Rand Water | Integrated Annual Report 2025

INTEGRATED ANNUAL REPO

Consolidated Annual Financial Statements for the year ended 30 June 2025

NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS

42.Financial instruments (continued)

Domestically, electricity load-shedding continues to undermine economic productivity and directly affects municipal finances through escalating operational costs. The fuel levy increase proposed by the Minister of Finance in the current year budget will have a severe on the movement of goods and services thus increasing the cost of goods that will be hard on the communities. Municipalities are already experiencing rising electricity tariffs, fuel cost, and domestic food inflation all of which contribute to higher service delivery costs and delay creditor payments. These dynamics are visible even among Rand Water’s largest municipal customers, where payment patterns have slowed noticeably. The challenges are further exacerbated by the instability in governance structures within several metropolitan municipalities. Coalition governments have led to frequent leadership changes and administrative disruptions, which have in turn compromised institutional stability, delayed critical decision-making processes, and weakened financial management practices. This is evident in delayed creditor payments and instances of misallocated or underutilised grant funding. Rand Water’s two largest municipal customers are not immune to these risks, as they too are experiencing the consequences of fragmented leadership and strained fiscal controls. Although the country is still recovering from the lingering economic effects of the COVID-19 pandemic and the 2021 social unrest in KwaZulu-Natal and Gauteng compounded by recent natural disasters the rebound has been slow and has not translated into significant improvements in employment or economic confidence. Power supply constraints have further restricted post-pandemic economic recovery, making it increasingly difficult for customers to improve payment performance on water-related services. Encouragingly, the formation of the Government of National Unity (GNU) under the 7th administration has been met with cautious optimism by the markets. There are early signals of renewed confidence in South Africa’s political and economic trajectory, which may attract international investment and help reduce unemployment over time. While these developments are promising, their impact on municipal revenues and payment performance will take time to materialise. In the interim, Rand Water acknowledges the economic pressures faced by its customers and the increasing risk to revenue collection. The Group’s assumptions on expected credit losses remain grounded in performance trends and customer segmentation. Although overdue debt has increased marginally compared to the previous year primarily due to longer-than-anticipated collection cycles the Group is strategically using this time to bolster its future collection capabilities. Key interventions include the continued rollout of Rand Water Services and Special Purpose Vehicle (SPV) companies, which are designed to ringfence water services at municipal level and enable strategic partnerships to stabilise the water value chain. In parallel, Rand Water is constantly enhancing its credit control practices by refining its collections methodology, investing in digital monitoring tools, and fostering active engagement and collaboration with municipalities. These measures form part of a proactive and adaptive approach to credit risk management aimed at ensuring financial sustainability for both Rand Water and the broader water sector amidst a complex and evolving economic environment.

Bond investments at fair value through other comprehensive income

The Group's application of the ECL model for bond investments remains unchanged from the prior financial year.

ECL was calculated as a product of the probability of default (PD), Exposure at Default (EAD), and Loss Given Default (LGD) as follows: ECL=PDxEADxLGD. The Loss Given Default (LGD) for the bonds was derived from the implied Recovery Rate (RR) based on the counterparty's credit default swap or credit ratings compared with applicable ratings (LGD is 1- RR). The PD was derived from the counterparty's Credit Default Swaps (CDS) or credit ratings. Exposure at default represents the amount of each bond outstanding at the measurement date including interest accrued up to the point of default which is 90 days from the measurement date.

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Rand Water | Integrated Annual Report 2025