The Orban grinder and Hungary's monkey business with foreign investors

The Orban grinder and Hungary's monkey business with foreign investors
Prime Minister Viktor Orban makes foreign investors dance. / Photo by bne
By Kester Eddy in Budapest & Nicholas Watson in Prague March 24, 2016

It is rare that the fractious Hungarian opposition parties can find common purpose: if the so-called left-liberal groupings, headed by the Socialists and Democratic Coalition, are riven by both political and personal disputes, then the chances of finding common ground with Jobbik are normally zero, despite the radical rightwing party’s softer rhetoric over the past 15 months. But such is the ‘innovative’ – critics say outrageous – nature of legislation in the locker of the ruling Fidesz party of Prime Minister Viktor Orban, that even Jobbik and its otherwise sworn cosmopolitan enemies are beginning to see eye-to-eye of late.  

The catalyst for this remarkable concord is the sudden passing early in March of a private member’s bill – tabled, naturally, by a Fidesz MP – to render monies in foundations and companies controlled by the central bank (MNB) to be exempt from full public scrutiny.  

The move follows a spate of purchases by MNB-controlled foundations and subsidiaries on expensive art and real estate, not to mention buying a 68% stake in the Budapest Stock Exchange, and the consequent legal efforts by a Socialist MP to force full disclosure on spending on the principle that the central bank’s monies are public funds.  

The MNB argues its foundations and business operations will still be subject to the same transparency rules as any other, and that making them subject to the disclosure laws applicable to public funds puts its commercial secrets at risk. And the government's stance has since softened somewhat, at least over the principle of ultimate ownership of the assets. “The central bank's money is public money,” says Gergely Gulyas, deputy leader of the Fidesz parliamentary party, but, he adds, “There is the possibility to classify the spending public funds in other countries too. The question is, what is the constitutional ground for this? And how this is done?”

Critics have no truck with such logic. “Jobbik finds this clandestine treatment of spending Hungary’s public monies astounding and outrageous,” Gabor Staudt, deputy leader of Jobbik’s parliamentary group, complains to bne IntelliNews.  

Noting that any losses made by the central bank have to be covered by state funds, while the bank can utilise profits via its foundations without full public disclosure, Staudt reasons: “It seems that the bank’s profit is not public money, while any losses [it might make] are. It is intolerable.” As for the bank’s foundations, “they claim that once assets are handed over to them by their founder, the money ceases to be public. This raises the suspicion of misuse. What else could it be called if somebody turns public money into private money?”  

From the opposite end of the political spectrum, Dialogue for Hungary, a small pro-European party, is similarly scathing. “The activities of these foundations has been widely criticised. Now the Fidesz majority has adopted a law which allows them to hide the financial details of their activities… It is clear that the new laws are unconstitutional and their argumentations are complete legal nonsense,” Bence Tordai, Dialogue spokesman, tells bne IntelliNews.

For now, the process is on hold. Possibly influenced by the public outcry and yet more recent press allegations that MNB plans include a wine bar and spa operations, Janos Ader, the Hungarian president, declined to sign off the law, referring it instead to the Constitutional Court. News is that a ruling is expected after Easter. 

Unchecked power 

While this holds out hope of at least a partial defeat for the governing party, critics of Fidesz argue the MNB's non-disclosure legislation is but one brick in a complex wall of anti-democratic legal, regulatory and political manoeuvrings initiated since Viktor Orban won his second term as prime minister in the 2010 election – all designed to facilitate Fidesz’s drive for entrenched economic and political power.  

This drive has had serious implications for competitiveness and business, according to Miklos Ligeti, head of legal affairs for Transparency International (TI) in Hungary.  

In the latest rankings in TI’s annual Corruption Perceptions Index, Hungary garnered 51 points on a scale of 100 last year, three points below its score in 2014. Ligeti, clearly no fan of the Socialist regimes of the 2000s, says the latest figures are part of a decline which began in the middle of the decade.  

However, both the second and third Orban governments (elected in 2010 and 2014; his first was 1998-2002) “have systemically disrupted democratic checks and balances, [so] we now have a situation where the government has almost unchecked power to achieve its goals. These are largely discretionally decided and preferentially adopted, ie. it grants benefits to cronies,” Ligeti tells bne IntelliNews.  

He points to a long list of scandals, including the so-called “Trafik Scam” – under which the government awarded the rights sell tobacco products only to specially licensed retailers, many of whom were known Fidesz party supporters – as an example of the ‘legalised’ cronyism employed by the regime.  

Ligeti, while emphasising the decline in Hungary’s rankings began during the Socialist era in the mid-2000s, says such legal shenanigans by the Orban governments, along with the much-publicised punitive taxes levied in 2010 on the banks, large retailers, telcos and utilities – all sectors dominated by foreign investors at the time – have done much to undermine international trust in Hungary.  

The government, however, insists it is both implementing strict anti-corruption measures and working hard to attract foreign investment. It points to a string of projects, some expansions of current facilities, others green field – such as the €475m investment by Apollo, the Indian tyre maker, now being built at Gyongyos, 80 km east of Budapest – as evidence of its success.  

But there is little doubt that Hungary, once the leader in terms of attracting foreign direct investment (FDI) in Central Europe – both on a per-capita basis and in absolute terms – from 1990 to 1997, now simply does not make the list of potential locations for investment for many firms.  

