX inflation 6.8% Unemployment rate n.a. Gini coefficient 45.4% Source: CIA Fact File 3 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 transport, power generation and communication although it can be a public company), sectors, as well as the construction industry. Public is paid a fee, which is the price (usually investment was budgeted to rise by 23 percent expressed per m3) for the volume of water in the current fiscal year. Economic risks include produced and sold that is required for the a budgetary dependence on donor funding, the operating company to cover all its costs. fallout from misappropriations of the global HIV The operator's payment is calculated fund for Uganda, and uncertainty about succession according to a formula (set out in a contract), planning in the public sector. which may contain factors designed to reward performance in certain areas. The The power crisis that has plagued the economy operator/service provider collects revenue (constraining growth by an estimated percent from consumers on behalf of the asset- per annum) saw the government introduce diesel holding company, according to the tariffs powered thermal stations and provide a diesel facility set by the state, retains the amount of its for manufacturers (diesel import duty is waived for fee, and remits the difference to the asset manufacturers). Following the securing of funding holding company. by Uganda for the construction of the Bujagali Dam project, and plans to start the Karuma Hydropower Please refer to individual rating reports at the end of plant, the nation's energy constraints are likely to be the regional report for more detail. alleviated in the medium to long term, while remaining a significant risk in the short term. The country's significant dependence on oil was demonstrated 1.3 Performance agreements during the 2008 Kenyan political crisis, with supply disruptions leading to speculative hoarding, thus Performance based agreements, such as contracts undermining price-setting mechanisms. between water authorities and local utilities, provide explicit performance targets and clear incentives to service providers for meeting their targets. Performance benchmarking provides a 1.2 Water utility business models means of evaluating utility performance and guiding Two types of business model s are employed by the continuing performance improvement. In addition, sample of water utilities included in this report, each benchmarking is an important utility management of which is briefly described as follows: tool that enables managers to measure performance against their peers (see the brief overview of each · An asset holding company is responsible individual water utility's performance agreement for (i) owning infrastructure assets; (ii) below). planning and financing asset replacements and network expansions; and (iii) regulating the activities of the private operator. 1.4 Management · The asset operating company or service provider, (typically a private company The presence of strong leaders, supported by solid 4 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 political will, is crucial to the success of a water utility. Table 1. Percentage of the population with access Generally speaking, without broad-based political to basic services (%) support, transformation processes are unlikely to Water Sanitation be implemented. Urban Rural Urban Rural Management's policies and procedures can add Burkina Faso 94 54 42 6 stability to weak credit ratings, or, alternatively, can Kenya 83 46 46 41 negatively affect strong credits. In some cases, within Senegal 92 60 79 34 the seven water utilities reviewed, leadership was Tunisia 99 82 96 65 embodied in one or a small number of individuals, Uganda 87 56 54 41 who had the dynamism and resolve to create bold Source: Joint Monitoring Program for Water Supply and Sanitation proposals and see them through to implementation. It is recommended that in such cases, where utilities are over-reliant on key managers (`key man risk'), Table 2 Table 2 provides an indication of the efforts should be made to mitigate this. number of households with water and sanitation connections in the five countries, broken down into urban and rural coverage. With the exception of Tunisia (and Senegal to a degree), the number 1.5 Availability of water and of urban households with a water connection is sanitation very low, in particular for Uganda. This implies high growth potential for water utilities in these countries, Table 1 provides an indication of water and sanitation although the socio-economic characteristics of availability in each of the five countries selected for each country will largely mitigate development. The the peer comparison, broken down into urban and coverage of rural household water and sanitation rural coverage. As is evident, the water utilities have connections across all five countries is materially low, generally achieved full or close to full coverage with and non-existent in some instances, again implying respect to the provision of water in urban centres. substantial growth potential for water utilities. With respect to rural coverage, however, this is somewhat lower, typically in the region of 50 percent (except for Tunisia at a comparatively stronger 82 percent). Table 2. Household water and sewerage connections (%) In its provision of urban sanitation, Tunisia has Water Sanitation almost reached a hundred percent coverage and Urban Rural Urban Rural is significantly stronger than most of its peers. Burkina Faso 31 0 3 0 Kenya, Burkina Faso and Uganda are materially Kenya 52 12 9 1 weaker than the other countries in the sample. Senegal 75 17 19 2 Rural sanitation coverage is generally very poor, in Tunisia 94 38 75 4 particular in Burkina Faso at just 6 percent. Uganda 7 0 10 0 Source: Joint Monitoring Program for Water Supply and Sanitation 5 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 Most households in African cities (70 percent to 90 1.6 Regulatory environment, percent), and virtually all poor households, deal with performance agreements and their own waste by building latrines or septic tanks themselves, or hiring others to do this. In contrast to tariff structure the more competitive water supply situation, most African public sewer operators are not interested in claiming a monopoly, given the generally very low BURKINA FASO profitability of the systems they operate. In terms of the provision of sanitation, of the five OfficeNationaldeL'eauetde water utility operating companies reviewed, three - L'assainissement(ONEA) Nairobi City Water and Sewerage Company (Kenya), National Water and Sewerage Corporation (Uganda) and Office National de L'eau et de L'assainissement Regulatory (Burkina Faso) - are responsible for the collection and recycling of used water in cities where potable The activities of the Office National de L'eau water is distributed. However, sanitation is not very et de L'assainissement are regulated by the developed in most countries, as is evident in Table Ministry of Agriculture - Water Supply and Fishery 2. In order to address this, major projects (by the Resources, whose parent body is the Directorate three aforementioned utilities) aimed at expanding of Water Resources. The utility is managed by a sanitation distribution to a greater percentage of board of directors, which convenes on a regular the population will be undertaken in the medium to basis in accordance with its statutes. The board long term. Cognisance is taken of the associated submits an annual general report detailing ONEA's funding required to address this, which may serve financial and economic situation to the General to exacerbate the already large capital expenditure Assembly of State Corporations, which is chaired programmes and related borrowing requirements in by the Prime Minister. The General Assembly of the water sector. State Corporations approves ONEA's accounts and makes recommendations, and also provides guidelines to the chairperson of the board and the Table 3. Water volume and household connection managing director, who is appointed by the board. statistics ONEA is, however, subject to restrictions regarding Per capita Population/ its borrowing requirements for all amounts exceeding (litres/day) connection CFA billion or which have terms of payment Burkina Faso 34 28 exceeding one year. The historical reliance on Kenya 100 13 government as a key source of capex funding has Senegal 76 14 also served to prevent the utility from proceeding Tunisia n.a. n.a. with its capex projects in the event that government Uganda 46 28 is not in a position to fund these initiatives. In Source: WSP addition, as government grants can be viewed as 6 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 a non-recurring income source, this may dissuade Water and sanitation sales and tariffs investors, given that they are more likely to lend to an entity displaying consistent predictable revenue Tariffs reflect, as far as is possible, the revenue flows. More recently, it is noted that the Burkina necessary to cover all costs. A tariff review is Faso government is moving away from direct conducted every five years. ONEA lacks the financial investment in the water sector. This could impact autonomy to set tariffs, however it is empowered to ONEA's financial position if alternative funding (and does) propose tariff structures to its board of sources are not available (cognisance is taken of directors, based on its requirements. Once board the existing borrowing restrictions, which present a approval is obtained, the proposal is forwarded to difficulty with respect to sourcing alternative funding the Council of Ministers for consideration and final sources). approval. ONEA displays a fairly stable staffing component, Different tariffs apply to different consumer sectors with few positions open at any given time. However, based on consumption, with larger consumers it appears that salary reviews could be subject to subsidising smaller consumers, while larger centres some level of intervention from government. in the service area support small centres that are in deficit. As at July 1, 2008, the following charges were in place: Performance agreements · CFA 88 for 0m3 to 8m3 ONEA operates on the basis of triennial contracts, · CFA 430 for 9m3 to 5m3 which state the commitments of government in relation to water sector management, and clearly · CFA 509 for 6m3 to 30m3 establish performance targets and indicators. · CFA ,040 for +30m3. The latest contract outlines commitments and determines technical, financial and commercial objectives, which are evaluated on the performance of 28 indicators. ONEA also works on a contractual basis with municipalities. In addition, ONEA has KENYA signed conventions of partnership with some municipalities that do not have safe drinking water. These conventions provide a contractual Nairobi City Water and Sewerage framework whereby ONEA offers advisory support Company (NCWSC) and Athi Water and technical expertise for the development and Services Board (AWSB) implementation of municipal development plans for supplying drinking water, health and sanitation. Regulatory The regulatory structure comprises the Water Services Regulatory Board (WSRB), whose 7 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 responsibility it is to enforce the Water Act. Under While the regulatory framework appears sound, the Act, the Ministry of Water and Irrigation (MWI) is NCWSC continues to face challenges relating to responsible for policy formulation through the Water political interference and bureaucracy, which in Sector Reform Steering Committee and Water some instances undermine the company's efficiency Sector Reform Secretariat. Falling under the Ministry and decision-making processes. Although the of Water and Irrigation are two regulatory authorities: Water Act of 2002 sought to create a framework in the Water Resources Management Authority and which the government is not directly involved in the the WSRB. The Water Resources Management management and administration of water, it is noted Authority is tasked with the national management that Kenyan government involvement in the sector and regulation of water resources (including the remains material, with ministerial sign-off required issuance of licences for water abstraction from prior to sourcing any substantial new funding. any source, and disposal of treated effluent into Under the current framework, Athi Water Services rivers), while the WSRB oversees the maintenance Board does not own the bulk of the water and of quality, standards and issuance of licences for sewerage assets under its mandate, although it service provision. holds (on trust) and manages these assets. As such, The organisational structure of the Athi Water the water board pays a lease fee to the Nairobi City Services Board (AWSB) includes a board of Council based on a percentage of the lease fees it directors (appointed by the Ministry of Water and receives from NCWSC. Irrigation) with eleven members, each representing various stakeholder interests. The board convenes on a regular basis to discuss the various issues at Performance agreements hand, as well as the utility's strategy, policies and The Nairobi City Water and Sewerage Company the general administration. All members of the has agreed with Athi Water Services Board on board are trained in corporate governance and a list of tasks or targets to improve revenue and procurement procedure practices. reduce costs. These include improving billing and Nairobi City Water and Sewerage Company collection rates, and reducing customer debts and (NCWSC), a private limited company, incorporated unaccounted-for water. In return, during a transition in December 2003 under the Companies Act, period, NCWSC is receiving government support, is wholly owned by the Nairobi City Council. The which includes: company's organisational structure was adopted · Government transfer of labour and the from that of the Water and Sewerage Department payment of ministry wages bill of the Nairobi City Council. The utility is managed by a board of directors comprising eleven members, · Agreement by the ministry to pay its with the managing director being the only executive electricity bill member. The board convenes on a regular basis in accordance with its statutes, but special meetings · Maintenance budget agreed upon with may be called where a need arises. AWSB and provided on a monthly basis. 8 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 Water and sewerage billing and tariffs · Where no meter is installed a monthly flat fee of 200 Kenya shillings (KShs) is charged In the prevailing tariff regime, charges are set for the by the Ministry and NWCPC schemes, and following main components: KShs20 by NCWSC. · Water consumption · Bulk supply to kiosks and private vendors · Meter rent, deposit and services is provided on a (subsidised) flat rate charges (e.g. special reading of meter, tariff of KShs5m3 (Ministry/NWCPC) and reconnection). KShs0m3 (NCWSC). · Water supply to schools and learning institutions is provided at a flat rate of The level of water tariffs in Kenya has remained KShs20 to KShs25 per m3 (depending on unchanged (and not indexed to inflation) over the the permissible water demand) for Ministry/ past 10 years. As such, rising inflation has resulted NWCPC schemes and KShs5 to KShs34 in a considerable compression of margins for the per m3 for NCWSC. Nairobi City Water and Sewerage Company, with tariffs in 2008 close to operation and maintenance · The kiosk/vendor retail tariff is fixed at cost-recovery. Under the legal framework and as KShs2 (Ministry/NWCPC) and at KShs detailed in the tripartite agreement, NCWSC can (NCWSC) per 20-litre jerrycan, which set tariffs based on services provided and costs, corresponds to KShs00 per m3 (Ministry/ but the Athi Water Services Board must review and NWCPC) or KShs50m3 (NCWSC). approve these. Further approval may be required · For metered connections there is a lifeline from the Water Services Regulatory Board or the tariff in place at KShs200 (Ministry/NWCPC) Ministry of Water and Irrigation. As such, pricing is and KShs120 (NCWSC) for the first 10m3 of beyond NCWSC's control, which somewhat limits consumption, which is paid irrespective of its flexibility, as well as revenue growth prospects. the consumption level within this tariff block Although the Athi Water Services Board is not (even if consumers used substantially less directly involved in the sale and provision of water than 0m3). and sewerage services, it is indirectly reliant on tariff levels and water volumes (including water sources · Subsequent tariff blocks are based on an and treatment capacity) sold by its Water Service increasing block tariff structure with a total Providers. of five blocks between 10m3 and 300m3 consumption (Ministry/NWCPC) and a total Except for some minor differences, the Ministry/ of three blocks between 0m3 and 60m3 NWCPC (National Water Conservation and Pipeline consumption (NCWSC). Corporation) and the Nairobi City Water and Sewerage Company have implemented similar tariff structures and consumption charges: The average charge currently is KShs20/m3, which includes metered, unmetered and kiosk customers. 9 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 According to a study carried out by an independent entities. In contrast, SONES is directly responsible third party, water tariffs need to go up by at least for capital investment in the sector (including raising 75 percent to allow the water utilities to become and servicing debt), as well as ensuring the adequate sustainable and able to finance new investments. performance of Sènègalaise des Eaux (SDE). The average charge in 2008 was KShs55/m3, The obligations of SONES pertain to investment in which includes metered, unmetered and kiosk infrastructure (planning, financing and works) and customers. According to a study carried out by an coordination (with the Minister of Water) of tariff independent third party, water tariffs need to go up adjustments, albeit with the right to increase tariffs by at least 75 percent to allow the water utilities vested with the Minister. SDE's specific obligations to become sustainable and able to finance new the full maintenance of the infrastructure, minimum investments. renewals of pipes and connections and replacement of low-value equipment (up to CFA 7 million). Other SDE obligations relate to water quality and the adequate usage of the infrastructure. SDE is a privately-owned water sector operator, SENEGAL with its ultimate parent being the Buoygues Group, one of France's largest industrial conglomerates. This has proven to be of strong structural support Sènègalaise des Eaux (SDE) and Sociètè to the organisation, with technical expertise and Nationale des Eaux du Sènègal (SONES) systems flowing down from Buoygues to SDE. SONES is a state-owned entity, with 99.5 percent Regulatory and legal framework of its shares held by the state and the remaining 0.5 percent held by eight municipalities. Despite The regulation of the water sector in Senegal is this, SONES is governed by private law and enjoys determined by the framework instituted under substantial policy autonomy. The director general the 995/996 water sector reforms. Sectoral of SONES, who is appointed by decree, signed responsibilities (rural and urban, including sanitation) by the President of Senegal, plays a crucial role in ultimately vest with the Minister of Water (Ministre the organisation and oversees the activities of all de l'Hydraulique), with underlying responsibilities organisational departments. The director general and roles designated under the aforementioned reports to a board of directors for key long-term framework. Under the planning contract between decisions. Apart from the director general and the state and Sociètè Nationale des Eaux du assistant director general, the board consists of Sènègal (SONES), the obligations of both parties six members from state ministries, plus one from are clearly defined. The gist of these obligations is the National Assembly, one representative of the that the state performs a monitoring role, with its municipalities, one employee representative and a key task being the setting of tariffs (with assistance representative for water consumers. from SONES) and the provision of assistance with asset financing and collections from government 20 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 Performance agreements F07 the following charges were in place: The responsibilities of SONES and SDE are clearly · Social tranche: CFA9.3/m3 for 0m3 to defined in the performance contract, which provides 20m3 for review of performance targets every two years. · Full tranche: CFA629.9/m3 for 2m3 to The contract is designed to ensure efficiency 40m3 of collections and distribution throughout the remuneration structure. SDE is responsible for all · Deterrent tranche: CFA788.7/m3 for > 40 collections and pays a portion to SONES, subject m3. to performance targets. Thus, SDE loses revenue if collections and efficiency fall below targets, but benefits if they exceed targets. With regard to technical efficiency (accounted-for water), the initial target was set at 76 percent for 996. Subsequently, TUNISIA the targets have been set at 77 percent (997), 80 percent (998), 83 percent (999) and 85 percent SocieteNationaled'Exploitationetde since 2000 (although this target was later delayed Distribution des Eaux (SONEDE) to 2002). The collections efficiency target has remained at 97 percent since 988 (applied to all customers except the public administration). Regulatory It is noted that the operator's water supply rate is based on an indexation formula (established at SONEDE is overseen by the Ministry of Agriculture the time of tender), which adjusts SDE's revenues and Water Resources (MAWR), which formulates to compensate for increases in staff, energy and water sector strategies and coordinates investment iron pipe costs, as well as electromechanical planning and the allocation of resources. As a public equipment. agency, the government is responsible for mobilising financial resources beyond what SONEDE can recover itself through user fees. In addition, the Tariffs Tunisian government directly owns all of the utility's capital and financial assets, while the management SDE has no effective pricing power, as tariffs are of financial assets, operations and maintenance, determined by the Minister of Water with assistance rehabilitation, renewal, and installation of equipment from SONES. Tariffs (benefiting SDE, SONES and is delegated to SONEDE. the state-owned company ONAS) are set in order to cover all costs, both operational and in terms of A non-executive board of directors (state agents or capex spend. A stratified tariff structure is applied to other government employees) governs SONEDE's the industry, whereby different rates are applied to policies and the general administration of its different consumer types and consumption levels. activities. The board convenes at least once per Tariffs have evolved since reform to try to reduce quarter to discuss the various issues at hand, as subsidies to farmers (an objective of reforms). As at well as the utility's future strategy. 2 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 It is noted that in terms of current legislation, Water sales and tariffs ministerial sign-off is required prior to SONEDE being able to source new debt. This hinders the ability SONEDE's tariffs are revised periodically (twice of the utility to quickly change forms of financing, every five years, although, given the 2009 political and limits the autonomy of the utility to take its elections, only one tariff increase is expected own financial decisions and plan with surety. While during the current five-year term), although exact the system of applying for loans from government implementation is not certain. Tariff adjustment generally seems reasonable, utilities must be sure requests are submitted to the Oversight Ministry, that once loans have been approved they will be which has the option to transmit these for evaluation disbursed timeously, because the predictability and to a ministerial council headed by the Prime regularity of such transfers is critical to establish Minister. bankability and access to capital markets. Water tariff structures are applied uniformly across Planning for the drinking water sector is integrated the country. SONEDE's tariff structure has two at the national level through five-year plans. components: a fixed component and a variable These are developed by SONEDE and must be component, which is proportional to consumption. approved by the SONEDE board, the line ministry, The first bracket provides for low-income and the Ministry of Development and International households whose quarterly water consumption Cooperation partners. Planning is followed by the does not exceed 20m3, or the equivalent of 40 creation of an annual budget for operations and liters per day per person. The social tariff results in development, which is synchronized with the plan's a subsidy of over 30 percent of the cost to supply policies and programs. SONEDE is currently on its water. This tariff structure has resulted in improved th plan (2007-20). The historical reliance on coverage and connection rates in poor areas, while government and donor funds as the primary source encouraging cost savings through increasing tariff of capex funding serves to prevent the utility from scales. As at F07 the following charges were in proceeding with its capex projects in the event place: that this funding is not forthcoming. In addition, as · TD0.4 for 0m3 to 20m3 donor funds/government grants can be viewed as a non-recurring income source, this may dissuade · TD0.24 for 2m3 to 40m3 investors given that they are more likely to lend to · TD0.30 for 4m3 to 70m3 an entity displaying consistent predictable revenue flows. · TD0.55 for 7m3 to 50m3 The government and the National Trade Union · TD0.84 for +5m3 participate in salary negotiations every three years: on average, salaries rise by 6 percent over this period. It is also noted that all recruitment of staff requires ministerial approval. 22 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 UGANDA government, NWSC is subject to restrictions regarding its borrowing activity. In addition, the historical reliance on government as a key source National Water and Sewerage of capex funding has prevented the utility from Corporation (NWSC) accessing the commercial finance market. It is noted that more recently the government has been moving away from direct investment in the water Regulatory sector. The National Water and Sewerage Corporation's The corporation's credit policy does not allow operations are governed by the NWSC Statute, for disconnection for the non-payment of water which sets out the functions and operating services, thus directly affecting both operating structure of the corporation, while the Water Act of performance and overall liquidity. 2000 stipulates the utility's jurisdiction and overall regulatory framework. Under the Act, Uganda's Ministry of Water, Lands and Environment (MWLE) Performance agreements has the responsibility of setting national policies and NWSC executes internally delegated management standards for water development and management. contracts with service providers at the township NWSC thus operates under the direction of the level, which include explicit agreed performance MWLE and has to seek authorisation for any targets. These have contributed to increased levels tariff adjustments and major capex activities. The of accountability and overall operating efficiency. regulated and relatively transparent environment Examples of targets include unaccounted-for water, has helped eliminate the inefficiencies of the past, accounts receivable, and connection efficiency. allowing for quicker decision making. However, The management contracts establish the terms water service provision remains a social and political for monthly payment of management fees to the issue, with interference from the government towns, which include performance fees tied to the somewhat undermining the full commercialisation percentage of operational targets achieved and of the corporation. additional incentive fees tied to improvements in The utility is directed by a board of directors on behalf the cash-operating margin. The contracts also of the Government of Uganda, which convenes include penalties in the form of withheld payment on a regular basis in accordance with its statutes. for persistent failure to achieve certain targets. The board comprises nine government appointed directors and the Managing Director (MD). The MD, who is responsible for the day-to-day management Water and sanitation sales and tariffs of the utility, leads the management team, which With regard to the setting of tariffs, the government meets on a regular basis. Quarterly reviews are determines policy and sets tariffs, as well as ensures undertaken of all business units. service quality levels. Notwithstanding this, NWSC Following the capitalisation of debt by the does have the authority to study tariff changes and 23 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 propose appropriate tariffs, in line with achieving encouraged privatisation. Despite these measures, targets set in its mandate. However, the corporation however, intermediation remains low. All major has not been able to successfully propose real banks have varying degrees of foreign ownership, tariff increases. The following charges (in Ugandan primarily by France and other African nations. Credit shillings - Ushs) are currently in place: financing is largely of a short-term nature, which impedes longer-term economic growth, although · Public standpipes - Ushs 688 per m3 some banks do extend medium and long-term · Residential/domestic - Ushs ,064 per m3 credit. The World Bank, the European Union, the African Development Bank and other donors are · Institutional/government - Ushs ,30 per also actively engaged in Burkina Faso. m3 · Industrial/ commercial - First 500m3 per month: Ushs ,76 per m3 Capital markets - 50 to ,500m3 per month: Ushs The Regional Stock Exchange (BRVM) - the stock ,76 per m3 market for the Union Economique et Monétaire Ouest Africaine (UEMOA) region ­ started operating - Over ,500m3 per month: Ushs ,496 in September 998. It is located in Abidjan and per m3. has branches in each of the capital cities of the other UEMOA member states. Its main role is to pool and process stock market orders transmitted 1.7 Banking system and capital by brokerage companies (Sociétés de Gestion et markets d'Intermédiation - SGIs) authorised to negotiate securities quoted on the stock exchange. As of December 2006, 9 brokerage companies were registered in the Union. As of the same date, there has been only one BURKINA FASO brokerage company in Burkina Faso that is licensed to trade on the BRVM. The BRVM is regulated by the CREPMF whose responsibilities include the Banking sector promulgation of policies and procedures to regulate The banking sector comprises six commercial the Regional Stock Exchange, and the promotion of and three specialised credit institutions called a regional bond market. In order to list on the BRVM, Etablissments Finacieres. The financial system all bond issues must be guaranteed by an approved of Burkina Faso is integrated on a regional level, financial institution, a development financial with the Central Bank of West African States institution, a guarantee fund, or the parent company. (BCEAO) supervising the banking sector and This regulation , however, currently, in the process of finance institutions. A series of reforms in the 1990s being amended to provide for independent ratings. limited state ownership in banking institutions, and At the end of December 2006, the capitalisation of 24 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 the equity market was CFA 2,067bn, whereas the has 54 equity listings in its main and alternative bond market capitalisation stood at CFA4 89bn, investment market segments. The greater economic with CFA 260bn being government bonds. As at sophistication of the population has resulted year-end 2006, 6 securities were listed, including in strong demand for all types of investments. 40 shares and 2 bonds, compared to 57 securities Particular interest has been displayed for direct comprising 39 shares and 8 bonds at year-end equity investments on the NSE, supported by 2005. several large initial public offerings since 2006. This trend has significantly bolstered the number of private investors on the NSE. KENYA The Capital Markets Authority (CMA) was established under the Capital Markets Authority Act (renamed the Capital Markets Act in 2000), Banking sector which became operational from December 989. The CMA is responsible for the licensing, regulation The banking industry in Kenya is governed by the and supervision of all operators in the capital Companies Act, the Banking Act, the Central Bank markets. The Capital Markets Advisory Committee of Kenya Act, and the various prudential guidelines consists of eleven appointed representatives from issued by the Central Bank of Kenya. The banking private-sector organizations, and nine ex-officio sector was liberalised in 995 and exchange members representing the CMA, NSE, and other controls lifted. non-commercial organizations. The mandate of There are 46 bank and non-bank financial the committee is to act as a forum for discussion institutions, 15 microfinance institutions and 48 between the Authority and stakeholders on all foreign exchange bureaus. Thirty-five of the banks, matters pertaining to capital markets. most of which are small to medium sized, are locally Liquidity in Kenya poses a particular opportunity for owned. The industry is dominated by a few large Ugandan and Tanzanian debt issuances, in that the banks, most of which are foreign owned, although pension sector regulator in Kenya (the Retirement some are partially locally owned. Six of the major Benefits Authority) classifies Uganda and Tanzania banks are listed on the Nairobi Stock Exchange. as onshore investments. The Retirement Benefits The banks have come together under the Kenya Authority requires that at least 85 percent of pension Bankers Association, which serves as a lobby for assets be invested onshore. Given the limited the banks' interests and also addresses issues existence of debt instruments in Kenya, there is affecting member institutions. appetite to place some of the considerable pension liquidity into instruments issued in Uganda. Capital markets The Nairobi Stock Exchange (NSE) is one of the oldest bourses in sub-Saharan Africa. The NSE 25 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 SENEGAL the share of CBAO, one of Senegal's two largest banks. Microfinancing organisations play a key role in the country's large informal sector. Banking sector Senegal's banking sector is the second largest in the Capital markets Economic Community of West African States (Union Economique et Monétaire Ouest Africaine ­ UEMOA) Senegal's capital markets sector is still in a relative after that of Côte d'Ivoire, with about one-quarter state of infancy. Economic development has of total banking assets. The Senegalese market is traditionally been tied to the general development widely seen as attractive because it is profitable and of the West African region. In 994, the country was its growth prospects are considered to be promising, a founding member of UEMOA. With the creation of especially in the light of the low banking penetration the BRVM (the Regional Stock Exchange) in 998, rate ­ only 5 percent to 6 percent of the population Senegal gained the necessary foundation for the currently holds a bank account. The authorities are modern capital market structure. Although the use trying to combat the low penetration rate of banking of public and private bonds has recently proved services by introducing new legislation, such as that to be the most popular means of raising capital lowering the required monthly income threshold for for investment, it is clear that the BRVM's stock opening an account to around US$ 00 per month. market holds the greatest potential for meeting the capital needs of Senegal's emerging economy. Measures to integrate all of the member countries' Since the signing of the peace deal in Côte d'Ivoire banking systems have also been taken, with the in March 2007, the BRVM 0, which is the index of introduction of an electronic clearing system and the market's top ten firms, has excelled. For 2007, a payment card to be put into circulation shortly. the BRVM 0 index registered a 76 percent gain in The structure of banking credits reveals a clear capitalisation levels. dominance of short term at the expense of longer term credits, and a concentration of credits to the Bonds are increasingly popular with governments country's large companies to the detriment of the in the UEMOA region which require capital to meet small and medium enterprise (SME) sector of the their budget deficit requirements. The potential for economy. the country's regionally oriented capital market is contingent on the members of UEMOA and BRVM There are 7 banks in Senegal, the majority of which taking positive steps. A transition from the traditional are private-sector owned. The year 2007 witnessed commercial bank- and bond-oriented system of a number of banking mergers. The Moroccan bank acquiring capital for investment will also continue to BMCE acquired a 35 percent stake in Bank of gain momentum. With several initial public offerings Africa in March 2007. The second merger involved planned for 2008 and the expectation of a number the subsidiary of the Moroccan bank Attijariwaja, of privatisation projects for Senegalese state- which merged with Banque Sénégalo-Tunisienne owned assets, increased capital market activity is in July 2007. At the end of 2007, Attijariwaja also expected. announced that it was acquiring 79.5 percent of 26 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 TUNISIA market capitalisation of US$ 4bn. Derivative activity comprising modest but growing volumes of foreign exchange forwards completes the capital markets, along with a small secondary bond market. Banking sector Foreign participation has increased gradually and The banking system is regulated by the Central Bank stood at 28.2 percent at the end of 2007. The bourse of Tunisia (BCT). The sector, which was responsible does, however, face a number of key challenges if for 90 percent of financing to the economy in 2006, it is to reach its potential. These include too few comprises 4 deposit banks, eight development listings, insufficient exposure of listed companies to banks, eight offshore banks, and two merchant the stock market (few have more than 20 percent banks. Three public banks maintain a significant to 30 percent public floats); and too few institutional market share and their lack of management investors. Tunisia's new alternative market, designed autonomy makes for slow internal modernisation. to attract companies reluctant to list on the main Credit has been growing strongly, helped by a surge board because of stringent requirements, is a step in consumer credit, and banks have been focusing on in the right direction. However, the market is not improving their portfolios by increasing provisioning. yet sufficiently developed to fulfill its desired role as Branch expansion and cash-dispensers have also a regional financial platform and major source of been a major focus. However, the sector remains corporate investment. one of the weak points in the economy due to over-fragmentation and a dominant public banking sector. Much still needs to be done for the industry to achieve European Union banking standards by 200. The authorities are also aiming for full Dinar UGANDA convertibility by 20. The Tunisian banking sector seems well geared for growth, with a focus on establishing subsidiaries in overseas markets, in Banking sector particular Libya and Algeria. Wide-reaching financial-sector reform followed the spate of bank failures during the mid to late 990s, which saw prudential regulations upgraded to Capital markets better reflect international standards. Procedures In 2006, around 50 percent of investors in bond taken to strengthen the banking system and markets were mutual funds. The government is restore industry confidence included: shutting responsible for 90 percent of bonds issued; these down several distressed banks; the privatization are listed on the stock exchange, and are regulated of the systemically important Uganda Commercial by the Financial Markets Council. Tunisia is a Bank; and the substantial improvement of banking regular issuer of Samurai and Yankee bonds with supervision with the introduction of a risk-based a maximum maturity of 30 years. The exchange is approach. In Uganda, the BoU) has proposed 200 relatively small, in 2006 comprising 48 listings with a as the implementation deadline for Basel II. 27 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 Banking supervision and regulation is outlined in the Capital markets Financial Institutions Act (2004). During 2005, nine new regulations were gazetted, which covered: The Capital Markets Authority (CMA) was established licensing, capital adequacy requirements, credit in 996 following the enactment of the Capital classification and provisioning, limits on credit Markets Authority Statute 996. It is an autonomous classification and large exposures, insider-lending body responsible for promoting, developing and limits, liquidity, corporate governance, ownership regulating the capital markets industry in Uganda, and control, and credit reference bureaus. with the overall objectives of investor protection and market efficiency. Further regulations have been implemented of late or are in advanced stages of implementation Significant progress has been made in the area of The regulations address issues related to money regional co-operation through a forum known as the laundering, consolidated supervision, foreign East African Member States Securities Regulatory exchange business, external audits, prompt Authorities (EASRA), which brings together the corrective actions, mergers, acquisitions and securities regulators and stock exchanges in takeovers, and internal auditors' reporting Kenya, Uganda and Tanzania. EASRA's objective is standards. to harmonise the securities laws and infrastructure of capital markets in the East African region leading Uganda's banking system is small and to common training and conduct of business underdeveloped, defined by a limited number of standards, and cross-border listing of companies commercial banks and a nascent bond market within the region. dominated by a single investor. Despite having grown in 200 ­ albeit from a very low 20 percent of GDP The Ugandan Stock Exchange currently has only ­ by 2005 industry assets still amounted to only 24 six companies listed. In the past bonds were only percent of GDP. The extent of financial deepening issued by the Ugandan government, although three and intermediation in the economy is exceptionally corporate bonds have been listed in recent years. low by international and African standards. As such The capital markets in Uganda have excess the market is not fully efficient in relation to capital liquidity and are continuously seeking longer-term allocation and pricing. Local banks tend to have investments, often matched to the demands of low asset-to-deposit ratios, preferring instead to infrastructure providers. Pricing of such funds is use their deposits to fund treasury bills and bonds. made difficult in the absence of a liquid long-term While the larger banks do have excess liquidity that tail to the Bank of Uganda yield curve. Given such they are willing to deploy in financing medium term pricing difficulties there is potential to mis-price assets (5-year to 7-year tenor), the loan covenants infrastructure issues, thereby complicating planning required under such lending can be onerous. In for potential issuers. addition, given the limited competition within the banking sector (and between banks and the wider Potential infrastructure borrowers have access to capital markets), loan spreads remain high. competing pools of funding in the development finance institutions (DFIs). These institutions are often able to mobilise the required funds using sub- 28 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 sovereign borrower targeted products at rates lower than those available in the local market. These funds are, however, characterised by long approval lead times, frequent currency risks, and again onerous loan covenants. The demand for infrastructure finance is to some degree linked to its availability locally as well as to competition between commercial and concessional finance. However in Uganda the condition of potential issuers is the key demand driver for infrastructure finance. In Uganda the unreformed pension sector has led to a concentration of liquidity with the National Social Security Fund (NSSF). There are other smaller pension funds that have also participated in bond issuances in the past, but the NSSF has acted as a de facto underwriter for most issues. Recently, the NSSF has been engaged in an enquiry into its investment decisions. This enquiry has left the Fund without a functioning investment committee, essentially removing the considerable liquidity it holds from the market. Given the dearth of corporate bond issues in the country, however, the appetite of remaining investors for corporate and infrastructure debt is considerable. But this short-term limitation of NSSF's ability to invest in debt instruments may limit the success of bond issuances in the country. In the longer term, an unreformed pension sector obviously poses a liquidity risk to potential issuers of debt instruments. 