Rating Public Sector Entities

Public Finance
Global
Rating Public Sector Entities

Strategic Importance Central Among Principal Rating Factors
Special Report
Government Support: Fitch Ratings public-sector entity (PSE) criteria focus on the likelihood
of extraordinary from a government to an entity in financial distress. Fitch follows a top-down
ratings approach from the sponsors rating or bottom-up approach from the standalone profile
of the PSE, depending on the link with the sponsor.
Not Profit Focused: PSEs in key social sectors normally do not aim for profit maximisation. In
some cases they are recipients of government funding through transfers and/or subsidies,
capital injections, below-market-rate funding or co-funding of capital expenditure. The aim of
these PSEs is to provide an important service and not to maximise returns.
Five Rating Factors: Fitchs PSE criteria assess five main factors to determine the notching
for dependent entities: legal status; control; financial integration; ability; and strategic
importance. Although some factors have a greater weight in the criteria than others (eg control
plays a key role in a decision to narrow the notching), they are all important in the assessment.
Strategic Importance Key: The entitys strategic importance to the sponsor government is
central to our assessment. In some situations, although the sector is strategically important, an
individual PSE may not be as there are alternative private sector providers of the service. Fitch
considers some sectors more strategically important than others because they are
constitutionally protected or because they are important for a country or regions economic and
social development.
Requirement to Provide Services: Fitch considers whether the services provided are
mandatory or discretionary responsibilities of the sponsor government. If they are mandatory
we are more likely to regard the PSE as strategic.
Four Principal Sectors: Fitch has identified four sectors that generally have a strong strategic
importance in a country and are usually provided on a not-for-profit basis: higher education,
health care, public transport and social housing. These sectors have a strong social role and in
many cases are subsidised by the government, either directly by the provider of the service or
indirectly through the provision of benefits to the users of the services.
Analysts
Fernando Mayorga
+34 93 323 8407
fernando.mayorga@fitchratings.com
Top-Down Ratings in Principal Sectors: Fitchs ratings approach to PSEs in the principal
sectors tends to be top down from the sponsors ratings, due to their strategic importance and
high level of public funding, which results in high financial dependence. Most PSE ratings on
the international scale follow the top-down approach.
Health Care
Guilhem Costes
+34 93 323 8410
guilhem.costes@fitchratings.com
Higher Education
Vladimir Redkin
+7 495 956 7064
vladimir.redkin@fitchratings.com
Public Transport
Raffaele Carnevale
+39 02 87 90 87 203
raffaele.carnevale@fitchratings.com
Social Housing
Christophe Parisot
+33 1 44 29 91 34
christophe.parisot@fitchratings.com
www.fitchratings.com
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9 July 2014
Public Finance
Determining the Notches
The maximum range for a top-down or bottom-up approach to rating a PSE is generally three
notches on the international ratings scale, depending on our assessment of support.
Fitch first decides whether the PSE is dependent on the sponsor based on the factors set out in
our criteria. If the PSE is dependent we adopt a top-down ratings approach. If it is nondependent we take a bottom-up ratings approach. We take a top-down ratings approach to
most PSEs we rate on the international ratings scale. The Appendix contains a list of Fitchrated PSEs by sector.
If we adopt a top-down ratings approach, the issuers standalone profile would not play a
significant role in the rating as the link with the sponsor is the main rating driver. Nevertheless,
Fitch would not rate a PSE lower than its standalone profile even if the dependence link implies
wider notching and therefore a lower rating than warranted by the standalone profile. However,
the standalone profile is relatively weak in most cases as the main role of these entities is not
to maximise profit.
Assessing Strategic Importance

