Varieties of corruption in Hungarian publicly owned companies

An interesting article appeared in today's Népszava describing the possibilities for graft in Hungarian state or municipally owned companies. The list was put together on the basis of information provided by Tibor Lengyel, president of the National Association of Hungarian Accountants.

One possibility is overcharging. For little or no work performed an exorbitant amount of money is paid to outside experts. The most common beneficiaries of this form of graft are consulting firms, communication experts or advertising agencies, and law firms. Overcharging has been going on for years, and the authorities are well acquainted with it. The problem is that it is difficult to prove. First of all, how does one ascertain that the company was actually in need of the advice that it paid for? And how can one put a figure on the value of the advice received? Admittedly, sometimes the discrepancy between services rendered and payment received is staggering. For example, Budapesti Közlekedési Vállalat (BKV) fairly recently paid out twenty or thirty million forints to a communications firm for a four-page study! The advice that BKV received included the half-witted suggestion to ask a distinguished professor to announce the rise in the price of tickets and fewer runs because the public would accept this bad news from such a learned man!

A variation on overcharging is changing the price for services rendered after signing the contract (presumably a case of cost overruns). BKV, the current poster child for corruption in publicly owned companies, hired a private company to provide an electronic information service for passengers in one section of town. The original price was 85 million forints. Soon enough the price was raised to 99 million forints that BKV paid. However, the electronic information service hasn't been installed as yet! Moreover, I doubt that it ever will be.

Outside firms are not the only beneficiaries of graft. Within BKV some employees got obscene retirement and "fond farewell" packages; parachutes at BKV were truly golden. The company is currently looking into the cases of 110 former employees but according to the police there might be as many as 700 people involved.

The article doesn't venture into the world of possible kickbacks although it is hard to imagine that the BKV bigwigs did all this from the goodness of their hearts. Surely, for these "favors" they had to be compensated by those at the receiving end.

According to Tibor Lengyel, it is unlikely that this kind of corruption can be completely eliminated but the introduction of an electronic accounting system should help. As it now stands, it takes months of work to find the culprits while if an electronic accounting system were used it would take only minutes to flag the "suspicious" cases. (Well, perhaps, but advice is not a commodity that is easily fairly priced.) He also suggests setting up a central clearing house that would check the contracts of all state and municipally owned companies. 

These corruption cases cannot be eliminated completely nor can they be linked to only one party. The party in power, be it in the central or the local government, wants to reward those close to it. It wasn't too difficult for Zoltán Szabó, an MSZP parliamentary member, to find 27 corruption cases in Fidesz-led municipalities. Just as it is relatively easy to blame MSZP-SZDSZ for the corruption cases at BKV in Budapest. It will be very difficult to put an end to this practice because it has a long history in Hungary. In this respect people usually mention the writers Kálmán Mikszáth (1847-1910) and Zsigmond Móricz (1979-1942) who wrote extensively about small town corruption by office holders. Put it this way, I'm not optimistic.

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John T
Guest

The situation at BKV is truly appalling and just when you think it can’t get any worse it does.
If there are up to 700 people involved, it indicates just how many people are willing to screw their fellow rate / tax paying Hungarians. And I would guess BKV is not an untypical example of what is happening across society, at various levels.
The other big issue here is the total lack of internal / external governance. Most of what has happened at BKV should have been spotted and dealt with at an early stage, with people either sacked or prosecuted.

John T
Guest

You mentioned consultancy in the article. The use of consultants is becoming a hot topic in the UK, mainly because of the fees that they rack up. Now don’t get me wrong, there are some excellent consultants, but their daily fees are massive.
In the UK, in many cases, consultants are employed without first checking whether similar expertise is available in the business / company. Often it is and the consultant merely ends up telling you what you should know / already know, at 5 or 6 times the cost of commissioning the work “in house”.
Overcharging by the consultant? Maybe. But then the consultant is likely charging the going rate, kept artifically high because of demand. The issue is whether there is this great need for consultants. I think that in many cases, the answer is no.

Steve
Guest

“an electronic accounting system were used it would take only minutes to flag the “suspicious” cases”
BKV does have electronic accounting system. It’s just, as Zsolt Balogh said, there was no controlling department in BKV, to actually monitor the accounting. But it’s not worth anything, if the the leadership is the actual source of corruption.
The problem with the farewell packages is not that they paid such, not even that its a public company, the problem with it is that they paid huge farewell packages from a company which has heavy losses.
“find 27 corruption cases in Fidesz-led municipalities”
The 27 Fidesz-led municipalities took loans on 20 year payback time. Now, if the state would not have drained them of money, they would not had to take loans. This is what happens when the government goes to save money without thinking.

Steve
Guest

@John T
“The use of consultants is becoming a hot topic in the UK, mainly because of the fees that they rack up.”
There are a number of issues here a work. The companies (like BKV) does not have the knowledge. They have old unmotivated workforce, unwilling to take responsibility for decisions. The consultants are making the decisions for them.
The price of consultancy is driven up by contractors. They make minimal contribution to the actual work, they just “keep relation” between the subcontractor and the company. This doubles the consultancy fees at best. Its not exactly corruption, but almost.

Eva S. Balogh
Guest

Steve: “Now, if the state would not have drained them of money, they would not had to take loans. This is what happens when the government goes to save money without thinking.”
That’s the Fidesz argument but there is incredible amount of waste and graft on the local level as well. Perhaps more than in the central government owned companies.

THE NUMBERS
Guest

A good short video for Eva Balogh about the economy policy of the social-liberal government. (only K.S.H data)


John T
Guest

@ THE NUMBERS – As well as failure of government, this also reflects a failure of the whole society too.