29 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 30 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 SECTION 2: COMPARATIVE WATER UTILITY ANALYSIS 2.1 Size and profitability statistics Table 1: Income statement Total revenue Total operating Net income (US$'m)Kenya expenditure F06 F07 F06 F07 F06 F07 Service Providers NCWSC (Kenya) 44.9 45.3 37.4 41.5 7.4 3.4 NWSC (Uganda) 31.9 38.9 29.7 35.2 (9.4) 0.6 ONEA (Burkina Faso) 38.6 48.7 39.9 52.7 2.0 1.4 SDE (Senegal) 96.8 116.2 93.4 118.3 2.3 2.8 SONEDE (Tunisia) 166.0 175.6 161.3 173.0 1.4 0.8 Asset Holding Companies AWSB (Kenya) 7.3 10.2 6.2 9.6 1.1 0.6 SONES (Senegal) 27.9 36.4 22.2 24.8 0.9 2.6 An analysis of the seven water utilities in terms of and sanitation services, namely NWSC (Uganda), total revenue generated over the two-year period NCWSC (Kenya) and ONEA (Burkina Faso), have 2006 to 2007 reveals that the revenue of Tunisian good growth prospects. service provider, SONEDE, is significantly larger Following a spike in NCWSC's revenue in F06, its than that of its counterparts. SONEDE has a higher F07 revenue was largely unchanged, with growth level of coverage than the other utilities ­ within constrained by limited water production capacity the urban areas covered by SONEDE access to (given limited funding for infrastructure development) water services is at roughly 99 percent and in rural and high levels of unaccounted for water. Uganda's areas it is 50 percent. The utility also has a higher NWSC exhibited fairly consistent and strong growth level of water sales, and operates within a stronger in revenue of close to 20 percent in recent years. underlying economy. However, the high level of ONEA (Burkina Faso), AWSB (Kenya) and NWSC coverage limits SONEDE's growth prospects (Uganda) are all recipients of operating grant somewhat, with the other utilities being better funding. In the case of AWSB this is fairly significant positioned for growth in the medium to long term. at roughly 28 percent of the Kenyan utility's income In particular those utilities that also offer sewerage 3 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 in F07. Conversely, SONEDE does not receive any prospects are integrally linked to those of the water operating grants. While operational grant funding distributor. is generally favourably viewed, this is not the case where a water utility is reliant on such funding to Most of the water utilities experienced comparatively meet operational requirements and/or interest higher increases in operating expenditure relative to charges, and where the grants are not predictable/ revenue growth during F07. This could be explained formula based. If such funds had to fall away, there partly by higher exogenous costs (such as fuel and utility would be placed under significant operational energy prices), as well as by the reality that utilities strain. were grappling to contain staff costs and salary increases in an inflationary environment. The returns Measured by revenue, the Kenyan asset holding have been affected by the fact that tariff increases for company AWSB is the smallest of the water utilities some water utilities have been below the prevailing surveyed, which is understandable given that it inflation rate, resulting in margin compression. For commenced operation only in 2004. Nonetheless it SDE, operating expenditure comprises a large has exhibited fairly strong growth since its inception: component of payments to SONES and ONAS this has been largely a result of the change in lease under their compensation arrangement. fee structure, coupled with improved performance by Water Service Providers (WSPs). However, limited water production capacity and high levels of 2.1.1 Aggregate water utility unaccounted for water have constrained AWSB's expenditure revenue growth. In addition, limited funding for The Aggregate Water Utility Expenditure graph infrastructure development has exacerbated this to reflects cumulative expenditure for each water a degree. utility during F06 and F07. As is evident, SONEDE AWSB is mandated with the management and is the largest utility with respect to both operating development of water infrastructure in Nairobi and expenditure and capital expenditure. During F07, the surrounding districts and is responsible for the relative level of capital expenditure, as a proportion contracting out of water and sewerage service of aggregate expenditure, increased for just two provision to Water Service Providers. NCWSC is of the utilities ­ AWSB and SONEDE. ONEA and the asset holding company's largest client in terms SONES reflect comparatively higher levels of capital of revenue, accounting for around 69 percent of expenditure than their counterparts, with ONEA at AWSB's revenue in F07. A similar relationship exists 34 percent and SONES at 54 percent of aggregate in Senegal, whereby SONES is the public asset expenditure. Reflective of the fairly aggressive holding and management company operating investment programmes for the bulk of the water in the urban and semi-urban water sector, while utilities over the next few years, it is expected water distribution is performed by the privately- that water utility capital expenditure will follow a owned company SDE, and sanitation is performed generally increasing trend (relative to aggregate by a further state-owned company ONAS (not one water utility expenditure) for the foreseeable future. of the utilities surveyed). SONES derives most of In the experience of Global Credit Ratings (GCR), its revenue from SDE, and accordingly, its growth water utility service providers operating in a mature 32 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 Table 2: Service Providers Asset Holding Companies Aggregate NCWSC NWSC ONEA SDE SONEDE AWSB SONES water utility (Kenya) (Uganda) (Burkina Faso (Senegal) (Tunisia) (Kenya) (Senegal) expenditure F06 F07 F06 F07 F06 F07 F06 F07 F06 F07 F06 F07 F06 F07 Operating 87.8 89.1 83.4 85.7 42.9 65.7 92.7 94.4 74.7 73.1 94.0 88.9 37.4 46.4 expenditure Capital 12.2 10.9 16.6 14.3 57.1 34.3 7.3 5.6 25.3 26.9 6.0 11.1 62.6 53.6 expenditure Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 33 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 market should ultimately aim for an average level from investment subsidies and non cash accounting of 80 percent operating costs versus 20 percent adjustment), which more than covers the operating capital expenditure. This would naturally be higher loss and contributes to the water utility's net result. for capital-intensive asset holding companies. Continuous and relatively stable increases in With respect to profitability, SONES is significantly the EBITDA (earnings before interest, taxes, stronger than its counterparts, exhibiting a depreciation and amortization) and operating substantial operating profit margin of 33 percent in margins are a good indicator of operating efficiency 2007 (F06: 2 percent). This is in sharp contrast and a basis for potential investors to predict future to the Senegalese water provider, SDE, and the trends. Some of the water utilities evaluated have, Tunisian provider, SONEDE, both of which exhibit however, exhibited erratic or decreasing earnings low operating profit margins of 4.4 percent and 1.5 over the period reviewed, thereby complicating percent respectively. Both the Kenyan entities, which forecasting efficiency. together operate in a similar vein to the Senegalese The ability to manage the debt serviceability cost utilities, reflected sharp decreases in their operating of a water utility is measured through the gross profit margins during F07, with profitability for the and net interest coverage ratios. NCWSC reflects two entities being fairly closely aligned. the strongest level of gross interest coverage In contrast to the other utilities, ONEA has (operating income relative to gross interest charges), continuously posted operating losses, implying albeit that the level of 0.9x attained in F07 was that tariffs are insufficient to address operating significantly down on the 73x cover recorded requirements. Cognisance is, however, taken of in F06: this was driven by a halving of operating the fact that ONEA derives fairly large extraordinary income and a jump in the net interest expense, income (relating to the writing off of depreciation although remaining comfortable. ONEA, by virtue of Table 3: Profitability EBITDA: Operatingprofit EBITDA: average Gross interest Net interest and revenues (%) margin (%) total assets (%) cover (x) cover (x) coverage F06 F07 F06 F07 F06 F07 F06 F07 F06 F07 Service Providers NCWSC (Kenya) 19.3 11.2 17.5 8.9 19.0 9.6 72.9 10.9 72.9 10.9 NWSC (Uganda) 23.9 26.4 7.0 9.7 5.1 5.4 0.4 n.a. 0.4 n.a. ONEA (Burkina Faso) 39.3 38.4 (3.3) (8.1) 4.7 4.8 (0.6) (0.9) (0.7) (0.9) SDE (Senegal) 8.7 9.3 3.6 4.4 11.8 12.1 3.5 5.3 3.6 5.3 SONEDE (Tunisia) 22.0 21.0 2.8 1.5 4.2 3.9 0.6 0.4 3.9 147.4 Asset Holding Companies AWSB (Kenya) 20.3 9.7 19.4 8.1 115.3 25.2 n.a. n.a. n.a. n.a. SONES (Senegal) 89.1 90.2 20.7 33.2 6.0 7.2 0.7 1.4 0.7 1.5 34 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 the continued operating losses posted, continues For SONEDE (Kenya), water tariffs are approved to reflect negative gross and net interest coverage. by the Ministry and are revised periodically (twice AWSB and NWSC are both currently ungeared and every five years), although exact implementation is reflected net finance income for F07. A level of over not certain. Given the timing uncertainty, this makes 5x net interest coverage is considered prudent, it difficult for SONEDE to prepare budgets and although this must be assessed in conjunction with can result in a relative income shortfall. This may the predictability and volatility of earnings, as well require above inflationary tariff increases in future. as future borrowing requirements and the impact In terms of NWSC, the Ugandan cabinet approved the additional interest expense burden will have on an annual indexation policy in order to stop further interest coverage ratios. erosion of tariffs, thus seeing an improvement in water margins. This notwithstanding, tariffs did not result in full cost recovery for the utility. Senegal's 2.2 Operating statistics SDE has no effective pricing power, as tariffs are Under the current regulatory framework, Kenya's determined by the Minister of Water with assistance NCWSC can recommend tariff increases to from the asset holding company SONES. Tariffs, AWSB, which in turn is expected to review and which benefit SDE, SONES and ONAS (the state approve these. However, in the ten years tariffs owned sanitation company), are set in order to cover have remained unchanged as a result of political all costs, both operational and in terms of capex and social pressures, and this has contributed spend. A stratified tariff structure in the Senegalese to a reduction in water margins. Burkina Faso's industry, applies different rates to different consumer ONEA lacks the financial autonomy to set tariffs, types and consumption levels. although it is empowered to and does propose The average tariff measures the notional average tariff structures to its board of directors, based on tariff of the utility. It is not the same as the actual tariff financial requirements. It is also noted that over charged, which may incorporate tariff bands and the past few years the tariff increases approved by applies different tariffs for domestic and industrial the Ministry in Burkina Faso have been lower than customers. Unit operating costs per cubic metre sold inflation. reflect the cost of providing water at the customer Table 4: Tariff statistics Average tariff (US$m3 Unit operating costs OCCR (F07)* sold) (US$m3 sold) Service Providers NCWSC (Kenya) 0.41 0.4 1.03 NWSC (Uganda) 0.74 0.71 1.04 ONEA (Burkina Faso) 1.0 0.64 1.63 SDE (Senegal) 1.01 1.04 0.97 SONEDE (Tunisia) 0.44 0.35 1.26 35 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 take-off point, while the operating cost coverage in the calculation, the amount recovered by the ratio (OCCR) is a key measure of a water utility's service provider is lower. This implies that it would ability to cover its operating and maintenance costs be possible to implement comparatively lower (excluding interest and depreciation) from revenues, tariff increases if utilities significantly improved without reliance on external subsidies. These three collection efforts. In reality, however, affordability is indicators - average tariff, unit operating costs and a key financial constraint in many African countries, OCCR - give some insight into the financial discipline thereby compounding collection efficacy. of a utility and its ability to cover operational costs with revenues from tariffs. In respect of billed water sales, SONEDE is significantly larger than its counterparts and more As is evident in Table 4, two of the participating than three times bigger than SDE, the second water utilities (NCWSC and NWSC) are barely able largest utility in the sample. NWSC (which reflected to cover operational costs from tariff revenues, flat sales in F07) and ONEA are the smallest while SDE is not managing to do so. The average utilities with respects to billed water sales. During tariff per cubic metre of water billed ranges from as F07, Kenya's NCWSC reflected the strongest low as US$ 0.4 for NCWSC to as high as US$.0 level of growth in water sales, at 20 percent. By for SDE. An OCCR value greater than one implies comparison SONEDE, given the mature nature of that revenues from tariffs cover the operating and its market, recorded growth in billed water sales of maintenance costs comfortably, while a value of only 2.4 percent during F07. AWSB and SONES, less than one indicates that a water utility is not able by virtue of the fact that they are responsible for to cover these costs. Of the sample, only ONEA asset distribution, do not reflect any water sales. and SONEDE were fairly comfortably above the break-even point. A water utility's distribution loss is the amount of water that the service provider purchases, but does It should also be noted that the calculations for not sell. This loss may be unaccounted for, or due average tariff per cubic metre of water billed are to theft (through illegal connections), or wastage based on billed water sales rather than actual through faulty meters, or loss during purification collections. When actual collections are used and distribution processes. Inadequate capital Table 5: Water statistics Billed water sales (million Estimated Water distribution losses m3/year) (%) F06 F07 F06 F07 Service Providers NCWSC (Kenya) 85.0 102.0 47.0 45.0 NWSC (Uganda) 40.8 40.8 29.7 32.5 ONEA (Burkina Faso) 36.6 40.1 18.0 18.0 SDE (Senegal) 103.7 108.7 19.8 20.0 SONEDE (Tunisia) 337.2 345.2 16.0 16.7 36 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 expenditure on maintenance is probably a major revenues generated by reducing water losses factor behind high distribution losses, which, in outweigh the costs. turn, results in considerable lost revenues. Poor The East African water utilities experienced maintenance also leads to higher costs down the line significantly higher staff expenditure increases than when infrastructure needs to be replaced or more their West and North African counterparts during extensively repaired. In terms of distribution losses, F07. For SONEDE, staff costs equated to a high special project teams should be established to 46 percent of revenue in F07 (F06: 44 percent), identify problem areas, followed by the deployment which is well above the levels of the other utilities. of task teams to reduce the amount of non-revenue Contributing to the utility's comparatively high staff water. costs, however, is the fact that SONEDE retains Although no exact statistics exist for ONEA, water most functions in-house, while other utilities tend to distribution losses are estimated to be in the range outsource more of their operational tasks. Such high of 8 percent, which is much lower than the losses levels of non-discretionary expenditure do, however, of NCWSC and NWSC, and is comparable to the serve to impede an entity's financial flexibility, and other two service providers. At an average of just concerted steps should be taken to reduce staff over 6 percent (for F06 and F07) SONEDE exhibits expenditure to lower levels over the medium term, the lowest level of distribution losses, while SDE's enabling the freeing up of funds to address other losses are in the region of 20 percent, which are important expenditure items. Staff cost ratios would considered acceptable. By contrast, NCWSC's have been even higher for utilities had there not losses are unsustainable, impacting negatively been unfilled positions - most specifically technical on revenue generation and operating capacity. and engineering posts. While in the long run the aim should be to reduce Over the period surveyed, the best performing utilities unaccounted for water losses to around 20 percent, in terms of containment of staffing costs were the this level should only be pursued if the additional two asset holding companies, AWSB and SONES, Table6:Staffing Staff costs: Staff costs: Increase/ (decrease) Staff per 1,000 revenue (%) operating costs (%) in staff costs (%) connections statistics F06 F07 F06 F07 F06 F07 F06 F07 Service Providers NCWSC (Kenya) 28.7 36.2 34.4 39.5 37.8 22.4 10.6 9.5 NWSC (Uganda) 31.5 33.8 33.3 36.1 (11.3) 27.6 7.0 7.0 ONEA (Burkina Faso) 19.3 17.4 18.7 16.1 2.2 3.9 6.4 4.6 SDE (Senegal) 17.3 15.0 17.1 14.8 9.2 (0.3) 2.6 2.4 SONEDE (Tunisia) 44.2 46.0 45.5 46.7 3.2 6.1 3.0 3.0 Asset Holding Companies AWSB (Kenya) 9.4 9.6 11.0 10.1 75.4 36.8 n.a. n.a. SONES (Senegal) 6.6 5.8 8.1 8.5 23.7 6.8 n.a. n.a. 37 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 with levels of below 0 percent relative to income (currently at 9.5 staff per thousand connections) posted during F06 and F07. Given the more capital- and poor support staff skills remain a challenge, intensive nature of their operations (management with further rationalisation of staff levels and skills and development of water infrastructure), this was development essential. NWSC displays a reasonable somewhat expected. Among the service providers, level of staff efficiency (seven staff members per ONEA and SDE were the most cost effective, thousand connections), although capacity does maintaining staffing ratios relative to both income exist to further reduce this in the medium to long and expenditure below 20 percent in F06 and F07. term. For NCWSC and NWSC, staff costs equated to Table 7 details the broader operational expenditure a comparatively high 36 percent and 34 percent components of each water utility and their relative respectively in F07. contribution to overall operational costs (before net All other things being equal, growth in a water utility's finance costs). For three of the five service providers, number of customers should be accompanied by staff costs comprise the largest component of total an improvement in the ratio of staff to connections, expenditure. For ONEA the largest expenditure item with a well-run organisation requiring proportionally is depreciation, while for SDE the biggest costs are fewer staff members relative to new connections payments to SONES and ONAS. For the asset implemented. SDE and SONEDE employ the holding company, SONES, depreciation accounts lowest number of staff per thousand connections for over 80 percent of expenditure, a direct result implemented. For NCWSC, inefficient staff levels of the nature of its business and historically vast 38 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 Table 7: Staff costs Water & related Electricity & Depreciation Other** Operational purchases* energy expenditure breakdown (%) F06 F07 F06 F07 F06 F07 F06 F07 F06 F07 Service Providers NCWSC (Kenya) 34.4 39.5 20.0 21.0 6.5 6.1 2.0 2.3 37.1 31.1 NWSC (Uganda) 33.3 36.1 8.8 7.8 11.4 17.3 18.0 17.2 28.5 21.6 ONEA (Burkina Faso) 18.7 16.1 15.0 13.5 13.9 11.2 41.3 43.1 11.1 16.1 SDE (Senegal) 17.1 14.8 46.4 47.8 14.3 14.9 5.0 4.8 17.2 17.8 SONEDE (Tunisia) 45.5 46.7 12.4 13.5 9.3 9.8 19.7 19.8 13.1 10.2 Asset Holding Companies AWSB (Kenya) 11.0 10.1 0.0 0.0 0.0 0.0 0.8 1.2 88.2 88.7 SONES (Senegal) 8.1 8.5 0.0 0.0 0.2 0.3 84.3 83.6 7.4 7.7 * Related purchases generally includes water treatment chemicals, water equipment repairs and water conservancy. ** Other typically includes operational and grant expenditure and other administration expenses. In the case of AWSB, other includes lease payments of 39.9% in F07 (F06: 50.5%). capital expenditure. By contrast, given AWSB's NWSC - The corporation's credit control policy relative infancy, it holds a low level of fixed assets, allows customers 4 days to pay their bills; thereafter and accordingly depreciation charges are nominal. NWSC can cut off water supply. The corporation These will gradually accumulate in line with the water has, however, stopped disconnecting customers utility's proposed capital expenditure programme. for non-payment in order to reduce the vandalism of infrastructure. To support this initiative NWSC has appointed an outside debt collector to collect 2.3 Efficiency statistics debts over three months old. The following briefly details the credit control policies ONEA - Private individuals (households) are given of each of the five water distributors. 90 days to pay their accounts (includes notification NCWSC - After reading meters (or in some cases of overdue amounts), after which the water service determining estimates), NCWSC sends a monthly bill is cut off. This is only re-instated once the customer for water and sewerage, allowing customers seven pays at least 50 percent of their historical account days to settle their accounts. Thereafter, another and signs a commitment to pay off the balance. A seven days' notice of intention to disconnect is penalty fee of around US$ 4 for individual accounts given. However, while the law allows the company and US$ for private companies is applicable on to cut off water supply for non-payment, NCWSC overdue accounts. No penalties or disconnections lacks capacity (in terms of manpower) to enforce are applied to the public sector. Bad debts are this provision, as consumers illegally reconnect written off after five years. themselves. 39 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 SDE - Typically, private clients are given three days Table 8 shows that of the seven utilities, five to meet payments, after which their water service is exhibited a deterioration in debt collection during cut-off. However, concessions are made to sensitive F07. In F07, the collection period for NCWSC and clients (such as hospitals) and where clients have ONEA was over 200 days, which is significantly informed SDE of their inability to meet payment. higher than acceptable international norms. It is Nonetheless, late payment carries interest penalties, therefore crucial that increased emphasis be placed whilst fraudulent activity is discouraged by sizeable on efficiency of debt collection until such time as fines. However, SDE is not empowered to cut off the number of debtor days has been lowered water to government entities, which accordingly to at most a hundred days and there has been a account for the overwhelming majority of long- marked improvement in the overall collections as a overdue debtors. percentage of total billings. This will have a positive impact on cash flows. SONEDE - Clients with amounts outstanding for over three months are sent notification of their arrears Of concern is that AWSB exhibited a doubling of its position. After a further 60 days, if payment has not collection period to 86.7 days, which is somewhat been received, SONEDE removes the client's water concerning given that the bulk of its debtors' book meter, and also applies a removal fee charge. This pertains to money owed by the service provider policy is not, however, applicable to public entities. NCWSC (notwithstanding this, AWSB's debtors' SONEDE provides for all outstanding debtors in full days compared favourably to other water utilities). over a five-year period. Twenty percent is provided The same is true for SONES, which exhibited for accounts that are overdue for between one a collection period of over 200 days in F07, with and two years, a further 50 percent is provided for the bulk of these debtors relating to SDE. For accounts overdue for between two and three years, F07, NCWSC's level of debtors' days remained and the remainder for outstanding amounts over the highest at 272 days. Over the longer term, a five years. collection period of between 60 and 90 days should be targeted by the water utilities, which is more in line with internationally accepted norms. Table 8: Credit Days Additional Total days Thereafter Interest/ Disconnection control policies permitted to days permitted water penalty applicable to pay water bill notification to pay disconnection applied for government ­ Service Providers after due date water bill applied overdue departments accounts NCWSC (Kenya) 7 7 14 No Yes No NWSC (Uganda) 14 0 14 No Yes No ONEA (Burkina Faso) 90 0 90 Yes Yes No SDE (Senegal) 3 0 3 Yes Yes No SONEDE (Tunisia) 90 60 150 Yes Yes No 40 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 Table9:Efficiency Collection period (days) Net debtors: revenue (%) Current ratio (:1) F06 F07 F06 F07 F06 F07 Service Providers NCWSC (Kenya) 278.1 272.0 66.2 78.3 4.1 2.6 NWSC (Uganda) 133.4 133.3 36.9 42.0 0.3 3.8 ONEA (Burkina Faso) 188.9 205.7 64.3 56.8 1.2 1.4 SDE (Senegal) 145.9 173.6 47.0 54.2 1.1 1.1 SONEDE (Tunisia) 185.5 190.1 54.0 51.1 1.2 1.2 Asset Holding Companies AWSB (Kenya) 41.3 86.7 19.6 32.0 1.9 1.4 SONES (Senegal) 207.3 207.8 59.9 64.6 3.0 2.9 Excluding AWSB and SONES, a large component negatively impacts a utility's cash flow and often of the water utilities' debtors' books pertain to results in unnecessary borrowings to cover costs. private individuals. Typically private individuals The number of net debtors, as a percentage (except those falling under NWSC) have tended to of revenue, remains high for most of the water pay their water bills on time. This is largely because utilities. Generally speaking, a more conservative failure to pay means disconnection, and because provisioning policy should be implemented for tariff structures usually incorporate a cross subsidy outstanding water collections. While cognisance to the poorer portion of the population. However is taken of the fact that the water utilities have the affordability for private individuals is becoming ability to cut off water supplies, certain debtors an increasing concern, with high increases in the have had outstanding debts for a number of years. cost of living resulting in significant declines in real These debtors should not be reflected as a current household income. asset, and bad debt write offs should be effected In contrast to the better credit record for individuals, when debts are known to be non-recoverable. government administrations generally have very poor payment records, equivalent to over one year's (or in some instances) two years' consumption. 2.4 Debt and liquidity levels and Furthermore, water utilities' credit control policies associated credit protection normally do not allow the disconnection of water statistics supply to government departments, thereby exacerbating this difficulty. It appears, therefore, Table 10 reflects the composition of each of the that credit control policies are too lenient towards seven water utilities' borrowings for F06 and F07. the public sector, and that there is therefore little Having carried an interest-bearing debt of US$ incentive for this sector to pay on time. This 46m on its balance sheet in F06, NWSC became 4 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 ungeared for the first time over the review period in expected to be sourced by AWSB in the short to F07. This followed the conversion of loan stock to medium term to address its vast capital expenditure equity. As such, capacity exists for the corporation requirements. to raise financing from the commercial market. In In terms of borrowings for all the water utilities, this regard, NWSC is in the process of issuing a these are typically sourced through a combination bond to finance a portion of its capital expenditure of the following: ) international funding agencies requirements. directly; 2) international funding agencies, sourced AWSB also reflected an ungeared position for F07. via the government on behalf of the water utility; Although the utility reflects a relatively weak balance and 3) domestic banks. In terms of domestic sheet, capacity exists for the water board to raise borrowings, these are typically small in relation to additional debt to fund new projects, within defined total borrowings and are often used to fund short- limits. Of the remaining five utilities, four reflected an term requirements. With respect to loans sourced increase in borrowings during F07, with SDE largely through international funding agencies, this often unchanged. Having inherited substantial debt exposes the water utility to foreign exchange risk, from the Nairobi City Council (NCC) at inception, although in some instances it is understood that NCWSC continues in its efforts to reduce its level of government assumes the foreign exchange risk on borrowings, which stood at US$ 3.3m as at year- behalf of the water utility. Finally, funds sourced on end F07. behalf of a water utility by government may have a repayment guarantee attached in the event that Given the capital-intensive nature and expected the water utility is itself unable to provide this. In long life of water assets, borrowings also typically the absence of an explicit guarantee, cognisance is exhibit a long maturity profile. Interestingly, AWSB taken of the fact that new borrowings typically require reflected very little or zero debt, which is somewhat ministerial consent (implying implicit government surprising given its mandate of developing new support), particularly when government is also the water infrastructure. New loans are, however, shareholder. Table 10: Borrowings Short term debt Long term debt Total debt (US$'m) F06 F07 F06 F07 F06 F07 Service Providers NCWSC (Kenya) 0.2 3.2 12.2 10.1 12.4 13.3 NWSC (Uganda) 22.5 0.0 23.7 0.0 46.2 0.0 ONEA (Burkina Faso) 5.8 9.1 108.9 121.2 114.7 130.4 SDE (Senegal) 3.1 2.7 19.8 20.0 22.9 22.6 SONEDE (Tunisia) 31.6 25.2 191.5 208.3 223.1 233.5 Asset Holding Companies AWSB (Kenya) 0.0 0.0 0.0 0.0 0.0 0.0 SONES (Senegal) 5.0 5.7 181.2 201.7 186.2 207.5 42 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 2.4.1 Gearing (F06: 607 percent) in F07. As mentioned previously, NWSC and AWSB were ungeared on a gross basis Financial flexibility is assessed in terms of a water in F07, while also exhibiting a fairly strong net cash utility's gearing levels ­ debt to EBITDA (earnings position. Both utilities will, however, be sourcing before interest, taxes, depreciation and amortization) new borrowings in future. Both ONEA and SONEDE and equity ratios. Despite an improvement, given exhibit relatively low levels of debt in relation to their SDE's relatively low capital base, net debt to capital capital base; however, this is comparatively high and reserves remained high at 27 percent in F07 when measured in terms of both gross and net (F06: 329 percent), although net debt to EBITDA debt to EBITDA. amounted to a much more comfortable 85 percent (F06: 260 percent). Net debt was also comfortable relative to total income, amounting to only 7 2.4.2 Liquidity percent in F07 (F06: 23 percent). When compared Overall, the movement in cash holdings was mixed with its geared counterparts, SONEDE displayed a across the water utilities in F07. In particular, comparatively moderate level of net debt to capital SONEDE evidenced a 32 percent decrease during and reserves of 27 percent in F07. All other geared the year, compared to a 65 percent increase for water utilities exhibited reasonably low levels of ONEA. Notwithstanding this, SONEDE remains the gearing on a capitalisation basis (in particular, given largest utility (by some margin) in terms of absolute the capital intensive nature of their business). cash holdings. Overall, most of the geared water For SONES, although the level of debt relative to utilities exhibited relatively unchanged levels of cash capital is considered acceptable, other gearing coverage of short-term debt in F07 (not applicable measures register high. In this respect, net debt to AWSB and NWSC, which had no debt in F07). amounted to a sizeable 543 percent of EBITDA Relative to their peers, SONES and ONEA reflected (F06: 682 percent) and 490 percent of total income comparatively strong cash coverage of short-term Table 11: Net debt: capital & reserves (%) Net debt: EBITDA (%) Capitalisation & gearing* F06 F07 B08 B09 B10 F06 F07 B08 B09 B10 Service Providers NCWSC (Kenya) 63.8 48.9 n.a. n.a. n.a. 149.1 247.9 n.a. n.a. n.a. NWSC (Uganda) 95.8 (4.2) neg. 9.9 22.5 575.2 (59.4) neg. 156.1 n.a. ONEA (Burkina Faso) 46.0 40.7 45.4 55.8 70.0 646.5 544.2 739.2 910.9 1108.2 SDE (Senegal) 328.8 270.6 291.9 405.0 355.7 259.7 184.5 195.5 268.0 232.6 SONEDE (Tunisia) 23.8 27.2 25.6 27.0 29.4 421.0 507.8 448.7 405.8 462.9 Asset Holding Companies AWSB (Kenya) (95.6) (46.4) 35.2 37.5 39.4 (156.3) (185.0) 260.3 335.2 460.4 SONES (Senegal) 70.5 64.4 86.6 87.3 84.5 681.6 542.8 779.8 718.9 644.9 * Forecasts for F06 and F07; budgets for F08, F09 and F10. 