July 9, 2014 / 8:30 AM / 3 years ago

RPT-Fitch: Strategic Importance Central to Public Sector Entity Rating

(Repeat for additional subscribers)

July 9 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says in a new report that the ratings of public sector entities (PSEs) are primarily driven by their strategic importance to the government, which is typically defined by the sector’s social role.

Fitch’s PSE criteria focus on the extraordinary likelihood of support that a government can provide to an entity in case of financial distress. Depending on the linkages between the PSE and the state, Fitch will, in assigning a rating to a PSE, either take a top-down ratings approach to the sponsor’s rating or a bottom-up ratings approach to the standalone credit profile of the PSE.

Public entities in key social sectors normally do not have a profit maximisation role. In some cases they are recipients of government funding by way of transfers and/or subsidies, capital injections, or the financing of capital expenditure and are regulated. The aim of these PSEs is to provide an important service and not to maximise returns.

In deciding whether or not a sector is strategic for the government, Fitch would assess whether the services provided are a mandatory or a discretionary responsibility (whether at the central government or the subnational level). If it is a mandatory responsibility then it is more likely to be considered strategic than if it is discretionary.

Fitch has identified four sectors which generally have strong strategic importance in a country and are usually delivered on a not-for-profit basis. These sectors are education, health care, public transport and social housing. These sectors play a strong social role and, in many cases, are subsidised by the government either directly by the provider of the service or indirectly by the provision of benefits to the users of the services.

It should be noted that while a sector may be considered as strategically important, it does not necessarily confer the same status on an individual PSE within the same sector if there are alternative private sector players that can provide the service. Also, if external funding is important for the development of the sector, then it is more likely that the government would provide extraordinary support, if necessary, to retain investor confidence.

The special report, entitled ‘Rating Public Sector Entities - Strategic Importance Central Among Principal Rating Factors”, is available at www.fitchratings.com or by clicking on the link below.

Link to Fitch Ratings’ Report: Rating Public Sector Entities


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