Nationalization Hungarian style

It is hard not to notice that the Orbán government is very fond of state ownership, especially in business sectors that they deem of “vital interest to the nation.” The first major venture of the Hungarian government was the purchase of a 21.1% share in MOL. It was a fantastic deal for the Russian company that owned these shares and a truly rotten one for the Hungarian government. As we discussed at the time, the Orbán government overpaid: 22,400 forints per share. Today the price is 16,350.

The next move was to buy out Rába Automotive Holding, whose stock is languishing on the Budapest Stock Exchange. This was followed shortly thereafter by the purchase of the German E-ON storage facilities. Again the price was too high according to people in the know.

So, one can ask,what is the Orbán government after? When we hear about the nationalization of private property, we tend to think of the kind that took place in 1948-49 when one day the store owner arrived to open up his small store only to be barred from entering. Surely, this kind of nationalization is out of the question today. If the state wants to have a greater share in the economy, it has to find more subtle ways of achieving its desired end.

Policy Agenda, an economic and political think-tank, estimates that up to date the Orbán government has spent more than three trillion Hungarian forints on purchasing or acquiring in one way or the other hitherto privately owned businesses. In most cases, at least outside of the energy sector, the state doesn’t actually want to own these companies. Rather, it wants to change the ownership structure of a particular business sector. In plain language, to take away from some in order to give to others.

Reaching hands / tmblr.com

Reaching hands / tmblr.com

One method is direct interference in the ownership of entire business sectors. The government is able by legal means to force current business owners to give up their businesses and sell them to others. The transfer in such cases is direct; the state is not an intermediary.

A good example of this type of state interference is the pharmacies. Soon after the Orbán government came into power the decision was reached that by a certain date all pharmacies must be owned by a practicing pharmacist working on the premises. Now it seems that relatively few employees want to buy their boss’s pharmacy although the government is offering loans. So for the time being the state will have to step in and assume “temporary” ownership.

Another example of direct transfer of ownership is the heavily criticized land lease program by which state-owned lands are distributed to people close to Fidesz and their relatives. By legal means the government can also achieve a transfer of ownership in the banking sector by demanding a minimum 50% Hungarian stake in all banks in the country.

A second method of ownership transfer is for the state to make a certain segment of the economy a monopoly. Cases in point: the monopolization of tobacco products or, earlier, of  slot machines. Here the state not only interferes with private property ownership but shuts down all activities connected to a market segment. The same thing happened to the so-called Elizabeth lunch vouchers, the issuance of which became a state monopoly. It’s no wonder that the European Commission objects to the practice.

A third method used by the Orbán government to achieve a change of ownership is price fixing. No one doubts that a government has the right to adjust tax laws, but when it also decides the final price of the product the owners of the enterprise might be forced to sell because of financial pressures. The much lauded mandatory lowering of utility prices is a good example of this method.

A fourth method of ownership transfer occurs when the central government takes over the responsibilities of the municipalities and consequently their business activities. This is what happened in the case of schools and hospitals. The municipalities now own the buildings and therefore are responsible for their maintenance but the activities within these buildings are supervised by the central government.

I doubt that we’ve seen the end of the state’s expansion into the domestic economy. If tobacco products could be made a monopoly why not have national liquor stores? I’m also certain that casinos are on the list. Perhaps the transfer of Margaret Island from District XIII to the City of Budapest is the first step in building a state casino on the island.

A final note on the French Suez  Environment  Co. that was part owner of Pécs’s water company. You may recall that shortly after Zsolt Páva, the new Fidesz mayor, took office in 2009 security officers in the dead of night locked out the employees of Suez and the city forcibly took over the company. The head of the company couldn’t even enter the building. Suez naturally sued. It was only a few days ago that Páva proudly announced that they settled with Suez for 7.5 billion forints instead of the 10 billion (34  million euros) originally demanded by Suez. The central government will take over part of the obligation.  Meanwhile the price of water has gone up substantially and local MSZP officials claim that investors cannot be convinced to come to Pécs. They all remember the fate of Suez. Currently unemployment in the city is 13%, well above the national average.

Who ever said that governments were great entrepreneurs?

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NWO
Guest

For someone who supposedly hated pre-1990 Hungary, Mr Orban certainly seems like he want to recreate large parts of it.

An
Guest

The latest in the line: the nationalization of the savings cooperatives.
In Hungarian: http://www.origo.hu/gazdasag/20130626-az-allam-atveszi-a-hatalmat-a-takarekszovetkezetek-folott.html

spectator
Guest

Well, he declared once in the Parliament, that he “didn’t fought against the system, but it’s leaders”.
This came across to me as a slightly Freudian confession, so it may even be true.
Otherwise it looks to me, that he managed to slip back in time quite a bit more, now working on the fifties feeling…

Paul
Guest

He’s not interested in systems, policies and politics, he’s just interested in power. He will do and say anything to that end.