43 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 44 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 Cash holdings Cash coverage Days cash on Operating cash Operating cash Table 12: Liquidity (US$'m) of short-term hand (days) flow:totaldebt flow:netdebt debt (x) (%) (%) F06 F07 F06 F07 F06 F07 F06 F07 F06 F07 Service Providers NCWSC (Kenya) 0.2 1.0 1.2 0.3 2.2 8.4 102.8 28.4 104.7 30.8 NWSC (Uganda) 3.4 6.3 0.1 n.a. 35.7 61.5 10.9 n.a 11.7 (143.2) ONEA (Burkina Faso) 12.1 20.0 2.1 2.2 101.4 117.7 8.6 12.0 9.6 14.2 SDE (Senegal) 1.1 1.1 0.4 0.4 7.5 5.7 29.6 47.6 31.1 49.9 SONEDE (Tunisia) 70.6 48.2 2.2 1.9 155.0 97.8 5.2 2.4 7.7 3.0 Asset Holding Companies AWSB (Kenya) 1.7 1.4 n.a. n.a. 103.1 49.5 n.a n.a (52.5) (30.8) SONES (Senegal) 12.7 14.0 2.5 2.4 145.6 143.9 6.3 8.9 6.8 9.6 borrowings of 2.4x and 2.2x respectively in F07. NWSC and ONEA posted healthy increases in their NCWSC, which was driven by a significantly higher respective liquidity levels. For NWSC, liquidity levels component of debt in the short term, reflected a increased to 62 days' cash on hand at the end of decline in its cash coverage of short-term debt to F07 (F06: 36 days), supported by the suspension 0.3x in F07 (F06: .2x). of interest payment on government loans. Both NCWSC and SDE continue to reflect marginal levels One of the key ratios that Global Credit Ratings of cash holdings (for NCWSC, liquidity is expected (GCR) uses in assessing a water utility's liquidity is to improve significantly once the utility has repaid in the days' cash on hand ratio, which is essentially a full the debt inherited from the Nairobi City Council). measure of the entity's ability to cover its operating Such low levels often require the utilisation of short and debt servicing costs. Four of the seven term funding to address operational requirements water utilities exhibited decreases in their level of during the year. days' cash on hand in F07. In particular, AWSB experienced a halving in its ratio to 50 days in F07. Improved operating cash flows for SDE, the This, coupled with the decline in the water board's strongest of the geared water utilities, was reflected operating cash flows over the past three years has in the level of operating cash to total debt increasing served to weaken liquidity and is channelling cash to a healthy 48 percent in F07 (F06: 30 percent). away from capex projects, which have largely been NCWSC also displayed a comparatively strong funded by concessionary capital grants. level of coverage (relative to total and net debt), although this decreased significantly in F07, from a Liquidity is, however, strengthened by the absence level of over a hundred percent in F06. In particular of debt. SONEDE reflected a lower 98 days' cash SONEDE, as well as ONEA and SONES, reflect on hand, down from 55 days in F06 (the highest comparatively weak operating cash coverage of of the water utilities for that year). Conversely, both total and net debt. 45 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 Table 13: Capital Actual Budgeted* expenditure(US$'m) F06 F07 F08 F09 F10 Service Providers NCWSC (Kenya) 5.2 5.1 6.6 8.4 6.8 NWSC (Uganda) 5.9 5.9 28.5 39.1 n.a. ONEA (Burkina Faso) 53.1 27.5 54.3 85.1 78.0 SDE (Senegal) 7.4 7.0 6.0 5.2 5.2 SONEDE (Tunisia) 54.6 63.7 93.5 99.3 107.2 Asset Holding Companies AWSB (Kenya) 0.4 1.2 26.5 47.7 51.3 SONES (Senegal) 37.2 28.6 48.0 34.5 23.1 * Translated at FYE07 closing exchange rate. 2.5 Capital expenditure and historical levels). In addition, through an expected operating estimates increase in the use of interest bearing borrowings, gearing levels are anticipated to rise somewhat for Generally speaking, capex levels are expected to certain water utilities. SONEDE reflected growth in rise in the medium term (for some of the water capital expenditure of 7 percent to US$ 64m in F07, utilities this is expected to be significant relative to confirming the water utility's position as the largest 46 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 investor (in absolute terms) in water infrastructure. F08 to F0; however, AWSB has implemented a A continued expenditure on infrastructure is very aggressive expansionary programme. This expected to see the water utility increase these is reflected in the expected substantial jump in levels further to around US$ 00m per annum for capital expenditure to US$ 26.5m in F08 (F07: the next few years. While ONEA reflected capital US$ .2m), thereafter almost doubling by F0 expenditure only slightly below that of SONEDE in (funded by IDA and AFD loans as concessionary F06, the water utility spent only half this amount in capital grants from the GoK and other development F07. Notwithstanding this, capital expenditure was partners). However, with the majority of AWSB's budgeted to revert to F06 levels in F08, increasing capex targeted towards rehabilitation of water significantly to around US$ 85m and US$ 78m in infrastructure and the development of water and F09 and F0 respectively. sanitation for informal settlements, as opposed to the expansion of existing infrastructure, short term The other relatively large water utility with respect to benefits are expected to remain relatively small. capital expenditure is SONES, which budgeted for a sharp jump in infrastructural spend in F08, with In F07 SONES reflected the highest level of this expected to taper off somewhat in subsequent expenditure on infrastructure relative to revenue, years. While SDE and AWSB are responsible for with ONEA investing the most on infrastructure in asset maintenance and development, infrastructural F06. AWSB, which has an aggressive investment spend remained comparatively low in F06 and F07. programme, has budgeted for capital expenditure This is supported by their level of capital expenditure as a percentage of revenue to increase significantly, to revenue, with SDE representing the lowest at 5.6 to over 300 percent in both F09 and F0. ONEA is percent, and AWSB the third lowest at 2.2 percent, expected to revert to levels in line with F06, while as shown in Table 14. For SDE, capital expenditure NWSC is also expected to see a noticeable increase was budgeted to remain low over the period relative to historical norms. Table 14: Income Actual Budgeted* (US$'m) F06 F07 F08 F09 F10 Service Providers NCWSC (Kenya) 44.9 45.3 49.7 52.1 54.6 NWSC (Uganda) 31.9 38.9 43.1 47.8 n.a. ONEA (Burkina Faso) 38.6 48.7 44.0 46.9 50.2 SDE (Senegal) 96.8 123.4 120.4 126.8 133.9 SONEDE (Tunisia) 166.0 175.6 184.7 198.9 204.7 Asset Holding Companies AWSB (Kenya) 7.3 10.2 11.5 12.7 15.2 SONES (Senegal) 27.9 36.9 38.1 40.3 43.4 * Translated at FYE07 average exchange rate. 47 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 Table 15: Capex: Actual Budgeted* revenue (%) F06 F07 F08 F09 F10 Service Providers NCWSC (Kenya) 11.5 11.3 13.3 16.1 12.5 NWSC (Uganda) 18.6 15.2 66.1 81.8 n.a. ONEA (Burkina Faso) 137.5 56.5 123.4 181.4 155.4 SDE (Senegal) 7.6 5.6 5.0 4.1 3.9 SONEDE (Tunisia) 32.9 36.3 50.6 49.9 52.4 Asset Holding Companies AWSB (Kenya) 6.0 12.2 230.4 375.6 337.5 SONES (Senegal) 133.5 77.7 126.0 85.6 53.2 * Translated at FYE07 exchange rate. Table 16 provides an overview of funding sources for donor agencies, as well as bilateral entities (which the water utilities during F06 and F07. As is evident, underlies the important role these organisations both ONEA and SONES were largely reliant on grant have played in enabling infrastructural development). funding to support their infrastructural projects - in Prior to F07, SONEDE received fairly large grant addition to government grants, the sampled water funds, however, this dipped noticeably from US$ utilities have typically relied on generating much of 27m in F06 to US$ 6.3m in F07. The strongest water their finance from developmental organisations and utilities in terms of funding capital expenditure from Service Providers Asset Holding Companies NCWSC NWSC ONEA SDE SONEDE AWSB (Kenya) SONES Table 16: Funding (Kenya) (Uganda) (Burkina (Senegal) (Tunisia) (Senegal) (US$'m) Faso) F06 F07 F06 F07 F06 F07 F06 F07 F06 F07 Service Providers NCWSC (Kenya) 0.2 1.0 1.2 0.3 2.2 8.4 102.8 28.4 104.7 30.8 NWSC (Uganda) 3.4 6.3 0.1 n.a. 35.7 61.5 10.9 n.a 11.7 (143.2) ONEA (Burkina Faso) 12.1 20.0 2.1 2.2 101.4 117.7 8.6 12.0 9.6 14.2 SDE (Senegal) 1.1 1.1 0.4 0.4 7.5 5.7 29.6 47.6 31.1 49.9 SONEDE (Tunisia) 70.6 48.2 2.2 1.9 155.0 97.8 5.2 2.4 7.7 3.0 Asset Holding Companies AWSB (Kenya) 1.7 1.4 n.a. n.a. 103.1 49.5 n.a n.a (52.5) (30.8) SONES (Senegal) 12.7 14.0 2.5 2.4 145.6 143.9 6.3 8.9 6.8 9.6 48 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 internally generated funds (in relative terms) during improve creditworthiness. This will, in turn, reduce F06 and F07 were NCWSC, NWSC and SDE. the cost of borrowing, which is crucial, given the vast capital expenditure requirements of each water utility. 2.6 Conclusion The current constraints in relation to of the general 2.6.1 Credit rating results and credit quality of water utilities in Africa revolve challenges around socio-economic, structural, administrative and financial issues. Some of the constraints All seven of the water utilities reviewed have been can be addressed in the near term by the utilities accorded investment grade domestic currency themselves, but some can be addressed only in credit ratings. This is important as it enables each the context of a broader national policy framework utility confidently to approach its domestic financial involving the central government. Given continued markets for funding. In some instances these ratings urbanisation and relatively high unemployment, the compare favourably to the ratings accorded by most immediate steps that should be taken revolve GCR to various large entities operating across other around increasing efficiencies and reducing costs. key sectors (within the same countries as those of However, sustainable and material improvements in the participating water utilities). Notwithstanding key credit protection ratios are likely to occur only in this, it is important to note that key credit protection the medium to long term and in the context of broader ratios reflected by some of the African water utilities regulatory and macro economic developments. are not overly conducive to the accordance of the high ratings typically associated with being virtual In summary, the sampled water utilities face various monopoly providers of a life sustaining resource. common challenges, including: In some instances gearing is too high by international · Containment of costs: in some instances, a standards, interest cover is very low, liquidity is poor high proportion of expenditure is generally and internally generated cash flows are insufficient non-discretionary, leaving insufficient funds to to ensure protection, especially in the light of the be allocated to make contributions to capital high operating cost structures in place at the time expenditure. This has been made exacerbated of the survey. Furthermore, notwithstanding the by the high inflationary environment. fact that some of the water utilities in the sample · Working capital management remains exhibit fairly healthy operational performance and constrained by the challenges experienced associated financial statistics (as reflected by with regard to debtors' management. This comparatively high domestic currency ratings), is exacerbated by increased migration into scope exists for each of the water utilities to improve various urban areas, with most of the migrants its respective credit ratings in the medium to longer not being able to afford water services, given term (in some instances by several rating notches). that most are unemployed. The clear inability This can be done through lessons learned during of many of the water utilities to implement the credit ratings and benchmarking exercise, and stringent credit collections processes, and by focussing on the areas highlighted by GCR to to cut off supply to government entities, is a 49 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 major problem, which needs to be addressed. · A lack of technical skills to address the vast This will, in turn, require the necessary political infrastructural requirements. support from governments. · Most importantly, given the high capital · Water utilities' levels of autonomy remain expenditure requirements of most water utilities, overly restricted, in particular pertaining to tariff it is crucial that water tariffs are more aligned approval, borrowing requirements and salary with actual costs (there is a need to translate increases. full cost recovery policy into reality). In most instances, tariffs are extraneously determined · Many of the sampled water utilities are able at government level. This involvement is to fund only a small component of capital understandable in the context of the vital expenditure from internally generated importance of the sector, but in many instances revenue, and have in the past relied heavily sub-inflationary cost increases have been on government grants, donations and other enforced for long periods, while the utilities soft loans to address their infrastructural seem to have limited influence in determining requirements. In addition, some of governments tariffs in practical terms. Establishing a under which the utilities operate are looking transparent, indexed and long-term pricing to move away from direct investment in the structure is crucial for the utilities to provide water sector in the medium to longer term. services in accordance with their mandate and These governments therefore face a major to make the necessary long-term plans with challenge as they need to generate alternate greater certainty. This requires co-ordination forms of funding (for example from the private and buy-in from all key role players, particularly sector) to address the vast capital expenditure government. In this regard, it seems that a requirements. Furthermore, implementing number of lessons can be drawn from steps capital expenditure programmes is in some implemented in Senegal (and more recently instances made difficult, as grant and donor Uganda), as well as in South Africa. funding is not always provided at the time that it is anticipated. The fact that government grants can be viewed as a non-recurring income source, may dissuade investors, given 2.6.2 Domestic debt funding that they are more likely to lend to an entity opportunities and the way displaying consistent predictable revenue forward flows. Utilities and government/donors should It is apparent that the credit ratings and benchmarking work on a formula that provides security and exercise has been favorably received by domestic consistency of yearly transfers, or alternatively banks and other funding institutions. Evidence for develop a financial policy geared towards this could be seen at the educational presentations limiting future government/donor support. This made to the financial sector regarding credit ratings would be likely to enable the utility to finance and the benefits thereof (during the introductory its own activities in the longer term. on-site visits to each water utility), and through the 50 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 level of interest expressed by the financial sector at water utilities, with a view to improving each entity's the final workshop in Dakar, Senegal in November financial viability. 2008. This is particularly encouraging given that the financial sector in Africa has typically perceived the water sector to be of a very high risk. In addition to this, given the current global financial turmoil and re-assessment of lending criteria by many international banks and/or donors, the accordance of domestic currency ratings provides the water utilities with an opportunity to source funding domestically, thereby eliminating currency conversion risk. While increased and ongoing interaction between the water and financial sector is required to better understand the various risks, the progress made of late is very encouraging. Global Credit Ratings (GCR) also notes that most of the water utilities reviewed during this initial credit ratings exercise were considering or already in the process of raising debt funding through their respective domestic capital markets. It is important that independent assessment through credit ratings continues (water utilities must engage directly with credit rating agencies to improve their self assessment) so as to improve each utility's credit rating and hence financial attractiveness to investors. An annual review (or more frequently if required) of each water utility's credit rating is also crucial in terms of maintaining transparency through regular monitoring, as well as widening the investor base available to each entity. This is particularly pertinent in light of the fact that the capital markets in many African countries have excess liquidity and are continuously seeking alternative long-term investments. Finally, benchmarking of water utilities across the African continent must continue so as to enable continuous learning and improvement. It is also hoped that the ratings and benchmarking process will be extended to include additional 5 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 52 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 SECTION 3: LIST OF RATINGS ASSIGNED AND INDIVIDUAL RATING REPORTS Name Short term rating Long term rating Athi Water Service Board A2 BBB+ Nairobi City Water and Sewerage Company A3 BBB National Water and Sewerage Corporation A2 A Office National de L'eau et de L'assainissement (ONEA) A2 BBB+ Sènègalaise des Eaux (SDE) n.a. n.a. Sociètè Nationale des Eaux du Sènègal (SONES) A1 A+ Société Nationale d'Exploitation et de Distribution des Eaux (SONEDE) A1- A 5=Positive rating outlook °= Rating watch 53 Global Credit Rating Co. Africa Water Utility Regional Comparative Utility Creditworthiness Assessment Report December 2008 54 Athi Water Services Board Kenya Water Utility Analysis July 2008 Security class Rating scale Currency Rating Rating watch Expiry date Long term National KShs BBB+ No 07/2009 Short term National KShs A2 Financial data: Rating rationale (US$'m Comparative) The rating is based on the following key factors: 30/06/06 30/06/07 AWSB's significant reliance on the performance of NCWSC KShs/US$ (avg.) 73.7 70.8 (contributing 96% core operating revenue in F07) and the revenue KShs/US$ (close) 74.2 66.8 risk implied, was a significant constraining factor on the rating. Total assets 3.4 5.5 Being a wholly government-owned utility, AWSB has implicit Total debt 0.0 0.0 Total capital support from the Kenyan government. 1.7 2.4 Cash & equiv. 1.7 1.4 A level of comfort is provided by AWSB's sound management Turnover 5.5 7.3 and corporate governance structures. EBITDA 1.1 0.7 AWSB does not own the water assets under its mandate, with NPAT 1.1 0.6 ownership still vesting with the CCN (which has failed to maintain Op. cash flow 0.9 0.4 these assets despite receiving significant lease fee revenue from Market cap. n.a. AWSB). Cognisance is taken of the fact, however, that all new Market share n.a. investment in existing infrastructure will be conducted by AWSB, while it is the intention to transfer all existing assets from CCN to Fundamentals: AWSB by 2012 (at zero cost). AWSB's large operating expense base, driven by the high Athi Water Services Board ("AWSB") is proportion of lease revenue ceded to CCN, has served to a state corporation mandated by the Kenyan Ministry of Water and Irrigation undermine the water board's profitability. ("MWI") (under the Water Act of 2002) Of concern is AWSB's aging debtors and declining days cash on with the management and development hand. of water infrastructure in Nairobi and Total debt funding of KShs5.8bn over the next 4 years, to finance surrounding districts. Following its the expansion of the network and development of water sources, establishment in 2003, AWSB will result in a significant rise in gearing levels going forward. commenced operations in 2004, taking Notwithstanding, this will in turn increase billing and revenue over management of water assets from the City Council of Nairobi ("CCN"). capacity of WSP's. The water board is responsible for the contracting out of water and sewerage Funding and liquidity profile service provision to Water Service Providers ("WSPs"), with Nairobi City While AWSB has remained ungeared over the review period (with Water and Sewerage Company grants largely funding the water board's capex activity), liquidity ("NCWSC") being its largest client. strain is evident. This has been characterised by a significant increase GCR contacts: in working capital absorption, with net debtors increasing to KShs165m in F07 (F06: KShs80m). This resulted in days cash on Jotham Makarudze hand declining to 50 days in F07 from 209 days in F05 (F06: 103 +27 11 784-1771 days). Although the percentage of the debtors book collected declined jotham@globalratings.net to 40% in F07 (F06: 56%), the water board does not provide for bad debts. The water board spent a net amount of KShs88m on capex Melanie Brown projects in F07 (F06: KShs32m), which saw a relative increase in +27 11 784-1771 fixed assets reflected on the balance sheet. brown@globalratings.net Website: www.globalratings.net This document is confidential and issued for the information of clients only. It is subject to copyright and may not be reproduced in whole or in part without the written permission of Global Credit Rating Co. ("GCR"). The credit ratings and other opinions contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information is given or made by GCR in any form or manner whatsoever. Background and is now expected to only be completed by 2012. In order to accurately determine the value of the The formation of Athi Water Services Board assets it holds, AWSB has recently appointed an ("AWSB") in 2003 was a direct result of the independent third party (Lloyd Masika enactment of the Water Act of 2002. The act was Consortium) to carry out an asset valuation setup with the objective of decentralising and exercise. The study determined that assets leased delineating the management of water infrastructure by AWSB had a total market value of KShs8.7bn and the provision of water. Before the formation of and replacement value of KShs21.2bn1. This water service boards, the Ministry of Water and notwithstanding, given the sizeable capital Irrigation ("MWI") administered national water expenditure program in place, the value of the supply and sanitation. Following the passing of the assets owned by CCN will be naturally diluted, Act, MWI appointed AWSB to manage and given the planned investment in these assets. develop water and sewerage assets in Nairobi and surrounding districts. Prior to this appointment, AWSB's areas of coverage are Nairobi City and water assets in Nairobi (the water board's largest surrounding districts of Kajiado, Loitoktok, service area) were managed by the City Council of Kiambu East, Kiambu West, Machakos, Yatta, Nairobi ("CCN"), which currently maintains Makueni, Kibwezi, Thika and Gatundu. ASWB ownership of these assets. currently has 17 WSPs operating under its mandate in these areas. WSPs are mostly private companies Under the Act, the MWI is responsible for policy initially setup by local authorities, but may include formulation through the Water Sector Reform NGOs, and community groups. A large proportion Steering Committee ("WSRSC") and Water Sector of AWSB's operational revenue (96%) is garnered Reform Secretariat ("WSRS"). Falling under the from the Nairobi City Water and Sewerage MWI are two regulatory authorities; Water Company ("NCWSC"). Resources Management Authority ("WRMA") and Water Services Regulatory Board ("WSRB"). A Operating environment Water Services Trust Fund ("WSTF") assists in Economic financing the provision of water services to areas Following years of economic stagnation, Kenya has without financial capacity to develop water seen economic recovery since 2004, and the services. country's macroeconomic environment has AWSB's key functions under the WSRB licence stabilised, notwithstanding the downturn are: occasioned by violence following the December The management and development of water and 2007 elections. The economy grew at 6.1% in sewerage assets in the greater Nairobi area; 2006, up from 5.8% in 2005. It grew a further 6.5% the contraction of Water Service Providers in 2007, even though external development (water companies such as Nairobi City Water assistance to Kenya amounted to only about 5% of and Sewerage Company Ltd) to provide water government spending and about 1% of GDP. On and sewerage services under a Service Provision average, Kenya's economy has grown by 5.1% in Agreement (SPA); and the period 2003-2007, making it one of the fastest the oversight of water and sewerage service growing economies in Sub-Saharan Africa. This provision in its jurisdiction. recovery has been mainly due to improved macroeconomic management and progress in Under the current framework, AWSB does not own structural reform. As a result, public debt has the bulk of the water and sewerage assets under its declined and prices have stabilised. Several mandate, although it holds (on trust) and manages decades of declining economic performance, these assets. As such, the water board pays a however, combined with rapid population growth, leasing fee to the CCN based on a percentage of the translated to increased poverty and worsening lease fees it receives from the Water Service unemployment. Between the 1970s and 2000, the Providers (WSPs). These assets cover number of Kenyans classified as poor grew from approximately 40,000km2 and service a population 29% to about 57%, despite increases in overall per of over 6 million people. In December 2004, the capita incomes.2 Government of Kenya ("GoK") put a transfer plan in place, which sought to facilitate the transfer of The Kenyan economy is largely dependent on the full ownership of water assets from the CCN to agriculture, which accounts for more than a quarter AWSB by June 2006, at zero cost to the water of GDP and employs nearly 75% of the country's board. However, as a result of political resistance, the transfer process has been delayed considerably 1 AWSB Asset Valuation Report, 2007 2 World Bank, 2007 Global Credit Rating Co. ­ Kenya Water Utility Credit Rating Report economically active population. The sector, water abstraction from any source and disposal of together with tourism, manufacturing and treated effluent into rivers). In the event of a telecommunications has underpinned growth in the dispute the case is submitted to the Water Appeals past three years, despite erratic weather patterns. Board, which then has the final decision. AWSB Whilst the economy's outlook remains positive, operates in a fairly regulated environment under growth estimates for 2008 have had to be revised which it has the authority to make certain downwards to around 4% (previously around 7%) operational decisions. However, the legal as a direct consequence of the disruptions caused framework restricts the water board's ability to by the post-election violence. Going forward, the make major capex and policy decisions without Kenyan economy, being heavily reliant on rain-fed approval from WSRB and sometimes the MWI, agriculture and limited agricultural exports which somewhat limits its flexibility and lengthens (exposed to world price fluctuations), will continue the decision-making process. to be vulnerable to alternating periods of prosperity and depression. In addition, poor governance and Operations corruption also have had a negative impact on AWSB's operational framework is set by a growth, making it expensive to do business in tripartite agreement entered into with CCN and Kenya, while another large drag on Kenya's NCWSC, which spells out the roles of all parties economy is the burden of HIV/AIDS. Risks to involved. Although ownership of the assets still continuing robust growth also include weak vests with the CCN, AWSB currently has infrastructure, drought and the diminution of operational control. At present AWSB holds 4 financial flows from donors because of corruption water reservoirs with a combined capacity of allegations leveled against the government. Despite 80,000 megalitres, together with water these setbacks, however, the formation of the infrastructure covering 6,000km2. However, rapid coalition government has gone a long way towards population growth, driven by massive rural-urban allaying the international finance community's migration, has seen Nairobi's population reaching fears about the country, and 2008 has seen a an estimated 3 million people, which continues to reversal in stance of several international bodies place considerable pressure on water assets. In with regards to financial involvement in Kenya. addition, limited water sources, in a region that continues to be highly susceptible to drought, has Kenya's annual inflation reflected a steady climb negatively affected supply. throughout 2007, buoyed by higher food, transport and energy prices. This was despite a marked Given that the water board's main responsibility is decline in the first quarter of 2007, when the y-o-y the maintenance and development of water growth in CPI reduced to 5.9% from 15.6% in infrastructure, daily operations require highly March 2006. Inflation soared to 12% in December technical skills. In this regard, the water board 2007. Overall, average inflation for the year employs 5 engineers with the bulk of the amounted to 9.8%. The inflation outlook for 2008 manpower sourced through district water officers remains bleak and has been worsened by the post- (paid by the MWI). However, capacity constraints election violence. Energy imports, rising food have led to WSPs carrying out certain maintenance prices and bottlenecks resulting from the economic work (then having to submit claims to AWSB). impasse in 1Q 2008 continued to drive the month- This, however, requires express permission from on month CPI inflation to over 31% by May 2008, the water board and due to time and work leading to a revision of fiscal and monetary policy pressures, WSPs often carry out work without strategies. obtaining the required approval. More specifically, AWSC have rejected a claim from NCWSC Regulatory amounting to KShs194m for works executed since Following the enactment of the Water Act of 2002, its inception on the basis of non-compliance with the MWI ceased to be directly involved in the the procedures for delegated works as required by regulation of water services and appointed a the SPA. Given the concentration in revenues, a regulatory authority. The regulatory structure significant level of risk is inherent in that NCWSC comprises the WSRB and WRMA. The WSRB's can withhold lease payments in order to offset responsibility is to enforce the Water Act, including expected reimbursements for delegated works. development and maintenance of quality standards, approval of tariff increases and issuance of licenses Given the low technological component and long for service provision. The WRMA is tasked with useful life of water infrastructure, the level of the national management and regulation of water operational risk is generally considered low for resources (including the issuance of licenses for water utilities. However, given the aging nature of Global Credit Rating Co. ­ Kenya Water Utility Credit Rating Report water assets in AWSB's jurisdiction, operational may constitute unfunded mandates as they generate risk is significantly higher. In this respect, the old relatively small amounts of revenue but yet may infrastructure is a large contributor to the high require substantial capital funding. From a unaccounted-for water (or non-revenue water) - regulatory perspective, the water board is not currently at 45% - as a substantial amount of water required to match the source of revenue with is lost through leaks and burst pipes. These capital expenditure, which heightens this risk. commercial losses are exacerbated by theft, vandalism and poor metre reading & billing Nairobi Water Revenue Structure systems. This results in reduced revenues for the NCWSC Water consumer WSPs and in turn AWSB. In light of the aforementioned, proper maintenance and NCWSC pays replacement of assets (which currently only covers 20% of revenue to AWSB as 40% of AWSB's jurisdiction, leaving huge areas lease fees unserviced) is crucial going forward. Water sales and tariffs AWSB CCN Although AWSB is not directly involved in the sale and provision of water and sewerage services, it is AWSB cedes 50% of revenue to CCN indirectly reliant on tariff levels and water volumes and 1 % to WSRB (including water sources and treatment capacity) WSRB sold by its WSPs. AWSB derives its revenue from lease fees charged to the WSPs for use of the water assets (currently determined as a percentage of Initially set at 10% of the WSP's revenue, lease water sold as set out by the tripartite agreement). In fees paid to AWSB increased to 15% in 2005 this regard, although the number of connections has before increasing further to 20% in January 2006. increased over the review period and demand for AWSB then cedes 50% of this revenue to the CCN, water & sanitation services continues to be high, and a 1% fee to the WSRB. The cessation of 50% tariffs have remained unchanged (and not indexed of revenue to CCN represents a substantial leakage to inflation) over the past ten years. As such, rising and significantly undermines AWSB's revenue and inflation has resulted in a considerable compression growth potential, as CCN does not use the revenue of margins for WSPs, with tariffs currently close to to develop the assets. However, once the transfer operation and maintenance cost-recovery. In this has been completed, AWSB will retain all its regard, a study carried out by an independent third revenue, which should result in improved operating party (WS Atkins International) in October 2007 performance. recommended that tariffs in Nairobi be increased Table 1: Debtors breakdown KShs'm F06 F07 by at least 75% and 300% for water and sewerage Lease fees receivable (from WSPs) 78.4 139.4 respectively in order to achieve full cost recovery Advances to district water offices 1.1 1.6 given the existing cost structure. Recommendations Staff debtors 0.0 1.5 were also made for these increases to be gradually IDA grants receivable 0.0 18.0 phased in over a period of 5 years for water and 10 National Water Corporation Pipeline Co. 0.3 4.1 years for sewerage. WS Atkins also recommended Total debtors 79.8 164.6 that a tariff indexation policy be adopted until full In F07, the increase in trade debtors was cost recovery is achieved. characterised by a KShs61m increase in lease fees Under the legal framework, NCWSC can propose receivable and KShs18m in IDA grants receivable. tariff increases based on services provided and The increase in lease fees was ascribed to improved costs, but these must be reviewed and approved by performance by WSPs, as well as the increase in AWSB. However, further approval may be required the percentage of revenue payable as lease fees from the WSRB or MWI. In this regard, social (from 15% to 20%). factors and political resistance have dampened Table 2: Debtors age F06 F07 efforts to raise tariffs. analysis KShs'm % KShs'm % Current 21.0 26.3 47.2 28.7 The diagram below depicts the flow of water 31-60 days 22.5 28.2 46.8 28.4 revenue in the Nairobi area. Whilst AWSB's core 61-90 days 9.0 11.3 18.0 10.9 operating revenue is derived largely from Nairobi 91-120 days 13.8 17.3 23.0 14.0 City Water and Sewerage Company, accounting for 121-150 days 13.5 16.9 13.0 7.9 >150 days 0.0 0.0 16.6 10.1 96% in F07, from 100% in F06, cognisance is Total 79.8 100.0 164.6 100.0 taken of the risk posed by smaller WSPs, which Global Credit Rating Co. ­ Kenya Water Utility Credit Rating Report Going forward, an adjustment in the tariff structure, Table 3: Operating F07 YTD* YTD* Variance performance KShs'm Actual Budget % as well as growth of the customer base, are crucial Income if water utilities are to become financially self- Lease fees - WSPs 514.5 398.1 395.6 0.6 sustainable and capable of financing infrastructural Grants - restricted 136.3 7.3 0.2 3,550.0 development. However, a significant challenge to Grants - unrestricted 69.6 0.0 0.0 n.a. growing the revenue base remains the culture of Miscellaneous income 3.4 27.3 0.9 2,937.0 non-payment. In this regard, awareness campaigns Total revenue 723.9 432.7 396.7 9.1 and sound credit policies and implementation less: Expenditure thereof are required to improve payment records, Staff costs (69.1) (52.8) (57.3) (7.9) particularly in domestic consumers who have Board costs (7.6) (3.2) (4.9) (34.8) historically shown a lack of willingness to pay Operational expenses (83.6) (75.4) (80.6) (6.4) Administrative expenses (40.3) (18.1) (20.4) (11.3) water bills. General expenses (5.2) (17.2) (16.7) 3.0 Lease fees ­ CCN (251.4) (182.5) (182.5) 0.0 Financial performance Lease fees - WSRB (20.7) (24.6) (20.8) 18.1 A synopsis of AWSB's financial results is reflected Grant expenditure (203.3) (40.2) (0.0) n.a at the end of this report, with brief comment Total expenditure (681.3) (414.0) (383.2) 8.0 following. Surplus/deficit 42.6 18.7 13.5 38.5 * For the nine months ended March 2008. AWSB's financial performance is directly linked to Following an annualised 9% increase in cash the performance of NCWSC, its largest client. In generated by operations in F06, AWSB reported a F07, a significant 69% of total income (including 39% decline in F07. Given AWSB's operational other income) was garnered from the NCWSC, expansion since inception, the water board while the remainder comprised largely of evidenced a KShs22m working capital absorption government grants and sale of tender documents in F07 (an increase of 44% from F06). This saw a (that is the development of transitional business 58% decline to KSh29m in cash flow from plans for WSPs). Despite slightly weaker operations. This is largely attributed to the shifting performance by NCWSC, the water board reported of cash to debtors as evidenced by the increased a 26% increase in operational revenue to average days receivable to 87 days in F07 (F06: 42 KShs515m in F07. This was on the back of revenue days). Since inception AWSC has invested from other WSPs, as well as the 2006 percentage KShs129m in water assets, of which KShs88m was increase to 20% taking full effect. AWSB also spent in F07. This expenditure was partially funded recorded a robust 61% increase in grants and sale by KShs23m in capital grants, which resulted in a of tender documents, which saw total revenue net cash decrease of KShs37m. increase by 35% to KShs724m in F07. Funding profile Notwithstanding the aforementioned, an 18% rise in lease payments to KShs272m (which comprised Since inception, AWSB (which has remained 40% of total operating costs) and a 104% increase ungeared) has primarily been funded by grants, in grant expenditure (30%) saw total expenses from the Government of Kenya ("GoK") and the increase by 48% to KShs674m. Staff costs (driven International Development Association ("IDA") ­ by an increase in staff levels and inflation (a lending window for the World Bank), amongst adjustments) represented a relatively low 10% of others. Given the capital-intensive nature of overall expenditure (F06: 11%). The water board AWSB's operations, it is expected that the water reported a 40% lower EBITDA of KShs50m in board would reflect a more sizeable balance sheet. F07. Following a depreciation charge of KShs8m, However, this is not the case, given the inefficient the water board reported operating income of ownership structure, although as mentioned, the KShs42m (F06: KShs79m). development of assets by AWSB will see the gradual transfer of these assets onto its balance Overall, the water board has evidenced decreased sheet. To date, 69% of fixed assets relate to water profitability over the review period (driven by the assets and work in progress. This notwithstanding, aforementioned rise in operating expenses), with the water board's ability to leverage financing is the operating margin declining from 34% in F05 to thus somewhat constrained at present. Taking 8% in F07 (F06: 19%). AWSB has reflected cognisance of the expected capex over the next four modest year to date performance, with total years and the funding thereof, gearing is forecast to revenue exceeding budget by 9%, while expenses increase significantly relative to historical levels. surpassed forecasts by 8%. Global Credit Rating Co. ­ Kenya Water Utility Credit Rating Report As at F07, the water board reflected cash holdings the development of water systems for informal of KShs92.5m, down from KShs129m, used largely settlements. to fund working capital. Days cash on hand has decreased from 209 days in F05 to 50 days in F07 Currently, the most significant project the water (F06: 103 days). Currently 82% of cash vests with board is undertaking is the rehabilitation of the Co-operative Bank, which is unrated. Sasumua Dam (financed by the AFD). Once complete (by end of 2008), the dam will have a Capex projects and funding storage capacity of 16 million m3, from the current 3.8 million m3. With sewerage services being the Recently, AWSB has embarked on a number of least covered in the southern part of Nairobi and infrastructure development projects aimed at surrounding districts, a substantial portion of the increasing production capacity (to service growing US$60m funding from IDA is earmarked for demand) and expanding sewerage systems in the sewerage works. This will augment recent efforts greater Nairobi area. The water board has received made through the Southern Outfall Trunk Sewer substantial support over the last 3 years from the project, carried out in partnership with NCWSC. IDA in the form of a US$15m (KShs975m) grant to fund its setup costs, which was meant to Future prospects operationally prepare both AWSB and NCWSC for the bulk of the funding expected to come through Whilst funding from the World Bank and AFD will in the first half of F09 (specifically October 2008). secure the water board's operational revenue in the long term (i.e once capex projects have been Table 4: Capex and funding completed and the new capacity comes on-stream), F08 F09 F10 F11 KShs'm it is not expected to drive short term revenue Capex Water supply infrastructure -IDA 112.0 1,720.0 1,500.0 1,500.0 growth. Water supply infrastructure -AFD 1,461.0 450.0 650.0 750.0 Table 5: Operating budget Water and sanitation -districts 0.0 747.4 1,094.8 6,323.9 F08 F09 F10 F11 KShs'm Intervention -informal settlements 48.0 110.0 120.0 120.0 Income Nairobi city W&S development 150.0 162.0 65.0 75.0 Lease fees - WSPs 565.8 622.4 746.9 821.5 Total 1,771.0 3,189.4 3,429.8 8,768.9 Grants - restricted 150.0 165.0 198.0 217.8 Capex funding Grants - unrestricted 96.1 105.7 126.8 139.5 Internal funds 0.0 172.0 95.0 105.0 Miscellaneous income 3.8 4.2 2.5 27.0 SIDA/DANIDA (KWSP) 50.0 -- -- -- Total revenue 815.7 897.3 1,074.2 1,205.8 IDA grants 112.0 220.0 -- -- less: Expenditure IDA loans 0.0 1,500.0 1,500.0 1,500.0 Staff costs (78.7) (90.5) (99.5) (114.4) AFD grants 1,461.0 200.0 300.0 350.0 Board costs (8.3) (9.1) (9.9) (10.8) AFD loans 0.0 250.0 350.0 400.0 Operational expenses (151.4) (166.5) (249.8) (288.5) EU grant 48.0 90.0 90.0 90.0 Administrative expenses (50.0) (62.5) (78.1) (97.7) GoK grants 100.0 757.4 1,094.8 6,323.9 General expenses (5.4) (5.9) (6.5) (7.2) Total 1,771.0 3,189.4 3,429.8 8,768.9 Lease fees - NCC (282.9) (311.2) (373.4) (410.8) Lease fees - WSRB (28.3) (31.1) (37.3) (41.1) The WSTF has funded some of the projects Grant expenditure (101.6) (111.8) (123.0) (135.3) undertaken, while the World Bank and AFD are Total expenditure (706.6) (788.6) (977.5) (1,105.7) financing other ongoing projects (including the Profit before finance costs 109.1 108.7 96.7 100.1 rehabilitation of the Sasumua Dam). A large less: Financing costs portion of the funding from the World Bank is AFD 0.0 (37.7) (37.7) (36.3) targeted towards water infrastructure (pipes, World Bank 0.0 (48.2) (48.2) (48.2) metres, sewerage systems and treatment facilities) Total finance costs 0.0 (85.9) (85.9) (84.5) and water systems for informal settlements. An Surplus/ deficit 109.1 22.8 10.8 15.5 amount of US$66m (KShs4.5bn) is to be disbursed Key ratios: through the IDA to MWI, which will then on-lend Turnover growth (%) 12.7 10.0 19.7 12.3 through the Ministry of Finance to AWSB. The Operating margin (%) 13.4 12.1 9.0 8.3 loan will be extended to AWSB with an 8-year Net interest coverage (x) n.a. 1.3 1.1 1.2 moratorium (at an interest rate of 1.5% per annum) Total debt to equity (%) n.a. 50.5 71.2 46.1 and AWSB will only start repaying the loan in 2016 over a period of 15 years. The water board is In F08 the water board plans to achieve revenue also receiving 30m (KShs3.3bn) from the AFD, growth of 13% to KShs816m, accompanied by 4% with one third of this funding disbursed as a loan growth in total operating expenses, which should and the balance as a grant. In addition, AWSB will see improved profitability. However, the growth of receive a grant of 2.7m from the EU restricted to concessionary grant revenue, although substantial in the short term, is considered unsustainable in the Global Credit Rating Co. ­ Kenya Water Utility Credit Rating Report long term. The relative underperformance in the first 9 months of F08 is also noted. Finance charges will remain low as finance is to be provided at low interest rates, relative to the commercial market. Although a portion of the AFD funding is to be disbursed as grant funding, gearing levels are expected to rise significantly over the next three years. Moreover, the water board has a number of pending project proposals for the development of water sources and production capacity, although funding for this has not been secured. Global Credit Rating Co. ­ Kenya Water Utility Credit Rating Report Athi Water Services Board (KShs in millions except as noted) Income Statement Year end : 30 June 2005* 2006 2007 Revenue 166.5 407.8 514.5 Other income 27.7 130.2 209.4 Operating expenditure (137.0) (455.2) (673.9) EBITDA 57.2 82.8 50.0 Depreciation (0.2) (3.5) (8.1) Operating income 57.0 79.2 41.8 Net finance charges 0.0 0.6 0.8 Net income 57.0 79.8 42.6 Cash Flow Statement Cash generated by operations 57.3 83.4 50.8 Working capital: (increase)/decrease 14.8 (15.5) (22.3) Net finance charges 0.0 0.0 0.0 Cash flow from operations 72.0 67.9 28.5 Maintenance capex (0.2) 0.0 0.0 Net expansionary capex and investments (8.9) (32.1) (88.2) Capital contributions 44.8 (11.2) 22.8 Cash movement: (increase)/decrease (107.7) (24.6) 36.9 Borrowings: increase/(decrease) 0.0 0.0 0.0 Net increase/(decrease) in debt (107.7) (24.6) 36.9 Balance Sheet Capital and reserves 108.9 127.9 162.9 Total interest-bearing debt 0.0 0.0 0.0 Short-term 0.0 0.0 0.0 Long-term 0.0 0.0 0.0 Interest-free liabilities 20.1 120.7 206.8 Total liabilities 129.0 248.6 369.7 Fixed assets 8.7 24.7 58.3 Projects in progress 0.0 11.7 51.1 Investments 0.0 0.0 0.0 Cash and cash equivalents 104.6 129.4 92.5 Net trade debtors 12.4 79.8 164.6 Other current assets 3.3 3.0 3.3 Total assets 129.0 248.6 369.7 Ratios Operating: Turnover growth (%) n.a. 83.7 26.2 Net capex : total income (%) 4.7 6.0 12.2 Staff costs : operating costs (%) 21.0 11.0 10.1 Staff costs : total income (%) 14.8 9.4 9.6 Cash Flow: Operating cash flow : total debt (%) n.a n.a n.a Operating cash flow : net debt (%) (91.9) (52.5) (30.8) Profitability: EBITDA : revenues (%) 34.3 20.3 9.7 Operating profit margin (%) 34.2 19.4 8.1 EBITDA : average total assets (%) n.a 115.3 25.2 Coverage: Operating income : gross interest (x) n.a n.a n.a Operating income : net interest (x) n.a (134.6) (53.4) Activity and liquidity: Days receivable outstanding (days) n.a 41.3 86.7 Net debtors : total income (%) 5.6 19.6 32.0 Current ratio (:1) 6.0 1.9 1.4 Average days working cash (days) 208.6 103.1 49.5 Capitalisation: Net debt : capital and reserves (%) (96.0) (95.6) (46.4) Total debt : total assets (%) 0.0 0.0 0.0 Total debt : EBITDA (%) 0.0 0.0 0.0 Net debt : EBITDA (%) (137.1) (156.3) (185.0) Total debt : total income (%) 0.0 0.0 0.0 Net debt : total income (%) (40.4) (22.7) (10.4) * 9 months to June 2005 Nairobi City Water and Sewerage Company Limited Kenya Water Utility Analysis July 2008 Security class Rating scale Currency Rating Rating watch Expiry date Long term National KShs BBB- No 07/2009 Short term National KShs A3 Financial data: Rating rationale (US$'m Comparative) The rating is based on the following key factors: 30/06/06 30/06/07 NCWSC is set to benefit significantly from the funding being KShs/US$ (avg.) 73.7 70.8 received by AWSB for the development of water assets in Nairobi KShs/US$ (close) 74.2 66.8 and surrounding districts. Total assets 42.1 57.1 Despite ongoing initiatives to improve the company's operational Total debt 12.4 13.3 efficiency, NCWSC still bears considerable legacy challenges Total capital 20.5 27.9 (inherited from the CCN), which include billing errors, inherited Cash & equiv. 