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FINANCE: Cape Town Upholds Top Financial Rating


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Despite a tough economic climate, the City of Cape Town has managed to retain its double A credit rating for the third consecutive year.

Independent ratings agency, Moody’s International, has again confirmed Cape Town’s rating – the highest score for a South African local authority.

“This is an exceptional feat, bucking the current trend of credit downgrading for financial institutions,” says Alderman Ian Neilson, Mayoral Committee Member for Finance, Economic and Social Development and Tourism. 

“This prized rating provides investors with a strong vote of confidence in the financial leadership and management of this municipality,” he says.

In its analysis, Moody’s comments favourably on ‘the Mayor’s commitment to clean administration and sound corporate governance’, as well as the City’s ‘experienced and competent’ executive management team.

The report describes Cape Town’s rating outlook as ‘stable’, ‘reflecting the expectation that its key financial ratios will remain sound in the medium term’.

“The municipality will maintain a solid budgetary position, a prudent and conservative financial policy, and its indebtedness will remain manageable despite the ambitious capital expenditure programme.

“Cape Town remains largely self funded by generating 86% of its revenue from own sources. This high proportion of discretionary revenue reflects the City’s control over its revenue base and indicates a high degree of financial flexibility.

“Cape Town’s large measure of autonomy in setting the property rates and service tariffs enhances the predictability and stability of its revenue base.”

The report also refers to the city’s diversified and robust local economy, which is being driven by the local authority's infrastructure-led economic growth strategy.

“This strategy is starting to pay off in terms of providing the necessary infrastructure and municipal services to facilitate economic growth and create job opportunities,” says Neilson.

With total assets of R20 billion, Cape Town continues to build a track record of solid revenue growth and operating surpluses.  In 2008, its revenue grew by almost 16% to R12.7 billion and it achieved a gross operating surplus of R499 million.

The City’s gross operating balance of R1.1 billion underpins its R3,5 billion cash generation from operating activities. Although the primary operating balance declined to 13% from 17.7% in 2007, Moody’s states that this remained a good parameter for budgetary control and fiscal discipline.

Property taxes make up the City’s primary revenue source, contributing 25% of its revenue in 2008. The total value of its latest valuation roll now exceeds R631 billion. Electricity distribution, at 24,8%, is the second largest contributor to revenue.

Moody’s notes that although the City faced huge pressures to eradicate service backlogs, develop new areas and maintain existing infrastructure, ‘its expenditure trends are predictable’.

With a staff complement of about 22 000, the City’s largest expenses consist of staff costs of R3.5 billion and bulk electricity and water purchases of R2.1 billion.

“Cape Town's budgetary situation has been characterized by a solid performance in recent years, the outcome of a conservative budget and good financial management and control.

“Its infrastructure-led economic growth strategy has raised the level of its borrowings, but its debt indicators remain sound and its debt burden is well within the financial parameters relative to its own revenues.”

The report views the City's prudent and active debt management in a positive light. To fund its capital investment programme of R10.7 billion, the City will need to borrow about R5.2 billion over the next three years.

Grant funding from higher tier governments will contribute more than R4 billion and the City's own accumulated reserves some R1.4 billion.

According to Moody’s, Cape Town's treasury has developed solid funding and liquidity policies, as well as sound credit control measures.

“During the last two years the City stayed well within its budget targets and demonstrated a prudent approach to its revenue and expenditure,” says Mike Richardson, Chief Financial Officer for the City of Cape Town.

Cape Town is one of only a handful of municipalities in the country to receive an unqualified audit report from the Auditor-General over the last five years.

The City’s first R1 billion bond issue in June 2008 was over-subscribed by almost 300%. It is currently managing the next bond issue of R1,2 billion this coming June.

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