Try to understand him as a ‘normal’ politician, and you will fail.

Member
I would love to hear the excuses of Johnny Boy and such. Just a few posts ago on the previous blog entry he tried to convince the readers about how awful those ex-communists are. Of course they do not considers any Fidesz members ex-communists, even though it is a proven fact that Fidesz has more ex-communist party and ex-young communist members on it payroll (Orban, Kover, etc.) than any other party. I agree with Johnny Boy, we haver to get rid off these ex-communists, and lets start with the governing party that pretends ti be something else, then the worst of what Kadar regime had to offer. In fact Kadar never pretended to be something else. Communists never pretended to be anything else then communists. THey were proud of it. So what is Orban exactly, because his government seem to offer the embodiment of some of the worst of the Rakosi and the Kadar era. Eva, you left out the nationalization of the retirement incomes! You also left out the tax deductions offered to those who donate to stadiums, hence a larger tax burden on the poor. The flat tax that takes away from the poor to provide for a… Read more »
Johnny Boy
Guest

“When we hear about the nationalization of private property, we tend to think of the kind that took place in 1948-49”

Yes, if you are completely unable to differentiate between a property robbed by violence and a property properly bought – but only then, you tend to think about 1948-49.
For everyone else with some brain cells, the two cases are something entirely different.

Johnny Boy
Guest

Paul :
He’s not interested in systems, policies and politics, he’s just interested in power. He will do and say anything to that end.
Try to understand him as a ‘normal’ politician, and you will fail.

It seems that you have failed trying to understand him in any (other) way anyway, so what’s this lecturing about?

petofi
Guest

The friendship between the Russians and Azeris is blossoming ever and anon: just a week ago we got news of a 1 billion dollar sale of Russian arms. Yesterday–what a surprise–the Azeris declared that their oil will not be shipped by the Nabucco pipeline.

Ahh, new friendships–ain’t they a delight?

Member

bahaha Johnny Boy and his no-answers. I recall well how he pretends not see or hear when he has no answers. I love how Fidesz Troopers run around offending everyone, and then get their nose out of joint because they cannot answer simple questions. Just like Fidesz (the revitalized communist ).

Julianna Bika
Guest

Kedves Eva

Koszonjuk a nagyszeru cikket Ebbe a magyar gazdasagi kategoriaba tartozik meg , Hulladek hasznosito, szemetegetok recicling , A tavalyi Hulladek hasznosito torveny alapjan az allamnak 50 % -os reszesedese kell , hogy legyen

Zala Sopron Szombathely kornyekerol kivonultak a kulfoldiek.

Udv Juli

Dan
Guest
Er … you are aware, aren’t you, that the largest share holder in Suez Environnement is … wait for it … the French government. That’s via GDF Suez’s holding in the company. A quick look at GDF’s bylaws reveals that the French government holds a “golden share” in the company, which gives it total control. From GDF’s bylaws: “… the share capital includes one “golden share” resulting from the conversion of one ordinary share belonging to the French government, with a view to preserving the essential interests of France in the energy sector, as regards the continuity and security of energy supply.” Section III, article 6: https://www.gdfsuez.com/wp-content/uploads/2012/05/GB-Statuts-GDFSuez-2013-04-23.pdf So ultimately the French government controlled the waterworks in Pecs and now the Hungarian government does. Gyurcsany’s government by it’s own admission did very little but one of it’s finest hours was the spirited defense of MOL when Austria’s OMV tried to mount a hostile takeover. I believe they even amended the capital market laws to stop it. Faced with opposition from the Gyurcsany government and MOL’s management the Austrians eventually gave up, but not before complaining bitterly to the EU. They ended up selling their stake to the Russians out of spite… Read more »
Qaz
Guest

You forgot to mention the creeping expropriation of the recycling business, including curbside recycling. Overnight operators were no longer allowed to continue their activity because of a change in the law making it mandatory for those operators to have majority public or “non profit” ownership. Either they got into “partnership” with a publicly owned or “non profit” entity or they had to fold. This was of course done without compensation. The main idea was to create a de facto monopoly in a heavily subsidized and regulated business segment. The three main operators were foreign owned companies.