0.2 1.0 debt of KShs688m (18% of total assets), poor public perceptions Turnover 42.8 41.7 of customer service, as well as a large and unskilled workforce. In EBITDA 8.2 4.7 terms of the latter, overall staff costs remain high and undermine NPAT 7.4 3.3 profitability at 40% of expenditure, relative to a management-set Op. cash flow 12.9 3.6 Market cap. n.a. target level of 25%. Market share Significant capacity constraints in the sourcing and distribution of n.a. water, exacerbated by aging infrastructure, vandalism and theft. Growth is further constrained by uneconomically low tariffs, the Fundamentals: culture of non-payment and ongoing errors in the billing system. Nairobi City Water and Sewerage Part settlement of the substantial amount of inherited debt, coupled Company ("NCWSC") is a water service with increased working capital absorption, continued to weigh on provider contracted by Athi Water the company's liquidity in F07, and is expected to continue in F08. Services Board ("AWSB") to service Nairobi City and surrounding districts. Of concern is the significant level of debtors outstanding, a large The company (also referred to as Nairobi portion of which is deemed irrecoverable. Water Company) is a wholly-owned However, the installation of new and improved billing and subsidiary of the City Council of Nairobi customer management systems in 2006 should see a sizeable ("CCN") and was incorporated in improvement in billing accuracy and management going forward. December 2003 under the Companies In this regard, cognisance is taken of the steps being taken to Act. NCWSC took over the provision of improve systems and streamline its operating structure. water and sewerage services within Nairobi and surrounding districts from Funding and liquidity profile the CCN's water and sewerage department. NCWSC operates under a Assets have largely been funded by capital grants and interest-free Service Provision Agreement ("SPA") liabilities. Despite a 57% drop in net income in F07, capital and entered into with AWSB. reserves increased by 23% to KShs1.9bn (underpinned by increased GCR contacts: capital grants and a positive foreign exchange adjustment). Total interest-bearing debt (including debt inherited from the CCN) Jotham Makarudze declined to KShs888m (F06: KShs923m). The company evidenced an +27 11 784-1771 increase in short term debt as a result of a KShs200m short term loan jotham@globalratings.net acquired to finance the company's operational expansion. This, coupled with a 46% decline in EBITDA resulted in total debt to Melanie Brown EBITDA increasing to 269% in F07 (F06: 152%). As such, a 222% +27 11 784-1771 increase in net finance charges saw net interest coverage decrease to brown@globalratings.net 10.9x in F07 (F06: 72.9x), albeit still high. Cash holdings remained marginal, with liquidity strain evident, exacerbated by the high level Website: www.globalratings.net of net debtors, currently averaging 272 days. This document is confidential and issued for the information of clients only. It is subject to copyright and may not be reproduced in whole or in part without the written permission of Global Credit Rating Co. ("GCR"). The credit ratings and other opinions contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information is given or made by GCR in any form or manner whatsoever. Background1 occasioned by the December 2007 elections. The Nairobi City Water and Sewerage Company's economy grew at 6.1% in 2006, up from 5.8% in ("NCWSC") or ("Nairobi Water Company") 2005. It grew a further 6.5% in 2007, even though formation arose from the enactment of the Water external development assistance to Kenya Act of 2002, which sought to delineate water amounted to only about 5% of government infrastructure management and service provision in spending and about 1% of GDP. On average, Kenya. The new structure established seven water Kenya's economy has grown by 5.1% in the period services boards, each allocated a jurisdiction. These 2003-2007, making it one of the fastest growing were tasked with the management and development economies in Sub-Saharan Africa. This recovery of water assets, as well as the appointment of water has been mainly due to improved macroeconomic companies responsible for water and sewerage management and progress in structural reform. As a service provision. In this regard, the Athi Water result, public debt has declined and prices have Services Board ("AWSB"), appointed for the stabilised. Several decades of declining economic Nairobi jurisdiction, contracted NCWSC to provide performance, however, combined with rapid water and sewerage services to Nairobi and population growth, translated to increased poverty surrounding districts. NCWSC was incorporated in and worsening unemployment. Between the 1970s December 2003 under the Companies Act and is and 2000, the number of Kenyans classified as poor wholly-owned by the City Council of Nairobi grew from 29% to about 57%, despite increases in ("CCN"). NCWSC took over the provision of overall per capita incomes.2 water and sewerage services in Nairobi and The Kenyan economy is largely dependant on surrounding districts from the CCN's water and agriculture, which accounts for more than a quarter sewerage department. The company operates of GDP and employs nearly 75% of the country's within the framework of a Service Provision economically active population. The sector, Agreement ("SPA") entered into with AWSB, together with tourism, manufacturing and whilst a tripartite agreement entered into by CCN, telecommunications has underpinned growth in the AWSB and NCWSC sets out the company's past three years, despite erratic weather patterns. overall responsibilities, with the one Whilst the economy's outlook remains positive, complementing the other. growth estimates for 2008 have had to be revised NCWSC's key functions under the SPA are: downwards to around 4% (previously around 7%) Adequate provision of quality water and as a direct consequence of the disruptions caused sewerage/sanitation services in the areas agreed by the post-election violence. Going forward, the to with AWSB; Kenyan economy, being heavily reliant on rain-fed Billing of water and sewerage services provided agriculture and limited agricultural exports and credit control; and (exposed to world price fluctuations), will continue Maintenance and improvement of water and to be vulnerable to alternating periods of prosperity sewerage infrastructure (after seeking prior and depression. In addition, poor governance and approval from AWSB). corruption also have had a negative impact on growth, making it expensive to do business in At inception the company inherited a number of Kenya, while another large drag on Kenya's operational challenges from the CCN. These economy is the burden of HIV/AIDS. Risks to included a high proportion of unskilled staff, continuing robust growth also include weak KShs1.5bn debt and billing errors. While the infrastructure, drought and the diminution of majority of management staff has changed, the financial flows from donors because of corruption company is still in the process of improving skills allegations leveled against the government. Despite (through various training programmes) and these setbacks, however, the formation of the rationalising staff levels. In addition, the company coalition government has gone a long way towards has also embarked on initiatives to improve public allaying the international finance community's perceptions and overall operational efficiencies. fears about the country, and 2008 has seen a These include the adoption of a customer service reversal in stance of several international bodies charter, as well as awareness campaigns. with regards to financial involvement in Kenya. Operating environment Kenya's annual inflation reflected a steady climb Economic throughout 2007, buoyed by higher food, transport Following years of economic stagnation, Kenya has and energy prices. This was despite a marked seen economic recovery since 2004, and the decline in the first quarter of 2007, when the y-o-y country's macroeconomic environment has growth in CPI reduced to 5.9% from 15.6% in stabilised, notwithstanding the downturn March 2006. Inflation soared to 12% in December 2007. Overall, average inflation for the year 1 Readers requiring more information are asked to refer to the 2008 2 AWSB credit rating report World Bank, 2007 Global Credit Rating Co. ­ Kenya Water Utility Credit Rating Report amounted to 9.8%. The inflation outlook for 2008 Being a labour intensive operation, the company remains bleak and has been worsened by the post- has a staff complement of 2,015 (150 of whom are election violence. Energy imports, rising food management staff), slightly below 2,059 in the prices and bottlenecks resulting from the economic previous year. In addition to management's efforts impasse in 1Q 2008 continued to drive the month- to improve the quality of staff and rationalise staff on month CPI inflation to over 31% by May 2008, levels, the company has experienced natural leading to a revision of fiscal and monetary policy attrition of staff since inception. Staff optimisation strategies. is estimated at 1,700. Local economy The company's technical operations involve the As a result of massive rural­urban migration, sourcing of water, treatment and storage, followed Nairobi's population has grown significantly in by distribution to consumers. In addition, the SPA recent years and as at 2007 was estimated at just provides for the company to undertake certain over 3 million, with an average life expectancy of operational responsibilities, as well as take transfer 63 years recorded. Currently, absolute poverty of fixed assets, allowing NCWSC to develop or levels in Nairobi are estimated at 21%, which is expand infrastructure on behalf of AWSB relatively low compared to a national average of (provided express permission is obtained from the 46%. With the massive rural-urban migration, water board). In this regard, the company is also water per capita has declined significantly over the responsible for installing new connections and last 10 years. Only 23% of Nairobi's population attending to connection failures. Under the has access to clean drinking water, with 29% agreement, AWSB will reimburse the water having piped access in residences. The majority of company for any work done on its behalf. the population use boreholes and wells, and also However, given the problems and complexities of buy from water vendors at an inflated price. the current structure, it appears efficient for NCWSC to carry out all the capex activities itself, Regulatory as it appears to have more on-the-ground The regulatory structure comprises the Water knowledge of capex requirements. Services Regulatory Board ("WSRB"), whose responsibility is to enforce the Water Act. Under NCWSC's only source of water is from a single the Act, the Ministry of Water and Irrigation dam 52km from Nairobi City, with 3 reservoirs ("MWI") is responsible for policy formulation having a combined capacity of 80,000 megalitres. through the Water Sector Reform Steering Whilst demand for water (including non-revenue Committee ("WSRSC") and Water Sector Reform water) is currently estimated at around 600,000 m3 Secretariat ("WSRS"). Falling under the MWI are per day, NCWSC only has capacity to supply two regulatory authorities; the Water Resources 525,000 m3 of treated water per day3. The focus of Management Authority ("WRMA") and the AWSB and NCWSC over recent years has, WSRB. The WRMA is tasked with the national however, been the expansion and rehabilitation of management and regulation of water resources sewer services (which continue to lag water (including the issuance of licenses for water services). In this respect, a substantial amount of abstraction from any source and disposal of treated investment is earmarked for sewerage works (to be effluent into rivers), while the WSRB oversees the implemented largely by AWSB). This will augment maintenance of quality, standards and issuance of the Southern Outfall Trunk Sewer project licences for service provision. While the regulatory embarked on in May 2007 in partnership with framework appears sound, NCWSC continues to ASWB, in an effort to improve sanitation services face challenges relating to the lack of by-laws to in the industrial and residential areas. In the aid the enforcement of proper utilisation of water interim, NCWSC continues to provide exhauster and sewerage services. In some instances, this has services to properties not connected to the central served to undermine the company's efficiency and sewerage system. decision-making processes. The company faces enormous challenges relating to Operations the sourcing and distribution of water. These As set out by the SPA, the company is responsible include old and dilapidated infrastructure that for ensuring the availability of water and sewerage continues to be a significant contributor to the high services, as well as billing and credit control. The unaccounted-for water or non-revenue water water company thus interfaces directly with the (currently in the region of 45%), as a substantial consumer. While the idea is for the company to amount of water is lost through leaks and burst operate as a private company, NCWSC still carries pipes. This has been exacerbated by vandalism and with it some of the internal processes set by the theft, which has also seen a reduction of inventories CCN. The company, however, continues to focus of spares and maintenance parts. The level of on streamlining its operating structure with emphasis on skills and technological development. 3 AWSB Tariff Modelling Report, October 2007 (Atkins) Global Credit Rating Co. ­ Kenya Water Utility Credit Rating Report operational risk is also heightened by the substantial amount of old irrecoverable debts. The company's reliance on a single source of water in a department also faces a number of legacy drought prone region. Although the quality of challenges, which include internal corruption, water meets World Health Organisation ("WHO") billing errors (caused by old and inadequate billing standards, the old infrastructure poses a significant software) and general unwillingness and sometimes threat to quality going forward. Other challenges inability to pay for water among water consumers. facing technical operations include the unavailability of detailed drawing plans showing While 70% of the company's revenue is derived the location of pipes, as well as buildings erected from domestic users, a significant 24% of the over infrastructure and therefore hindering repairs revenue is garnered from commercial and industrial and maintenance. users (with the 5 largest accounting for 8% of total income). The remainder comprises government Water & Sewerage billing and tariffs institutions. Overall, as at June 2008 the company The level of water tariffs in Kenya has remained had 216,489 water connections in Nairobi and unchanged (and not indexed to inflation) over the surrounding districts. past 10 years. As such, rising inflation has resulted in a considerable compression of margins for After reading meters (or in some cases determining NCWSC, with tariffs currently close to operation estimates), NCWSC sends a monthly bill for water and maintenance cost-recovery. Under the legal and sewerage, allowing customers 7 days to settle framework and as detailed in the tripartite their accounts. Thereafter, another 7 days' notice to agreement, NCWSC can propose new tariffs based disconnect is given. Although revenue and on services provided and full costs of providing receivables have previously been inflated as a these services, but the AWSB must review and result of billing errors, the implementation of a new approve these. Further approval may be required billing and customer management system should from the WSRB or MWI. As such, pricing is see improved revenue measurement and debtors beyond the company's control, which somewhat management going forward. In addition, the limits the company's flexibility, as well as revenue proposed full roll-out of data loggers (handheld growth prospects. While efforts have in the past devices used in meter reading) will see the full been made to raise tariffs, these have been met with automation of the process, thus improving political resistance, particularly in the period accuracy. running up to the December 2007 elections. Since inception NCWSC has reported a decrease in According to a study carried out by an independent debtors collections, largely as a result of inaccurate third party (WS Atkins International), water tariffs records and as such the company was not able to in Nairobi should be adjusted upwards by at least provide debtors aging for F06. In addition, the 75% and sewerage tariffs by at least 300% to allow period in the run-up to the election, together with water utilities to become self-sustainable and be the violence that occurred post election, saw a able to finance new investments. In arriving at significant reduction in collections. While the law these recommendations, Atkins used the full cost of allows the company to cut-off water supply for providing water and sewerage services. In addition non-payment, NCWSC lacks capacity to enforce to recommending the gradual phasing in of tariff this process (in terms of manpower), as some increases (over a 5-year period), Atkins also consumers illegally reconnect themselves. proposed a tariff indexation policy in the period up NCWSC maintains a high level of provisioning for to full cost recovery. bad and doubtful debts, with 53% of trade debtors Table 1: Customer categories Number of provided for in F07 (F06: 69%). However, connections management has not been able to provide an Metered residential 192,736 accurate debtors age analysis and as such GCR is Metered social services 142 unable to determine the adequacy of the company's Commercial 19,658 Industrial 608 provisioning policy (given low levels of collections Water kiosks 2,978 and the significant debtors book inherited from the EPZ 1 CCN, which is largely uncollectible). The majority Community project 1 of the company's debtors relate to domestic Government 344 consumers, while a smaller proportion comprises CCN 2 government institutions. In an effort to improve Boreholes 19 Total 216,489 collections the company has appointed an external debt collector to collect government debt. NCWSC The company's commercial department is also does not write-off bad debts, with management responsible for billing and credit control, which arguing that this would encourage consumers to involves meter reading, preparation of statements, abscond from paying their bills. and management of debtors. NCWSC inherited a Global Credit Rating Co. ­ Kenya Water Utility Credit Rating Report Financial performance exemption status, and has not made any tax provisions since inception. A synopsis of NCWSC's financial results is reflected at the end of this report, with brief Weaker operating profits in F07 resulted in comment hereafter. NCWSC reporting 37% lower cash generated by Table 2: Operating F07 F07 Variance YTD* operations of KShs371m. Following a working performance (KShs'm) Actual Budget (%) Actual capital absorption of KShs94m, and net finance Income charges of KShs25m, the company registered cash Water 2,239.1 2,160.1 3.7 1,992.3 flow from operations of KShs252m, a significant Sewerage 715.4 495.0 44.5 756.3 Other 78.0 156.8 (50.3) 76.8 drop from the KShs949m reported in F06. The Miscellaneous 81.1 1.6 4,968.8 166.3 increase in working capital absorption is largely Grant 92.2 54.0 70.7 127.2 attributed to a significant build-up of inventories, Direct op. revenue 3,205.8 2,867.5 11.8 3,118.9 and increased net trade debtors, as a result of lower Expenditure collections on outstanding accounts. As such, the Staff costs (1,161.4) (868.2) 33.8 (990.4) level of days receivable outstanding decreased to Operations (1,213.1) (1,283.8) (5.5) (981.9) 272 days in F07 from a high 660 days previously. Maintenance (246.1) (427.8) (42.5) (110.2) The company spent KShs364m on expansionary Finance costs (24.5) (223.1) (89.0) (35.3) Other expenses (322.4) (5.0) 6,348.0 (570.0) capex and investment (plant machinery and motor Total op. expenditure (2,967.5) (2,807.9) 5.7 (2,687.8) vehicles), funded by capital contributions of Net op. surplus 238.3 59.6 299.8 431.1 KShs198m and short term borrowings of * 10 months ending April 2008. KShs200m, which saw a net increase in debt of KShs87m. Water revenues were revised downwards by KShs1.5bn in 2007 and 2006, following the Funding profile implementation of a new billing system that Despite a significant drop in gearing levels over the identified significant billing errors. As such, review period, these remain relatively high, with its NCWSC reported a 7% decline to KShs3.0bn in assets funded by capital grants and interest free F07, despite a 20% increase in water volumes liabilities. The company continues to carry produced. Management confirms that there are still KShs668m of debt inherited from the CCN. In F07, a number of problems that need to be addressed NCWSC raised an additional KShs200m short term and 2007 figures may be revised down further. loan from the commercial market (Co-operative Overall, coupled with 4% growth in sewerage Bank) for the development of operating assets and revenue, this saw water contributing a marginally infrastructure. The company, however, intends to lower 76% to revenue in F07 (F06: 78%). Although repay this loan by the end of 2008. Despite a 57% the level of non-revenue water decreased decline in net income, shareholders interest marginally to 45% in F07 (F06: 47%) it remains increased by 23% to KShs1.9bn in F07 (as a result very high and well above the acceptable level of of increased capital grants and a positive foreign 20% for emerging markets. NCWSC reported a exchange adjustment), while total interest-bearing 63% increase in other income (which includes debt declined by 4% to KShs888m. Interest-free meter rentals and grant income). liabilities increased by 55% to KShs1.1bn, which In F07, the company reported a 6% increase in included an amount of KShs150m (F06: KShs73m) operating expenses, with staff costs comprising a owing to AWSB. As such, coupled with volatile significant 40% (F06: 35%). Other significant cost EBITDA (over the review period), total debt to drivers include water treatment chemicals (40%) EBITDA decreased sharply to 152% in F06 before and power (20%). This, coupled with the lower rising to 268% in F07. Interest coverage has revenue, saw EBITDA decline to KShs331m (F06: declined significantly from 72.9x in F06 to 10.9x in KShs608m) translating into an EBITDA margin of F07), although remaining comfortable. 11.2% (F06: 19.3%). The operating margin also Future prospects declined to 8.9%, having improved to 17.5% in F06 (F05: 2.8%). Following slightly higher depreciation The company's revenue growth going forward is and amortisation charges the company posted a expected to be driven by increased volumes and significantly lower operating profit of KShs263m new connections. The new billing system in place (F06: KShs554m). should provide management with more accurate data, allowing them to run the organisation more Despite a significant decrease in interest-bearing effectively. debt in F07, the company registered net finance charges of KShs25m (F06: KShs8m). This saw From a technical perspective, the capital NCWSC posting net income of KShs234m in F07 expenditure projects (proposed and currently under (F06: KShs545m). The company is still in the way), should see improved efficiencies, as well as process of applying for clarification of its tax- increased supply & treatment capacity. The Global Credit Rating Co. ­ Kenya Water Utility Credit Rating Report forecasts below are extracted from the company's to see an improvement in the long term. However three-year business plan. this is dependant upon focus being placed on streamlining the company's operations, as well as Table 3: Operating budget F08 F09 F10 increasing tariffs to more realistic levels. Income Water 2,492.4 2,617.0 2,747.8 Sewerage 830.8 872.3 915.9 Other 70.0 72.0 74.0 Miscellaneous 37.0 39.0 41.0 Grant 86.0 86.0 86.0 Direct operating revenue 3,516.2 3,686.3 3,864.7 Expenditure Staff costs (1,244.0) (1,257.9) (1,250.8) Operations (1,452.4) (1,451.2) (1,506.3) Repairs and maintenance (301.9) (309.9) (313.4) Finance costs (43.9) (34.6) (46.5) Other expenses (69.7) (177.4) (272.5) Total operating expenditure (3,111.9) (3,231.0) (3,389.5) Net surplus 404.3 455.3 475.2 Source: F08- F10 business plan. The operating budget predicts moderate water and sewerage revenue growth over the three years to F10, while grant income is expected to remain unchanged at KShs86m. Although revenue projections are deemed achievable assuming that the current tariffs prevail, it is expected that operating expenses are likely to exceed budget (particularly staff costs). NCWSC project fairly moderate increases in operating expenses, which are not reflective of the planned operational expansion. NCWSC projects borrowings to decline to KShs14m in F08, from KShs888m in F07, declining to zero in F09. This assumes the full repayment of inherited debt in F08 as well as the short term loan of KShs200m. This notwithstanding, cash flow forecasts suggest this is not the case; with debt in fact remaining on balance sheet (despite debt repayments of KShs213m and KShs6m in F08 and F09 respectively). As reflected in the balance sheet extract below, the company expects the amount of trade receivables to increase significantly, while a substantial drop in cash holdings is projected. However, a significant increase in payables is also forecast, implying the withholding of amounts due to AWSB. Overall, the company reflects a weaker liquidity profile over the three-year period. Table 4: Projected funding F08 F09 F10 profile (KShs'm) Capital and reserves 2,508.6 2,878.0 3,267.3 Borrowings 13.9 0.0 0.0 Trade and other receivables 2,640.7 2,763.1 2,943.7 Cash holdings 53.9 13.5 8.0 Trade and other payables 1,337.0 1,783.8 2,177.7 Ratios (%): Total debt : total assets 0.3 0.0 0.0 Total debt : EBITDA 2.5 0.0 0.0 Total debt : total income 0.4 0.0 0.0 Source: F08 - F10 business plan. Over the short to medium term, NCWSC is likely to continue facing the aforementioned operational challenges, although ongoing reforms are expected Global Credit Rating Co. ­ Kenya Water Utility Credit Rating Report Nairobi City Water and Sewerage Company Limited (KShs in millions except as noted) Income Statement Year end : 30 June 2005* 2006# 2007# Revenue 2,542.5 3,158.2 2,954.4 Other income 279.8 153.9 251.4 Operating expenditure (2,724.7) (2,704.0) (2,875.3) EBITDA 97.6 608.1 330.6 Depreciation (25.8) (52.5) (62.8) Amortisation (0.5) (1.4) (4.9) Operating income 71.3 554.1 262.9 Net finance charges (23.3) (7.6) (24.5) Net income 47.5 545.0 233.6 Foreign exchange adjustment 0.0 (28.7) 10.2 Cash Flow Statement Cash generated by operations 7,110.2 587.9 370.9 Working capital: (increase)/decrease (5,328.5) 368.7 (94.1) Net finance charges (23.3) (7.6) (24.5) Cash flow from operations 1,758.4 949.0 252.4 Maintenance capex (25.8) (52.5) (62.8) Net expansionary capex and investments (251.0) (328.0) (300.7) Capital contributions 1.1 74.1 198.1 Cash movement: (increase)/decrease (1.9) (14.7) (51.4) Borrowings: increase/(decrease) (1,480.8) (627.8) (35.5) Net increase/(decrease) in debt (1,482.7) (642.5) (86.9) Balance Sheet Capital and reserves 7,058.6 1,520.2 1,867.3 Total interest-bearing debt 1,576.4 922.9 887.5 Short-term 13.9 13.9 213.9 Long-term 1,562.5 909.0 673.6 Interest-free liabilities 1,253.9 684.2 1,060.4 Total liabilities 9,888.9 3,127.4 3,815.2 Fixed assets 245.1 373.9 553.3 Projects in progress 2.2 152.4 175.0 Cash and cash equivalents 1.9 16.5 68.0 Net trade debtors 9,331.3 2,090.6 2,313.0 Other current assets 308.4 494.0 705.9 Total assets 9,888.9 3,127.4 3,815.2 Ratios Operating: 3 Billed water sales (M ) - millions n.a. 85 102 Turnover growth (%) n.a. 44.9 (6.5) Staff costs : operating costs (%) 25.1 34.4 39.5 Staff costs : total income (%) 24.4 28.7 36.2 Staff per 1,000 connections 11.6 10.6 9.5 Water distribution losses (%) n.a. 47.0 45.0 Net capex : total income (%) 8.9 9.9 9.4 Cash Flow: Operating cash flow : total debt (%) 95.6 102.8 28.4 Operating cash flow : net debt (%) 95.7 104.7 30.8 Profitability: EBITDA : revenues (%) 3.8 19.3 11.2 Operating profit margin (%) 2.8 17.5 8.9 EBITDA : average total assets (%) 2.3 9.4 9.6 Coverage: Operating income : gross interest (x) 3.1 72.9 10.9 Operating income : net interest (x) 3.1 72.9 10.9 Activity and liquidity: Days receivable outstanding (days) n.a. 660.0 272.0 Net debtors : total income (%) 428.2 66.2 78.3 Current ratio (:1) 7.8 4.1 2.6 Average days working cash (days) 0.3 2.2 8.4 Capitalisation: Net debt : capital and reserves (%) 22.7 63.8 48.9 Total debt : total assets (%) 15.9 29.5 23.3 Total debt : EBITDA (%) 1,884.6 151.8 268.5 Net debt : EBITDA (%) 1,882.4 149.1 247.9 Total debt : total income (%) 72.3 29.2 30.0 Net debt : total income (%) 73.5 30.7 30.9 * 14 months to 30 June 2005 # Debt inherited from NCC restated as borrowings National Water and Sewerage Corporation Uganda Water Utility Analysis July 2008 Security class Rating scale Currency Rating Rating watch Expiry date Long term National UShs A No 07/2009 Short term National UShs A2 Financial data: Rating rationale (US$'m Comparative) The rating is based on the following key factors: 30/06/06 30/06/07 The company's robust revenue growth over the review period, UShs/US$ (avg.) 1,826.1 1,810.8 with 5-year compound average growth of 19% achieved. This UShs/US$ (close) 1,841.0 1,701.0 notwithstanding, aging infrastructure and strain caused from Total assets 151.5 238.6 rapidly increasing demand poses a significant threat to short to Total debt 46.2 0.0 medium term growth, exacerbated by the cost of rising non- Total capital 44.7 151.4 revenue water. Cash & equiv. 3.4 6.3 Turnover 31.4 37.6 Being a wholly-government-owned utility, NWSC has implicit EBITDA 7.5 9.9 support from the Government of Uganda ("GoU"). Further NPAT (9.4) 0.6 comfort is derived from NWSC's sound management and Op. cash flow 5.1 8.5 corporate governance structures, as well as the increased Market cap. n.a. operational efficiencies achieved to date. Market share n.a. The capitalisation of principal debt of UShs85bn (on-lent from the International Development Association) and accrued interest of Fundamentals: UShs68.6bn by the government has bolstered the balance sheet and should facilitate increased profitability going forward. The National Water and Sewerage The absence of title deeds for properties held, which saw the Corporation ("NWSC") is a government- owned water utility mandated (under the qualification of the company's accounts in F07, is noted. Water Act of 2000) with the provision of Management has, however, indicated that the issue is in the water and sewerage services in its process of being resolved. jurisdiction. Since inception in 1972, the The high level of government trade debtors, with a significant corporation's operations have expanded amount over 360 days in arrears. from the 3 major towns of Kampala, Cognisance is also taken of the high proportion of staff costs (44% Jinja and Entebbe to the current 22 towns. In 1995 NWSC was re- of operating expenditure in F07), which has served to undermine established under the National Water and profitability. Sewerage Statute, whose main objective was to facilitate the conversion of the Funding and liquidity profile corporation into a commercial entity. Currently, NSWC produces The conversion of on-lent loans to equity by the government in F07 approximately 64.6 million m3 of water resulted in NWSC becoming ungeared for the first time over the per annum, servicing roughly 2.7 million review period. This saw NWSC's assets being largely funded by people (15% of Uganda's population). government-held equity and capital grants from various development GCR contacts: partners. Accordingly, shareholders interest jumped to UShs257.5bn in F07 (F06: UShs82.3bn), while capital grants and interest free Jotham Makarudze liabilities increased by 33% to Ushs148.3bn. Improved operating +27 11 784-1771 performance saw cash flow from operations increase by 65% to jotham@globalratings.net UShs15.3bn, while cash holdings rose by 73% to UShs10.7bn. Melanie Brown However, a high level of trade debtors (largely comprising +27 11 784-1771 government institutions) continues to place strain on the corporation's brown@globalratings.net liquidity. Net debtors to total income increased to 42% in F07 (F06: 37%), while days receivable outstanding remained unchanged at 133 Website: www.globalratings.net days. This document is confidential and issued for the information of clients only. It is subject to copyright and may not be reproduced in whole or in part without the written permission of Global Credit Rating Co. ("GCR"). The credit ratings and other opinions contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information is given or made by GCR in any form or manner whatsoever. Background diversified from its strong reliance on the agricultural sector, which contributed 30% to GDP The National Water and Sewerage Corporation in 2006 (2001: 41%). ("NWSC") is a government-owned corporation originally established in 1972 under decree No. 34. This notwithstanding, Uganda remains one of the Initially the corporation only operated in the 3 poorest countries in the world, with per capita major towns of Kampala, Jinja and Entebbe. income of about US$281 in 2007, and a life Following the enactment of the National Water and expectancy at birth of around 50 years. Population Sewerage Corporation Statute in 1995, the growth, at about 3.2%, remains amongst the highest company was re-established with the objective of in the world. Nevertheless the country's transforming it into a commercialised entity. The commitment to poverty reduction, as spelled out in passing of the Water Act of 2000 entrusted the the Poverty Eradication Action Plan ("PEAP") and corporation with the provision of water and the World Bank's and other Development Partners' sewerage services in specified jurisdictions (which contributions, brought the country closer are gazetted to NWSC). Over the years the to reaching the Millennium Development Goals. corporation's area of jurisdiction has increased This has seen poverty decline rapidly from 1992 to from 8 towns in the 80's, to 12 in the 90's and 2006, as a result of high and broad-based economic currently covers 22 towns across the country growth. The poverty headcount dropped from (representing 15% of the population), with the 56% in 1992 to 31% in 2006. Poverty, balance under the jurisdiction of District Water however, remains high in rural areas and Northern Boards. NWSC's jurisdiction currently covers and Eastern Uganda. Kampala (including Kajansi, Nansana), Mukono, The power crisis that has plagued the economy Jinja/Njeru, Entebbe, Tororo, Mbale, Masaka, (constraining growth by an estimated 1% per Mbarara, Gulu, Lira, Fort Portal, Kasese, Kabale, annum) saw the government introduce diesel Arua, Bushenyi/Ishaka, Soroti, Malaba, Lugazi, powered thermal stations and provide a diesel Mubende, Hoima, Masindi and Iganga. facility for manufacturers (diesel import duty is Coming from a history of mismanagement and waived for manufacturers). Following the country operational inefficiencies, in 1998 NWSC began a securing funding for the construction of the performance enhancement exercise that saw a Bujagali Dam project, and plans to start the pronounced improvement in revenue and a Karuma Hydropower plant, the nation's energy significant drop in water distribution losses. Over constraints are likely to be alleviated in the medium the past 8 years the corporation has undergone to long term (although remaining a significant risk further structural changes, which have seen a in the short term). As a result, the manufacturing notable improvement in its operational efficiencies. sector grew by nearly 3% in 2006, underpinned by This has been in the form of Internally Delegated increased electricity generation following improved Area Management Contracts ("IDAMCs") rainfall patterns countrywide in the 2006/2007 established to decentralise the corporation's season. The country's significant dependence on oil operations, enhancing autonomy at area level. The was demonstrated during the Kenyan political adoption of IDAMCs also allowed NWSC to crisis, with the supply disruptions leading to introduce other internal management reforms and speculative hoarding, thus undermining price- staff incentives such as awards for areas achieving setting mechanisms. exceptional performance, which has resulted in Although the effect of the recent energy shortages some of its areas attaining ISO certification. on industrial production; and the high and volatile Furthermore, NWSC has introduced value- world oil prices, have weighed heavily on the enhancing services, including an external services domestic economy, the outlook for 2008 envisages division that provides consultancy services to other average real growth of about 7%, barring energy water utilities in Africa and other developing and food procurement challenges. In the short term, countries. infrastructure gaps, internal budgetary pressures, Operating environment high population growth, exogenous shocks, as well as the recovery cost following a return to peace in Economic the North (Sudan) will limit the prospects for faster Uganda has reflected strong growth over the past growth. few years, with GDP growth amounting to an estimated 6.8% in 2007 (2006: 5.1%). Economic Regulatory growth has been largely driven by the increased NWSC's operations are governed by the NWSC upswing in the transport and communications Act, which sets out the functions and operating sector, growing at an annual average rate of 19.2% structure of the corporation, while the Water Act of since 2002. During this period, the country has 2000 stipulates the utility's jurisdiction and overall Global Credit Rating Co. ­ Uganda Water Utility Credit Rating Report regulatory framework. Under the Act, Uganda's largest service area of Kampala poses a significant Ministry of Water and Environment ("MWE") has threat to NWSC's operations in the short to the responsibility of setting national policies and medium term. This has been exacerbated by illegal standards for water development and management. water