The strategic importance of the PSE is key, even among the four other principal rating factors
(legal status, control, financial integration and ability). An individual PSE may not be
strategically important even if the sector in which it operates is, as there may be private sector
companies that could provide the service. Fitch has identified some sectors as more
strategically important than others, either because they are constitutionally protected or
because they are important for economic and social development. Higher education, for
example, is strategically important because development of human capital will have a positive
impact on growth potential, whereas a theme park would be of less strategic importance.
Fitch assesses whether the services provided are mandatory or discretionary responsibilities of
the government. If they are mandatory we are more likely to consider them strategic than if they
are discretionary.
We also consider whether the disruption of the services would have negative political or
economic consequences. For example, the disruption of public transport in a major capital city
could temporarily paralyse economic development. Strong political statements about
maintaining the service (for example, health care in some countries is universal and free to all
citizens) and whether the PSE is providing an important public service are also important
factors for determining strategic importance.
The owning government does not always guarantee the provision of even strategically
important services, or step in to provide financial support to avoid a default. Where external
funding is important for the development of the sector, it is more likely that government would
do its utmost to retain investor confidence. However, if private sector funding is less
widespread and there are adequate alternative public sector financing providers, this factor
would be less important.
The assessment of strategic importance goes beyond the systemic risk the collapse of a
publicly owned company or entity could pose to the country. Fitch also looks at the relationship
between the entity and the government. We assume that all PSEs that have a strong
dependence link to the government would be treated the same way in a non-systemic stressed
situation, although priorities could differ in a general crisis.
Subsidy Support
Related Criteria
Ratings of Public Sector Entities Outside the
United States (March 2014)
In most cases the cost of providing strategically important services is higher than the revenue
from fees, and the government has to provide subsidies to ensure the services are provided at
a socially permissible cost to users. The subsidys size depends on how attractive the

July 2014
Public Finance
government wishes to make this service, and its place among general government priorities.
Therefore, in general the higher the proportion of subsidies from the public sector the greater
the level of financial dependence and the closer the link between the rating of the PSE and that
of the sponsor.
Subsidies can be tailored to financially benefit all users of the services, or only certain sections
of the population (such as the elderly and the young). In recent years, the amount of subsidies
paid to certain sectors has been reduced in many countries. In some cases subsidies have
been linked to efficiency savings to promote a private-sector mentality in the management and
optimisation of service delivery. The European Union has been monitoring the level of public
funding remitted to some sectors to ensure competition is not distorted.
Strategic Sectors
Fitch has identified four sectors that generally have strong strategic importance and are usually
provided on a not-for-profit basis: higher 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 to the provider or indirectly through benefits available to the users of
the service. We consider the PSEs role in these sectors in assigning a rating.
However, each sectors strategic importance varies by country, as the government may wish to
ensure that some services are provided by the private sector, and therefore public sector
involvement would be arms length. In addition, the services could be provided by a mixture of
publicly funded and private sector entities, affecting the importance of particular PSEs (see
Assessing Strategic Importance above).
In some countries or regions the public sector may play a greater role than elsewhere in
contribution to GDP and employment. PSEs in these cases not only provide a service, but also
play a wider economic role, which Fitch takes into account in its analysis.
Health Care
Strategic Importance
Health care is usually provided on a not-for-profit basis. Therefore it is normally heavily
subsidised by the government, or the government provides funding to certain population groups
if the services are provided through private health insurance. In principle, the greater the
proportion of public health care funding the closer the credit link with the sponsor, except where
the government has granted a large degree of autonomy to the health care providers. In these
situations the rating differentiation from the sponsor could be wider.
General Funding for the Sector

Funding needs for the health care sector have been growing rapidly, not only due to a rise in
life expectancy, but also because of patients increasing demand for more advanced
technology or medicine. According to Eurostat, average expenditure on healthcare for 16
selected European countries rose by more than 50% in 2003-2011. Healthcare spending
represented 9% of GDP in 2011 for the same group of countries, compared with 8.5% in 2003.
The most important form of delivery of health care is through hospitals. These tend to have
very large budgets, and are regulated to reduce national deficits while improving the efficiency
of the healthcare system.
The private sector can also be involved in the running of hospitals, although the largest ones
tend to be predominantly public or publicly funded. Even if the private sector is involved,
national governments are usually involved in funding the sector. In many countries this funding
is agreed by the central or regional governments in their annual budgets, and hospitals have to
manage their activities within a limited budget.

