Analysis of the crisis resilience of utilities in the ownership of municipalities in Hungary between 2006 and 2022

Abstract

Hungary’s utility sector, encompassing district heating, water services, waste management, and public transport, has experienced notable shifts from municipal to privatized ownership and back to community control between 2006 and 2022. The purpose of this study is to assess the financial performance and crisis resilience of municipally owned utility companies in Hungary between 2006 and 2022, with a particular focus on the impact of state price regulation and the role of economic cycles. The regulation was intended to ensure service affordability but imposed significant constraints on financial flexibility and investment capacity. The study targeted a sample of Hungarian local government companies, with two distinguished periods (2006–2013 and 2014–2022), examining seven different financial indicators (formulas), e.g., EBITDA, ROA, etc., with variance analysis and correlation analyses. These revealed that while companies operated effectively during periods of economic growth, the post-2020 polycrisis, characterized by challenges such as the COVID-19 pandemic and rising energy prices, exposed vulnerabilities, especially in the district heating sector. Financial indicators, including EBITDA margin and liquidity ratios, showed mixed results, with profitability improving in certain sectors but liquidity and return on assets (ROA) declining, indicating stress on short-term solvency. The paper suggests that while price regulation maintained affordability, it limited the capacity for swift adaptation during crises. To enhance resilience, the study recommends incorporating more adaptive regulatory frameworks and investing in renewable energy and operational efficiency. These changes would help municipally owned utility companies better withstand economic fluctuations and maintain service continuity, contributing to long-term financial and service stability.AcknowledgmentProject no. TKP2021-NKTA-51 has been implemented with support from the Ministry of Culture and Innovation of Hungary from the National Research, Development and Innovation Fund, financed under the TKP2021-NKTA funding scheme.This study was done in Széll Kálmán Public Finance Lab of Ludovika University of Public Service, Budapest.