connections and vandalism of water NWSC thus operates under the direction of the infrastructure, which has resulted in increased non- MWE and the Ministry of Finance (which has revenue water (unaccounted-for water), especially representation on the board as set by an Act of in the Kampala area. As such, although non- parliament). The Ministry of Finance's interest in revenue water has come down significantly from the corporation is derived from the capitalisation of around 60% 10 years ago, Kampala is the only area debt, which resulted in a substantial amount of recording non-revenue water above the 20% equity stock being held by the ministry. Overall, accepted level for developing countries, at 38.5% however, NWSC operates under a transparent (F06: 35.7%), two thirds of which is stolen. Other environment, which has helped eliminate the areas averaged 18.2% from 15.2% previously. inefficiencies of the past allowing for quicker Hence, given Kampala's sizeable contribution, decision making. The corporation has undergone a NWSC's overall level of non-revenue water number of commercialisation processes, which increased to 32.5% in F07 (F06: 29.7%). have greatly improved its efficiency. However the major problem is that the tariff is still not at full IDAMCs cost recovery, which impairs the ability of the IDAMCs were introduced in March 2005 and corporation to effectively meet its investment signed in June of that year. These are contracts that needs. are tendered internally for the management of service provision in the 22 towns under the Operations corporation's jurisdiction. Once an area management contract is open, interested and The corporation is responsible for both asset eligible employees submit tenders for the contract, development and service provision, and operates which include a business plan and operating within a clearly defined operating and management budgets. A committee (independent of the board) structure. As at year end F07, the corporation had a then selects an area manager based on the staff complement of 1,338 (96% of which are on applicants' business plan. Once selected, the contract terms), up from 1,067 previously. NWSC employee is awarded a two-year contract to manage sources the bulk of it raw water from Lake service provision in the area. The area manager is Victoria, to supply the areas of Kampala, Jinja and responsible for the majority of the area's operating Entebbe (which represent over 80% of the functions, including the hiring of staff (internally or corporation's water sales). Over recent years, the externally). Managers submit quarterly and annual receding levels of water in Lake Victoria, as a reports to the corporation, which access the area's result of a drought in the region, have seen a performance relative to others. Awards for good deterioration in the quality and quantity of raw performance and penalties for poor performance water sourced. This has in turn seen higher are issued at various intervals. treatment costs and frequent clogging of filters, which has forced NWSC to ration water supply in IDAMCs were set up in order to separate the these areas. Sewerage coverage remains very low function of asset management from that of (currently estimated at 6%), constrained by limited operations. However, as a means of effectively network capacity. This has largely been due to low operationalising the IDAMC in the Kampala area investment in this area in the past, as well as (which accounts for roughly 70% of water limited funding. revenue), Zonal Performance Contracts ("ZPCs") were established for the area in 2005. This saw Over the review period NWSC increased its water autonomy being transferred to the zones, resulting production by 18%, with total annual water in improved accountability and efficiency. While production reaching 60.5 million m3 in F07. The operational functions and administration of service growth in water production was due to major areas are decentralised (including new connections, refurbishment of treatment plants and increased mains extensions, leak control and billings), the efficiency in production as well as the completion following functions have remained centralised: of the Gaba III project (which increased capacity). Maintenance This notwithstanding, demand for water is currently Quality control at 208,000 m3 per day, whilst NWSC has capacity Bulk procurements to supply 317,981 m3 of treated water per day. As Block mapping such, aging infrastructure and strain caused by Taxes rapidly increasing demand (urban growth is estimated at 4.5% per annum) in the corporation's Global Credit Rating Co. ­ Uganda Water Utility Credit Rating Report Water & Sanitation sales and tariffs NWSC reflects a very high proportion of debtors In 2002, Cabinet approved an annual fomula-based over 360 days, which largely consist of amounts indexation policy in order to stop further erosion of owed by the GoU. While efforts are being made to tariffs thus seeing an improvement in water reduce the amount owed by the government, it margins. This notwithstanding, tariffs are not at full places significant strain on the corporation's cost recovery. Under the current legal framework, liquidity, which undermines its ability to expand. tariff increases can only be approved by the MWE, As at year-end 2007, the total amount owed by although no formal real tariff increase plan is in government institutions was UShs15.1bn. place. At present, a uniform tariff policy is applied Table 3: Water and sewerage F06 F07 in all areas, with lower tariffs for public standpipes debtors UShs'm % UShs'm % and domestic consumers and higher tariffs for Industrial/commercial 6,126.0 19.8 6,437.0 17.9 government and commercial consumers. However, Domestic 11,067.0 35.8 12,250.0 34.0 block tariffs for industrial and commercial Government/institutions 12,732.0 41.2 15,139.0 42.1 consumers decline as consumption increases. It is Other 949.7 3.1 2,157.6 6.0 noted that the current structure provides an Total 30,874.7 100.0 35,983.6 100.0 Provision for bad/doubtful debts (9,694.6) (31.4) (7,392.9) (20.5) incentive for the corporation to supply more water Net debtors 21,180.1 68.6 28,590.7 79.5 to commercial consumers in times of water shortages. Sewerage tariffs for all areas are based Overall, the reluctance to pay water bills, on the amount of water consumed (75% for particularly among domestic and government domestic consumers and 100% for other consumers, has made collections difficult. The categories). corporation's credit control policy allows In F07, NWSC increased its number of water customers 14 days to pay their bills, thereafter connections by 19% to 180,679. The demand for NWSC can cut off water supply. The corporation new (particularly domestic) connections has been has, however, stopped disconnecting customers for driven by the new connection policy implemented non-payment in order to reduce the vandalism of in 2004. In terms of the policy, new customers are infrastructure. To support this initiative NWSC has not billed a connection fee, although existing appointed an outside debt collector to collect clients pay a small surcharge each month, which is debtors amounts over 3 months old. In this regard put aside for new connections (thereby ultimately the significant decline in the proportion of long subsidising connection costs). Demand for outstanding debtors (from 47% in F06 to 31% in commercial connections has been driven by strong F07) is noted. Although not fully automated, the growth in the commercial and industrial sectors. corporation's billing efficiency remains high, with errors estimated at less than 1%. Table 1: Water market No. of % of total % of total segments connections connections revenue External services Industrial/commercial 20,397.0 11.3 33.1 This department's role is to market NWSC's Domestic 149,478.0 82.7 36.0 expertise and to benchmark the corporation's Government/institutions 5,504.0 3.1 28.7 performance against other utilities. The division Other 5,318.0 2.9 2.2 Total 180,697.0 100.0 100.0 also aims to promote capacity building and sustainable management of water and sewerage Although 83% of connections related to domestic systems through the running of capacity building consumers, a significant 33% and 29% of revenue programmes with other water utilities. Over the is garnered from commercial and government years, the corporation's staff have developed a set consumers respectively, given the higher tariffs that of skills, which has allowed it to offer advisory and apply to them. Although the number of water project management services to other utilities. The connections increased in F07, the increase in the division carries out a number of projects in amount of water volumes sold was negligible as a partnership with these utilities. result of reduced raw water supply, given the prevailing drought in the region. At present the division operates profitably, however, with only a small portion of the shared Table 2: Debtors F06 F07 costs being absorbed by the corporation. In F07, age analysis UShs'm % UShs'm % this division contributed UShs224m to revenue and Current 275.7 0.9 1,480.6 4.1 30-90 days 4,022.0 13.0 13,547.0 37.7 UShs127m to operating profit. As detailed in 91-180 days 6,553.0 21.2 4,686.0 13.0 NWSC's corporate plan, the ultimate goal is to spin 181-360 days 5,656.0 18.3 5,152.0 14.3 off the external services division, allowing it to >360 days 14,368.0 46.6 11,118.0 30.9 operate as a self-sustaining subsidiary. In addition, Total 30,874.7 100.0 35,983.6 100.0 in an effort to improve staff knowledge and skills the corporation has recently embarked on the Global Credit Rating Co. ­ Uganda Water Utility Credit Rating Report construction of a training centre (at an estimated quality pushed up the cost of water treatment. total cost of US$1.6m), which according to Foreign-denominated expenses constituted 12% of management will be funded internally (5 year pay total expenses, which are not hedged, thereby back period). The centre will offer skills and exposing the company to foreign exchange management training to various staff in the utility fluctuations. NWSC reported EBITDA of industry. UShs18bn in F07 (F06: UShs13.7bn), translating into a marginally improved EBITDA margin of Financial performance 26% (F06: 24%). Following an increased A 5-year financial synopsis of the company's depreciation charge of UShs11.4bn (F06: performance is reflected at the back of this report UShs9.7bn), NWSC reported a 64% increase in and brief comment follows. operating income to UShs6.6bn, to see an improved operating margin of 9.7% in F07 (F06: 7.0%). The Over the review period, NWSC has evidenced capitalisation of NWSC's interest-bearing debt strong revenue growth, with a 5-year compound resulted in net finance income of UShs396m in average growth rate of 19%. In F07, operational F07, a stark contrast to the UShs8.9bn net cost in revenue grew by a robust 19% to UShs68bn. F06. Consequently, NWSC registered net income Despite the aforementioned decrease in water after tax of Ushs6.9bn against a loss of Ushs5bn in supply (which resulted in an insignificant increase F06, a direct result of the lifting of the interest in volumes sold in F07), the increase in revenue burden. Taxation reduced after tax profits to was also supported by the tariff inflation Ushs1.1bn, from a loss of Ushs17.2bn in F06. The adjustment, coupled with rationing of water for latter was driven by the significant taxation expense domestic consumers, which saw the bulk of the of UShs12.2bn in the prior year. This was due to an water sold to industrial/commercial consumers at under-provisioning of deferred taxation amounting higher average tariffs. Other income, which to UShs11.2bn. In F07 the corporation reported net comprises reversals of provisions, exchange income of UShs1.1bn following a reduced tax gains/losses and deferred income, increased by charge of UShs5.8bn. 158% to UShs2.3bn. NWSC's improved operating performance drove a Table 4: Operating F07 F07 Variance 72% rise in cash generated by operations to performance (UShs'm) Actual Budget (%) UShs19.1bn. However, an increase in trade debtors Income resulted in a UShs4.2bn working capital absorption Water & sewerage income 68,146.1 68,302.0 (0.2) Other income 1,017.2 760.0 33.8 in F07 (F06: UShs1.9bn). With the payment of Deferred income 1,243.7 732.0 69.9 interest on the government loan having been Direct op. revenue 70,407.1 69,794.0 0.9 suspended in 1999, the corporation has evidenced Expenditure net finance inflows over the review period. In F07 Staff costs (18,191.5) (20,674.0) (12.0) NWSC reported a net finance inflow of UShs396m, Service gratuity (2,016.6) (1,763.0) 14.4 up from an inflow of UShs95m in F06, to see cash Terminal benefits (2,810.1) (0.0) n.a flow from operations of UShs15.3bn in F07 (F06: Administrative costs (6,670.4) (8,133.0) (18.0) UShs9.3bn). Static plant & network repair (13,544.9) (10,574.0) 28.1 Supplies and services (4,729.1) (5,537.0) (14.6) Funding profile Premises maintenance (2,023.4) (2,019.0) 0.2 Transport (2,434.5) (2,263.0) 7.6 Having carried interest-bearing debt of UShs84bn Direct op. expenditure (52,420.4) (50,963.0) 2.9 on balance sheet, NWSC became ungeared for the Depreciation (11,465.4) (12,541.0) (8.6) first time over the review period in F07. This Net finance income 394.6 0.0 n.a followed the conversion of loan stock to equity, Surplus/(deficit) before tax 6,915.8 6,290.0 9.9 which was approved by the Cabinet on the 30th of Taxation (5,782.4) (1,887.0) 206.4 May 2007. As a result, government held equity and Net surplus/(deficit) 1,133.4 4,403.0 (74.3) retained earnings, as well as a substantial amount of Operating expenditure (of which staff costs interest-free liabilities and capital grants from comprised a high 44%, including service gratuity international development partners now largely and terminal benefits) increased by 18% to fund NWSC's assets. UShs52.4bn in F07, driven largely by the Capex projects and funding recruitment of new middle management staff. Given the energy intensive nature of NWSC's As at June 2008, an external asset revaluation of operations, electricity and fuel continued to be the corporation's water infrastructure was significant cost drivers in F07 (21% of total costs), undertaken, with assets valued at UShs483bn. exacerbated by frequent power cuts and erratic In F07, the most significant capex activity was the supply. In addition, a deterioration in raw water completion of the Gaba III water supply project, Global Credit Rating Co. ­ Uganda Water Utility Credit Rating Report adding 80,000 m3 of water production capacity in ending March 2008, the company had achieved Kampala. As at year-end 2007, a substantial 71% of budgeted revenue, while operating costs UShs42bn (F06: UShs11.1bn) of the corporation's were marginally higher at 78% of budget. Staff non current assets comprised of 11 capital projects costs are budgeted to remain high at 44% of total in progress. These are expected to see a significant expenses in F08 and are expected to continue increase in water production capacity over the short driving the corporation's costs in the short term, to medium term, as well as a reduction in non- although relative costs should reduce as capacity revenue water. The following table outlines the comes onboard. As at March, staff costs capex program for F09 and F10. represented an unchanged 44% of overall costs, and Table 5: Capex budget Ushs'm F08 F09 an annualised 104% of full year budget. Overall, Capital expenditure the company was in line to meet profit forecasts at Land 90.0 5.0 the end of the third quarter. Buildings 1,474.0 3,272.3 Static plant/network extensions 33,402.0 55,061.9 Table 6: Operating YTD* F08 F09 performance/budget (UShs'm) Vehicle and mobile plant 112.0 107.8 Furniture and equipment 1,718.0 2,306.0 Income Total capex 36,796.0 60,753.0 Water and sewerage income 55,490.2 77,771.0 86,213.0 Contribution to projects 11,675.0 5,755.0 Other income 4,215.1 321.5 321.5 Total capex 48,471.0 66,508.0 Deferred income 0.0 0.0 0.0 Direct operating revenue 59,705.3 78,092.5 86,534.5 Capex funding Internal funds 22,761.0 20,510.5 Expenditure Bond issue -- 30,000.0 Staff costs (19,683.4) (25,315.0) (27,700.0) ADB loans 1,760.0 -- Administrative costs (4,603.7) (6,736.0) (7,390.0) IDA loans 3,300.0 -- Static plant and network repair (11,989.2) (14,684.0) (15,418.0) AFD loans -- 10,997.5 Supplies and services (4,958.8) (6,225.0) (6,848.0) KfW/GoU 5,720.0 -- Premises maintenance (1,500.8) (1,947.0) (2,044.0) UN Habitat 80.0 -- Transport (2,198.1) (2,927.0) (3,073.0) GoU grants 14,850.0 5,000.00 Direct operating expenditure (44,934.0) (57,834.0) (62,473.0) Total 48,471.0 66,508.0 Depreciation and amortisation (8,997.3) (12,783.0) (14,121.0) NPBT 5,774.0 7,475.5 9,940.5 Overall, the financial strategy for the corporation is *9 months ending March 2008. to finance the expansion of sanitation through grants and use commercial finance specifically for Whilst the short term challenges faced by NWSC commercial projects. Total capex spend of remain, cognisance is taken of the longer term UShs115bn is projected over the next two-year benefits to be derived from the capex programme, period, a substantial amount of which will be alleviating the strain on existing infrastructure and funded internally and from grants from the GoU. positioning the company to take full advantage of Additional funding to be disbursed over the next growing demand. This notwithstanding, the few years includes a 30m grant from the African investment in infrastructure will result in a rise in Development Bank ("ADB"), a 7m grant from the gearing over the next three years, with gross debt to European Union ("EU") and a 6m grant from EBITDA expected at around 170% in F09, from a KfW. All of this will be restricted to sanitation, previously ungeared position in F07. NWSC's which currently lags water service provision. In liquidity is expected to remain adequate in the short terms of debt funding, the corporation plans to to medium term. issue a UShs30bn bond in the first half of F09 and Table 7: Forecast balance sheet take a loan of UShs11bn from the French (UShs'm) F08 F09 F10 Development Agency ("AFD"). The full amount Property plant & equipment 416,496 466,202 531,582 from the AFD loan is to be used to finance the Jinja Trade & other receivables 36,169 41,744 45,949 and Gaba intake extensions, while the bond finance Cash& equivalents 8,165 9,367 9,747 is to be divided as follows: Kampala network Other assets 9,519 9,818 10,118 Total assets 470,349 527,131 597,396 rehabilitation (UShs18bn), Arua (Ushs1bn), Equity and reserves 308,596 321,107 352,825 Bushenyi (UShs2.2bn), Mukono (UShs4.0bn) and Total interest-bearing borrowings -- 40,998 80,000 procurement of electromechanical equipment Other liabilities 161,753 165,026 164,571 (UShs4.9bn). Total capital employed 470,349 527,131 597,396 Future prospects The corporation is expected to continue reporting strong operational revenue growth over the short term, supported by growth in the customer base. Water and sewerage revenue is expected to increase by a robust 14% in F08. For the nine months Global Credit Rating Co. ­ Uganda Water Utility Credit Rating Report National Water and Sewerage Corporation (UShs in millions except as noted) Income Statement Year end : 30 June 2003 2004 2005 2006 2007 Revenue 33,604.5 39,095.2 50,934.8 57,347.7 68,146.1 Other income* 2,672.6 3,716.6 2,952.2 877.4 2,260.0 Operating expenditure (29,069.0) (31,599.1) (40,334.0) (44,523.1) (52,420.4) EBITDA 7,208.1 11,212.7 13,553.0 13,702.0 17,985.7 Depreciation (7,262.3) (9,650.1) (9,450.1) (9,692.9) (11,391.5) Operating income (54.2) 1,562.5 4,102.9 4,009.1 6,594.2 Amortisation (31.3) (72.4) (94.7) (86.7) (73.9) Net finance charges (10,935.9) (7,199.2) (9,560.9) (8,932.1) 395.6 Income after finance charges (11,021.4) (5,709.0) (5,552.7) (5,009.7) 6,915.8 Exceptional Items** 0.0 0.0 26,263.5 0.0 0.0 Taxation 6,034.9 0.0 3,658.2 (12,190.0) (5,782.4) Net income (4,986.5) (5,709.0) 24,369.0 (17,199.7) 1,133.4 Cash Flow Statement Cash generated by operations (4,215.8) 4,946.8 6,694.2 11,089.5 19,118.6 Working capital: (increase)/decrease 10,457.4 7,207.4 3,405.0 (1,928.2) (4,204.4) Net finance charges 213.6 570.5 655.9 94.7 395.6 Cash flow from operations 6,455.2 12,724.8 10,755.0 9,256.0 15,309.8 Net capex and investments (16,040.7) (10,791.9) (18,731.9) (10,835.1) (10,728.8) Capital contributions 8,187.2 772.6 5,412.5 710.8 0.0 Cash movement: (increase)/decrease n.a. (3,439.9) 2,719.6 899.7 (4,515.5) Borrowings: increase/(decrease) n.a. 841.4 0.0 0.0 0.0 Net increase/(decrease) in debt n.a. (2,598.5) 2,719.6 899.7 (4,515.5) Balance Sheet Capital and reserves 92,222.8 87,259.7 95,609.3 82,271.6 257,513.0 Total interest-bearing debt 84,131.2 84,779.5 84,670.8 84,985.9 0.0 Short-term 9,462.4 14,281.2 18,933.0 41,376.3 0.0 Long-term 74,668.8 70,498.3 65,737.9 43,609.6 0.0 Interest-free liabilities 44,939.2 53,452.8 92,982.3 111,632.9 148,332.7 Total liabilities 221,293.2 225,492.1 273,262.5 278,890.4 405,845.7 Fixed assets 154,160.9 189,182.3 223,107.6 230,438.2 313,906.5 Projects in progress 43,042.1 7,506.4 12,719.2 11,094.3 41,999.1 Investments 0.0 0.0 0.0 0.0 0.0 Cash and cash equivalents 6,351.6 9,791.3 7,071.8 6,172.1 10,687.6 Net trade debtors 12,255.2 13,003.7 20,752.0 21,180.1 28,590.7 Other current assets 5,483.5 6,008.3 9,611.8 10,005.6 10,661.8 Total assets 221,293.2 225,492.1 273,262.5 278,890.4 405,845.7 Ratios Operating: 3 Billed water sales (m ) - millions 31.2 34.2 38.2 40.8 40.8 Volume increase (%) 11.0 9.6 11.7 6.8 0.0 Turnover growth (%) n.a. 16.3 30.3 12.6 18.8 Collection efficiency (%) 92.0 98.0 89.0 90.0 92.0 Staff costs : operating costs (%) 22.0 28.1 40.9 33.3 36.1 Staff costs : revenue (%) 23.7 29.6 39.9 31.5 33.8 Staff per 1,000 connections 11.0 10.0 9.0 7.0 7.0 Water distribution losses (%) 39.4 37.6 33.8 29.7 32.5 Net capex : revenue (%) 47.7 27.6 36.8 18.9 15.7 Cash Flow: Operating cash flow : total debt (%) 7.7 15.0 12.7 10.9 n.a Operating cash flow : net debt (%) 8.3 17.0 13.9 11.7 (143.2) Profitability: EBITDA : revenues (%) 21.4 28.7 26.6 23.9 26.4 Operating profit margin (%) (0.2) 4.0 8.1 7.0 9.7 EBITDA : average total assets (%) n.a 5.2 5.6 5.1 5.4 Coverage: Operating income : gross interest (x) (0.0) 0.2 0.4 0.4 n.a Operating income : net interest (x) (0.0) 0.2 0.4 0.4 (16.7) Activity and liquidity: Days receivable outstanding (days) n.a. 137.2 157.6 133.4 133.3 Net debtors : total income (%) 36.5 33.3 40.7 36.9 42.0 Current ratio (:1) 0.4 0.4 0.4 0.3 3.8 Average days working cash (days) 49.0 73.8 43.5 35.7 61.5 Capitalisation: Net debt : capital and reserves (%) 84.3 85.9 81.2 95.8 neg Total debt : total assets (%) 38.0 37.6 31.0 30.5 0.0 Total debt : EBITDA (%) 1,167.2 756.1 624.7 620.2 0.0 Net debt : EBITDA (%) 1,079.1 668.8 572.6 575.2 (59.4) Total debt : total income (%) 250.4 216.9 166.2 148.2 0.0 Net debt : total income (%) 214.4 175.2 144.0 135.4 neg * Including exchange gains/losses ** Exceptional item relates to an impairment reversal for static plant Office National de L'eau et de L'assainissement (ONEA) Burkina Faso Water Utility Analysis July 2008 Security class Rating scale Currency Rating Rating watch Expiry date Long term National CFA BBB+ No 07/2009 Short term National CFA A2 Financial data: Rating rationale (US$'m Comparative) The rating is based on the following key factors: 31/12/06 31/12/07 · ONEA is the monopoly supplier of potable water within the urban areas CFA/US$ (avg.) 539.9 492.9 of Burkina Faso. CFA/US$ (close) 517.2 454.6 · The utility has close ties to the state and operates in a regulated Total assets 376.8 445.6 environment, overseen by the Ministry of Agriculture, Water Supply and Total debt 114.7 130.4 Fishery Resources. Total capital 229.4 280.8 · In addition, although government does not explicitly guarantee the Cash & equiv. 12.1 20.0 utility's debt, cognisance is taken of the fact that any new borrowings Revenue 38.6 48.7 require ministerial consent. EBITDA 15.2 18.7 · Liquidity levels appear to be adequate, while cash flow from operations NPAT 2.0 1.0 has improved somewhat in recent years. Op. cash flow 9.4 14.5 · The operating margin has remained negative in each year over the review Market cap. n.a. period, implying that tariff increases are insufficient to address operating Market share* 76% requirements. However, operating losses have historically been more than covered by Hors Activites Ordinaires (reflected as extraordinary * Rate of overall service to 31/12/2007. income). Fundamentals: · The utility displays a poor debtors collection profile, with the collection period of 206 days being significantly higher than international norms. A public water utility was established in · While a fairly large component of capital expenditure has being funded 1945, which subsequently underwent through grants in recent years, cognisance is taken of the government's various stages of change, culminating in stated intention of moving away from direct investment in the water the establishment of Office National de sector in the medium to long term. The shortfall in grant funding will be L'eau et de L'assainissement (ONEA) in replaced through concessional loans, while new borrowings are being 1985. The utility was transformed into a assessed as a means to address insufficient internal funds. Cognisance is 100% state owned public company in 1994, with legal and financial autonomy. taken of the associated financial risk, with gearing levels forecast to Sanitation services have been provided by increase to levels well above historical norms in the coming years. the utility since 1985. Burkina Faso's · A further challenge for ONEA is the replacement of its aging urban and rural water sector institutional infrastructure, which would likely enable lower unaccounted for water framework is organised around three losses. institutions, namely government agencies, territorial communities and ONEA. Funding profile ONEA is responsible for water and sanitation to urban and semi-urban areas Total interest bearing debt was largely unchanged at CFA59.3bn in F07, of in Burkina Faso. which short term debt comprised CFA4.1bn, or 7% (F06: 5.1%). Total debt GCR contacts: declined to 46% of total capital and reserves (F06: 50%), while net debt to equity decreased to 41% from 46% in F06. Furthermore, total debt to Marc Joffe EBITDA was posted at a review period low of 643% in F07 (F06: 723%). +27 11 784-1771 Cash and cash equivalents increased by CFA2.8bn to CFA9.1bn in F07. This joffe@globalratings.net supported an increase in the level of cash holdings covering short term debt to 2.2x from 2.1x in F06. In addition, the level of days cash on hand Website: www.globalratings.net increased to 118 days in F07, from 101 days previously. Total net debtors were posted at a 1.8% higher CFA13.6bn in F07. The debtors collection period increased for a third consecutive year to a high 206 days (F06: 189 days). This document is confidential and issued for the information of clients only. It is subject to copyright and may not be reproduced in whole or in part without the written permission of Global Credit Rating Co. ("GCR"). The credit ratings and other opinions contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information is given or made by GCR in any form or manner whatsoever. Operating environment The monetary indicators for Burkina Faso are reflective of its economic improvement. The low Economic inflationary measures mentioned above are Burkina Faso has experienced fairly healthy long projected to remain subdued for both 2008 (2%) term economic growth, as evidenced by its average and 2009 (1.9%), and this maintenance of annual GDP growth of 5.9% over the period 1997- purchasing power has been aided by currency 2006. The economic growth rate for 2006 equalled appreciation. As a member of the WAEMU, 6.1% (2005: 7.1%), although the figure for 2007 Burkina Faso's monetary policy, defined by the equates to 4.3%. The reason for this lower level is Central Bank of West African States (BCEAO), largely attributed to the decrease in the level of has the primary objective of controlling inflation, a cotton production, upon which Burkina Faso's guideline strongly influenced by the Euro Zone, economy is reliant. Projections, however, indicate since the CFA is pegged to the Euro. The exchange a modest recovery, as 2008's growth rate stands at rate for 2007 against the US$ was CFA492.9, a forecast 4.7%. It is noted that Burkina Faso's representing an 9% appreciation against CFA539.9 growth for 2007 surpasses that rate achieved by the for 2006 (2005: CFA527.5). The current account West African Economic and Monetary Union deficit amounted to a high 14.9% of GDP in 2007 (WAEMU) for the same period, which averaged (2006: 15.2%), although the privatisation of 2.9%. The country has attained this economic ONATEL (the national telecommunications accomplishment while keeping its inflation rate at bureau) led to a transaction of US$336m, allowing an efficient level: 2007 realised inflation of 2% for a balance of payments surplus of US$379m (2006: 2.4%), a number significantly lower than (2006: US$84m). the 6.4% recorded in 2005, mainly due to healthy food-crop production and sufficient supply to the Regulatory markets. ONEA's activities are regulated by the Ministry of Agriculture, Water Supply and Fishery Resources Despite this economic expansion and performance, (MAWFR), whose parent body is the Directorate Burkina Faso remains one of the poorest countries of Water Resources (DWR). The utility is managed in the world, substantiated by the fact that 45% of by a Board, which convenes on a regular basis in the population lives on less than US$1 per day. accordance with its statutes. The Board submits an The country's economic performance remains annual general report detailing ONEA's financial hampered on account of poorly diversified and economic situation to the General Assembly of agriculture, insufficient road coverage, constrained State Corporations (GASC), which is chaired by energy supply and the fact that it is landlocked. the Prime Minister. The GASC approves ONEA's Cotton's position as the primary agricultural accounts and makes recommendations, as well as product, accountable for 82.7% of the country's provides guidelines to the Chairperson of the total exports, has restrained economic progression Board and the Managing Director (MD), who is due to the unresolved problems within the cotton appointed by the Board. The MD oversees day to industry. The government has, however, joined day management of the utility, and is assisted by a with three other cotton producing countries in the Secretary General and management committee region, namely Mali, Niger, and Chad, to lobby the comprising nine main functional departments World Trade Organisation for fewer subsidies to namely: Sanitation; Operations; Finance; Human producers in other competing countries. Resources; Customer Care; Procurement & Logistics; Planning & Investment; IT; and Agriculture contributes 21% to GDP and employs Department in charge of Ziga dam operations 90% of the population (largely engaged in (discussed later in the report). Management meet subsistence agriculture), however, remains on a monthly basis, while weekly reviews are vulnerable to periodic drought. Consequently, the undertaken of all business units. diversification index for the country (a variable compiled by the African Development Bank and The Board determines overall policy objectives. OECD to measure the extent to which exports are The Director General is responsible for studying diversified) amounted to just 1.5, which measures tariff changes and proposes appropriate tariffs in poorly against the low African average of 3.6. The line with achieving targets set in ONEAs mandate. other sectors within the country that constitute the These rates are adopted by the State prior to their main contributors to GDP are livestock, forestry application. ONEA is, however, subject to and fisheries (14%), manufacturing (14%), and restrictions regarding its borrowing requirements, trade, transport and communications (14%). for all amounts exceeding CFA 1 billion and terms of payment exceeding one year. Global Credit Rating Co. ­ Burkina Faso Water Utility Credit Rating Report Operations ONEA has a reasonably stable staff complement. As at December 2007, the company had 660 ONEA is mandated to supply potable water to permanent staff, which are divided into 129 private and public sector consumers on a basis that managers, 163 supervisors and 368 implementing enables the utility to fully recover its costs. With agencies and agents. The majority of staff are respect to sanitation, ONEA's mandate includes relatively young. Attrition is low, at less than 2% the collection and recycling of used water in all per annum. The management to staff ratio is 44.2% cities where potable water is distributed. However, (managers and supervisors), while the staff to sanitation is not very developed and at this stage subscriber ratio in 2007 was 4.6 per 1,000 only covers Ouagadougou (50%) and Bobo- connections, an improvement from 7 per 1,000 Dioulasso (35%). ONEA receives financial support connections in 2005. The ONEA Centre for Water from its financial partners in the form of Treatment and Sanitation evaluates training needs operational and capital subsidies. and ensures implementation of the company's training programme for internal and external staff. ONEA operates on the basis of triennial contracts, Government does not interfere in staffing which state the commitments of government requirements. relating to water sector management, and clearly establishes performance targets and indicators. The Water distribution losses are in the range of 18%, latest contract outlines commitments and compared to a target of 16%. The age of water determines technical, financial and commercial infrastructure is very high, particularly in objectives, evaluated based on performance of 28 Ouagadougou and Bobo-Dioulasso. This will be indicators. ONEA also works on a contractual addressed through an equipment renewal policy basis with municipalities. In addition, ONEA has based on five year plans. signed conventions of partnership with some Water & sanitation sales and tariffs municipalities that do not have safe drinking water. Tariffs reflect, as far as is possible, the required These conventions provide a contractual revenue necessary to cover all costs. A tariff framework whereby ONEA offers advisory review is conducted every five years. ONEA lacks support and technical expertise for the the financial autonomy to set tariffs, however, it is development and implementation of municipal empowered to (and does) propose tariff structures development plans for supplying drinking water, to its Board of Directors (Board), based on health and sanitation. financial requirements. Once Board approval is obtained, the proposal is forwarded to the Council The utility's operations are largely decentralised, of Ministers for consideration and final approval. with operational departments overseen by regional 3 directors in Ouagadougou and Bobo-Dioulasso, as Table 1: Water tariffs (CFA/m ) well as 43 auxiliary centres throughout the country. Private consumers 3 2002 ONEA also owns and runs six laboratories for 0-6 m 180 3 water quality assurance. The utility provides 7-30 m 370 3 metered networked services and manages Over 30 m 1,040 standpipes to private households, government Private consumers (2008)* branches and municipalities. Water is sourced via a 0-8 m 3 188 combination of underground and surface water (8 9-15 m 3 430 dams), various boreholes across the country and 16-30 m 3 509 natural springs. Following treatment and cleansing, Over 30 m 3 1,040 the raw water is sent to various water reservoirs for * Tariffs were amended as at 1 July 2008. domestic, industrial and public use. Water supply is assured to approximately two thirds of ONEA's Different tariffs apply to different consumer service area on an ongoing basis, with the sectors based on consumption, with larger remaining one third requiring rationing, consumers subsidising smaller consumers, while particularly between the high drought months of larger centres in the service area support small March to May. centres that are in deficit. GCR notes that future tariff increases could be constrained by low wealth Current infrastructure geared towards the Ziga dam levels displayed by the majority of the populace (Phase 1 completed in 2007,), with an eventual and the fact that new connections to networks tend capacity of 200 million m3, will generate sufficient to be to indigent households. water capacity to cover all of Ouagadougou and surrounding areas for the foreseeable future. Global Credit Rating Co. ­ Burkina Faso Water Utility Credit Rating Report The following table compares tariff increases to ONEA has consistently posted an operating deficit inflation over the past five years. The average over the review period, with the operating margin water tariffs implemented by ONEA between F03 posted at negative 8.1% in F07 from negative 3.3% and F06 were lower than CPIX inflation. previously. The operating deficit worsened to CFA2bn in F07 from CFA696m in F06. Interest Table 2: (% annual F03 F04 F05 F06 F07 received amounted to only CFA80m, compared to change) financial costs of CFA2.3bn, and accordingly, net Average water tariff* 423.3 493.2 464.7 514.7 n.a. CPIX inflation 2.0 (0.4) 6.4 2.4 2.0 finance charges more than doubled to CFA2.2bn in * This is the average price of m3 of water sanitation fee included in the F07 (F06: CFA1bn). The government of Burkina period 2003 to 2007. Faso assumes the risk of all foreign denominated liabilities of the utility, and as such, no forex Financial performance movements are incurred by the company. Extraordinary income of CFA5bn (Hors Activites A synopsis of ONEA's financial results for the past 5 years is reflected at the end of this report, with Ordinaires), relating to the writing off of brief comment following. depreciation from investment subsidies (non cash accounting adjustment), supported the net result in F07, with net profit after tax reported at CFA708m Sales volumes of water increased by 9.7% to 40 in F07 (F06: CFA1.1bn). Although it is million m3 in F07. ONEA posted a 15% increase in government owned, ONEA operates as a private total revenue to CFA24bn in F07, driven by a 13.1% increase in water & sanitation revenue to sector company and is liable for income tax. CFA20.6bn. Growth in revenue in recent years has Cash generated by operations amounted to been supported by the additional sales generated CFA8.8bn in F07 (F06: CFA9bn). Following the through the Ziga dam project for supplying water first working capital release in three years, of to Ouagadougou. Overall, total revenue has increased by an annual average compound rate of CFA510m (F06: CFA2.9bn absorption), and 12% over the period F03 to F07, which is well higher net finance charges of CFA2.2bn (F06: CFA1bn), cash flow from operations was recorded above inflation over the same period. Operating at a review period high of CFA7.1bn (F06: subsidies increased by 48% to CFA1bn in F07, or CFA5.1bn). Operating cash flow as a percentage of 4.3% of total income (F06: 3.4%). net debt increased to 14.2% in F07, from 9.6% in Table 3: Operating F07 F06. Following four years of comparatively high Performance (CFAm) Actual Budget % of budget capital expenditure spend, net expansionary capex Income more than halved to CFA13.6bn in F07. Water & sanitation sales 20,621 20,331 101.4 Accordingly, net capex to total income fell to 57% Operating subsidies 1,039 39 2,664.1 in F07 from 138% previously. Capital grants Other operating income 2,346 2,242 104.6 received remained high at CFA14bn in F07 (F06: Total revenue 24,006 22,612 106.2 CFA15.7bn). ONEA recorded a CFA7.6bn Staff costs (4,187) (4,088) 102.4 decrease in net debt in F07, following three Related purchases (3,511) (4,034) 87.0 consecutive years of increases cumulatively Electricity (2,905) (2,738) 106.1 totalling CFA31bn. Other operating expenses (4,180) (2,819) 148.3 EBITDA 9,222 8,933 103.2 Liquidity and gearing Depreciation (11,175) (10,044) 111.3 Operating result (1,953) (1,111) 175.8 Total interest bearing debt was largely unchanged Net finance costs (2,189) (2,257) 97.0 at CFA59.3bn in F07, of which short term debt Extraordinary items 5,045 4,679 107.8 comprised CFA4.1bn, or 7% (F06: 5.1%). Total Taxation (195) (195) 100.0 debt declined to 46% of total capital and reserves NPAT 708 1,116 63.4 (F06: 50%), while net debt to equity decreased to 41% from 46% in F06. Furthermore, total debt to Operating expenditure (including depreciation) EBITDA was posted at a review period low of increased by 20.4% to CFA26bn in F07, well 643% in F07 (F06: 723%), although this remains above revenue growth for the year. The primary relatively high. components of operating expenditure are depreciation (43%), staff costs (16%), related Total borrowings are mainly comprised of various purchases (14%) and electricity costs of CFA2.9bn concessional loans from international funding (11%). Staff costs increased by a modest 4% to agencies, such as the African Development Bank CFA4.2bn in F07, and accounted for a review (roughly CFA16bn), BEI (CFA8.2bn) and IDA period low 17.4% of revenue (F06: 19.3%). (CFA17.7bn). While these loans are mainly Global Credit Rating Co. ­ Burkina Faso Water Utility Credit Rating Report sourced in foreign currency, as mentioned endeavour to repay all amounts owing. In terms of previously, the government of Burkina Faso the utilities credit control policy, private assumes the foreign exchange risk of all foreign individuals (households) are given 90 days to pay denominated liabilities of the utility. Although their