July 2014
Public Finance
In some cases the government or health care regulator also decides on target prices for the
performance of certain hospital treatments. This enables hospitals that can function below the
target price to make a small surplus, and those whose activities cost more than target price to
have deficits. Target prices are usually determined not just for hospital procedures but are also
adjusted to take into account different regional cost pressures.
Some countries have an insurance-based system. This can be through private insurance
providers and/or through public ones. A certain proportion of salaries is paid into the insurance
scheme, which is then responsible for the payment of the employees health costs.
Government Involvement/Oversight
Most countries have some form of regulator to ensure the efficient functioning of the health
care sector, either a department of a ministry or an independent body with no government
involvement. The regulator is usually involved in the control of the quality of the service
delivered and also in the promotion of efficiency and value for money.
The regulator can usually decide to close a hospital if its care provision is poor or there are
governance issues. The regulator also monitors the financial profile of hospitals either by
requiring hospitals to send periodic financial information or through the approval of borrowing. It
can intervene in a hospital if the financial conditions are particularly vulnerable.
Alternative Private-Sector Providers

The private sector can compete, either through the delivery of services contracted through
specific insurance paid by the user or through contractual arrangements by the government
where there is scarcity of public hospitals. The private sector could also be involved in the nonsurgical functions of a hospital while the clinical aspect is funded by the public sector. The
greater the availability of private sector providers the lower the strategic importance of the
sector or a particular hospital. However, large reference hospitals or teaching hospitals are
usually publicly or largely publicly funded.
Higher Education
Education is an important part of governments strategies to gain competitiveness and develop
human capital. Although subsidies to the higher education sector are being reduced in many
countries, governments usually still provide a large proportion of universities income.
There are some establishments that are financed solely by student fees and in some cases
also by endowment returns but many universities globally either receive direct funding from the
government, or the salaries of the teaching staff and/or the borrowing are paid directly by the
government.

Colleges and universities can have a wide range of revenue sources, which vary depending on
their ownership structure (public or private) and diversification (student fees, research funding,
endowments, student accommodation fees, conferences and events as well as public funding).
However, much of the revenue collected by institutions is either generated directly by
enrolment (tuition and fees) or is indirectly related to it (public funding).
Common revenue sources for public and private institutions include tuition fees, research
grants, student rental income, patents and licences, investment income, auxiliary operations
such as conferences, and private donations.
Public funding can play a significant role for public universities. It may be provided through
annual transfers, which can be both earmarked and non-earmarked, for example to pay
salaries. Some public universities may also receive grants for capital projects such as
construction of academic and research facilities. The stability of public funding, either from the

July 2014
Public Finance
state or from regional and local governments, plays a major role in the financial performance of
public universities.
In some countries, the legal link between the university and the state (either central or regional
government) is close and/or there is an effective regulatory framework. When there is a strong
regulatory environment, government oversight is implemented through tight financial control,
reporting and accountability.
Financial control can take many forms, although the most common is the requirement for the
higher education institution to seek authorisation for borrowing either from the state/local
authority or from an independent regulatory body.
In some countries colleges and universities are obliged to obtain a licence or state accreditation
to operate. These procedures ensure the ability of educational institutions to provide services in
compliance with state educational standards.
Alternative Private Sector Providers

The revenue structure of privately owned colleges and universities is usually skewed toward
sources other than public funding. These institutions focus more on students from middle- and
upper-income backgrounds, while public institutions may provide services for lower- and
middle-income students. However, in many countries scholarships and bursaries are available
for students that need financial aid at public and private colleges and universities.
Public Transport
Public mobility is key to economic growth in many large cities and therefore governments have
invested heavily to build and expand public infrastructure networks. In addition, fares have
generally been heavily subsidised to encourage people to use the services. In countries where
subsidies have not been that significant, governments have often assisted the financing of
capital expenditure. The large proportion of public funding to revenue means that public
transport entities have tended to be rated at the same level as, or within a very narrow range
of, the sponsors ratings.
General Funding
Transport entities range from national railway companies to municipal bus and tube operators.
The proportion of revenue from the public sector is 25% to 50% of the income for most
transport companies, with a few cases where the costs of passenger operations are subsidised
by freight operations or other sources of revenue such as rental income. National subsidies
represent a larger proportion of funding for capital spending, while guarantees, patronage or
grandfathering are common features of debt.
In some instances national legislation can allow for preferential repayment to promote the
participation of private investors. Fare revenues are usually collected by transport companies
themselves, but in some cases they pass through municipal or regional budgets, strengthening
the integration with the owner. Transfers from the public sector ultimately reflect the perception
that pollution prevention policies, mobility planning and public transports developmental
mission warrant a contribution from general taxation.
However, government grants commonly subsidise operations as ticket prices rarely fully cover
the cost of the provision of services. Grants are usually quite common for capital expenditure
as transport companies are normally very capital intensive. Therefore, as spending on
infrastructure upgrading of transport companies plays an important role in investment
strategies, regional or municipal governments are very sensitive regarding transport
companies finances.

