Johannesburg, 07 May 2015 — Global Credit Ratings has today assigned first-time national scale ratings to Kampala Capital City Authority of A(UG) and A1-(UG) in the long term and short term respectively; with the outlook accorded as Stable. The rating(s) are valid until 05/2016.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Kampala Capital City Authority (“KCCA”) based on the following key criteria:
Kampala is the capital city and financial centre of Uganda, accounting for approximately 80% of industrial and commercial activity and contributing 65% to GDP. Thus, the city is considered critical to the country’s prosperity, implying strong government support. Government support has also been demonstrated through the establishment of KCCA and the assignment of a minister to represent the city in the Cabinet. This implied and demonstrated support is an important supporting factor in respect of the ratings.
KCCA has made good progress in updating its property register, licencing taxis and other businesses, and generally expanding the rates and fees base. Combined with improved debtors’ collection, this has seen internal revenue rise from UGX40bn in F12 to UGX72bn in F14. Nevertheless, the municipality remains heavily dependent on the National Treasury for the bulk of its income. While the staff cost ratio (whether to total expenses or income) remains above the 35% benchmark that GCR considers prudent for public entities, the sharp downward trend in F14 indicates that new appointments are having a positive economic impact on KCCA. With internal revenue expected to rise sharply in the medium term to comprise around 40% of total income in F16, this should lessen KCCA’s reliance on government grants. Nevertheless, KCCA’s financial position is constrained by the substantial socio-economic challenges faced by most of its residents, which limits the amount of income the municipality can generate, while at the same time increasing the burden of service delivery.
The improved operational capacity has, nonetheless, engendered renewed confidence from development institutions, which are now engaging KCCA on potential projects. Maintaining their confidence is critical as KCCA will need their assistance in implementing the substantial infrastructure programmes that are necessary.
Although the much more stringent cash management efforts are positively noted, maintaining only negligible cash balances does expose the municipality to unforeseen liquidity requirements. In addition, it exposes KCCA to the financial health of the National Government, such that any cash flow problems at the national level would likely result in KCCA being unable to meet its short term liquidity requirements, even if funding has been allocated to the city.
KCCA currently has no debt, but the city is considering future debt funding. This will only be for projects that are able to generate sufficient revenue to service the obligation. However, legislation caps debt funding at 10% of internal revenue, a limitation that will have to be eased if KCCA is to tap the commercial debt market.
Positive rating action is dependent on sustained growth in internal revenue, making KCCA more financially self-sustainable. The demonstrated ability to bring large infrastructure projects to fruition would also be positively viewed. Conversely, the reversal of the operational progress made by KCCA, potentially evidenced by rising expenditure on staff and consumption could lead to negative rating action. A lack of progress in addressing the social and infrastructural needs of the city could also have a negative impact.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating (May/2015)|
|Long term: A-(UG); Short term: A1-(UG)|
Sector Head: Corporate & Public Sector Debt Ratings
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|Liquidity Risk||The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Public Entities, updated February 2015
RATING LIMITATIONS AND DISCLAIMERS
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Kampala Capital City Authority participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to Kampala Capital City Authority with no contestation of the rating.
The information received from Kampala Capital City Authority and other reliable third parties to accord the credit rating(s) included the 2014 audited annual financial statements (plus three years of comparative numbers), Five year strategy report, details of debtors facilities, Auditor General Reports 2013 and 2014, internal and/or external management reports, 2015 budgeted income statements, as well as legislative framework and corporate governance.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GCR accords an initial rating of A(UG) to Kampala Capital City Authority; Outlook Stable