Member
Eva S. Balogh : Dan : Er … you are aware, aren’t you, that the largest share holder in Suez Environnement is … wait for it … the French government. And what difference does it make in this case. Páva sent security men and locked out the management. And the consequences were grave. A warning to others. If it makes any difference, probably the situation is worts than the plan assumption. Locking other countries out from fair investments, especially governments? Are they kidding? Dan, would you say that it would be fair to take over 50% of the Audi or Mercedes productions in Hungary? Would you defend such moves too? (By the way it was the Gyrurcsany government who started the negotiations with Mercedes.) Also, the Fidesz communist style government tried to take over the mobile telephone market. Eva, Maybe it would be a good idea to have a plan list of takeovers, high involvements, and attempts listed in a blog entry, so we can always direct back our Fidesz Troopers to this list, each and every time they try to prove how the opposition members are all communists who are trying to bring back the Kadar Regime. It would… Read more »
Jano
Guest

This shows how screwed up political ideology is in Hungary. A government that calls itself right wing nationalizes in a way that would make Hugo Chavez humble…

spectator
Guest

Jano :
This shows how screwed up political ideology is in Hungary. A government that calls itself right wing nationalizes in a way that would make Hugo Chavez humble…

I have this sinking feeling: there is no political ideology in Hungary.
In fact, there isn’t any ideology in use – or better put – there isn’t any coherent ideology, only bits and pieces of different ideas, modified to fit to the actual purpose, which is the total power and unlimited wealth to themselves, they relatives and the attached bunch of vassals, oligarchs and a kind.
If you look at the career of Orbán, you’ll find, that he quite easily changed sides, ideologies, religious view, you name it, in order to reach that goal, an he mastered this art to perfection.

In my deepest belief there is no political sides either in Hungary, there is only self serving interests, wrapped into one or other flag for show to the masses.

Maybe that’s why there isn’t easy to chose “something” to vote for, only the “someone” gives some indication?

Dan
Guest

Eva S. Balogh :

Dan :
Er … you are aware, aren’t you, that the largest share holder in Suez Environnement is … wait for it … the French government.

And what difference does it make in this case. Páva sent security men and locked out the management. And the consequences were grave. A warning to others.

The local government in Pecs is the majority owner. They decided that the people they hired to run the company (Suez) weren’t doing a good job and they decided to break the contract, paying quite a lot of money in compensation. As the majority owner they have a right to do that. Suez is still a large minority owner of the company, holding just under 50 percent and with a number of representatives on the board. Hardly nationalization.

Welcome to the political economy of the energy and utility sectors.

qaz
Guest

Eva, as immoral as it may sound, one can always breach a contract as long as one pays damages. The theory of efficient breach is partly based on this principle.

Although it was unintended, the airport expropriation of the Canadian investor early 2000 by the first Fidesz government is a case in point. The Hungarian state ultimately and rightfully lost the ICSID case and paid almost USD 100 million in compensation to the investors (the publicly available award is a very interesting read, and not only for lawyers). However, 100 million dollars were peanuts compared to the proceeds from the re-privatization of the airport under the Gyurcsány government.

Ironically, people in certain circles consider the windfall from this re-privatization to have prevented a Hungarian default (with the help of the IMF) under the Gyurcsány government. So Fidesz’s expropriation of the airport ultimately helped the Gyurcsány government to prevent a Hungarian default. Interesting turn of events.

Jano
Guest

Spectator: “Maybe that’s why there isn’t easy to chose “something” to vote for, only the “someone” gives some indication?”

Exactly, people don’t even listen to what is being said. You turn on a TV debate (if you can find any these days) and before hearing a word you know who you are going to like and who you are going to identify with. This also stems from the fact that there is almost zero correlation between what is said and what is done. Bajnai says they will do this after the election if they win? Ask 10 people on the street if they think he will actually follow through. So they think why would bother listening to arguments?

Dan
Guest

qaz :
Eva, as immoral as it may sound, one can always breach a contract as long as one pays damages. The theory of efficient breach is partly based on this principle.
Although it was unintended, the airport expropriation of the Canadian investor early 2000 by the first Fidesz government is a case in point. The Hungarian state ultimately and rightfully lost the ICSID case and paid almost USD 100 million in compensation to the investors (the publicly available award is a very interesting read, and not only for lawyers). However, 100 million dollars were peanuts compared to the proceeds from the re-privatization of the airport under the Gyurcsány government.
Ironically, people in certain circles consider the windfall from this re-privatization to have prevented a Hungarian default (with the help of the IMF) under the Gyurcsány government. So Fidesz’s expropriation of the airport ultimately helped the Gyurcsány government to prevent a Hungarian default. Interesting turn of events.

Interesting insight. Thanks very much. I wasn’t aware of that line of argument on the airport privitization.

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