South Africa electricity price hike poses challenges for municipalities

The latest electricity tariff increases in South Africa will likely add to the liquidity pressures on the country's municipalities, as they purchase electricity from national utility Eskom and sell it on to consumers, Moody's Investors Service said in a special comment. Whilst Moody's does not envisage any immediate rating implications for the 24 municipalities it rates in the country, downward rating pressure may occur for those issuers that fail to maintain solid revenue collections from customers and manage the increased expenditure pressure.
On February 24, the National Energy Regulator of South Africa (NERSA) announced a 24.8% increase in electricity tariffs as from April, and subsequent increases of 25.8% and 25.9% for 2011 and 2012, respectively.
"The new tariff regime will impact South African municipalities directly, as they will need to increase expenditures for electricity purchases and pass on the higher costs to consumers, which will create revenue collection difficulties– a key area of attention for credit analysis in the sector," explained the report's authors Francesco Soldi and Leon Claassen.
Moody's believes that the municipalities' attempt to pass on the tariff increase to consumers may not fully translate into increased cash flows for them. "Lower-income groups of consumers, in particular, may have difficulties in meeting any tariff increase for core public services such as electricity, in the context of a challenging socio-economic environment. We therefore expect municipalities to suffer an increase in bad debts and write-offs of irrecoverable debts," the analysts cautioned.
Whilst Moody's does not anticipate any immediate rating implications for the municipalities it rates in South Africa, they will need to adopt an even greater focus on revenue collections and expenditure discipline in order to manage the resulting increased liquidity pressures. Indeed, liquidity will continue to play a pivotal role in Moody's rating determinations.