July 2014
Public Finance
Private-sector transport companies represent an alternative to public provision, mostly in bus
transport when public services are inadequate. Where municipal transport companies have
long been established, bus companies may be separated from local governments, as recipients
of public sector funds will eventually be subjected to tender. Private-sector operations are
commonly as concessions for public services, and their funding is usually through availability or
service contracts, and linked to patronage and quality of service.
Prospects for new entrants are weaker in the railway sector: rolling stock is owned by transport
companies or by subnationals, which would extend preparations for entering a new market to
three to five years. However, competition is increasing in high-speed train services, which are
operated purely commercially. Governments are starting to consider separating high-speed
from the more general public/subsidised service, and listing the former on the stock exchange.
Social Housing
The strategic importance of social housing depends on the governments policy on provide
affordable housing to lower-income population groups. Government involvement in this sector
is generally through direct subsidies, capital grants to the housing provider or housing benefits
to the tenant. This sector is also generally not-for-profit and entities aim to provide a surplus
sufficient to cover operating costs and capital maintenance. Strategic importance within a
particular country can be determined by the level of government financial support to the sector,
either direct or indirect.

Social housing relates both to properties let at below market rates to tenants or sold at below
market rates to people in low-income groups, whether working, retired or unemployed. Social
housing entities are not-for-profit organisations that provide and manage homes for people who
cannot afford to meet their housing needs on the open market even if they are not buying,
private renting could prove too expensive.
Demand for social housing for rent is determined by two main variables the socio-economic
profile of the residents where the housing stock is located and the difference between the
social housing rent and private rent. The weaker the socio-economic profile and the wider the
gap between the social housing rents and private rents, the greater the demand.
A common trait among countries is that social housing rents are cost based that is, they must
cover financial and operating costs although the way rents on individual dwellings are
determined may differ. Rent calculations vary according to the attributes of the housing, but
they may also be directly related to value or to tenant income. However, a differentiating
feature among the countries is how rent increases are determined. The extent of this difference
depends on the specific regulatory framework and most of the time should not exceed a target
rent that remains below private market rents. Rent increases may be decided by governments,
or by negotiation between landlords and tenants.
In some countries people with low incomes benefit from some form of housing benefit or
subsidy. This housing subsidy is paid either to the claimant or to the social housing provider.
Where there are no direct rental subsidies, the tenant may benefit from indirect public funding
provided to the housing entity either through tax incentives for the construction of social homes
for sale or rent, or though capital grants used to part-finance the construction of the property.
As social housing entities provide a social service and receive public subsidies, there is usually
tight control and oversight of the sector. This is carried out either by a sector regulator
through a government body/agency or a private body controlled by the government or by

July 2014
Public Finance
direct control from central or local governments.
The regulator can use statutory powers to intervene where there are serious concerns about
the performance of a social housing provider. In some countries the regulator can force a
provider to transfer its housing assets to another association to protect the interests of tenants
and other relevant parties.
The regulators purpose is also to check that public funding through subsidies, loans or other
funding is used as intended and that the various bodies concerned comply with the statutory
and regulatory provisions governing the construction and management of social housing.
Housing regulators periodically publish viability reports on social housing entities. These are
generally ex post checks, but assist in regulation.