accounts (includes notification of overdue government does not explicitly guarantee the amounts), after which the water service is cut off. utility's debt, cognisance is taken of the fact that This is only re-instated once the customer any new debt requires ministerial consent (which addresses at least 50% of their historical account according to management is decided fairly quickly and signs a commitment to pay off the balance. A by government). The utility exhibits a fairly well penalty fee of CFA2,000 and CFA5,000 is spread debt maturity profile, extending over applicable to overdue individual and private periods of up to 15 years. company accounts respectively. No penalties or disconnections are applied to the public sector. Bad Cash and cash equivalents increased by CFA2.8bn debts are written off after five years. to CFA9.1bn in F07. This supported an increase in the level of cash holdings covering short term debt Capex projects and funding to 2.2x from 2.1x in F06. In addition, the level of days cash on hand increased to 118 days in F07, Capital expenditure incurred in the development of from 101 days previously. new infrastructure, and the refurbishing and upgrading of existing infrastructure amounted to Accounts receivable CFA13.6bn in F07 (F06: CFA28.7bn), or only Gross consumer debtors decreased by 1.3% to 63% of the originally budgeted CFA21.6bn. As is CFA13.5bn in F07. Following a marginal increase illustrated in the following table, the majority of in the provision for bad debts (to CFA2.3bn), net net capital expenditure was funded from grants consumer debtors were 1.8% lower at CFA11.2bn. from F06 to F07, with a decreasing reliance on The total provision amounted to a higher 17.2% of external borrowings noted. gross consumer debtors in F07, from 16.8% in F06. Inclusive of other net debtors totalling Table 5: Funding (CFAm) F06 F07 CFA2.4bn (F06: CFA2bn), total net debtors were Internal funding 5,080.7 7,139.3 posted at a 1.8% higher CFA13.6bn in F07. Government grants 15,671.8 13,981.7 Net debt 7,937.6 (7,559.9) Table 4: Debtors (CFAm) F06 F07 Net capex 28,690.1 13,561.1 Gross consumer debtors 13,708.5 13,525.6 Less provision for bad debts (2,305.4) (2,328.0) ONEA has two core expansionary plans. Firstly, Net consumer debtors 11,403.1 11,197.7 the Development Plan focuses on the long term Other net debtors 2,005.9 2,449.4 (2004-2015), while the Strategic Plan covers a Total net debtors 13,408.9 13,647.1 four-year cycle (the latest is for 2008-2010). These plans articulate the company's long-term vision, The increase in total income outpaced the rise in and are developed within a context that involves net debtors for the year, which saw the ratio of net the entire company, from the Board through to debtors to income decrease to 57% in F07 from staff. In addition to this, ONEA is responsible for 64% previously. The debtors collection period developing a financial policy that is geared increased for a third consecutive year to a high 206 towards limiting future government support, in days (F06: 189 days). terms of financing its activities. All of ONEA's customers are metered, and billing The government launched the PN-AEPA (the is conducted monthly. The overall payment rate is National MDG Water and Sanitation Program) in around 85%, compared to a targeted level of 92%. February 2008. The total investment requirements The main reason behind the poor recovery rates is amount to around CFA543.8bn. ONEA is a failure by municipalities and local communities responsible for implementing the bulk of the urban to pay their bills on time. The average bill payment component, which amounts to around rate for private individuals is in the region of 2 to 3 CFA137.8bn, of which the following (as per table months (94% payment rate), and around 6 months 6 below) has been earmarked for Phase I (2007- for public institutions. Municipalities and local 2011). Major projects to be undertaken over this communities have very poor payment records, period are aimed at expanding water and sanitation ranging in excess of two years' consumption. distribution to a greater percentage of the Recently, an agreement was signed between population. Furthermore, several projects aimed at ONEA and the government, whereby the state will Global Credit Rating Co. ­ Burkina Faso Water Utility Credit Rating Report the upgrading and replacement of existing period F08 to F11. Operating costs are forecast at a infrastructure will be undertaken. level well above revenue over this period, culminating in large operating deficits being posted Table 6: Capex and funding F08 F09 F10 F11 (the operating margin is forecast at around CFAm negative 20% in each year over the four year Capex period). The key drivers of the rise in operating Production 4,508 8,057 23,102 812 Distribution 13,025 7,931 6,621 6,709 expenditure are staff costs and other operating Connections 1,252 4,616 1,514 1,643 expenses. Furthermore, this will be exacerbated by Replacement capex 2,926 3,174 3,261 3,289 the higher interest charges incurred as a result of Other 2,995 14,896 940 1,880 the increased borrowings, as well as larger Total 24,706 38,674 35,438 14,333 depreciation charges incurred from the large capex Capex funding investments in water assets. As a percentage of Internal 5,923 5,886 5,747 6,158 total income, staff costs are forecast to increase Net borrowings 10,278 16,950 21,415 3,605 from 21% in F08 to 22% in F11 (F07: 17%). Donations/grants 7,461 11,161 7,084 2,829 Extraordinary income is expected to remain fairly Other (shortfall not yet financed) 1,044 4,677 1,192 1,741 Total 24,706 38,674 35,438 14,333 substantial in each year (this relates to the previously mentioned non cash Hors Activites The aforementioned table summarises ONEA's Ordinaires), albeit insufficient in supporting a sources of funding for its capex programme from positive net result. F08 to F11. ONEA relies on its own resources, Table 7: Operating budget along with government and donor finance. The (CFAm) F08 F09 F10 F11 extent to which local bank finance is used tends to Total revenue 21,694 23,113 24,762 26,594 be on a short term basis, in the form of advances for working capital (in part to bridge the cash flow less: Op. expenditure gap caused by late payments from government Staff costs (4,606) (4,982) (5,378) (5,964) agencies). Net new borrowings of CFA52bn are Water & related purchases (3,812) (3,996) (4,178) (4,378) Electricity (3,023) (3,294) (3,568) (3,876) budgeted to be sourced over the four year period Other operating expenses (2,074) (2,343) (2,720) (2,960) and are expected to fund a fairly large and EBITDA 8,179 8,498 8,918 9,416 increasing component of capital expenditure spend Depreciation (12,299) (13,317) (14,163) (14,153) up to F10 (F08: 42%; F09: 44%; F10: 60%), before Operating result (4,120) (4,819) (5,245) (4,737) reducing to 25% in F11. Total revenue is forecast Net finance costs (2,149) (2,498) (3,050) (3,126) to increase from CFA21.7bn in F08 to CFA26.6bn Extraordinary items 5,947.0 5,983 6,309 7,010 in F11 (see future prospects). Based on the Taxation (107) (114) (123) (132) forecasts provided, GCR estimates that total debt NPAT (429) (1,448) (2,108) (986) to EBITDA could increase to 850% in F08 (F07: Key ratios (%) 642%), peaking at around 1,225% in F10. Total Turnover growth (9.6) 6.5 7.1 7.4 debt to capital & reserves is forecast at a high 95% EBITDA : revenues 37.7 36.8 36.0 35.4 in F11 (F07: 46%). Operating profit margin (19.0) (20.9) (21.2) (17.8) Op. income : net interest (1.9) (1.9) (1.7) (1.5) Despite a high level of political commitment, the Net debt : EBITDA 739.2 910.9 1,108.2 1,087.8 government is moving away from direct Net debt : capital & reserves 45.4 55.8 70.0 74.7 investment in the water sector in the medium to long term, and accordingly, less reliance is being The following are ONEA's main objectives in the placed on grant funding than in prior years. This medium term: could clearly impact ONEA's financial position · Productivity gains to minimise tariff going forward. increases and improve operating performance; Future prospects · Improve ONEA's image to its customers and increase customer satisfaction; The following budget is extracted from ONEA's · Improve the commitment level of ONEA latest financial forecasting model. The model staff, with systematic evaluation; and appears to be somewhat outdated given that the · Increase water and sanitation coverage to actual F07 results have not replaced the original more municipalities and cities. F07 forecasts. Based on the model provided, the utility expects to generate an average annual compound growth rate in revenue of 7% over the Global Credit Rating Co. ­ Burkina Faso Water Utility Credit Rating Report Key challenges in achieving these objectives include: · Tariffs are structured whereby household consumers are in fact purchasing water below the cost of production, with profitability deriving from large-scale consumers (such as government and other commercial users) who are charged higher rates. As such, with the rollout of services being largely to households, this is likely to place further downward pressure on the sectors margins. Tariffs should be restructured such that households are purchasing water on a cost- reflective basis. · Given government's stated intention of eventually moving away from direct investment in the water sector, establishing a transparent, indexed and long term pricing structure is crucial in order for ONEA to provide services in accordance with its mandate and to make the necessary long term plans with greater certainty. This requires co- ordination and buy in from all key roll players, particularly government. · The inability of ONEA to implement a stringent credit collections policy (and cut off supply) to government entities is a concern, which needs to be addressed. This will, in turn, require the necessary political support from the government. · Deteriorating exogenous factors of late (higher average oil price, inflation etc) present a risk to the utility in the short term. Global Credit Rating Co. ­ Burkina Faso Water Utility Credit Rating Report Office National de L'eau et de L'assainissement (ONEA) (CFA in millions except as noted) Income Statement Year end : 31 December 2003 2004 2005 2006 2007 Revenue 15,274.8 17,416.8 18,305.4 20,864.6 24,006.0 Operating expenditure (11,286.6) (12,038.6) (13,384.7) (12,657.5) (14,783.9) EBITDA 3,988.2 5,378.2 4,920.7 8,207.1 9,222.1 Depreciation (5,669.1) (6,984.5) (8,320.4) (8,903.5) (11,175.2) Operating income (1,680.9) (1,606.3) (3,399.7) (696.4) (1,953.1) Net finance charges (566.6) (618.0) (546.5) (1,033.3) (2,188.5) Finance costs capitalised 0.0 0.0 0.0 0.0 0.0 Income after finance charges (2,247.5) (2,224.3) (3,946.2) (1,729.7) (4,141.6) Extraordinary Items 3,351.6 3,060.9 5,131.6 3,002.9 5,044.6 Income tax (556.6) (323.3) (926.5) (167.1) (195.3) Net income 547.5 513.3 258.9 1,106.1 707.7 Prior year adjustment 0.0 0.0 0.0 0.0 0.0 Cash Flow Statement Cash generated by operations 3,400.2 4,423.5 4,348.5 9,009.3 8,818.3 Working capital: (increase)/decrease 565.7 (97.3) (1,556.9) (2,895.3) 509.5 Net finance charges (663.5) (720.4) (586.8) (1,033.3) (2,188.5) Cash flow from operations 3,302.4 3,605.8 2,204.8 5,080.7 7,139.3 Net expansionary capex and investments (31,678.0) (29,876.0) (20,067.0) (28,690.1) (13,561.1) Capital contributions 9,740.9 12,531.2 8,419.6 15,671.8 13,981.7 Cash movement: (increase)/decrease n.a. 625.6 23.7 (14,159.7) (3,305.6) Borrowings: increase/(decrease) n.a. 13,011.0 9,378.6 22,097.3 (4,254.3) Net increase/(decrease) in debt n.a. 13,636.6 9,402.3 7,937.6 (7,559.9) Balance Sheet Capital and reserves 89,013.6 99,045.5 102,968.9 118,621.4 127,657.2 Total interest-bearing debt 31,687.2 40,232.0 54,864.5 59,333.8 59,261.6 Short-term 1,598.3 2,371.6 2,036.5 3,017.1 4,149.2 Long-term 30,088.9 37,860.4 52,828.0 56,316.7 55,112.4 Interest-free liabilities 10,725.3 15,254.8 11,108.6 16,913.9 15,653.5 Total liabilities 131,426.1 154,532.3 168,942.0 194,869.1 202,572.3 Fixed assets 114,284.4 135,820.7 150,735.3 171,343.0 175,301.5 Projects in progress 3,785.3 6,082.7 2,756.0 1,508.7 1,649.7 Investments 0.0 0.0 0.0 0.0 0.0 Cash and cash equivalents 5,878.2 5,193.6 5,171.0 6,274.3 9,078.5 Net trade debtors 5,941.8 5,392.7 8,182.9 13,408.9 13,647.1 Other current assets 1,536.4 2,042.6 2,096.8 2,334.2 2,895.5 Total assets 131,426.1 154,532.3 168,942.0 194,869.1 202,572.3 Ratios Operating: Billed water sales (million m3 / year) n.a. n.a. n.a. 36.6 40.1 Volume increase (%) n.a. n.a. n.a. n.a. 9.7 Turnover growth (%) n.a. 14.0 5.1 14.0 15.1 Staff costs : total operating costs (%) 19.9 19.0 18.2 18.7 16.1 Staff costs : revenue (%) 22.1 20.8 21.5 19.3 17.4 Staff per 1,000 connections 8.1 8.4 7.3 6.0 4.6 Net capex : revenue (%) 207.4 171.5 109.6 137.5 56.5 Cash Flow: Operating cash flow : total debt (%) 10.4 9.0 4.0 8.6 12.0 Operating cash flow : net debt (%) 12.8 10.3 4.4 9.6 14.2 Profitability: EBITDA : revenues (%) 26.1 30.9 26.9 39.3 38.4 Operating profit margin (%) (11.0) (9.2) (18.6) (3.3) (8.1) EBITDA : average total assets (%) n.a 3.9 3.1 4.7 4.8 Coverage: Operating income : gross interest (x) (2.5) (2.2) (5.8) (0.6) (0.9) Operating income : net interest (x) (3.0) (2.6) (6.2) (0.7) (0.9) Activity and liquidity: Days receivable outstanding (days) n.a. 135.4 142.3 188.9 205.7 Net debtors : total income (%) 38.9 31.0 44.7 64.3 56.8 Current ratio (:1) 1.2 0.8 1.3 1.2 1.4 Average days working cash (days) 122.4 96.5 84.8 101.4 117.7 Capitalisation: Net debt : capital and reserves (%) 30.4 36.9 49.6 46.0 40.7 Total debt : total assets (%) 24.1 26.0 32.5 30.4 29.3 Total debt : EBITDA (%) 794.5 748.1 1,115.0 723.0 642.6 Net debt : EBITDA (%) 647.1 651.5 1,009.9 646.5 544.2 Total debt : total income (%) 207.4 231.0 299.7 284.4 246.9 Net debt : total income (%) 169.0 201.2 271.5 254.3 209.0 Sènègalaise des Eaux (SDE) Senegal Water Utility Analysis August 2008 Financial data: Analytical considerations (US$'m comparative) Key analytical considerations 31/12/06 31/12/07 The strong overall state of the Senegalese urban water CFA/US$ (avg.) 539.9 492.9 infrastructure following the wholesale water sector reforms CFA/US$ (close) 517.2 454.6 Total assets 78.2 107.3 undertaken in 1995/1996. These reforms have resulted in a well Total debt 22.9 22.6 organised water sector, with clear designation of roles and Total capital 7.2 9.1 responsibilities by way of detailed contractual agreements. Cash & equiv. 1.1 1.1 SDE's contractual mandate, covering the operation and Revenue 92.3 116.2 maintenance of the infrastructure only, has allowed it to focus its EBITDA 8.0 10.8 efforts on the core activities of potable water production and NPAT 2.3 2.8 distribution, as well as collections. Ongoing spend by SONES on Op. cash flow 6.5 9.9 the infrastructure has enabled a sustained rise in water volumes Market cap. n.a. produced, while SDE's strong performance in terms of new Market share n.a. connections to the network has seen strong growth in volumes sold. Note is taken of the punitive contractual structure under which Fundamentals: SDE operates. In this regard, the private operator has consistently Owned by the Bouygues Group of France failed to meet technical efficiency targets, which has constrained (63%), SDE is the private sector asset profitability. Although subject to contractual protection, collection operating company in the urban & semi- levels from government have significantly lagged the high private urban water sector in Senegal. SDE was collection levels and this remains a key challenge to SDE. formed following sectoral reform in 1995/1996, which resulted in the division Supported by the network's growth and sustained tariff increases, of asset holding and operation in the SDE has reported stable profitability and operating cash flows over water distribution sector. In this respect, the review period, translating to comfortable debt serviceability. asset development and the majority of However, the entity remains fairly highly geared. maintenance is performed by a public Although Senegal is relatively stable, both politically and company (SONES), while sanitation is economically, it displays weak fiscal and social finances. As such, performed by a further state-owned government collections are expected to remain poor, while the low company (ONAS). Although operations in the sector are bound by the contracts wealth levels could prevent viable tariff increases in the future. implemented at the time of reform, governance of the sector ultimately falls Funding profile under the ambit of the Minister of Water; SDE displays a geared balance sheet, especially relative to who is also responsible for tariff setting. capitalisation. In this respect, the private operator's asset base of GCR contacts: largely debtors (64%) is funded predominantly by interest-free liabilities (70%) and interest-bearing debt (21%). Interest-bearing Richard Hoffman debt amounted to CFA10.3bn in F07 (F06: CFA11.8bn), of which +27 11 784-1771 12% consists of bank overdrafts. With low equity of CFA4.1bn, this hoffman@globalratings.net equates to net debt to equity of 271% in F07 (F06: 329%). Similarly, net debt to EBITDA registered at 194% in F07 (F06: 273%), although Marc Joffe +27 11 784-1771 operating cash flow amounted to a comfortable 50% of net debt. joffe@globalratings.net Although liquidity is poor, given low cash holdings, debt serviceability remained comfortable, with net interest cover of 5.3x in Website: www.globalratings.net F07 (F06: 3.6x). This document is confidential and issued for the information of clients only. It is subject to copyright and may not be reproduced in whole or in part without the written permission of Global Credit Rating Co. ("GCR"). The credit ratings and other opinions contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information is given or made by GCR in any form or manner whatsoever. Background to this contract. These latter contracts defined the asset regime, service standards & conditions, The Senegalese water sector has witnessed governance of the works, remuneration and considerable reform over the past two decades, monitoring mechanisms for SDE. with a focus on ensuring adequate water resources and service delivery for the country's burgeoning The above reforms brought positive benefits for urban population. In this regard, urban water the sector as a whole. Most significant of these has services were nationalised in 1971, with SONEES been the substantial expenditure undertaken on the (Société Nationale d'Exploitation des Eaux du core production and distribution infrastructure. Sénégal) becoming responsible for the operation of water and sanitation services. In 1983 SONEES In 2006, having performed strongly under the first become responsible for water sector asset affermage contract, SDE's operational mandate investment, which was formalised only by 1990 was extended for a further 5 years to 2011. SDE through a "contrat-plan". However, by the mid- was formed in December 1995, following the 1990s it had become apparent that such an appointment of SAUR (Société d'Aménagement arrangement was failing, with sub-optimal tariff Urbain et Rural), which was selected as the increases approved by government and weak operator due to its considerable experience in collections from public enterprises. Moreover, and Africa (having operated water utilities in the Ivory most significantly, there was serious concern Coast, Guinea, Central African Republic, regarding the adequacy/security of water supply Mozambique, South Africa and Zambia). for Dakar at the time. Precipitated by the economic Moreover, SAUR had in the past provided turmoil that followed the devaluation of CFA technical assistance to SONEES. In late 2004 the against the French Franc in 1993, this led to Bouygues Group sold its share in SAUR, although significant water sector reform in 1995/1996. water contracts in Africa and Italy remained within the Bouygues Group and are currently managed by The 1995/1996 water sector reforms saw the 100%-owned subsidiary Finagestion. This ensures operations of SONEES dismantled and split the considerable financial strength of SDE, as well between three key operators, as follows: as synergies and benefits gained from its parent SONES (Sociètè Nationale des Eaux du (notably the Sapphire information system). Sènègal) is the public asset holding company in charge of managing & developing water related Operating environment assets in urban/semi-urban areas of Senegal and Socio-economic context monitoring the delivery of water services. Senegal is a country spanning around 197,000km2, A private operator in charge of producing and located on the Westernmost tip of Africa and delivering potable water to these areas, as well bordered in the North by Mauritania, the East by as maintaining the network and collecting Mali and in the South by Guinea & Guinea Bissau. revenues from customers. SDE (Sènègalaise Having achieved independence from France in des Eaux) was set up as the private operator, 1960 as part of the Mali Confederacy (and with an effective 63% held by French water thereafter gaining independence from Mali), sector operator SAUR (now held directly by the Senegal has grown into a hub of Francophile West- Bouygues Group). Africa, with its capital Dakar being a centre of ONAS (Office National d'Assainissement commercial activity and an important port. The Urbain) is a government owned and managed country reported a moderate population of around company responsible for the sanitation services 12.2m people in 2007, with the most notable trend of six major urban centres. being the migration of the population towards The above reforms resulted in a clear division and urban centres (especially the Dakar area in which designation of water sector responsibilities, with over 60% of the population now resides). This the roles & responsibilities stipulated by way of a populace is comprised of various ethnic groupings, strong legal/contractual framework. SONES the largest (at around 50%) being Wolof, while entered into a 30-year Concession contract with the two official languages (Wolof and French) are Senegalese Republic, as well as an annexed spoken. The Senegalese religion is particularly Planning contract, effectively outlining the unified, with 95% of the population being Muslim. respective responsibilities of SONES and the State. Senegal remains a poor, agrarian-based economy, A 10-year Affermage contract was entered into by lacking the wealth of commodities displayed by the State, SONES and SDE, while a Performance neighbouring West-African states. As such, its contract (between SDE & SONES) was annexed economy remains highly skewed towards a few Global Credit Rating Co. ­ Senegal Credit Assessment Report outputs, such as fishing and groundnuts. In recent State performs a monitoring role, with its key roles years, the fishing sector has replaced groundnuts as being the setting of tariffs (with assistance from the country's leading export, with peanut product SONES) and assistance with asset financing and exports being detrimented by falling global prices. collections from government entities. In contrast, Phosphate production has suffered from the recent SONES is directly responsible for capital financial collapse of the nationalised Industrie investment in the sector (including raising and chimique du Sènègal, which also resulted in the servicing debt), as well as ensuring the adequate loss of over 3,000 jobs. However, the tourism performance of SDE. In this regard, the sector continues to flourish, with over 0.5m responsibilities of SONES and SDE are clearly tourists visiting per annum. With a relatively low defined in the Performance Contract. This contract level of industrialisation, the economy reports a was renewed after the first 10-year period of substantial current account deficit and is highly operation and provides for review of performance dependant on grants and concessional funding. targets every two years. Table 1: Key economic Obligations of SONES and SDE per Performance Contract 2004 2005 2006 2007 2008e indicators SONES GDP (US$'bn) 8.0 8.7 9.2 11.1 12.9 · Ensuring adequate infrastructure is available to the operator GDP growth (%) 5.8 5.3 2.1 5.0 5.4 and that requisite investment is made (including a rolling 3- GDP per capital (US$) 704.8 743.4 767.7 909.8 1,027.1 year investment programme). Inflation, avg. (%) 0.5 1.7 2.1 5.9 4.5 · Timeous execution of works related to system investments. Current account (% of GDP) (6.1) (7.8) (9.8) (8.1) (10.3) · Financing of works. · Adjustment of tariffs. Exchange rate (CFA/US$)* 528.9 524.7 539.9 492.9 437.4 Population (million) 11.4 11.7 11.9 12.2 12.5 SDE * Average exchange rate. 2008e denotes the average rate for 1H 2008. · Optimal usage of productive assets. Source: IMF. · Maintaining and repairing infrastructure at its own cost. · Renewing a minimum of 14,000m of pipe and 6,000 Notwithstanding the above, the economy has connections per year. reported relatively stable fundamentals over recent · Replacing electromechanical equipment valued below CFA15m and with a lifespan up to 10 years. years, with GDP growth estimated to have · Prepare an annual maintenance place and technical report. recovered to 5% in 2007 (2006: 2.1%) and · Meet WHO standards for water quality. expected at 5.4% in 2008. Moreover, rising · Respond to mains leakage with one hour. · Adhere to renewal schedule (min. 17km of pipe per annum). consumer wealth levels have been accompanied by · Supply monthly data to SONES on consumption, billing and relatively low (single digit) inflation and a collections. strengthening exchange rate. It is noted that despite · Meet performance targets in terms of leakage and collections. the strong measured growth, economic activity remains centred in the informal sector. As reflected above, SONES's obligations pertain to the investment in infrastructure (planning, As a member of the West Africa Economic and financing and works) and the coordination with the Monetary Union (WAEMU), Senegal's monetary Minister of Water in respect of tariff adjustments, policy is defined by the Central Bank of West albeit with the right to increase tariffs vested with African States (BCEAO), which has the primary the Minister. SDE's specific requirements are objective of controlling inflation. The prevailing stipulated with regards to maintenance obligations, CFA currency shared by WAEMU countries is which covers the full maintenance of the pegged against the Euro, which has facilitated infrastructure, minimum renewals of pipes & considerable economic stability for these countries connections and replacement of low value (with the last major revaluation occurring in 1993). equipment. Other requirements are in respect of Accordingly, the currency has strengthened against water quality and the adequate usage of the the US$ in line with the Euro, from an average of infrastructure. CFA540/US$ in 2006 to CFA493/US$ in 2007 and further to CFA437/US$ in 1H 2008. The Performance Contract was designed to ensure collections and distribution efficiency through the Regulatory and legal framework remuneration structure. Under this system, SDE is The regulation of the water sector in Senegal responsible for all collections and pays a portion follows from the framework instituted under the across to SONES, subject to performance targets 1995/1996 water sector reforms. Sectoral (which are periodically negotiated). In this way responsibilities (rural & urban, including SDE loses revenue if collections and efficiency fall sanitisation) ultimately vest with the Minister of below targets but benefits should they exceed Water (Ministre de l'Hydraulique), with targets. With regards to technical efficiency, the underlying responsibilities & roles designated per initial target was set at 76% for 1996. Since this the aforementioned contractual arrangements. time targets were set at 77% in 1997, 80% in 1998, Under the Planning contract between the State and 83% in 1999 and 85% since 2000 (although this SONES, obligations of both parties were clearly target was later delayed to 2002). Similarly, the defined. The gist of these obligations is that the collections efficiency targets has remained at 97% Global Credit Rating Co. ­Senegal Credit Assessment Report since 1988 (applied to all customers except the feeding numerous towns and villages en-route public administration). It is noted that the (including the major centers of Saint-Louis, Thiès operator's water supply rate is based on an and Touba). Notwithstanding the above, the indexation formula (established at the time of majority of potable water is in fact accumulated tender), which adjusts SDE's revenues to along the conduit's path via a plethora of reservoirs compensate for increases in staff, energy & iron and boreholes (around 840), contributing the pipe costs, as well as electromechanical equipment. remaining 170,000m3 of installed capacity. Calculation of SONES's remuneration SDE utilises SONES's substantial asset base in Amount paid to SONES = (Tavg,n ­ OPn) Vpn x CTEn x CCEn order to service Dakar and a further 55 towns & 414 villages along the primary network. SDE uses Tavg, n = average tariff ; sum of the amount billed in each tariff category divided by the total overall volume billed for the conduit without any additional charge above in cubic meters: this is the weighted average of all SONES's remuneration per the performance tariffs (net of taxes). contract, however, certain ancillary premises are OPn = operator's water supply rate in CFA/ m3 (referred to as "bid price" or "operator's fee"), adjusted annually leased from SONES. Most of SDE's activities are according to the indexation formula. centralised from Dakar, with a sophisticated Vpn = water put into supply (volume of water produced) in central information system providing live feedback m3/yr. on the network's performance (with a central CTEn = contractual technical efficiency; the target for water monitoring "cockpit"). billed divided by water produced according to the contract. Tariffs CCEn = contractual commercial (bill collection) efficiency; the SDE has no effective pricing power, as tariffs are target for water paid for divided by water billed according to the contract. determined by the Minister of Water with assistance from SONES. Tariffs (benefiting SDE, Operations SONES and ONAS) are set in order to cover all costs, both operational and in terms of capex Given the above remuneration calculation, SDE's spend. A stratified tariff structure is applied to the earnings is exposed to nearly every risk facet in the industry, whereby different rates are applied to production and distribution of water, as well as in different consumer types and consumption levels. the billings and collections of consumers. As at year end 2007 typical charges were in place as follows: SONES and SDE have free and unrestricted access Social tranche: CFA191.3/m3 for 0m3 to 20m3; to water, which it sources from rivers and ground Full tranche: CFA629.9/m3 for 20m3 to 40m3; & water. In this regard, daily installed capacity Deterrent tranche: CFA788.7/m3 for > 40 m3. registers at around 280,000m3, of which approximately 110,000m3 is sourced from surface It is noted that SDE's average cost of production water and the remainder (around 60%) from registered at around CFA305.3/m3 (2006: underground sources. In this regard, the actual CFA292.6/m3), from CFA271.5//m3 in 2004. purification and transportation of water drive the Accordingly, profits derive from large users, with cost of production, with major costs in the process small social users typically being unprofitable. being electricity, labour and (cost of) capital. It is Since customers are metered, all tariffs are noted that the cost of producing underground water volumetric and consist of a basic portion, a is markedly lower than surface water, because sanitation allotment, VAT, a municipal surcharge underground water requires less treatment and can and water development levy, as represented in the often be sourced closer to the consumption points following table. than surface water. However, Senegal's Table 2: Water tariffs underground water does have certain problems (for 2004 2005 2006 2007 (CFA/m3) which studies are underway), including trace iron Average global tariff 485.6 485.6 531.6 525.8 in some water and high fluoride in Dakar. Water Taxes (50.9) (52.4) (81.1) (30.2) quality is maintained at WHO acceptable levels. Net tariff 434.7 433.2 450.5 495.6 ONAS (sanitation) (40.8) (40.3) (40.7) (39.8) The water production & distribution infrastructure SONES (asset development) (146.5) (142.7) (140.9) (164.1) is essentially contained along a single conduit Net tariff - SDE 247.4 250.2 268.9 291.7 Source: Management. running between the Senegal River in the North and Dakar in the South-West of the country. Production, collections and efficiency Approximately 110,000m3 is sourced from Lac de A key revenue driver is the number of connections Guiers, a lake on the Senegal River. This water is to the distribution network, as this ultimately processed via two treatment plants, with around drives consumption. A failure to make the requisite 110,000m3 treated at the Ngnith and Keur Momar connections has a two-fold impact on SDE, in that Sarr (KMS) plants. From these treatment plants, a it incurs penalties under the Performance Contract dual pipeline carries the water towards Dakar, and results in lost revenue (as water sales would Global Credit Rating Co. ­Senegal Credit Assessment Report lag water production). Connection rates, however, Examination of expenditure reveals that the single have been robust and in line with requirements, largest component consists of payments to SONES rising from 363,228 connections in F03 to 461,887 & ONAS under the compensation arrangement. in F07 (F06: 433,676). Having dipped to CFA17.6bn in F05, these payments leapt to CFA27.9bn in F07 (F06: As remuneration to SONES is calculated on a CFA23.4bn). General operating expenses rose 13% production basis, while more water produced to CFA27.7bn in F07, inclusive of unchanged staff translates to higher sales (assuming the requisite costs of CFA8.6bn and electricity charges of connections are effected), the onus rests on SDE to CFA8.7bn (F06: CFA7.2bn). Accordingly, having ensure that production levels translate into sales. In peaked at CFA5.8bn in F05, EBITDA amounted to this respect, distribution losses of 15% are CFA5.3bn in F07 (F06: CFA4.3bn). Thus, the allowable per the Performance Contract, being the EBITDA margin of 9.3% in F07 (F06: 8.7%) was proportion of water produced that is not billed. well below the 12.7% recorded in F05. Given its Table 3: Efficiency statistics F03 F04 F05 F06 F07 more moderate fixed asset base, SDE reports Number of connections (000s) 363.2 383.0 412.3 433.7 461.9 relatively low depreciation charges compared to Water production (m3- millions) 113.8 118.7 124.7 129.2 135.4 SONES. Specifically, depreciation amounted to Water sold (m3- millions) 90.8 94.8 99.7 103.7 108.7 CFA2.8bn in F07 (F06: CFA2.5bn), resulting in Technical efficiency (%) 79.9 80.1 80.1 80.2 80.3 operating profits of CFA2.5bn (F06: CFA1.8bn) Collections (%) 98.2 98.3 97.9 98.2 97.4 and an operating margin of 4.4% (F06: 3.6%). Sustained expenditure on the infrastructure by Table 4: Operating F07 % of SONES has facilitated strong growth in actual Performance (CFA'm) Actual Budget* budget water production, which has risen from 113.8m Income cubic meters in F03 to 135.4m in F07, representing Sales 57,268.6 50,200.2 114.1 a compound annual growth rate of 4.4%. Operating subsidies 0.0 0.0 n.a. Simultaneously, volumes sold have risen from Other operating income 3,561.5 1,354.8 262.9 90.8m cubic meters to 108.7m. As such, technical Total revenue 60,830.1 51,555.0 118.0 losses have remained around 20%, with SDE less: Op. expenditure resultantly penalised under the contract. The issue Staff costs (8,602.9) (8,175.8) 105.2 of technical efficiency will continue to be a point Payment to SONES & ONAS (27,853.8) (14,929.8) 186.6 of contention between SDE and SONES, with the Operating charges (19,057.6) (23,538.6) 81.0 EBITDA 5,315.8 4,910.8 108.2 former contending that initial benchmarking was Depreciation & amortisation* (2,787.7) (2,401.9) 116.1 incorrect and an 85% target is not feasible. Operating result 2,528.2 2,508.9 100.8 Only non-governmental collections are included in Net finance costs (478.1) (675.6) 70.8 Extraordinary items 32.4 0.0 -- the contractually prescribed collections target. This Taxation (684.9) (583.5) 117.4 is due to difficulties in cutting-off water to the NPAT 1,397.6 1,249.8 111.8 administration and the requirement that SONES * Source: Management. actively aides in such collections. As such, prescribed collection rates relate to household and Net finance charges registered 5% lower at commercial debtors. Given a strong credit control CFA478m in F07, facilitating an improvement in infrastructure, SDE has reported a high level of debt serviceability, with net interest cover collections, with the average collection rate of 98% recovering to 5.3x (F06: 3.6x). Income tax reduced for the five-year period exceeding the stipulated to CFA39m in F06 but normalised to CFA685m in 97% requirement in each year. F07. Overall, inclusive of exceptional earnings of CFA32m, retained income amounted to CFA1.4bn Financial performance in F07 (F06: CFA1.3bn). A synopsis of SDE's financial performance for the SDE reported sizeable cash generated by past 5 years is reflected at the end of this report, operations of CFA4.4bn in F07 (F06: CFA4.1bn). whilst brief comment appears hereafter. This was boosted by a working capital release of SDE has reported a sustained rise in revenue over CFA1bn (F06: CFA0.1bn absorption), with a the review period, spurred by stable tariff increases CFA9.2bn increase in trade payables outweighing and sustained growth in billings. In this regard, a CFA7.6bn increase in receivables. Coupled with revenue has grown at a compound annual rate of relatively unchanged actual taxation paid of 7.1% from CFA43.6bn in F03 to CFA57.3bn in CFA0.5bn, this saw cash flow from operations F07. Revenues have been boosted by substantial 40% higher at CFA4.9bn in F07. ancillary operating income (other products, transfer With its limited capex mandate, SDE has reported charges and provision reversals), which totalled moderate capital expenditure over the review CFA3.6bn in F07 (F06: CFA2.4bn). period, the majority of which is for maintenance of infrastructure. In this respect, total capex amounted Global Credit Rating Co. ­Senegal Credit Assessment Report to CFA2.4bn in F07 (F06: CFA2.3bn). Other Table 5: Debtors (CFA'm) F06 F07 significant investing outflows pertained to Gross consumer debtors n.a. 36,514.6 Less provision for bad debts n.a. (5,487.0) dividends paid of CFA1.7bn and CFA1.1bn in F06 Net consumer debtors 23,436.1 31,027.6 and F07 respectively. A CFA1.5bn net decrease in Other net debtors 2,031.1 2,550.4 debt was reported in F07, mostly pertaining to the Total net debtors 25,467.2 33,578.0 paydown of debt. The comprehensive collections and renewals Funding profile process ensures that meters are functional (with a maximum down-time of a single month), with Funding profile meter readers also performing meter replacements & repairs, delivering invoices and cutting of Assets - F07 (F06) Liabilities - F07 (F06) delinquent debtors. Billings and collections are Fixed Other assets Interest- Capital and managed through the Sapphire system, which free Cash 9% (1 ) 0% 26% (31 ) % liabilities reserves provides real-time debtors information. 