The relationship between government debt and state-owned enterprises: an empirical analysis of Eskom

Abstract

While state-owned enterprises play an instrumental role in economic development, they are a significant fiscal risk to the state. This occurs through state-guaranteed loans that have more lax credit monitoring, and soft budget constraints, where stateowned enterprises can increase their debt levels without fear of liquidation or bankruptcy. This study empirically investigated the relationship between Eskom’s financial performance and its own debt and government debt, using the utility’s financial statements and government debt data from 1985 to 2017. The study used two models, namely, the Vector Autoregression (VAR) Model and the Error Correction Model (ECM) to analyse the data. In terms of the VAR, according to the impulse response functions, a one standard deviation shock to the debt-to-GDP ratio has a minimal impact on the electricity price, Eskom’s revenue and Eskom debt. Therefore, an innovation to the debt-toGDP ratio explains a large proportion of itself, as one standard deviation shock to the electricity price has a positive response from Eskom’s revenue and its debt. Similarly, a one standard deviation shock to Eskom’s revenue has a positive response from the electricity price and Eskom’s debt, and a one standard deviation shock to Eskom’s debt has a positive response from the electricity price and Eskom’s revenue. The forecast error variance decomposition analysis shows that up to 9,17% of the forecast error variance of the debt-to-GDP ratio is explained by the electricity price. Government debt relative to GDP explains 32,9% of the forecast error variance in the electricity price. The electricity price explains 29,51% of the forecast error variance in Eskom’s revenue. The forecast error variance for Eskom debt is explained by government debt/GDP which is up to 30,34%. The ECM shows that a long run relationship exists between Eskom’s debt relative to government debt, Eskom’s revenue relative to the electricity price and Eskom’s staff numbers. The study shows that Eskom’s increase in revenue is largely attributed to tariff hikes, stateguaranteed loans and equity injections, rather than increases in sales. A large proportion of government debt is comprised of Eskom debt. The proposed avenue as a way forward is partial privatisation or fiscal consolidation.