Anto Bajo from the Institute of Public Finance, who commented on the downgrade of Zagreba Holding’s credit rating in the Current Review, has dealt more thoroughly with the news that the media only ‘touched upon’.
On November 22 of this year, Moody’s downgraded the rating of Zagreba Holding from Baa2 to Baa3 (a good rating from medium to lower category of payment ability) and the City of Zagreb from Baa1 to Baa2 (a good rating from higher to medium category of good payment ability). Their ratings were downgraded due to the high indebtedness of the Holding and poor debt repayment conditions, which worsened the financial position of the Holding. Despite the low direct debt of the City, its exposure to the financial operations of the Holding is increasing, claims Bajo. The rating of the City of Zagreb was reduced because the Holding requires subsidies and guarantees from the city budget. Namely, the Holding has initiated large capital investments in the last two years, causing its debt from 2006 to nearly triple. Therefore, the question arises about the quality and financial operations of the utility companies in the Holding, especially the impact of the Holding’s borrowing and debts on the borrowing of the city budget.
The Holding consists of 22 companies fully owned by the City of Zagreb. It is primarily financed by earmarked revenues (more than 50%), which is why it could have the status of an off-budget user (fund) of the City of Zagreb. Then the financial budget of the Holding could also enter the formal approval procedure from the City Assembly like the city budget, writes Bajo. Namely, the City budget and the budget of the Holding do not formally operate according to the principle of connected vessels. The City administration proposes, and the City Assembly adopts the budget, but not the financial plans of the Holding. Representatives of the Holding submit a report on operations for the previous year to the City administration once a year, and the City administration reviews the Holding’s report and forwards it to the City Assembly. Thus, the financial plan and report on the financial operations of the Holding do not go through the same degree of formality (preparation, approval, execution, and audit) as the City budget. Therefore, there is no unified, consolidated budget that would, along with the City budget, constitute the budget of the Holding and allow insight into the size and structure of assets, total debt, and total financial position of the City.
To obtain a complete picture of the assets, financial operations of the City, and especially the size of debts incurred through the Holding, it is necessary to consolidate the financial reports of the Holding and the City. However, due to the status of the Holding as a trading company, this is currently not possible. The City and the Holding operate financially on the principle of connected vessels as funds from the city budget flow in the form of subsidies, but also by providing guarantees on the Holding’s debts. Subsidies to the Holding from the city budget increased from 477 million kuna in 2002 to 670 million in 2007. From 2002 to 2007, 3.4 billion kuna was allocated from the city budget for subsidies to the Holding and 1.4 billion kuna in guarantees was issued.
The net financial position of the City is positive, so after covering the obligations for loans, the City still has about 240 million kuna in liquid financial assets. However, problems may arise due to the guarantees given for the Holding’s borrowing, which may be activated due to its unfavorable financial position, warns Bajo. The City’s credit obligations are 350 million kuna, but together with the guarantees, this totals 1.75 billion kuna. Due to these guarantees, the financial position may be compromised if the Holding is unable to repay interest and principal on the debt.
The source of potential financial instability in the city’s finances should be sought in the financial operations of the Holding. The revenues of the Holding have indeed increased from 3.3 billion kuna in 2006 to 4.3 billion kuna in 2007. However, it is unclear whether this is real growth or a result of expanding the scope and better consolidation of all revenues of the companies within the Holding. At first glance, it seems to be a stable financial operation; however, the Holding has borrowed from banks and on the international financial market over the past two years. The total debt of the Holding increased from 1.4 billion kuna in 2006 to 4 billion in 2007.