71 % 8% (9% ) % % 1 (1 ) (62% ) Clients payments are made by various means, such Total interest- as posted cheques, payments at any of SDE's 65 Debtors 64% bearing debt centres and direct debit orders. Typically, clients (58%) 21% are given three days to meet payments, after which (29% ) their water service is cut-off. However, SDE's funding profile is in line with its nature as concessions are made to sensitive clients (such as the operator in the industry. The balance sheet hospitals) and where clients have informed SDE of reflects an asset base that is 26% comprised of their inability to meet payment. Nonetheless, late fixed assets of CFA12.7bn (meters, vehicles and payment carries interest penalties, whilst pipes), with 64% derived from debtors of fraudulent activity is discouraged by sizeable fines. CFA31bn. Assets are mainly funded by interest Other initiatives to improve customer service and free liabilities, which comprised 71% of the asset collections include a 24-hours call centre (for base in F07. Interest free liabilities include trade complaints, suggestions and reporting of leakages), creditors (SONES and ONAS) of CFA10.3bn in as well as ongoing consumer surveys. F07, fiscal and social creditors of CFA6.2bn and Gearing and liquidity profile other creditors of CFA16.5bn. SDE displays a low Total interest-bearing debt declined by 13% to level of capitalisation at 8% of total funding, with CFA10.3bn in F07, consisting 88% of long-term shareholders funds rising 10% to CFA4.1bn in borrowings of CFA9.1bn and 12% of overdrafts of F07. The remaining 21% of the asset base derives CFA1.2bn. This represents a cumulative 29% rise from borrowings of CFA10.3bn in F07. It is noted on the CFA8bn reported in F03. In comparison, that an amount of CFA6bn owing to SONES has despite the stripping of profits via dividends, been restructured into a loan. equity has risen by 31% from CFA3.1bn in F03 to Debtors CFA4.1bn in F07 (F06: CFA3.7bn). Gross consumer debtors amounted to CFA36.5bn As such, gearing levels have remained high over in F07, with provisions of CFA5.5bn amounting to the review period. Despite improving, net debt to around 15% of the gross book. The sharp rise in capital and reserves remained high at 271% in F07 net debtors was associated with the rise in tariffs (F06: 329%), while net debt to EBITDA amounted and water volumes sold, as well as poor collections to a more comfortable 185% (F06: 260%). from government. In this regard, it is noted that Furthermore, net debt is comfortable relative to payments to SONES on government collections are total income, amounting to only 17% in F07 (F06: withheld until funds are received, with the increase 23%). in amounts owing to SONES largely explained by the increase in government debtors. Net debtors to With moderate cash holdings of CFA0.5bn in F07 total income rose to a review period high of 54% in (F06: CFA0.6bn), SDE displays a weak liquidity F07 (F06: 47%), from 36% in F05. Similarly, the profile. In this regard, cash covered short term debt days receivables outstanding rose from 146 days in by just 0.4x in F07, while cash on hand fell to 6 F06 to 174 days in F07. days cover (F06: 7.5 days). SDE conducts it billing activities monthly for large Capex projects and funding clients (generally government and commercial users) and bimonthly for private clients, in order to Capital expenditure is largely directed towards the smooth cash flows and reduce administrative maintenance of the infrastructure owned by burdens. Unlike other economies, where certain SONES. As such, capex is not performed for long water sales such as standpipes are subsidised, all term projects and for long term asset formation water sales are billeable and measured by meters. purposes. Rather, it is undertaken ad-hoc for Global Credit Rating Co. ­Senegal Credit Assessment Report repairs and per the agreed replacement schedule SDE is expecting a stable operating performance in for renewals & connections. the medium term. In this respect, revenue is expected at CFA59.4bn in F08 and thereafter to Examination of historical capex reveals that it has rise by around 5.5% in each year to reach remained at moderate levels over the review CFA66bn in F10. However, growth in operating period, peaking at CFA3.4bn in F04 and declining expenditure is expected to slightly outpace to CFA2.3bn by F07. In this respect, capex relative revenue, with a resultant compression in margins. to fixed assets and revenues has decreased In this respect, total operating expenditure is consistently over the review period to amount to forecast to rise to CFA54bn in F08 and thereafter just 19% and 4% respectively in F07, further by 6% in each year to CFA60.5bn in F10. indicative of the low capex burden on SDE. Accordingly, EBITDA is budgeted to remain at Capital expenditure % around CFA5.4bn in each of the next three years, CFA'bn 14 35 with a fall in the EBITDA margin from the 9.3% 12 30 reported in F07 to 8.3% by F10. 10 25 Following relatively unchanged depreciation, 8 20 operating profits are expected to remain similarly 6 15 stable and a compression in the operating margin is 4 10 2 5 likewise anticipated. However, interest coverage is 0 0 forecast to remain comfortable and above 5x for F03 F04 F05 F06 F07 the three years to F10.Gearing levels are expected Total capex Fixed assets to remain at the high levels displayed historically. Capex : fixed assets Capex : revenue Examination of SDE's projected balance sheet indicates a more highly geared entity over the next Going forward, capex is expected to remain at three years, with gearing peaking in F09 and similar levels to those displayed historically, with reducing thereafter in F10. In this respect, net projected spend of CFA2.7bn in F08 reducing to borrowings are expected to peak at CFA14.6bn in CFA2.4bn in each of F09 and F10. F09 and reduce to CFA12.8bn in F10. GCR notes Table 7: Capex budget (CFA'm) 2008 2009 2010 that SDE will continue to payout all of its retained Capex spend earnings as dividends. Intangible assets 96.0 63.9 63.9 Fixed assets 2,619.7 2,287.6 2,287.6 SDE's overall prospects are robust. In this respect, Total 2,715.7 2,351.5 2,351.5 the private operator's strong performance since Source de financement water reform has served to entrench its position in Internal cash flows 1,100.2 1,100.2 1,100.1 the industry. Notably, SDE's operating contract is Debt 1,615.5 1,251.3 1,252.4 up for renewal in 2011. This has a number of Total 2,715.7 2,351.5 2,351.5 implications for SDE and the industry. Positively, it is expected that SDE will be working to retain its Future prospects contract. Conversely, the tenuous contractual Table 8: Operating budget F08 F09 F10 scenario might result in delayed investment by (CFAm) SDE and profit taking by its parent (evidenced in Total revenue 59,336.6 62,475.7 66,014.5 the historically high dividend payout ratio of SDE). less: Op. expenditure Nonetheless, it seems likely that SDE will retain its Payments to SONES & ONAS (21,146.5) (23,215.7) (25,529.9) contract in 2011, given its strong historical Staff costs (9,222.6) (9,374.0) (9,757.4) performance and entrenched position in the Other operating expenses (23,592.1) (24,446.1) (25,221.9) industry. GCR notes that an apparent conflict of EBITDA 5,375.4 5,440.0 5,505.3 Depreciation* (2,796.8) (2,879.3) (2,920.5) interest appears in the industry structure, as Operating result 2,578.6 2,560.6 2,584.8 government ultimately appoints the industry Net finance costs* (505.9) (496.1) (489.9) operator but is also the single largest customer of Net profit before tax 2,072.7 2,064.6 2,094.9 that operator. This could potentially impact SDE's Capital and reserves 3,600.0 3,600.0 3,600.0 operations leading up to the contract renewal. Net borrowings 10,509.6 14,578.7 12,803.8 In addition to the above, the organisation will Key ratios (%) continue to face a number of ongoing challenges Turnover growth 3.6 5.3 5.7 looking ahead. Chief amongst these is the issue of EBITDA : revenues 9.1 8.7 8.3 technical efficiency, with punitive targets expected Operating profit margin 4.3 4.1 3.9 to continue to impair SDE's profitability. Other Op. income : net interest 5.1 5.2 5.3 Net debt : EBITDA challenges include the ongoing difficulties 195.5 268.0 232.6 Net debt : Capital & reserves 291.9 405.0 355.7 experienced in collections from State entities and Net debt : Total income 17.7 23.3 19.4 continuing to expand service delivery in line with * GCR has estimated the allocation between depreciation and finance charges. the growth of the infrastructure. Global Credit Rating Co. ­Senegal Credit Assessment Report SENEGALAISE DES EAUX (SDE) (CFA in millions except as noted) Income Statement Year end : 31 December 2003 2004 2005 2006 2007 Revenue 43,574.2 44,248.3 45,815.0 49,837.0 57,268.6 Transfer to SONES & ONAS (20,959.2) (21,529.4) (17,635.4) (23,427.8) (27,853.8) Operating expenditure (19,697.9) (21,525.8) (24,687.4) (24,488.6) (27,660.5) Other income and expenses 2,348.0 3,692.1 2,303.4 2,412.7 3,561.5 EBITDA 5,265.0 4,885.2 5,795.7 4,333.4 5,315.8 Depreciation (2,424.2) (2,115.2) (3,445.0) (2,533.8) (2,787.7) Operating income 2,840.8 2,770.0 2,350.7 1,799.6 2,528.2 Amortisation 0.0 0.0 0.0 0.0 0.0 Net finance charges (515.4) (435.1) (453.0) (502.4) (478.1) Corporate income tax (987.9) (961.5) (714.6) (39.3) (684.9) Income after finance charges 1,337.4 1,373.5 1,183.1 1,257.9 1,365.2 Exceptional Items 29.6 13.5 50.2 (3.7) 32.4 Net income 1,367.0 1,387.0 1,233.3 1,254.2 1,397.6 Cash Flow Statement Cash generated by operations 3,253.6 2,247.0 6,170.1 4,069.7 4,383.6 Working capital: (increase)/decrease 3,494.9 (649.5) 276.6 (66.8) 991.3 Net finance charges (515.4) (435.1) (453.0) (502.4) (478.1) Cash flow from operations 6,233.0 1,162.4 5,993.8 3,500.6 4,896.8 Maintenance capex* (2,424.2) (2,115.2) (2,024.6) (2,299.3) (2,429.8) Discretionary cash flow from operations 3,808.8 (952.8) 3,969.2 1,201.3 2,467.0 Net expansionary capex and investments (1,741.4) (2,521.9) (1,247.6) (1,684.1) (1,002.2) Capital contributions 0.0 0.0 0.0 0.0 0.0 Cash movement: (increase)/decrease (375.2) 366.9 44.1 (1,344.4) 64.1 Borrowings: increase/(decrease) (1,692.1) 3,107.8 (2,765.8) 1,827.3 (1,528.9) Net increase/(decrease) in debt (2,067.4) 3,474.7 (2,721.7) 482.9 (1,464.8) Balance Sheet Capital and reserves 3,118.1 3,155.0 4,731.6 3,728.1 4,118.9 Total interest-bearing debt 7,981.2 11,089.0 8,323.3 11,821.7 10,292.8 Short-term 675.0 2,565.8 (75.0) 1,596.2 1,213.6 Long-term 7,306.3 8,523.2 8,398.2 10,225.5 9,079.2 Interest-free liabilities 19,456.3 19,806.1 20,534.5 24,870.2 34,358.9 Total liabilities 30,555.6 34,050.1 33,589.4 40,420.0 48,770.6 Fixed assets 10,575.8 11,703.6 13,383.0 12,409.6 12,737.7 Projects in progress 0.0 0.0 0.0 0.0 0.0 Investments 0.0 0.0 0.0 5.2 23.0 Cash and cash equivalents 661.7 294.8 250.7 568.3 486.5 Net trade debtors 15,399.8 17,989.8 16,398.0 23,436.1 31,027.6 Other current assets 3,918.4 4,061.9 3,557.7 4,000.7 4,495.8 Total assets 30,555.6 34,050.1 33,589.4 40,420.0 48,770.6 Ratios Operating: Average cost of treated water (CFA/m3) n.a. 271.5 277.8 292.6 305.3 Billed water sales ( million m 3/year) 90.8 94.8 99.7 103.7 108.7 Volume increase (%) n.a. 4.4 5.2 4.0 4.8 Average tariff increase (%) n.a. n.a. 0.0 9.5 (1.1) Turnover growth (%) n.a. 1.5 3.5 8.8 14.9 Transfers to SONES & ONAS : revenue (%) 48.1 48.7 38.5 47.0 48.6 Staff costs : operating costs (%) 35.9 34.8 32.0 35.2 31.1 Staff costs : revenue (%) 16.2 16.9 17.3 17.3 15.0 Staff per 1,000 conections 3.2 3.0 2.8 2.6 2.4 Water distribution losses (%) 20.1 19.9 19.9 19.8 20.0 Net capex : revenue (%) 7.6 7.7 4.4 4.6 4.2 Cash Flow: Operating cash flow : total debt (%) 78.1 10.5 72.0 29.6 47.6 Operating cash flow : net debt (%) 85.2 10.8 74.2 31.1 49.9 Profitability: EBITDA : revenues (%) 12.1 11.0 12.7 8.7 9.3 Operating profit margin (%) 6.5 6.3 5.1 3.6 4.4 EBITDA : average total assets (%) n.a. 15.4 17.3 11.8 12.1 Coverage: Operating income : gross interest (x) 5.4 6.3 5.2 3.5 5.3 Operating income : net interest (x) 5.5 6.4 5.2 3.6 5.3 Activity and liquidity: Days receivable outstanding (days) n.a. 139.8 141.8 145.9 173.6 Net debtors : total income (%) 35.3 40.7 35.8 47.0 54.2 Current ratio (:1) 1.1 1.0 1.0 1.1 1.1 Average days working cash (days) 10.7 4.5 3.2 7.5 5.7 Capitalisation: Net debt : capital and reserves (%) 271.0 370.7 189.7 328.8 270.6 Total debt : total assets (%) 26.1 32.6 24.8 29.2 21.1 Total debt : EBITDA (%) 151.6 227.0 143.6 272.8 193.6 Net debt : EBITDA (%) 139.0 221.0 139.3 259.7 184.5 Total debt : total income (%) 18.3 25.1 18.2 23.7 18.0 Net debt : total income (%) 16.8 24.4 17.6 22.6 17.1 Sociètè Nationale des Eaux du Sènègal (SONES) Senegal Water Utility Analysis August 2008 Security class Rating scale Currency Rating Rating watch Expiry date Long term National CFA A+ No 07/2009 Short term National CFA A1 Financial data: Rating rationale (US$'m comparative) The rating is based on the following key factors: 31/12/06 31/12/07 · The strong overall state of the Senegalese urban water CFA/US$ (avg.) 539.9 492.9 infrastructure following the wholesale water sector reforms CFA/US$ (close) 517.2 454.6 undertaken in 1995/1996. These reforms have resulted in a well Total assets 439.9 519.8 organised water sector, with clear designation of roles and Total debt 186.2 207.5 responsibilities by way of detailed contractual agreements. Total capital 247.0 301.5 Cash & equiv. 12.7 14.0 · With respect to the above, SONES's limited mandate has Revenue 27.4 36.4 facilitated the substantial development of the urban water EBITDA 24.4 32.9 production and distribution infrastructure. This has seen a sustained NPAT 0.9 2.6 level of fixed asset formation, with fixed assets of CFA213bn Op. cash flow 11.3 17.1 amounting to 91% of the company's asset base as at F07. Note is Market cap. n.a. taken of the high level of spend still to be undertaken by SONES. Market share n.a. In this regard, there are numerous capex projects underway, with the Millennium Development Goals spanning through to 2015. Fundamentals: · The asset base has historically been funded via a combination of grant and debt funding, with the latter largely being concessional SONES is the public asset holding and funding from global infrastructure development agencies. As such, management company operating in the SONES displays a highly geared balance sheet especially relative urban & semi-urban water sector in Senegal. SONES was formed following to earnings. sectoral reform in 1995/1996, which · Due to the prevailing industry structure, SONES is reimbursed resulted in the division of asset holding based on volumes of water produced and tariffs. As such, it is not and operation in the water distribution exposed to the risks of distribution loss and debtors. As a result, sector. In this respect, water distribution is SONES has displayed robust operating cash flows and strong performed by a privately-owned company profitability (the largest expense being depreciation), with stable (SDE), while sanitation is performed by a further state-owned company (ONAS). debt serviceability. Note is taken of the stable rises in tariffs and Although operations in the sector are SDE's efficacy as an operator since reform. bound by the contracts implemented at the · Although Senegal is relatively stable, both politically and time of reform, governance of the sector economically, it remains a relatively poor country. As such, ultimately falls under the ambit of the government support to SONES is weak, while the low prevailing Minister of Water; who is also responsible wealth levels could prevent viable tariff increases in the future. for tariff setting. Funding profile GCR contacts: SONES's assets are funded via a combination of debt and equity of Richard Hoffman CFA94.3bn and CFA137.1bn respectively in F07 (F06: CFA96.3bn +27 11 784-1771 and CFA127.7bn). In terms of capitalisation, SONES has been hoffman@globalratings.net moderately geared, with net debt to capital & reserves of 64% in F07 (F06: 71%). However, indebtedness is particularly high when Marc Joffe compared to earnings, with net debt to EBITDA at 543% in F07 (F06: +27 11 784-1771 682%) and operating cash flow amounting to a low 9.6% of this debt. joffe@globalratings.net In the same vein, debt serviceability has been low (albeit stable), with Website: www.globalratings.net net interest cover reaching a peak of 1.5x in F07 (F06: 0.7x). Note is taken of the long dated capital redemption profile of the utility's debt. This document is confidential and issued for the information of clients only. It is subject to copyright and may not be reproduced in whole or in part without the written permission of Global Credit Rating Co. ("GCR"). The credit ratings and other opinions contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information is given or made by GCR in any form or manner whatsoever. Background The above water sector reforms have brought positive benefits for the sector as a whole. Most The Senegalese water sector has witnessed significant of these has been the substantial considerable reform over the past two decades, expenditure undertaken on the core production and with a focus on ensuring adequate water resources distribution infrastructure. In 1995 the Water and service delivery to the country's burgeoning Sector Project was initiated, with a view to meet urban population. In this regard, urban water water demands in Dakar by 2003 (although the services were nationalised in 1971, with SONEES project experienced substantial delays). The project (Société Nationale d'Exploitation des Eaux du was a considerable success, with capacity doubled Sénégal) becoming responsible for the operation of along pipeline between purification facilities off water and sanitation services. In 1983 SONEES the Senegal River (on Lac de Guiers) and Dakar. became responsible for water sector asset This also saw the addition of further reservoir investment, which was formalised only in 1990 points along the pipeline, as well as the through a "contrat-plan". However, by the mid- rehabilitation of the Ngnith Treatment plant. 1990s it had become apparent that such an arrangement was failing, with sub-optimal tariff In 2006, having performed strongly under the first increases approved by government and weak Affermage contract, SDE's operational mandate collections from public enterprises. Moreover, and was extended for a further 5 years to 2011. The most significantly, there was serious concern focus of SONES's capex activities, as currently regarding the adequacy/security of water supply stands, fall under the Long Term Water Project, for Dakar at the time. Precipitated by economic which aims to address long-term water supply turmoil following the devaluation of CFA against concerns, as well as meet the water-specific targets the French Franc in 1993, this led to the significant per the Millennium Development Goals. In this water sector reform undertaken in 1995/1996. respect, with dwindling groundwater and rapid urbanisation, water security remains a key concern. The 1995/1996 water sector reforms saw the operations of SONEES dismantled and split Operating environment between three key operators, as follows: SONES (Sociètè Nationale des Eaux du Socio-economic context Sènègal) is the public asset holding company in Senegal is a country spanning around 197,000km2, charge of managing & developing water related located on the Westernmost tip of Africa and assets in urban/semi-urban areas of Senegal and bordered in the North by Mauritania, the East by monitoring the delivery of water services. Mali and in the South by Guinea & Guinea Bissau. A private operator in charge of producing and Having achieved independence from France in delivering potable water to these areas, as well 1960 as part of the Mali Confederacy (and as maintaining the network & collecting thereafter gaining independence from Mali), revenues from customers. SDE (Sènègalaise Senegal has grown into a hub of Francophile West- des Eaux) is the private operator, with 62% Africa, with its capital Dakar being a centre of effectively held by French water sector operator commercial activity and an important port. The SAUR. These shares were transferred to the country reports a moderate population of around Finagestion subsidiary of the Bouygues Group. 12.2m people in 2007, with the most notable trend ONAS (Office National d'Assainissement being the migration of the population towards Urbain) is a government owned and managed urban centres (especially the Dakar area in which company responsible for the sanitation services over 60% of the population now resides). This of six major urban centres. populace is comprised of various ethnic groupings, the largest (at around 50%) being Wolof, while The above reforms resulted in a clear division and two official languages (Wolof and French) are designation of water sector responsibilities, with spoken. The Senegalese religion is particularly roles & responsibilities designated by way of a unified, with 95% of the population being Muslim. strong legal/contractual framework. SONES Table 1: Key economic entered into a 30-year Concession contract with the indicators 2004 2005 2006 2007 2008e Senegalese Republic, as well as an annexed GDP (US$'bn) 8.0 8.7 9.2 11.1 12.9 Planning contract, effectively outlining the GDP growth (%) 5.8 5.3 2.1 5.0 5.4 respective responsibilities of SONES and the State. GDP per capital (US$) 704.8 743.4 767.7 909.8 1,027.1 A 10-year Affermage contract was also entered Inflation, avg. (%) 0.5 1.7 2.1 5.9 4.5 into by the State, SONES and SDE, while a Current account (% of GDP) (6.1) (7.8) (9.8) (8.1) (10.3) Exchange rate (CFA/US$)* 528.9 524.7 539.9 492.9 437.4 Performance contract (between SDE & SONES) Population (million) 11.4 11.7 11.9 12.2 12.5 was annexed to this contract. These latter contracts * Average exchange rate. 2008e denotes the average rate for 1H 2008. defined the asset regime, service standards & Source: IMF. conditions, governance of the works, remuneration and monitoring mechanisms for SDE. Global Credit Rating Co. ­Senegal Water Utility Credit Rating Report Senegal remains a poor, agrarian-based economy, sector (including raising and servicing debt), as lacking the wealth of commodities displayed by well as ensuring the adequate performance of the neighbouring West-African states. As such, its operator. economy remains highly skewed towards a few Obligations of the State and SONES per Planning Contract outputs, such as fishing and peanuts. In recent years, the fishing sector has replaced groundnuts as State · Define and monitor water sector policy, with a focus on the country's leading export, with peanut product financial viability, efficiency and transparency. exports being detrimented by falling global prices. · Ensure efficient allocation of water resources. Phosphate production has suffered from the recent · Set cost-reflective tariffs and provide investment subsidies in exception cases only. financial collapse of the nationalised Industrie · Increase tariffs per indexing and apply specific tariffs to chimique du Sènègal, which also resulted in the farmers, as well as modifying tariff structures. loss of over 3,000 jobs. However, the tourism · Reduce State consumption and ensure payment by the administration. sector continues to flourish, with over 0.5m · Approve SONES's 3-year investment plans and 3-year tourists visiting per annum. With a relatively low investment agreements with SDE. level of industrialisation, the economy reports a · Facilitate financing via grants, loans, subsidies or guarantees. substantial current account deficit and is highly SONES · Prepare 3-year investment plans and agree on 3-year dependant on grants and concessional funding. investment agreements with SDE. · Calculate annual changes in tariffs & submit these to the State. Notwithstanding the above, the economy has · Supervise construction works. reported relatively stable fundamentals over recent · Service the sector's debt. years, with GDP growth estimated to have · Allocate revenue to fund infrastructure renewals. recovered to 5% in 2007 (2006: 2.1%) and · Establish a yearly communication/sensibilisation programme. · Prepare annual financial accounts. expected at 5.4% in 2008. Moreover, rising consumer wealth levels have been accompanied by Similar to the above are the responsibilities of relatively low (single digit) inflation and a SONES and SDE as defined in the Performance strengthening exchange rate. It is noted that despite contract. This contract was renewed (after the first the strong measured growth, economic activity 10-year period) in 2006 for a further five years. remains centred in the informal sector. Obligations of SONES and SDE per Performance contract As a member of the West Africa Economic and SONES Monetary Union (WAEMU), Senegal's monetary · Ensuring adequate infrastructure is available to the operator policy is defined by the Central Bank of West and that requisite investment is made (including a rolling 3- year investment programme). African States (BCEAO), which has the primary · Timeous execution of works related to system investments. objective of controlling inflation. The prevailing · Financing of works. CFA currency shared by WAEMU countries is · Adjustment of tariffs. pegged against the Euro, which has facilitated SDE considerable economic stability for these countries · Optimal usage of productive assets. · Maintaining and repairing infrastructure at its own cost. (with the last major revaluation occurring in · Renewing a minimum of 14,000m of pipe and 6,000 January 1994). Accordingly, the currency has connections per year. strengthened against the US$ in line with the Euro, · Replacing electromechanical equipment valued below CFA15m and with a lifespan up to 10 years. from an average of CFA540/US$ in 2006 to · Prepare an annual maintenance plan and technical report. CFA493/US$ in 2007 and further to CFA437/US$ · Meet WHO standards for water quality. in 1H 2008. · Respond to mains leakage with one hour. · Adhere to renewal schedule (min. 17km of pipe per annum). Regulatory and legal framework · Supply monthly data to SONES on consumption, billing and collections. The regulation of the water sector in Senegal · Meet performance targets in terms of leakage and collections. follows from the framework instituted under the 1995/1996 water sector reforms. Sectoral Key to the above Performance contract is the responsibilities (rural & urban, including calculation of remuneration under both contracts. sanitisation) ultimately vest with the Minister of SDE, through its billing and collections function, Water (Ministre de l'Hydraulique), while effectively controls the cash flows of both underlying responsibilities & roles are designated organisations. Per the Affermage contract, SDE per the aforementioned contractual arrangements. must pay to SONES the average tariff minus the Under the Planning contract between the State and operator's fee, multiplied by the volume produced SONES, obligations of both parties were clearly and the annual targets for efficiency and defined, as tabulated below. The gist of these collections. This has resulted in one of the key obligations is that the State performs a monitoring contentions under the contract, being the technical role, with its key roles being the setting of tariffs efficiency the operator requires (at 85%), which is and assistance with asset financing and collections considered to be unachievable by SDE's from government entities. In contrast, SONES is management. directly responsible for capital investment in the Global Credit Rating Co. ­Senegal Water Utility Credit Rating Report Calculation of SONES's remuneration costs in the process being electricity, labour and (cost of) capital. Of these cost drivers, it is only the Amount paid to SONES = (Tavg, n ­ OPn) Vpn x CTEn x CCEn financing of capital that accrues to SONES's Tavg, n = average tariff ; sum of the amount billed in each tariff category divided by the total overall volume billed for account. It is noted that the cost of producing in cubic meters: this is the weighted average of all underground water is markedly lower than surface tariffs (net of taxes). water, because underground water requires less OPn = operator's water supply rate in CFA/ m3 (referred to as treatment and can often be sourced closer to the called "bid price" or "operator's fee"), adjusted annually according to the indexation formula. consumption points than surface water. However, Vpn = water put into supply (volume of water produced) in Senegal's underground water does have certain m3/yr problems (for which studies are underway), CTEn = contractual technical efficiency; the target for water including trace iron in some water and high billed divided by water produced according to the fluoride in Dakar. Water quality is maintained at contract. WHO acceptable levels. CCEn = contractual commercial (bill collection) efficiency; the target for water paid for divided by water billed according to the contract. Asset infrastructure Table 2: Asset infrastructure (CFA'bn) F06 F07 CTEn and CCEn are fixed at 85% and 97% respectively. Land 10.6 10.6 Buildings 37.9 37.8 Operations Facilities 142.6 150.0 SONES's mandate, as described above, is to hold Equipment 15.6 14.1 and develop the urban water asset infrastructure, as Equipment ­ transport 0.3 0.2 well as ensure the ongoing performance of the Operational assets 206.9 212.6 operator. As such, its key operating activities are Projects in progress 1.4 0.9 the planning of infrastructure development, the raising of funding via debt & grants and the Total fixed assets 208.3 213.5 monitoring of SDE's activities. With respect to the SONES displays a substantial asset base, which is latter task, although its revenue derives from the utilised by SDE in order to service Dakar and a efficacy of SDE, the performance contract between further 55 towns and 414 villages along the SONES and SDE is designed such that SONES is primary network. Most of the asset base (70%) is largely unexposed to the performance of the vested in actual water production/distribution operator. Examination of the remuneration formula assets, whilst a cumulative 23% pertains to land & reveals that SONES's risk in terms of revenue buildings owned by SONES. Land & buildings are derives from the average tariff (set by the Minister largely leased to SDE. of Water) and the volume of water produced, which SDE is contractually bound to maintain per The water production & distribution infrastructure the current capacity of the infrastructure. is essentially contained along a single conduit, running between the Senegal River in the North SONES is modelled along a "lean" staffing and Dakar in the South-West of the country. infrastructure, with a preference to hire technically Approximately 110,000m3 is sourced from Lac de skilled staff and rely on computer systems for Guiers, a lake on the Senegal River. This water is secretarial & administrative functions. In this processed via two treatment plants, with around regard, at formation in 1996, SONES had around 110,000m3 treated at the Ngnith and Keur Momar 79 staff (of which the majority derived from Sarr (KMS) plants. From these treatment plants, a SONEES). Since this time, despite the substantial dual pipeline carries the water towards Dakar, increase in the infrastructure, the total staff feeding numerous towns and villages en-route. complement has increased moderately to 82 as at Notwithstanding the above, the majority of potable 2007. In this regard, staff members are dispersed water is in fact accumulated along the conduit's into a number of key departments covering path via a plethora of reservoirs and boreholes different organisation functions. (around 840), contributing the remaining SONES and SDE have free and unrestricted access 170,000m3 of installed capacity. to water (albeit controlled by the Department of Water sales Administration and Planning of Water Resources), Due to the nature of the compensation arrangement which it sources from rivers and ground water. In between SONES and SDE, SONES is precluded this regard, daily installed capacity registers from certain risks associated with revenue around 280,000m3, of which approximately generation in the industry. In this regard, the 110,000m3 is sourced from surface water and the contract stipulates that revenue is calculated on remainder (around 60%) from underground water production at an 85% efficiency rate (i.e. sources. The actual purification and transportation 15% technical loss) and that revenue is calculated of water drive the cost of production, with major assuming a 97% collection rate. Accordingly, Global Credit Rating Co. ­Senegal Water Utility Credit Rating Report SONES is remunerated assuming the above and On the back of higher volumes produced by SDE benefits should SDE underperform in terms of and the aforementioned increased tariffs, SONES collections or efficiency. For more information on posted a sizeable 22% rise in its core revenues to collections and efficiency, please refer to GCR's CFA18bn in F07. Although growth in core sales corresponding report on SDE. revenue has fluctuated in line with increases in capacity and tariffs (with revenue contraction SONES is exposed to the volume of water reported in F06), this has equated to a compound produced and the average tariffs. With regard to annual growth rate of 7.3% between F03 and F07. the former, SONES is largely responsible for Revenue in F07 was augmented by ancillary capital formation, as well as ensuring that capacity revenues of CFA0.5bn, including sizeable is utilised. However, tariffs are effectively set by provision reversals and exchange gains. the Minister of Water, exposing SONES to regulatory risk. However, the Minister of Water Due to its asset-holding nature, SONES displays bases such decisions on proposals from SONES. low operating costs, with the single largest cost As reflected below, water volumes increased being the (7% higher) staff expenses of CFA1bn in robustly between F04 and F07. Coupled with F07. With a moderate 3% rise in other operating strong tariff increases since F05, this transpired expenses to CFA0.9bn, this resulted in substantial into a marked rise in revenues in F07. Going EBITDA (including specific provisions) of forward, through to F11, production volume CFA16.2bn in F07 (F06: CFA13.2bn), translating growth is expected to be more sluggish, although to a margin of 90% (F06: 89%). stable tariff increases are anticipated. Also in line with SONES's nature is that its largest Table 3: Efficiency statistics F03 F04 F05 F06 F07 operating charge pertains to the depreciation of its Number of connections (000s) 363.2 383.0 412.3 433.7 461.9 asset base. As depreciation & amortisation Water production (m3- millions) 113.8 118.7 124.7 129.2 135.4 (excluding specific provisions) remained relatively Water sold (m3- millions) 90.7 94.8 99.7 103.7 108.7 unchanged at CFA10.2bn in F07 (F06: Technical efficiency (%) 79.9 80.1 80.1 80.2 80.3 Collections (%) 98.2 98.3 97.9 98.2 97.4 CFA10.1bn), this resulted in a 95% higher operating profit of CFA6bn in F07. Accordingly, Table 4: Water tariffs F04 F05 F06 F07 the operating margin registered at a robust 33% in (CFA/m3) Average global tariff 485.6 485.6 531.6 525.8 F07, following the review period low 21% reported Taxes (50.9) (52.4) (81.1) (30.2) in the prior year. Net tariff 434.7 433.2 450.5 495.6 Net finance charges were 11% lower at CFA4bn in ONAS (sanitation) (40.8) (40.3) (40.7) (39.8) (146.5 F07, and resultantly, net interest cover amounted to SONES (asset development) (142.7) (140.9) (164.1) Net tariff - SDE ) 247.4 250.2 268.9 291.7 an improved 1.5x for the year (F07 0.7x). Overall, retained income was reported at CFA1.3bn in F07 Financial profile (F06: CFA0.5bn). Earnings in F06 were boosted by net extraordinary gains totalling CFA2.1bn A synopsis of SONES's financial performance for (associated with the salvage of assets), compared the past 5 years is reflected at the end of this to an exceptional loss of CFA0.6bn in F07 report, whilst brief comment appears hereafter. (resulting from provisions of CFA1.3bn for Table 5: Operating F07 % of renewals). performance (CFA'm) Actual Budget budget The improved profitability transpired in a sharp Income 25% rise in cash generated by operations to Sales 17,965.8 17,357.8 103.5 Operating subsidies 0.0 0.0 -- CFA16.1bn in F07. This was moderated by a third Other operating income 536.4 462.3 116.0 successive working capital absorption of Total revenue 18,502.2 17,820.1 103.8 CFA3.7bn in F07 (F06: CFA2.4bn), pertaining largely to increased amounts owing by SDE. The less: Op. expenditure Staff costs (1,035.4) (959.4) 107.9 above, coupled with lower finance charges, Operating charges (940.5) (964.5) 97.5 resulted in 39% higher cash flow from operations Ancillary expenses (59.9) (1.0) -- of CFA8.4bn in F07. EBITDA 16,466.4 15,895.3 103.6 Total capex declined markedly to CFA15.4bn in Depreciation & ammortisation* (10,503.4) (10,323.9) 101.7 Operating result 5,963.0 5,571.4 107.0 F07 (F06: CFA20.6bn), well below the CFA27.7bn Net finance costs (3,972.0) (4,610.5) 86.2 reported in F04. Cash flows were also boosted by Exceptional items (591.8) 666.0 n.a. recoveries of advance payments to suppliers of Taxation** (127.0) (188.9) 67.2 fixed capital totalling CFA1.3bn in F07. NPAT 1,272.2 1,438.0 88.5 Resultantly, capital/donor contributions amounted * Includes specific provisions. to a much lower CFA7.5bn in F07 (F06: ** Operational (not income) taxation. CFA14.5bn). Overall, net debt decreased for the second consecutive year by CFA1.8bn in F07 Global Credit Rating Co. ­Senegal Water Utility Credit Rating Report (F06: CFA0.5bn), following a cumulative Given relatively large cash holdings, SONES CFA5.3bn increase in F04 and F05. displays sufficient liquidity. Specifically, days cash on hand amounted to an ample 144 days (F06: 146 Funding profile days). Gearing measures, however, register high. Examination of SONES's balance sheet reveals In this respect, net debt amounted to a sizeable that a substantial CFA213.5bn (90%) of the asset 543% of EBITDA (F06: 682%) and 490% of total base is vested in fixed assets (including work in income (F06: 607%) in F07. progress). Other assets include cash holdings of CFA6.4bn (3%) and net trade debtors of Capex projects and funding CFA11.6bn (5%), being SDE. Capital expenditure is a core function of SONES, Given that much of the fixed asset base was which has a number of ongoing projects to address inherited from SONEES, whilst a substantial water distribution and long term water security. A proportion of subsequent capex has been funded by key focus has been to meet the Millennium capital grants, the utility displays substantial equity Development Goals, which for the urban water of CFA 137.1bn in F07 (F06: CFA127.7bn), well sector are: to increase water via domestic up on the CFA105.6bn reported in F03. In contrast, connection to 85% in Dakar and 79% regionally by interest-bearing debt has grown more moderately, 2015, translating to an additional 2.3m people on rising from CFA88bn in F03 to CFA94.3bn in F07 the network. Since reform in 1995/1996, water (F06: CFA96.3bn). sector projects have been organised along PSE and Examination of borrowings by source reveals a PLT funding lines. PSE's initial objective was to broad array of funders, albeit with the majority rehabilitate the Ngnith treatment plant and increase stemming from four key lenders. In this regard, capacity of the pipeline between the lake and KfW (Kreditanstalt für Wiederaufbau) is the single Dakar (both of which have been completed). The largest funder with outstanding borrowings of project was also instrumental in funding new CFA24.2bn at F07, while the World Bank's IDA boreholes, as well as increasing the network and (Independent Development Agency) is similarly new social connections. The project's mandate has exposed at CFA23.7bn. The other two significant continued in terms of social connections, with a lenders are AFD (Agence Française de KFW project to cover 11 regional villages, as well Développement) and the EIB (European as a number of research studies. The PLT, with an Investment Bank). The most notable feature of the initial budget of US$300m, has followed on from above is that SONES's funders are predominantly the PSE, with a view to consolidate industry development agencies, which provide it with low reforms and continue to address long term water interest or interest-free long-dated loans. supply issues. Delays in funding have seen this project continue well beyond its original 2007 Examination of the application of these funds target. reveals that the majority pertained to the PSE (Water Sector Project) initiated in 1995 and the Other projects are funded distinctly, including PLT (Long Term Water Project), both of which certain MDG/PEPAM projects between 2006 and have witnessed extensions in their mandates and 2011. A second phase is set to run between 2011 delays in project completion. and 2015, following which further plans are being developed with regard to long term water security. Table 6: Borrowings F06 F07 source (CFA'm) CFA'm % CFA'm % Table 8: Funding (CFA'm) F06 F07 AFD 18,963.0 19.7 17,528.5 18.6 Borrowings 6,577.5 9,712.9 KfW 24,148.5 25.1 24,164.7 25.6 Grants 14,488.7 7,474.0 IDA 22,681.1 23.6 23,735.7 25.2 Internal funding (476.8) (1,793.5) BADEA 2,362.5 2.5 1,986.7 2.1 Net capex 20,589.4 15,393.3 BEI 10,073.3 10.5 9,704.9 10.3 BOAD 8,775.5 9.1 7,134.0 7.6 Substantial capital expenditure is expected over the CBAO 3,361.8 3.5 2,828.2 3.0 next four years to F11, albeit with an amount of Accrued interest 3,328.0 3.5 4,634.2 4.9 CFA21.8bn in F08 tailing off to CFA10.1bn by Long term borrowings 93,693.5 97.3 91,716.9 97.2 Reclassified borrowings 2,607.6 2.7 2,611.6 2.8 F11. The largest portions of this expenditure will Total borrowings 96,301.1 100.0 94,328.5 100.0 be on the network at CFA18.1bn (31%) and new connections at CFA17.6bn (30%), although a Table 7: Borrowings F06 F07 cumulative CFA19.5bn (34%) is to be spent on Application (CFA'm) CFA'm % CFA'm % civil works and electromechanical equipment & Outside of PSE 19,775.6 20.5 19,472.9 20.6 instrumentation. Examination of funding sources PSE 43,843.9 45.5 39,059.0 41.4 PLT 30,074.0 31.2 33,184.9 35.2 reveals that a high 94% of funds are expected to Reclassified borrowings 2,607.6 2.7 2,611.6 2.8 derive from internal cash flow, with grant funding Total borrowings 96,301.1 100.0 94,328.5 100.0 falling away after F08. In this regard, SONES has Global Credit Rating Co. ­Senegal Water Utility Credit Rating Report secured considerable new debt of around With the receipt of funds for the MDGs, SONES's CFA37.2bn from a consortium of lenders (AFD gearing is expected to peak in F08 and thereafter and EIB amongst others), largely in respect of the decline moderately over the four years to F11 (with MDGs. earnings-based gearing improving more sharply). Table 9: Capex and funding Table 11: Projected F08 F09 F10 F11 F08 F09 F10 F11 (CFA'm) funding profile (CFA'bn) Capex Capital and reserves 142.6 143.3 144.1 145.0 Construction & engineering 1,859.7 3,394.6 2,182.6 1,592.3 * Borrowings 131.4 134.0 131.7 131.4 Network 7,963.9 3,832.4 2,466.2 3,871.0 Cash holdings 7.9 8.9 9.9 13.7 Connections & equipment 4,462.1 5,860.6 4,087.1 3,221.5 Electromechanic instruments 6,632.1 1,809.9 1,148.2 887.8 Net debt : equity (%) 86.6 87.3 84.5 81.2 Planning, material & tools 682.3 577.6 371.7 270.1 Net debt : EBITDA (%) 779.8 718.9 644.9 576.5 Other 216.4 220.8 225.2 229.6 Total 21,816.5 15,695.9 10,481.0 10,072.3 Net debt : total income (%) 658.3 629.5 568.9 512.0 Source: financial model. Capex funding * Including CFA37.2bn to be raised for the MDGs. Borrowings 14,749.2 13,040.9 13,161.7 13,467.0 Internal cash flow 2,545.2 2,655.0 (2,680.7) (3,394.7) Going forward, SONES reports a viable financial Donations/grants 4,522.1 -- -- -- platform from which to continue to target the Total 21,816.5 15,695.9 10,481.0 10,072.3 