The private sector is becoming more involved in the provision of social housing. Government
subsidies for new development and regeneration schemes are increasingly targeted and
selective. More generally, as many countries are experiencing serious budgetary constraints,
the overall amount of available public funds has reduced. The private sectors role has
therefore expanded, not only in undertaking investment but also funding housing.
Private-sector provision is the norm in countries such as Germany, where housing is qualified
as social only for a limited period, then moves to the private market unless it is owned by the
municipality. Several countries have also promoted initiatives to supply social and intermediate
housing with less subsidisation and more private involvement. However, local governments
continue to play an active role in such schemes as they supply land at affordable prices to
private developers for planning projects.

July 2014
Public Finance
Appendix
List of rated PSEs by sector
Figure 1
Public Sector Entities by Sector

Sector
Agriculture
Financial Vehicle
Healthcare
Higher education
Country
Kazakhstan
Australia
Azerbaijan
Canada
Canada
China
China
China
Colombia
Colombia
Colombia
France
France
France
France
France
France
Georgia
India
India
India
Italy
Italy
Italy
Italy
Italy
Kazakhstan
Mexico
Mexico
Netherlands
Netherlands
New Zealand
South Africa
South Korea
Spain
Spain
Spain
Spain
Turkey
France
France
France
United Kingdom
Colombia
Entity
KazAgro National management holding JSC
Queensland Treasury Corporation
Azerbaijan Mortgage Fund
Financement Quebec
Municipal Finance Co of British Colombia
China Cinda Asset Management Co. Ltd
China Huarong Asset Management Co. Ltd
China Orient Asset Management Corporation
Fondo de Valorizacion del Municipio de Medellin
Fondo Rotatorio de Valorizacion de Sincelejo - FOMVAS
Inst Valorizacion Manizales
Agence Francaise de Developpement (AFD)
Caisse des Depots et Consignations (CDC)
Credit Municipal de Paris (CMP)
EPIC BPI - Groupe
Societe de Financement de lEconomie Francaise (SFEF)
Societe de Financement Local (SFIL)
JSC Partnership Fund
Indian Railway Finance Corporation Limited
Power Finance Corporation Limited
Rural Electrification Corporation Limited
Cassa Depositi e Prestiti
Cassa del Trentino
Gestione Commissariale del Comune di Roma
SACE S.p.A.
Trentino Sviluppo
JSC Sovereign Wealth Fund Samruk-Kazyna
IDEFIN Quintana Roo
IPFEH - Hidaldo
Nederlandse Financierings Mattschappij voor Ontwikkelingslanden NV (FMO)
Stichting Waarborgfonds Eigen Woningen (WEW)
New Zealand Local Government Funding Agency Ltd
Industrial Development Corporation of South Africa (IDC)
Small Business Corporation
Institut Catala de Finances
Instituto de Finanzas de Cantabria (ICAF)
Instituto Valenciano de Finanzas (IVF)
PYMAR
Iller Bankasi A.S.
Assistance Publique Hpitaux de Paris
CH de Roubaix
French Public Hospitals 3
Northumbria Healthcare NHS Foundation Trust
Corporacion Universidad de la Costa
Colombia
Colombia
Colombia
Colombia
Colombia
Colombia
Colombia
Colombia
Colombia
Colombia
Colombia
Colombia
Colombia
France
Italy
Mexico
Mexico
Panama
South Korea
United Kingdom
United Kingdom
United Kingdom
Institution Universitaria de Envigado

Instituto Universitario Escuela Nacional del Deporte
Politecnico Colombiano Jaime Isaza Cadavid
Universidad de Antioquia
Universidad de Caldas
Universidad de Cundinamarca
Universidad EAFIT
Universidad Industrial de Santander - UIS
Universidad Magdalena
Universidad Nacional de Colombia
Universidad Surcolombiana
Universidad Tecnologica de Pereira
Universidad del Tolima
Fondation Nationale des Sciences Politiques (Sciences Po) (n.d.)
University of Trento
University of Nuevo Leon (UANL)
University of Puebla (BUAP)
Universidad Latina de Panama, S.A. y Subsidiaria
Korea Student Aid Foundation
Lincoln College, Oxford
Somerville College, Oxford
St Peter's College, Oxford