Santander, the international banking group, estimates the total stock of FDI in Hungary at $98bn in 2014, about 80% of the $122bn acquired by the similar sized Czech Republic. As the Santander country profile notes, while Hungary still has one of the highest rates of FDI stock per capita in Central and Eastern Europe, FDI inflows after 2010 have “mostly fluctuated below expected levels, except in 2012”.  

Andras Vertes, chairman of GKI, a Budapest economic consultancy, while accepting that the Orban government has found solutions to the macroeconomic problems that dogged the economy in the Socialist era until 2010, says these improvements are negated by the erratic and unpredictable business environment, brought about by a lack of consultation, ill-thought out legislation affecting entire sectors, along with the “restructuring” of industries to favour certain parties.  

“The most important problem is confidence: confidence of investors, banks, multinational companies and domestic players. Because the Hungarian government has created a situation in which there is legal uncertainty and economic unpredictability in many elements of political and economic life,” Vertes says. “There is an economic environment, you invest, and in two weeks’ time there will be another environment.” 

EU-phemism for inaction

With so many foreign investors coming a cropper in Hungary, it might be expected that the EU would be overstretched trying to deal with all the complaints. However, the bitter experience of many foreign investors shows that Brussels has mostly just washed its hands of the problem.

Take the waste management and associated recycling business. In 2012, the Hungarian government passed a waste management law that stipulated companies involved in this business had to be in state or municipal majority ownership in order to gain a license to operate in the country. For private companies the choice was clear: either they would have to sell majority stakes to obtain a license, or else shutter their businesses. Under the law that came into force in 2013, private sector companies were further economically disadvantaged by a landfill tax and an annual energy fee for each resident whose waste is collected.

The Fidesz government defended its stance in the same way it has always done when singling out industries for ‘special attention’: that private companies are motivated only by profit, while the state pursues social goals that benefit taxpayers – especially, perhaps not coincidentally, its allies. And compensation to foreign owners was out of the question, said the environment minister at the time, because the new waste management and treatment facilities were financed by EU funds while, he claimed fancifully, the private companies had invested nothing.

When the law came into being from January 2013, the effect was profound. According to experts, at that time around half of the companies carrying out municipal waste management services did not meet the new law’s criteria, while most of the available treatment operations – landfills, recovery operations, etc. – were in the hands of private businesses.

Hungarian outfits obviously benefited at the expense of foreign firms. Közgép, owned by Lajos Simicska, a childhood friend of Orban’s and a former financial director of Fidesz, took advantage of the law change and now has a flourishing waste management business. Balazs Aron Kovacs, writing for Freedom House, says the combination of Simicska’s political ties and economic success makes him the arguably the most powerful oligarch in Hungary.

Some large foreign players like the Hungarian unit of the waste management group owned by Spain’s giant FCC group, .A.S.A., which works in eight CEE countries with a combined turnover of €354mn in 2013, and Austria’s Saubermacher survived the law change and are still operating in Hungary, though obviously expressed no wish to recount their experiences to bne IntelliNews. Others like Marlix International – a Dutch holding company containing two Hungarian start-ups, one undertaking commercial composting and the other door-to-door recycling for several municipalities in Budapest – were not so lucky.

Having fallen foul of the new waste management law and seen its composting company based in the home village of Orban forcibly closed to make way for a 6,000-seat white elephant of a football stadium, Marlix sought a legal opinion from Solvit – a network funded by the European Commission to assist citizens and businesses that feel their EU rights have been infringed. Solvit in 2011 duly ruled that the Hungarian government had openly breached four EU laws.

However, since first registering its complaint with the European Commission in 2012, Marlix has been given, quite literally, the runaround, as department after department shunted it from one to another, claiming each time it was not their responsibility. Three and half years later, on January 14, the Internal Market and Services Directorate General said that while a decision has still not yet been made, the likelihood is that Marlix’s complaint would be closed.

“The outlook is very bleak indeed – we are a very small voice,” sighs Jock MacKenzie, one of the founders of Marlix, who lost a personal fortune and was chased out of Hungary by the authorities for good measure. “We invested in Hungary in personal capacities in the open expectation of a free market and free trade deal that would be supported by the European Commission in case of any breaches of EU law – this has turned out not to be the case.”

One avenue still available to investors is the use of mutual bilateral investment treaties (BITs) – hangovers from the days before these CEE countries joined the EU. BITs aimed to protect foreign investors from discriminatory host government measures and illegal expropriation, and were signed between capital-exporting advanced economies and emerging markets with weak legal systems that wanted to give extra protection to foreign investors in order to attract them.

Given access to significant funds on the order of several million euros, aggrieved investors can still use these to enforce EU law and reach a settlement. This is the route being used by the UK-based Magyar Farming Company, which in its latest accounts filed with Companies House states that: “The company continues to face some challenges in Hungary, where retrospective legislative change to contractual property rights has placed some land used by the company under threat. The Directors continue to focus on achieving a satisfactory outcome from a number of challenges to the actions of the Hungarian government.”

Ironically, given its seeming disinterest in helping foreign investors enforce their rights, the European Commission since last year has stepped up efforts to force countries to scrap these BITs. In June last year, the Commission launched so-called ‘infringement proceedings’ against Austria, the Netherlands, Sweden, Romania and Slovakia for non-compliance with EU law by maintaining these BITs.

“The whole Commission is a self-satisfying circle, and I wouldn’t mind if the self-satisfying circle was effective, but it’s not. It makes the rules, but then won’t bloody implement them,” says Mackenzie.