It might sound like a complaint that an important study on the extent of corruption in procurement practices involving EU funds that was published on March 3 was discovered by the media only today, but I don’t mean it to be such. I actually have a high opinion of some of the Hungarian news sites, especially given their financial constraints. Yes, here and there something is missed, but it might be not their fault. Perhaps the authors of the study didn’t do a good job of publicizing their findings.
The study I’m talking about was done by an organization called Corruption Research Center, established in 2013. Their recent study is the center’s most extensive effort to date. The report examines 127,776 contracts between 2009 and 2015, details of which are available on the website of the Hungarian Public Procurement Authority.
I don’t want to dwell on the details of the study because we have a fair idea of the extent of systemic government corruption in Hungary. We also suspect, as it turns out for good reason, that when the money comes from the European Union, the government-favored “businessmen” become even greedier than usual and the government a great deal more cooperative than when the bills are paid exclusively from domestic sources. There is nothing really new in that, but there are a few interesting, unexpected pieces of information in the report.
One is that “on the basis of statistical research [the authors came to the conclusion] that overpricing in 2009 was negligible.” As we know, Gordon Bajnai was in charge of public procurement involving EU subsidies before he became prime minister, and both he and Ferenc Gyurcsány always claimed that procurement in those days was clean. The public was disinclined to believe them. But it seems that they were telling the truth: the Hungarian government prior to 2010 was not trying to “cheat” the EU. They may not have used the money wisely, but Brussels didn’t have to start all sorts of procedures against Budapest as it does now.
The other surprise for me was that even today overpricing in the construction industry is relatively rare because there are benchmarks for engineering prices which allow pretty accurate calculation of the real cost of the project. This means that for the average overall overpricing to be 30%, in some other sectors overpricing might be as high as 140-320%. The Orbán government in effect encouraged overpricing when it changed the law on public procurement, increasing the opportunities for restricted tenders. If there is no or limited competition overpricing is unavoidable. By now 50% of all tenders are restricted–only firms X and/or Y can apply.
Another fascinating part of the study is the chapter on four Hungarians who have benefited disproportionately from EU grants: Lőrinc Mészáros, István Garancsi, István Tiborcz, and Lajos Simicska. The researchers refer to these four men, who together own 66 different companies, as the MGTS-group. The following graph illustrates Viktor Orbán’s past and present political-economic-familial connections and how he is using European Union money for his own enrichment.
The full study can be found on the Corruption Research Center’s website.
A few months ago I heard an interview with a successful Hungarian businessman, one of the few who is not in Orbán’s inner circle. He can afford to be critical of the present government because his information technology business doesn’t depend on government orders. Most of his business is conducted abroad. During this interview, just as an aside, he suggested that the EU subsidies to Hungary do more harm than good. I tend to agree with him. The state plays a disproportionate role in the Hungarian economy, despite the massive privatizations during the Horn government’s tenure. For instance, it is the largest employer in the country. And in the last six years its role has only increased due to Orbán’s statist economic doctrine and the government’s unpredictable anti-multinational moves, which have retarded foreign investment. The tremendous amount of money that the EU gives to the Hungarian government to use as it sees fit puts a powerful weapon into the hands of Viktor Orbán.
Most of the men whose companies are the chief beneficiaries of the EU subsidies are not real entrepreneurs but ersatz businessmen who came from nowhere and who would be nowhere without the helping hand of Viktor Orbán. Lőrinc Mészáros, the former gasfitter, knows nothing about building roads, railways, and stadiums or raising mangalica pigs. And István Tiborcz would never have made his fortune if he hadn’t courted and later married Orbán’s daughter. These oligarchs are middlemen between the government and the subcontractors. They serve as a conduit for money that comes from overpriced contracts, destined for their and their boss’s pockets.
While all this shady activity is going on, a real Hungarian business class cannot develop organically. Would-be entrepreneurs don’t have the opportunity to establish and grow businesses, especially if they overlap at all with state interests. Yes, all this money coming from Brussels might be counterproductive.
In any case, there is talk about a drastic decrease in subsidies or perhaps even their total abandonment after 2017. At that time a completely distorted Hungarian economic structure, which is losing its competitive edge day by day, will be at the mercy of international market forces without any assistance from the European Union. The Hungarian “miracle economy” will turn out to have been a sham. As Warren Buffett famously said, “you only find out who is swimming naked when the tide goes out.”