MDGs. With SDE continuing to perform Source: Management. adequately under its performance contract, SONES's focus will be to ensure the necessary Future prospects asset formation required to expand the network's Table 10: Operating F08 F09 F10 F11 capacity and continue with new connections. It is budget (CFA'm) noted that plans for the above goals currently span Total revenue 18,761.6 19,873.4 21,407.9 22,987.7 up to 2015, after which expected growth of the less: Op. expenditure urban population will necessitate further water Staff costs (1,056.1) (1,077.3) (1,098.8) (1,120.8) supply. As such, management of SONES has been Other operating charges (1,866.2) (1,393.3) (1,421.2) (1,449.7) exploring a number of long-term solutions, Ancillary expenses (1.0) (1.0) (1.0) (1.0) including: sourcing ground water to the East of EBITDA 15,838.3 17,401.8 18,886.9 20,416.2 Depreciation* (10,922.0) (12,397.8) (13,925.7) (15,649.3) Dakar, a desalination plant near Dakar and Operating result 4,916.4 5,004.0 4,961.2 4,766.9 sourcing additional surface water from the Lake. Net finance costs (3,818.7) (4,097.6) (3,968.3) (3,731.9) One of the biggest constraints to all expansion Exceptional items 502.0 474.6 448.7 424.2 activities is the energy shortages in Senegal, with Taxation (150.7) (153.7) (156.7) (159.9) costs and availability of reliable electricity being NPAT 1,449.0 1,227.3 1,284.9 1,299.4 contemplated for all investments. Key ratios (%) Turnover growth 1.4 5.9 7.7 7.4 EBITDA margin 84.4 87.6 88.2 88.8 Operating profit margin 26.2 25.2 23.2 20.7 Net interest cover (x) 1.3 1.2 1.3 1.3 * Includes amortisation and specific provisions. Source: financial model. The above operating budget derives from the financial model - updated to include SONES's 2007 results. The model predicts stable growth in total revenue (including insignificant ancillary incomes), with revenue rising at a compound annual growth rate of 5.8% to CFA23bn by F11 (largely in line with new connections and stable tariff increases). Operating expenses, and notably staff costs, are expected to increase moderately. Accordingly, the EBITDA margin is set to dip in F08, before increasing thereafter. In contrast, given the ongoing capital formation, depreciation charges are expected to rise faster than revenue, resulting in compression in the operating margin. Nonetheless, debt serviceability is expected to remain stable, with an interest cover of around 1.3x through to F11. Global Credit Rating Co. ­Senegal Water Utility Credit Rating Report SOCIETE NATIONALE DES EAUX DU SENEGAL (SONES) (CFA in millions except as noted) Income Statement Year end : 31 December 2003 2004 2005 2006 2007 Revenue 13,552.5 14,131.9 15,347.2 14,775.3 17,965.8 Operating expenditure (1,743.4) (1,659.3) (1,496.7) (1,883.4) (1,975.9) Other income and expenses 185.5 184.5 339.3 275.1 213.1 EBITDA 11,994.6 12,657.1 14,189.7 13,167.0 16,203.0 Depreciation and ammortisation (8,000.7) (7,820.3) (9,212.5) (10,111.8) (10,240.0) Operating income 3,994.0 4,836.8 4,977.2 3,055.3 5,963.0 Net finance charges (4,028.0) (4,612.0) (4,622.1) (4,450.6) (3,972.0) Finance costs capitalised 0.0 0.0 0.0 0.0 0.0 Income after finance charges (34.0) 224.9 355.1 (1,395.4) 1,991.0 Exceptional Items 524.2 518.5 569.1 2,113.1 (591.8) Corporation income Tax (106.2) (179.5) (81.1) (226.2) (127.0) Net income 384.0 563.9 843.1 491.5 1,272.2 Cash Flow Statement Cash generated by operations 11,410.5 12,535.2 14,128.7 12,928.7 16,112.6 Working capital: (increase)/decrease 446.9 1,532.8 (1,918.0) (2,395.4) (3,702.4) Net finance charges (4,028.0) (4,612.0) (4,622.1) (4,450.6) (3,972.0) Cash flow from operations 7,829.4 9,456.1 7,588.6 6,082.7 8,438.2 Maintenance capex* (8,000.7) (7,820.3) (9,212.5) (10,111.8) (10,240.0) Discretionary cash flow from operations (171.3) 1,635.8 (1,623.9) (4,029.1) (1,801.9) Net expansionary capex and investments (14,064.7) (21,879.4) (5,120.1) (9,982.8) (3,878.6) Capital contributions 5,214.2 17,295.9 4,379.6 14,488.7 7,474.0 Cash movement: (increase)/decrease n.a. (3,024.4) (597.7) 118.5 179.1 Borrowings: increase/(decrease) n.a. 5,972.1 2,962.1 (595.2) (1,972.6) Net increase/(decrease) in debt (2.6) 2,947.7 2,364.3 (476.8) (1,793.5) Balance Sheet Capital and reserves 105,624.2 122,979.8 127,640.8 127,723.6 137,086.5 Total interest-bearing debt 87,962.1 93,934.2 96,896.3 96,301.1 94,328.5 Reclassified 56.4 69.5 55.6 2,607.6 2,611.6 Long-term 87,905.7 93,864.7 96,840.7 93,693.5 91,716.9 Interest-free liabilities 11,715.5 8,564.1 5,427.2 3,494.1 4,921.2 Total liabilities 205,301.8 225,478.1 229,964.3 227,518.8 236,336.2 Fixed assets 186,743.7 208,631.6 211,728.3 206,909.7 212,596.2 Projects in progress 3,288.1 1,229.7 338.7 1,418.3 887.9 Investments and other financial assets 454.5 443.3 316.2 1,766.5 1,788.7 Cash and cash equivalents 2,970.3 5,981.8 6,679.6 6,561.1 6,382.1 Net trade debtors 8,119.3 6,836.9 7,933.7 8,846.1 11,611.5 Other current assets 3,725.9 2,354.8 2,967.9 2,016.9 3,069.8 Total assets 205,301.8 225,478.1 229,964.3 227,518.8 236,336.2 Ratios Operating: Average cost of treated water (CFA/kl) n.a. 271.5 277.8 292.6 305.3 3 Billed water sales (millions of m per year) 90.8 94.8 99.7 103.7 108.7 Volume increase (%) n.a. 4.4 5.2 4.0 4.8 Average tariff increase (%) n.a. n.a. 0.0 9.5 (1.1) Turnover growth (%) n.a. 4.3 8.6 (3.7) 21.6 Staff costs : operating costs (%) 55.6 48.3 52.4 51.5 52.4 Staff per 1,000 conections n.a. n.a. n.a. n.a. n.a. Water distribution losses (%) 20.1 19.9 19.9 19.8 20.0 Net capex : revenue (%) 183.9 195.9 74.2 139.4 85.7 Cash Flow: Operating cash flow : total debt (%) 8.9 10.1 7.8 6.3 8.9 Operating cash flow : net debt (%) 9.2 10.8 8.4 6.8 9.6 Profitability: EBITDA : revenues (%) 88.5 89.6 92.5 89.1 90.2 Operating profit margin (%) 29.5 34.2 32.4 20.7 33.2 EBITDA : average total assets (%) n.a. 6.0 6.4 6.0 7.2 Coverage: Operating income : gross interest (x) 1.0 1.0 1.0 0.7 1.4 Operating income : net interest (x) 1.0 1.0 1.1 0.7 1.5 Activity and liquidity: Days receivable outstanding (days) n.a. 201.4 190.7 207.3 207.8 Net debtors : total income (%) 59.9 48.4 51.7 59.9 64.6 Current ratio (:1) 1.3 1.8 3.4 3.0 2.9 Average days working cash (days) 78.7 154.9 159.0 145.6 143.9 Capitalisation: Net debt : capital and reserves (%) 80.7 71.7 70.9 70.5 64.4 Total debt : total assets (%) 42.8 41.7 42.1 42.3 39.9 Total debt : EBITDA (%) 733.3 742.1 682.9 731.4 582.2 Net debt : EBITDA (%) 708.6 694.9 635.8 681.6 542.8 Total debt : total income (%) 649.0 664.7 631.4 651.8 525.0 Net debt : total income (%) 627.1 622.4 587.8 607.4 489.5 * Depreciation used as a proxy. Societe Nationale d'Exploitation et de Distribution des Eaux (SONEDE) Tunisia Water Utility Analysis July 2008 Security class Rating scale Currency Rating Rating watch Expiry date Long term National Tunisian Dinars A No 07/2009 Short term National Tunisian Dinars A1- Financial data: Rating rationale (US$'m Comparative) The rating is based on the following key factors: 31/12/06 31/12/07 · SONEDE enjoys a monopolistic position by virtue of the fact that it TD/US$ (avg.) 1.34 1.29 operates as the sole supplier of bulk potable water in urban Tunisia TD/US$ (close) 1.31 1.24 (and several rural areas). Total assets 1,006.3 1,072.9 · Furthermore, the utility is a 100% held entity of the Tunisian Total debt 223.1 233.5 government and operates in a regulated environment, with its Total capital 660.4 715.6 activities overseen by the Ministry of Agriculture and Water Cash & equiv. 70.6 48.2 Resources. Turnover 166.0 175.6 · Gearing levels have remained relatively stable over the review EBITDA 36.5 36.9 period, notwithstanding gradually increasing levels of borrowings. NPAT 1.4 0.8 · Liquidity levels appear to be adequate, although cash flow from Op. cash flow 11.4 5.3 operations has deteriorated somewhat in recent years. Market cap. n.a. · The continued deterioration in the operating margin over the review Market share n.a. period implies tariff increases are insufficient to address operating requirements. Fundamentals: · While a portion of SONEDE's anticipated increase in capital SONEDE is a publicly owned and expenditure will continue to be internally funded and through operated water utility that has been government grants, the utility's borrowings and gearing are expected responsible for delivering potable to increase in the medium to long term. water in Tunisia since 1968. While its · Tunisia is located in a semi-arid zone characterised by irregular mandate traditionally focused on urban rainfall, and is among those countries least endowed with renewable areas, in recent years SONEDE has natural water resources. As such, a prolonged drought could been expanding its operations in rural potentially threaten raw water supplies, which would likely impede areas. SONEDE manages water the utility's financial flexibility. infrastructure covering an area of approximately 160,000km2 serving a Funding profile population of over 10 million. Total interest bearing debt decreased by TD2.8m to TD290m in F07, of GCR contacts: which short term debt comprised 10.8% from 14% previously. Total debt Marc Joffe to equity was largely unchanged at 33% of total capital and reserves +27 11 784-1771 (F06: 34%), although net debt to equity increased to 27% from 24% in joffe@globalratings.net F06. Furthermore, total debt to EBITDA, which has increased consistently over the review period, was posted at a higher 608% in F07 from 598% in F06. Cash and cash equivalents decreased by 35% to TD60m in F07, and accordingly, cash holdings covered short term debt a lower 1.9x from 2.2x in F06. In addition, the level of days cash on hand decreased to 98 days in F07, from 155 days previously. Net trade debtors decreased by 4% to TD116m in F07. Accordingly, the ratio of net Website: www.globalratings.net debtors to income ratio decreased to 51% in F07 (F06: 54%), although the debtors collection period increased slightly to 190 days (F06: 186 days). This document is confidential and issued for the information of clients only. It is subject to copyright and may not be reproduced in whole or in part without the written permission of Global Credit Rating Co. ("GCR"). The credit ratings and other opinions contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information is given or made by GCR in any form or manner whatsoever. Operating environment electricity (8%), and construction & civil engineering (4.3%). The well diversified Tunisian Economic economy has witnessed a decline of the primary Tunisia's conservative macroeconomic policies sector's contribution to GDP, from a level of and commitment towards structural reforms have 13.1% in 2005 to 12.3% in 2006. Services are the steered it towards economic stability, despite the mainstay of the economy, accounting for 63% of challenges posed by the disbanding of the textile GDP, with trade, hotels and restaurants industry's Multifibre Arrangement in 2005. GDP constituting the largest portion of this bracket with growth for 2007 measured 6.3% (2006: 5.5%), an input to GDP of 17%. Manufacturing resulting in GDP per capita rising to US$2,626 (at contributes 19% to GDP, while government spend constant 2000 prices). Tunisia has exhibited that it in the form of public administration represents the is capable of maintaining this high degree of third largest portion of GDP at 14.4%. However, economic growth over the long term, as despite the prevalence of the service industry demonstrated by the average GDP growth rate over within the framework of the economy, it employs the period 1999-2007 amounting to 5%. The only 22% of the working population, while the attainment of this level of growth has been waning agricultural sector is responsible for the accompanied by restrained inflation of 3.1% in employment of just over half the work force. 2007 (2006: 4.5%). Unemployment is running at around 14.1%. While Tunisia's primary export products of The Tunisian authorities have taken steps to ensure petroleum and mineral oils summed to a slight greater solvency within the financial arena. In this 8.7% of total exports in 2007, the country remains regard, banks now have the ability to deduct a net oil importer. Nonetheless, despite the provisions for bad debts from taxable income, and negative impact of high oil prices on the balance of are restrained from dividend payouts prior to trade account, the region has contained the current coverage of 70% of doubtful loans by provisional account deficit to measure 0.5% of GDP (2006: funds. 2.1%), and has posted an average deficit of just 2% of GDP over the past five years. Finished textile Regulatory goods and olive oil comprise the other major SONEDE is overseen by the Ministry of exports. Having received FDI net inflows of Agriculture and Water Resources (MAWR), which US$3,279m in 2006, an amount significantly formulates water sector strategies and coordinates above the net inflows of US$782m in 2005, investment planning and the allocation of Tunisia has proven a popular target for resources. As a public agency, the government is international investor funds since the liberalisation responsible for mobilising financial resources of the capital account. The privatisation of beyond what SONEDE can recover itself through institutions such as Tunisia Telecom further user fees. In addition, the Tunisian government advances the country's financial appeal. directly owns all of the utility's capital and financial assets, while the management of financial These measures for the balance of payments assets, operations & maintenance, rehabilitation, accounts have impacted positively upon net renewal and installation of equipment are external debt, which totaled 25% of GDP for 2007 delegated to SONEDE. ­ an amount considerably lower than the measure of 50% for 2003, although still comparatively high SONEDE's board consists of 12 members, who are given Tunisia's recent economic strength. The debt state agents or other government employees service paid increased from US$2.5bn in 2006 to selected to protect the interests of shareholders to an estimated US$3bn in 2007. The Tunisian Dinar the drinking water sector. The board meets at least (TD) experienced slight appreciation to average quarterly, and is responsible for reviewing and TD1.29 against the US$ in 2007 (2006: TD1.34). approving SONEDE's budgets. Foreign exchange reserves increased by 16.2% to Operations reach an estimated US$7.9bn in 2007 (2006: US$6.8bn), representing 5.3 months of import SONEDE operates across 40 decentralised districts cover. across the country, which are responsible for operations (network management, maintenance The economic development has been driven at etc.), as well as the management of clients (issues, sectoral level by the advancement of the services billing etc.). Each district is run as a separate cost division, particularly due to the growth of centre, which helps SONEDE identify the telecommunications (20%), as well as progression investment priorities and operating requirements / in the secondary sectors of machinery and Global Credit Rating Co. ­ Tunisia Water Utility Credit Rating Report performance of each. 4 operational directors are freshwater available per inhabitant is 50% below each responsible for 10 districts. the water scarcity standard. Moreover, this situation is exacerbated by irregular annual In urban areas, which represent around 65% of the precipitations. In addition, water supply is country's population, 99% of residents are confronted to two major constraints: the remote provided with access to safe drinking water by location of water resources and the low quality of SONEDE. In rural areas, access to water services water. The remoteness of water resources from is at around 89%, with around 52% of these consumption centres results in significant water services provided by SONEDE. Service levels tend transfer infrastructure investments and the low to be consistent, without frequent structural quality of water resources with high salinity interruption. Moreover, the network for increases the cost of water treatment. distributing safe drinking water operates at 85% efficiency. The lifespan for water piping Water sales and tariffs infrastructure is around 60 years, and SONEDE Sales volumes of water increased by 2.4% to 345 aims to replace on average 1% of the network million m3 in F07. The number of customers annually (currently attaining around 0.6%). increased by 4% to 2.1m in F07, driven by growth Approximately 80% of water piping is less than 40 of 6.5% in the rural areas to 315,431 (or 15.3% of years of age. Leakages are being experienced at a total customers from 14.9% in F06). Residential rate of 55 per every 1,000 connections. A level of consumers account for over 50% of water income, 35 per 1,000 is being targeted. Distribution losses with the bulk of the remainder fairly evenly spread have gradually increased over the review period, amongst government, industry, commerce and from 15.4% in F03 to 16.7% in F07. This is, tourism. The utility exhibits a very well diversified however, well below levels of around 25% revenue base, with no single entity responsible for exhibited in 1981. more than 0.6% of annual revenue. SONEDE employs more than 7,000 staff (8% SONEDE's tariffs are revised periodically (twice senior staff, 22% first-line supervisors and 70% every five years, although given the 2009 political executing staff) and delivers water to over ten elections only one tariff increase is expected million people. The government and the National during the current five year term), although exact Trade Union participate in salary negotiations implementation is not certain. Tariff adjustment every three years, which rises on average 6% over requests are submitted to the Oversight Ministry, this period. SONEDE has an aging management which has the option to transmit it for evaluation to structure, and also competes with corporate entities a Ministerial Council headed by the Prime in terms of retaining existing staff. A succession Minister. plan is in place, whereby 10% of retirement age Water tariff structures are applied uniformly across management staff is expected to leave in each year the country. SONEDE's tariff structure has two over the next five years. It is, however, noted that components: a fixed component and a variable all recruitment of staff requires ministerial component, which is proportional to consumption. approval (this is a major impediment, supported by The first bracket provides for low-income the fact that only 52 of the recently requested 106 households whose quarterly water consumption new positions were approved by the Minister). does not exceed 20 m3, or the equivalent of 40 Private sector participation is currently limited to litres per day per person. The social tariff results in sub-contracting technical services for extending a subsidy of over 30% of the cost to supply water. water networks and installing connections. These This tariff structure has resulted in improved include leakage detection and engineering studies. coverage and connection rates in poor areas, while encouraging cost savings through increasing tariff Tunisia, which is located in the south of the scales. Mediterranean basin has very limited water Table 1: Tariff Brackets resources. According to FAO, the southern structure 1st 2nd 3rd 4th 5th Mediterranean countries are among those that will 3 Consumption (m ) 0-20 21-40 41-70 71-150 +151 face particularly severe water resource scarcity in 3 Cost/ m (TD) 0.140 0.240 0.300 0545 0.840 the future. Regarding the demographic evolution of those countries, the greatest challenge over the The last tariff represents six times the first one and coming decades will be increasing food production three and a half times the second, which has with limited water resources, and under global resulted in a situation whereby roughly 1.5% of climatic changes. The amount of renewable customers pay for more than 29% of the population Global Credit Rating Co. ­ Tunisia Water Utility Credit Rating Report and a high percentage of users pay water below the F07, above revenue growth for the year. The real economic cost. largest cost component is staff costs, which increased by 6.1% to TD104m in F07 to comprise The following table compares tariff increases over a significant 47% of operating expenditure (F06: the past five years to inflation. The average water 46%). As a percentage of revenue, staff costs tariffs implemented by SONEDE between F03 and increased to a high of 46% in F07. Another major F07 were lower than inflation, resulting in margin input is the cost of raw water and related purchases compression. of TD30m. Electricity & energy costs increased to 12.2% of operating expenditure in F07 from 11.6% Table 2: (% annual change) F03 F04 F05 F06 F07 previously. Average water tariff 0.51 0.52 0.55 0.55 0.57 The operating profit margin has steadily decreased Inflation 2.7 3.6 2.0 4.5 3.1 over the review period, falling from 6.1% in F03 to Financial performance 1.5% in F07. Accordingly, operating income decreased to TD3.4m in F07 from TD6.3m in F06. A synopsis of SONEDE's financial results for the Interest received was in line with finance charges past 5 years is reflected at the end of this report, in F07 (F06: TD1.6m net finance charge), while with brief comment following. the foreign exchange loss doubled to TD1.4m. Since 1989, SONEDE has been liable for corporate Table 3: Operating F07 performance (TDm) Actual Budget % of budget tax at a rate of 35% of its pre-tax income. Net Income income after tax totalled TD1m in F07 (F06: Water sales & connections 202.5 218.3 92.8 TD1.9m). Other operating income 24.0 12.8 187.5 Total revenue 226.5 231.1 98.0 Cash generated by operations decreased by 8% to TD27m in F07. Following a higher (and fourth less: Op. expenditure consecutive) working capital absorption of Staff costs (104.3) (107.7) 96.8 Water & related purchases (30.1) (29.2) 103.1 TD20m, cash flow from operations was recorded at Electricity & energy (21.8) (17.2) 126.7 a review period low of TD6.8m (F06: TD15.3m). Other operating expenses (22.7) (27.9) 81.4 Net expansionary capex amounted to TD82m in EBITDA 47.6 49.1 97.0 F07 (F06: TD73m), or 36% of revenue (F06: Depreciation (44.2) (45.7) 96.7 33%). SONEDE evidenced a TD67m increase in Total operating costs 223.1 227.7 98.0 net debt in F07. Operating cash flow as a Operating income 3.4 3.4 100.0. percentage of net debt fell to 3% in F07 (F06: 7.7%), a review period low. NPBT 2.0 (0.1) n.a. Liquidity and gearing Total revenue increased by 1.8% to TD227m in Total interest bearing debt decreased by TD2.8m to F07, and has increased by an average annual TD290m in F07, of which short term debt compound growth rate of 3.1% from F03 to F07. comprised 10.8% from 14% previously. Cash and This is below inflation of around 3.3% over the cash equivalents decreased by 35% to TD60m in same period. Water sales & connections comprise F07, and accordingly, cash holdings covered short the bulk of income at 89% (F06: 90%). According term debt a lower 1.9x from 2.3x in F06. In to management, SONEDE does not receive addition, the level of days cash on hand decreased operating subsidies. Included in other operating to 98 days in F07, from 155 days previously. income of TD24m in F07 is an amount of According to management, around TD10m of cash TD13.5m relating to 3rd party investment subsidies, holdings at FYE07 related to donor funds. If which is described as follows: For over a decade, excluded, days cash on hand falls to around 82 SONEDE has installed an average of 70,000 new days. The utility has both domestic currency and connections per year, at an average unit cost of forex denominated bank accounts, whereby foreign TD300. As of 1998, new customers were able to denominated donor funds are allocated until pay cash for new connections, or pay the cost of disbursed. Liquid funds are allocated based on best the connection on a quarterly basis over five years. available funding rates. Credit risk across banks in New customers who opted for a credit connection Tunisia is mitigated given that the Central Bank receive a bill each quarter that includes the tariff owns 30% of all registered banks' capital. for consumption during the previous quarter, and a loan repayment installment. Total debt to equity was largely unchanged at 33% in F07 (F06: 34%), although net debt to equity Total operating expenditure (including increased to 27% from 24% in F06. Furthermore, depreciation) increased by 3.2% to TD223m in Global Credit Rating Co. ­ Tunisia Water Utility Credit Rating Report total debt to EBITDA, which has increased meter readings. The overall payment rate was consistently over the review period, was posted at 82.2% in F07 (F06: 80.6%). The average collection 608% in F07 from 598% in F06. period for private individuals typically does not exceed 40 days. However, state and local Table 4: % Sources of debt (TDm) F06 F07 change administrations have very poor payment records, State transferred debt 39.9 36.2 (9.3) equivalent to one years' consumption for the state Government guaranteed loans* 170.7 177.4 3.9 administration, and approximately two years' Subscriber advances & surety receipts 36.7 39.5 7.6 consumption for the local administrations. Other 3.6 5.2 41.7 Long term debt 250.9 258.3 3.0 Table 6: Debtors age F06 F07 analysis TDm % TDm % Short term debt 41.4 31.2 (24.6) Current 27.1 17.8 15.1 10.8 Total debt 292.3 289.5 (0.1) 31-60 days 14.7 9.6 14.6 10.5 61-90 days 9.6 6.3 9.6 6.9 * Government guaranteed loans 91-120 days 7.4 4.9 7.4 5.3 IBRD 12.0 10.3 (14.2) 121-150 days 3.9 2.6 3.8 2.7 Islamic Development Bank 48.0 43.1 (10.2) >150 days 89.8 58.9 89.1 63.8 European Investment Bank 86.0 90.2 4.9 Total 152.5 100.0 139.6 100.0 African Development Bank 20.6 27.0 31.1 KFW 4.1 6.8 65.9 Outstanding amounts over 3 months are forwarded Total 170.7 177.4 3.9 notification of their arrears position. After a further 60 days, if payment has not been received, Total borrowings are mainly comprised of a range SONEDE removes the clients' water meter, and of concessional loans totalling TD177m (61% of also applies a removal fee charge. This policy is total debt). These loans were financed through the not, however, applicable to public entities. Tunisian government on behalf of SONEDE, who SONEDE provides for all outstanding debtors in has also guaranteed repayment in the event that the full over a five year period. 20% is provided for utility is unable to do so. Roughly half of these overdue accounts between one to two years, a loans are sourced through the European Investment further 50% is provided for between two to three Bank, and in foreign currency (primarily Euro's), years, and the remainder for outstanding amounts exposing the utility to foreign exchange risk. over five years. Domestically sourced borrowings as a new source of financing could contribute to mitigating this risk Capex projects and funding going forward (locally sourced borrowings amounted to only TD22m in F07). Through a strategic plan developed for the period 1990-2011, SONEDE aims to establish and Accounts receivable implement a strategy for water sector regulation Gross trade debtors decreased by 8% to TD140m and mobilisation. Through this plan, the rate of in F07, driven by lower government & other public water resource mobilisation increased to 88%, administration debtors. Following the provision for from 67% in 1996, and is expected to increase to bad debts of TD24m, net trade debtors were 4% 95% by 2011. A second strategic plan will forecast lower at TD116m. The total provision amounted to to 2030, and will be focussed on non-conventional 17% of gross trade debtors in F07 (F06: 21%). water resources, such as desalination and recycling treated wastewater; protection of water resources Table 5: Debtors (TDm) F06 F07 against pollution; preventing the over exploitation Households 62.6 63.9 Industrial 7.9 8.5 of water tables; increasing water efficiency; and Government & other public administrations 63.7 53.4 demand management of water resources. Other 18.3 13.8 Tunisia's water policy is designed so as to address Gross trade debtors 152.5 139.6 Less provision for bad debts (32.4) (23.8) future demand in a sustainable manner. Planning Net trade debtors 120.1 115.8 for the drinking water sector is integrated at the national level through five year plans. These are The ratio of net debtors to income decreased to developed by SONEDE and must be approved by 51% in F07 (F06: 54%), while the debtors the Board, the line Ministry and the Ministry of collection period increased slightly to 190 days Development and International Cooperation. (F06: 186 days). Planning is followed by the creation of an annual Billing is done on a quarterly basis for 98% of budget for operations and development, which is customers. The other 2%, representing private synchronised with the plan's policies and customers, are billed on a monthly basis. Most programmes. SONEDE is currently underway with customers' bills are calculated on the basis of its 11th plan (2007-2011). Global Credit Rating Co. ­ Tunisia Water Utility Credit Rating Report Total capex spend over the 5 year period, as per displays adequate liquidity. Moreover, cash the investment plan provided to GCR (as below), is holdings comfortably cover short term debt budgeted at TD598m. Given that capex fell short obligations. New long term loans, third party of budget in F07 (TD82m achieved versus funding and concessionary loans could see TD116m budgeted), mainly due to slow tender borrowings (net of redemptions) increase to around processes, this will have to be made up over the TD318m by F11. Based on this, GCR estimates remaining years of the plan (of the TD498m that net debt to capital & reserves could increase to budgeted from 2002 to 2006, TD480m, or 96%, around 34% by F11 (F07: 27%), albeit well within was achieved). acceptable limits. Total debt to EBITDA is forecast to remain fairly stable at around 450% over the SONEDE has completed a detailed study for the period F08 to F11. construction of a desalination plant in the island of Jerba, which will have a total capacity of 50,000 Future prospects m3 per day, and commenced construction in 2008. It is anticipated that the facility will be designed as The following table is extracted from SONEDE's a Build-Operate-Transfer (BOT) model through a latest financial forecasting model. This model public private partnership. Under a BOT contract, requires continuous input, with concern that the the private sector is responsible for the design, financial model provided contains outdated building and financing of new investment projects. information. Management has confirmed that the It is also responsible for operating and maintaining preceding investment plan is correct. As the the investments during the concession period, commentary that follows and the before handing over to the public sector. Funding assumptions/forecasts tie in with the investment is expected to be sourced through domestic plan, this may present an inaccurate picture if the borrowings. financial model is indeed outdated, and not aligned to the investment plan. Table 7: Capex and funding F07 F08 F09 F10 F11 (TDm) The utility is positioned for adequate revenue Capex growth in the medium to long term, supported by Work in progress 69.0 52.5 35.6 14.5 9.7 tariff increases and additional revenue sourced Rehabilitation & replacement 19.4 20.8 22.1 22.6 23.0 through newly completed capex projects. Total Production improvements 17.9 13.5 8.7 9.1 18.9 Major projects 8.6 28.0 60.9 55.3 48.1 revenue is forecast to increase from TD227m in Urban services 1.1 8.3 4.1 3.2 13.3 F07 to TD284m in F11, which represents a Rural services 0.0 0.0 1.5 2.3 5.8 compound average annual growth rate of 5.8%. Total 116.0 123.1 132.9 107.0 118.8 Notwithstanding the growth in revenue, SONEDE Capex funding expects to record an operating deficit in F08, partly Internal funds 33.3 35.4 38.2 30.7 34.1 due to the higher depreciation charges forecast Long term loans 39.6 42.0 45.3 36.5 40.5 from the large capex investments in water assets, Third party funding ­ as well as a jump in staff expenses of over 6% per concessionary loans 12.3 13.0 14.1 11.3 12.6 Government grants 20.9 22.2 23.9 19.3 21.4 annum. In addition, operating margins are expected Loans ­ Jerba 10.0 10.6 11.4 9.2 10.2 to remain weak over the forecast period. Total 116.0 123.1 132.9 107.0 118.8 Furthermore, significantly larger net interest charges incurred through higher levels of SONEDE has established partnerships with a borrowings would see the utility post net losses in number of donors, who finance long term each year from F08 to F10, only reverting to a investments for development and upgrading of profit in F11. Staff costs are budgeted at around existing assets, as well as strengthening the 48% of revenue over the four year period. utility's management and technical capacity. Electricity charges are forecast at around 7.5% of total income, although management has confirmed SONEDE has reported a stable funding profile in that these are currently running at around 12% recent years, which is expected to remain as such given the recent spike in the oil price, thereby based on budgets provided. This points to negatively impacting the utility's financial increased stability in the sector, with major flexibility. projects having been discharged in the earlier years following sector reform and historical capex having been supported by strong grant funding. Positively too, it is noted that the water utility Global Credit Rating Co. ­ Tunisia Water Utility Credit Rating Report Table 8: Operating budget F08 F09 F10 F11 organisational focus should be on improving (TDm) collections from government entities. Income · Restricting levels of autonomy, in particular Water sales & connections 225.3 243.0 250.3 269.7 pertaining to tariff approval, borrowing Other operating income 13.0 13.6 13.8 14.3 Total revenue 238.3 256.6 264.1 284.0 requirements and salary increases. less: Expenditure Staff costs (114.5) (121.6) (129.0) (136.8) Water & related purchases (30.3) (31.4) (32.5) (33.7) Electricity & energy (18.1) (19.1) (20.1) (21.1) Other operating expenses (28.2) (28.9) (29.2) (29.9) EBITDA 47.2 55.6 53.3 62.5 Depreciation (48.6) (50.7) (53.2) (54.7) Operating income (1.4) 4.9 0.1 7.8 Net interest charges (8.3) (8.7) (8.7) (8.2) NPBT (7.4) (1.5) (6.1) 1.2 Key ratios (%) Turnover growth 5.2 7.7 2.9 7.5 EBITDA : revenues 19.8 21.7 20.2 22.0 Operating profit margin (0.6) 1.9 0.0 2.8 Op. income : net interest (0.2) 0.6 0.0 0.9 Net debt : EBITDA 448.7 405.8 462.9 457.3 Net debt : capital & reserves 25.6 27.0 29.4 33.9 Notwithstanding the good operational progress made by SONEDE over time, the perceived strength of management, and virtual monopolistic position it holds, the utility faces various challenges going forward, including: · The relative level of expenditure on staff costs remains high, impeding the organisations ability to allocate financial resources to other key operating functions. Staff costs should be reduced to the lowest possible level, to improve the financial position and flexibility of the organisation. · In addition to this, deteriorating exogenous factors of late (higher average oil price, inflation etc) present a risk to the utility in the short term. · Tariffs are structured whereby household consumers are in fact purchasing water below the cost of production, with profitability deriving from large-scale consumers (such as government, farmers and other commercial users) who are charged higher rates. As such, with the rollout of services being largely to households, this is likely to place further downward pressure on margins. Tariffs should be restructured such that households are purchasing water on a cost-reflective basis. · Working capital management remains constrained by the challenges experienced with regards to debtors management, in particular government entities. This directly impacts cash generation. As such, a key Global Credit Rating Co. ­ Tunisia Water Utility Credit Rating Report Société Nationale d'Exploitation et de Distribution des Eaux (SONEDE) (Tunisian Dinars in millions except as noted) Income Statement Year end : 31 December 2003 2004 2005 2006 2007 Revenue 200.5 201.0 216.7 222.5 226.5 Operating expenditure (149.3) (152.1) (166.7) (173.6) (178.9) EBITDA 51.2 48.9 50.0 48.9 47.6 Depreciation (39.0) (42.0) (41.3) (42.6) (44.2) Operating income 12.2 6.9 8.7 6.3 3.4 Net finance charges 1.4 1.0 0.4 (1.6) (0.0) Foreign exchange gains/(losses) 0.0 0.0 (3.4) (0.7) (1.4) Income after finance charges 13.6 7.9 5.7 4.0 2.0 Post retirement benefits 0.0 0.0 0.0 0.0 0.0 Exceptional Items 0.0 0.0 0.0 0.0 0.0 Income tax (7.2) (5.4) (2.6) (2.1) (1.0) Net income 6.4 2.5 3.1 1.9 1.0 Prior year adjustment 0.0 (1.1) (0.8) 0.4 0.0 Cash Flow Statement Cash generated by operations 29.5 34.2 28.5 29.5 27.0 Working capital: (increase)/decrease 3.3 (14.8) (0.9) (12.6) (20.2) Net finance charges 1.4 1.0 0.4 (1.6) (0.0) Cash flow from operations 34.2 20.4 28.0 15.3 6.8 Net expansionary capex and investments (79.3) (111.1) (94.5) (73.1) (82.2) Capital contributions 0.0 21.7 26.8 36.1 8.1 Cash movement: (increase)/decrease n.a. 5.6 14.8 (31.6) 52.4 Borrowings: increase/(decrease) n.a. 63.4 25.0 53.2 14.9 Net increase/(decrease) in debt n.a. 69.0 39.7 21.7 67.2 Balance Sheet Capital and reserves 760.2 782.0 811.5 865.1 887.3 Total interest-bearing debt 186.8 253.7 263.3 292.3 289.5 Short-term 23.2 38.1 34.1 41.4 31.2 Long-term 163.6 215.6 229.2 250.9 258.3 Interest-free liabilities 136.8 136.9 157.3 160.9 153.5 Total liabilities 1,083.8 1,172.6 1,232.1 1,318.3 1,330.4 Fixed assets 836.4 745.4 835.4 1,008.6 878.8 Projects in progress 17.6 186.1 162.8 30.3 199.2 Investments 43.3 42.8 42.3 40.6 42.7 Cash and cash equivalents 76.1 80.6 58.5 92.5 59.8 Net trade debtors 89.2 95.6 106.1 120.1 115.8 Other current assets 21.1 22.1 27.0 26.1 34.0 Total assets 1,083.8 1,172.6 1,232.1 1,318.3 1,330.4 Ratios Operating: Billed water sales (million m3 / year) 300.8 313.9 325.6 337.2 345.2 Volume increase (%) 1.1 4.4 3.7 3.6 2.4 Average tariff increase (%) n.a. (1.1) 1.4 0.1 0.3 Turnover growth (%) n.a. 0.2 7.8 2.7 1.8 Staff costs : total operating costs (%) 45.0 45.9 45.8 45.5 46.7 Staff costs : revenue (%) 42.3 44.3 44.0 44.2 46.0 Staff per 1,000 connections 4.0 4.0 4.0 3.0 3.0 Water distribution losses (%) 15.4 15.5 16.0 16.0 16.7 Net capex : revenue (%) 39.6 55.3 43.6 32.9 36.3 Cash Flow: Operating cash flow : total debt (%) 18.3 8.0 10.6 5.2 2.4 Operating cash flow : net debt (%) 30.9 11.8 13.7 7.7 3.0 Profitability: EBITDA : revenues (%) 25.5 24.3 23.1 22.0 21.0 Operating profit margin (%) 6.1 3.4 4.0 2.8 1.5 EBITDA : average total assets (%) n.a 4.9 4.6 4.2 3.9 Coverage: Operating income : gross interest (x) 1.7 1.1 1.1 0.6 0.4 Operating income : net interest (x) (8.7) (6.9) (21.8) 3.9 147.4 Activity and liquidity: Days receivable outstanding (days) n.a. 168.2 183.1 185.5 190.1 Net debtors : total income (%) 44.5 47.6 49.0 54.0 51.1 Current ratio (:1) 1.2 1.2 1.0 1.2 1.2 Average days working cash (days) 148.6 152.4 102.9 155.0 97.8 Capitalisation: Net debt : capital and reserves (%) 15.8 23.4 26.0 23.8 27.2 Total debt : total assets (%) 17.2 21.6 21.4 22.2 21.8 Total debt : EBITDA (%) 364.8 518.8 526.6 597.7 608.3 Net debt : EBITDA (%) 234.2 374.2 421.2 421.0 507.8 Total debt : total income (%) 93.2 126.2 121.5 131.3 127.8 Net debt : total income (%) 55.2 86.1 94.5 89.8 101.4 APPENDIX: WATER UTILITY RATIO DEFINITIONS Operating ratios Staff costs: operating costs (%) = (salaries & allowances)*100 (Total operating costs) Staff costs: total income (%) = (salaries & allowanaces) *100 (Total income) Water distribution losses (%) = (Units purchased-units sold)*100 (Units purchased) Net capex: total income (%) = (Net expansionary capital expenditure)*100 Total income Cash flow Operating cash flow: total debt (%) = (Cash generated by operations + working capital changes +net finance charges)*100 (Long term liabilities +short term liabilities+bank overdraft) Operating cash flow: net debt (%) = (Cash generated by operations + working capital changes +net finance charges)*100 (Long term liabilities+short term liabilities+bank overdraft-cash &cash investments) Profitability EBITDA:revenues (%) = (EBITDA)*100 (Total revenue) Operating profit margin (%) = (Operating income)*100 (Total revenue) EBITDA: average total assets (%) = (EBITDA)*100 (Current year's assets+previous year's assets)/2 Coverage Operating income: gross interest (X) = (Operating income) (-Interest paid) Operating income: net interest (X) = (Operating income) (Interest paid-interest received) Activity and liquidity Days receivable outstanding (days) = ((Current year's net trade debtors+previous year's net trade debtors)/2)*365 (Revenue) Net debtors: total income (%) = (Net trade debtors)*100 (Total income) Current ratio (:1) = (Total current assets) (Total current liabilities) Average days working cash (days) = (Cash & cash investments)*365 (-(operating expenditure+depreciation+net finance costs) Capiltalisation Net debt: capital and reserves (%) = (Long term liabilities+short term liabilities+bank overdraft-cash &cash investments)*100 (Capital & reserves) Total debt: total assets (%) = (Long term liabilities +short term liabilities+bank overdraft)*100 (Total assets) Total debt: EBITDA (%) = (Long term liabilities +short term liabilities+bank overdraft)*100 (EBITDA) Net debt: EBITDA(%) = (Long term liabilities+short term liabilities+bank overdraft-cash &cash investments) (EBITDA) Total debt: total income (%) = (Long term liabilities +short term liabilities+bank overdraft)*100 (Total income) Net debt: total income (%) = (Long term liabilities+short term liabilities+bank overdraft-cash &cash investments) (Total income) GCR T NG GLOBAL CREDI RATI CO. l ts Loca Exper i e obalPr nce Gl ese