July 2014
Public Finance
Public Sector Entities by Sector (Cont.)
Sector
Infrastructure
Strategic Oil Reserves

Postal services
Real estate
Social housing
Social security
Transport
Water
Other
Country
Colombia
Colombia
Colombia
Colombia
Colombia
Indonesia
Indonesia
Tunisia
Belgium
Spain
France
Italy
Russia
Italy
Colombia
France
Italy
Kazakhstan
South Korea
United Kingdom
United Kingdom
United Kingdom
France
France
France
China
Colombia
Colombia
Colombia
Colombia
France
France
France
France
Italy
Italy
Italy
Poland
Poland
Poland
Russia
Spain
Spain
Ukraine
United Kingdom
Canada
Italy
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
Colombia
Colombia
Mexico
Mexico
Mexico
Spain
Entity
CAR Cundinamarca
Corporacion Autonoma Regional de Caldas CORPOCALDA
Corporacion Autonoma Regional del Quindo - CRQ
Corporacion Autonoma Regional de la Frontera Nororiental
Empresa de Desarrollo Urbano de Medellin
PT Penjaminan Infrastruktur Indonesia (Persero)
PT Sarana Multi Infrastruktur (Persero)
Caisse des Prets et de Soutien des Collectivites Locales (CPSCL)
Agence de Ptrole-Petroleum Agentschap (APETRA)
CORES
La Poste
Poste Italiane S.p.A.
FSUE Post of Russia
Patrimonio del Trentino SpA
Instituto Social de Vivienda y Habitat de Medellin
Societe Nationale Immobiliere
ITEA
Kazakhstan Mortgage Company
Korea Housing Finance Corporation
A2Dominion Housing Group Limited
Genesis Housing Association Ltd (n.d.)
Great Places Housing Group Limited
ACOSS
Caisse dAmortissement de la Dette Sociale
UNEDIC
Beijing Infrastructure Investment Co Ltd
Aeronautica Civil
Terminal de Transportes de Manizales SA
Terminal de Transportes de Pereira SA
Terminales de Transporte de Medellin
Caisse Nationale des Autoroutes (CNA)
RATP
RFF
SNCF
Azienda Sviluppo Ambiente e mobilita (ASAM SpA)
Ferrovie dello Stato Italiane
Trentino Trasporti SpA
Koleje Mazowieckie KM sp. z.o.o.
MPK Lodz
ZMK Gdansk
Russian Highways State Company AVTODOR
Administrador de Infraestructuras Ferroviarias (ADIF)
ADIF Alta Velocidad
State Administration of Railways Transport of Ukraine (Ukrzaliznytsia)
Transport for London
Hydro Quebec
Acquedotto Pugliese
AGUAHH Hermosillo, SON
CAPA Quintana Roo
CEAQ - Queretaro
CESPE Ensenada, BC
CESPE Mexicali, BC
CESPE Tecate, BC
CESPE Tijuana, BC
COMAPA ZC - Tamaulipas
JAPAC Culiacan, SIN
JCAS - Chihuahua
JMAS - Jaurez
OOMAPAS San Luis Rio Colorado, SON
SADM - Monterrey
SAPAL Leon, GTO
SIAPA - Guadalajar
SIMAS Torreon, COAH
Beneficencia de Antioquia (State Lottery)
Instituto de Turismo de Paipa
APICAM Campeche (Port Authority)
ICV Nuevo Leon (Vehicle Control Registry)
IFREM Estado de Mexico (Public Registry)
SEPI
Source: Fitch

July 2014
Public Finance
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neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection
with the sale of the securities. Ratings may be changed or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch does not
provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the
adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in
respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees
generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of
issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are
expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a
rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the
United States securities laws, the Financial Services and Markets Act 2000 of the United Kingdom, or the securities laws of any particular
jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to
three days earlier than to print subscribers.

July 2014
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Rating Public Sector Entities - Fitch 2014

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