An investigation into the relationship between debt sustainability and fiscal support for Eskom

Abstract

Eskom — South Africa’s state-owned electricity utility — is facing difficulty servicing the large debt obligations it has incurred over the last decade. This study investigated the trade-off between debt sustainability and the improvement in Eskom’s financial position. The empirical analysis is based on annual South African public finance data covering the period 2006/07 to 2016/17. The data analysis showed that the subsidies to the power utility did not detract from the underlying debt-sustainable public finance position. In fact, the analysis showed that the government subsidies improved Eskom’s valuation and profitability. Using simulations, a case was tested in which Eskom was provided with more subsidies instead of a loan guarantee, and the results showed that these subsidies would have further raised Eskom’s value while not harming the sustainable debt position of the public finances. Based on the results of this investigation it is recommended that the fiscal authorities employ the debt sustainability, guarantee valuation and cashflow techniques discussed in this report to evaluate whether issuance of a guarantee is aligned with the broader public finance objectives.