Kester Eddy in Budapest -

In early March, it transpired that a firm owned by a former Hungarian government party MP had been awarded a contract to develop the area in front of Hungary's parliament, including an underground car park - without a public tender.

A week earlier at the end of February, news broke that Continental Dohanyipari, a Hungarian-owned tobacco company, had strongly influenced proposed legislation to bring the tobacco and cigarette industry under state control. Foreign investors in the sector - British American Tobacco, Imperial Tobacco and United Leaf Tobacco - were outraged.

The three issued a statement insisting that only the DBMSZ, the industry association in Hungary, was authorised to represent the sector's views, and questioned the ethical and legal issues of a private company playing such a privileged role in lawmaking. Such incidents appear to vindicate the damning conclusions of the latest "National Integrity Study", a report by Transparency International Hungary on the country's institutions and sectors, and their ability to function ethically and for the public good.

According to the graft watchdog, since the Fidesz government of Viktor Orban took power almost two years ago, trends in several crucial areas or "pillars" of society - including judicial and legislative procedures, supposedly independent institutions such as the state audit office and media council, and most particularly the influence of private commercial interests and political decision making - have been deteriorating alarmingly.

All of which have serious implications for fair competition and the business environment in Hungary, Noemi Alexa, executive director of Transparency International Hungary, said when presenting the study to the press on March 8. "If we add up all the [negative] trends, we can see a new pattern of corruption is emerging. In short, the Hungarian state has become captive to certain business groups, which are working against the public interest," Alexa said.

While declining to specify any names or companies involved in this alleged "pattern of corruption" (saying it was "not the purpose" of the study), Alexa noted that the investigation had highlighted a long list of criticisms and detrimental moves under the Orban regime. "Clean operations are not a given in the Hungarian business sector. Even though simple, unified rules apply for setting up a company, fair operation is not guaranteed, whether it is foreign or domestically owned. A high corruption risk is present in public procurement, bankruptcy, liquidation and permitting procedures," she said.

The legislative environment had become "chaotic and unpredictable" due to the many laws pushed through parliament using private members' bills (which, due to a legal loophole, obviate the need for government to undertake mandatory consultation with affected parties) and the frequent last-minute, substantial amendments applied to bills in parliament.

Such practices, coupled with the weakening of independent institutions meant to act as checks and balances against misuse of state power, "seriously undermine" the transparency of the entire legislative process, Transparency International said.

In response, the ministry of public administration and justice said that, "in common with Transparency International, the government sees the fight against corruption as vitally important." The Orban regime, it claimed, had unearthed "numerous cases of largescale corruption" in connection with previous government leaders and, since taking office, had "closed loopholes in a great number of areas and launched an extremely intensive series of measures against corruption."

Captured state

Gabor Takacs, an analyst at Nezopont, a government-leaning think-tank in Budapest (and represented on the advisory panel of the Transparency International study), also criticised the headline conclusions. "We'd like to note that much of the report's findings were based on data from 2009 and the first half of 2010 - that is, before the Fidesz government was formed," he tells bne.

However, Lajos Bokros, former Hungarian finance minister and president of the conservative Freedom and Reform Institute, says the conclusions dovetailed with his own. "The Institute has repeatedly warned that Hungary has degenerated into an oligarchic, illiberal state," he says, adding that special interests had increased their malign influence in the past decade and "the situation has deteriorated further under the efforts of the present government to... institutionalise authoritarian power."

Despite continued news of incoming foreign investor activity - Prime Minister Orban was busy laying foundation stones for a new Knorr-Bremse plant in Kecskemet, a €17m investment project, in March - the Transparency International report is hardly a vote of confidence in Hungary for any business seeking to set up in the region. "Hungary is under the microscope right now for all the wrong reasons," Nicholas Spiro, managing director of the London-based Spiro Sovereign Strategy, tells bne.

"Yet when it comes to matters of graft, most foreign investors tend to see things in relative terms: there have been big improvements in Hungary over the past 20 years and things are much worse further south, not to mention eastwards. However there is no room for complacency and it is incumbent upon Fidesz to root out corruption given its political dominance," he says.