Paul
Guest

If only a corruption-free party could come into government and wipe the slate clean with serious law reform and a wave of prosecutions…
Now which party would dare to have such a brave policy? And what kind of baseless insults could they expect from the corrupt, dishonest parties, desperate to keep their dirty noses in the public trough?

John T
Guest

Paul – If you mean, to it properly & sensibly, then the political party doesn’t yet exist in Hungary.

John T
Guest

opps,that should say – If you mean, to do it properly & sensibly, then the political party doesn’t yet exist in Hungary.

Eva S. Balogh
Guest

John T: “Paul – If you mean, to it properly & sensibly, then the political party doesn’t yet exist in Hungary.”
There is no such thing as corruption free country. One shouldn’t expect any party to come up with such a perfect solution. The best one can hope for is limiting corruption and prosecuting those who are caught.

John T
Guest

Eva – That is the reality of course. But I don’t see an existing party in Hungary that will do this, despite all of the sloganising. And often, those that make these promises, often find plenty of skeletons in their own cupboards.

Eva S. Balogh
Guest

John T: “That is the reality of course. But I don’t see an existing party in Hungary that will do this, despite all of the sloganising.”
I’ll tell you what will happen. They will try to catch each other’s crooks!

Vándorló
Guest

@ESBalogh: I remember an almost identical article from almost the same time last year in NOL, though I’ve mislaid the reference.
I’d only add that there are plenty more inventive ways that larger companies use that are much harder to prove to be cases of real fraud.
One of the simplest is financing fraud, where a tender is placed in which the loan/financing terms detailed are not really a reflection of a competitive rate. This obviously inflates the tender’s cost. This is so that, soon after winning the tender the winner can renegotiate the underwritten loan/financing terms and take the profit. This was very common and still is, particularly in large construction projects.
OK, just one more type of commonly agreed fraud/collusion. Say you have a road to build and it is very simple and straightforward, such that the potential for risk and cost overruns is low. Well, in this case the parties have to look for additional complications that can be added. Tunnels, sidings, river diversions, a sudden interest in nature conservation etc… These all need to be added to the simple construction plan. Hey presto, costs shoot up and the planned over-runs and complications materialise to everyone’s satisfaction.
I won’t go on.

Odin's lost eye
Guest
Whenever there is a slightest opportunity for corruption and graft, it will arise. During the early part of the Thatcherite government in the U.K., I worked for a computer consultancy that looked at three of the old (hugely expensive) nationalised industries/state run operations. Although I was a systems analyst, because of my experience in Operational Research I had a quite detailed knowledge of the use of ‘utilities’. I could extract data from the computer system in a few hours (it would take a Cobol programmer days or weeks to do the same job). One of the things which emerged from our studies, which was very loud and clear, was that these state owned companies were run solely for the benefit of their senior management. They were certainly not run for the benefit for of their shareholders (the people). Because of the U.K’s Audit and accounting laws and rules very little ‘Hungarian’ style corruption could occur. Oh there were ‘kickbacks’ but these were generally small and given to the lower levels of management. The top management had to be cleaver to ‘reap their reward’. One example of this was one state industry which employed HVG drivers set up a driving school… Read more »
John T
Guest

Odin’s lost eye – spot on comments.
I remember going visiting one of my dad’s friends in Szombathely not long before the change of regime in 1989. At that time, he had a small business of his own, producing quality hand made goods. Being near to the Austrian border, he would get a lot of Austrian and some German customers, who he often received payment in Schillings or Marks. Clearly, he seemed to benefit from exchanging this – not a big racket, but a racket all the same. But I remember him and my dad laughing loudly at something – as part of the comments my dad translated was “only the country is poor”. Put into context, that was the time people suddenly seemed to be buying cars, building holiday homes or shopping in Vienna for video’s, colour TV’s, despite having pretty poor paying jobs. But I think that that comment sums up the problem facing the country now. The mindset is still to play the system.

whoever
Guest

That’s a very indicative story, borne out by my own experiences. But what this indicates to me, more than anything, is how sketchy any conception of social justice actually is in Hungary. A true commitment to social justice, as consistently advocated from a credible leadership, would have restrained the ability of big business and the ultra-rich, as well as helping those in poverty (and there are plenty of those). Hungarians are general are cynical about the whole concept of social justice -so it’s no wonder the political economy is so utterly dysfunctional.

Eva S. Balogh
Guest

John T: “You mentioned consultancy in the article.”
I learned just yesterday that projects financed by the EU must be advertised. In fact, a certain amount of money is set aside just for that purpose. So, whether one wants it or not the company must hire an advertising agent to tell the people about the fact that this project was financed at least partially by the EU. Interesting!

GDF
Guest

Odin’s lost eye:”One of the things which emerged from our studies, which was very loud and clear, was that these state owned companies were run solely for the benefit of their senior management.”
This is true, in my opinion, everywhere. Managers of any company look out for their own interest. But in the case of a private company the market usually takes care of bad managers (in many cases at the cost of the company going out of business). But state owned companies are not evaluated based on their profits or losses, the bad managers can survive for ever, or at least until those people or the party that placed them where they are stays in power (and continue to favor them, this is a whole different story, how these managers only care about what those above them think…)

Helen Hunt
Guest

Our accountants are refusing to submit our 2009 even though they prepared them.
These submissions are now long overdue.
Does anyone know how we stand with regard to this.
We are no-doubt going to be fined and possibly have our tax number removed.

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