Moody's raises red flags over Cape Town water crisis

Cape Town - Due to the marked income inequality in the City, Cape Town's water crisis poses a possible threat to social order, according to a report released by Moody's Investors Service on Monday.

The City of Cape Town is currently rated Baa3 - the lowest level of investment grade, and is on review for a downgrade.

If the water problem persists, it remains to be seen how the City will cope with the unfolding crisis’ potentially wide-ranging consequences on its finances and economy, says the report by Daniel Mazibuko, an associate analyst at the global ratings agency. 

The report deems the water supply crisis to be credit negative for Cape Town. Moody's emphasised that the latest research report was not, however, a rating action.

The report found that Cape Town's municipal water revenue contribution of R3.9bn equalled 10% of its operating income in 2017.

"The City will lose a portion of this revenue and will have increased operational costs from crisis management policies and programmes, and implementation of water supply projects," it states.

It anticipates that two of Cape Town's main industries, namely tourism and agriculture, are likely to decline due to the crisis. This would mean job losses and also a loss of tax income for the city.

The report anticipates that the water crisis could also pose a threat to public health from poor sanitation.

It points out that the City recently moved Day Zero forward by 10 days to 12 April 2018 from 22 April, to reflect declining water reserves.

Day Zero

Day Zero is the estimated date when the majority of the City’s roughly 4 million residents will be without water service in their homes for at least 150 days. Residents will be able to collect an allocation of 25 litres of water per person per day from any of the 200 collection points in and around Cape Town.

Municipal water supply will continue flowing at some sites including hospitals and large informal settlements.

The City has increased its capital budget to respond to the crisis, raising the 2018 total capital expenditure budget to R7bn from R5.9bn in 2017. The report says this is largely to implement water projects.

The report also points out that objections from business bodies, the private sector and civil society has prevented the implementation of a proposed "drought charge" by the City to augment the budget.

"According to 2017 draft financial statements, the city’s policy of maintaining a strong liquidity ratio of 1.5x of its current liabilities and conservative debt management with a debt burden of only 11% of its operating revenue will help mitigate the effects of borrowing required to implement capital projects over the next three years," the report states.

Moody's points out that, for now, the City is employing two main tactics to alleviate the crisis, namely demand management and supply augmentation.

"As of last Monday, with water consumption at some 586 million litres per day, demand exceeds the city’s August 2017 target of 500 million litres per day," states the report.

"The city has lowered further its per capita target to 50 litres per person per day starting 1 February from 87 litres per person. Supply augmentation projects, mainly small-scale desalination plants and ground water extraction, are behind schedule and will generate only around 100 million litres of water per day when completed – an insufficient amount to avoid Day Zero in 2018."

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