Tag Archives: BKV

Metro 4: The largest case of Hungarian fraud and corruption

Now that the complete OLAF report is available online, we can all settle down and try to read 103 pages of dense prose detailing “irregularities, fraud, corruption, and misappropriation of EU funds.” A five-member OLAF group began their investigation in January 2012 after the Court of Auditors and the Directorate General for Regional and Urban Policy of the European Commission contacted OLAF, asking the office to scrutinize the case. During the investigation, the OLAF staff got in touch with only the City of Budapest and Péter Medgyessy, prime minister of Hungary between 2002 and 2004, whose consulting firm worked for Alstom Transport S.A., one of the firms accused of wrongdoing.

The total cost of the project was €1,747,313,606, of which €696,490,000 came from the Cohesion Fund. According to OLAF’s calculation, “the financial impact on the Cohesion Fund is €227,881,690.”

The release of OLAF’s final report put an end to the political game Fidesz and the Orbán government had been playing with the document. János Lázár, head of the prime minister’s office, and his deputy, the honey-tongued Nándor Csepreghy, did their best to get as much political mileage from the affair as possible. Lázár intimated that an international socialist-liberal conspiracy was behind the corruption that occurred at the Metro 4 project. On another occasion, he claimed to have filed charges against Gábor Demszky, mayor of Budapest between 1990 and 2010, Csaba Horváth, deputy mayor between 2006 and 2009, and János Atkári, an adviser to Demszky. Csepreghy must have known that none of these people was mentioned in the document, but in a long interview at 888.hu he intimated that even Ferenc Gyurcsány, prime minister between 2004 and 2009, may have shared responsibility for the misappropriation of funds. A few days later he claimed that other politicians might also be implicated.

All this is just political fluff. What we know from the OLAF report is that the City of Budapest signed a contract in 2004 with Budapesti Közlekedési Vállalat (BKV), the city-owned transit authority, which was commissioned to implement the project. Most likely that was a major mistake, which led to a lot of difficulties later. Any project, especially such a large one as the construction of a metro, needs a general contractor who oversees the project. BKV’s staff was not equipped to coordinate the work, which led to innumerable hiccups during construction.

Throughout the project the Hungarian media, especially the online site Index, reported many suspicious cases of overspending. But these cases were actually small potatoes, like too many consulting firms and lawyers making millions for very little work. Although several such cases are described in the final report, the bulk of the money OLAF would now like to be returned came from serious irregularities during the acquisition of tenders by huge corporations.

According to OLAF, 96% of the “irregularities” occurred in contracts signed by six large firms: Siemens AG, the largest manufacturing and electronics company in Europe; Swietelsky, an Austrian construction company from Linz; Strabag, the largest construction company in Austria, based in Villach; a Hungarian company called Hídépítő Zrt., which as its name indicates builds bridges and roads; the BAMCO consortium (Vinci CGP, Strabag, Hídépítő Zrt); and Alstom, the French multinational company operating worldwide in rail transport, including the manufacture of metro trains.

I left Alstom to last because it was in regard to Alstom that OLAF got in touch with Péter Medgyessy, who received €600,000 in 2007-2008 from Alstom for two years of consulting. This payment occurred after Alstom had won the tender with apparently the worst offer. Medgyessy naturally claims that his consulting firm had nothing to do with the Alstom case, adding that it is a well-known fact that his relationship with Prime Minister Ferenc Gyurcsány and the liberal SZDSZ leadership of the City of Budapest was strained. What his relationship with Gyurcsány had to do with BKV deciding to purchase overpriced Alstom cars is beyond me. I have no idea whether in a court of law Medgyessy would be found innocent or not, but in ethical terms his behavior was highly suspect.

Siemens, the German company which was in charge of electrical works, received 31.7 billion forints (€102,303,730) for the job. Since OLAF claims that Siemens most likely received inside information during the bidding process, the European Union wants the Hungarian government to pay back the whole amount. The same is true of Alstom’s 22.9 billion forint (€73,892,769) tender. BAMCO also won the tender in an irregular manner, and therefore the European Union demands the return of 8 billion forints (€25,817,360). The EU also demands 7.6 billion forints (€24,523,364) from Swietelsky, which was responsible for the interior of the metro stations. Strabag-Hídépítő, in charge of structural work on the station at Baross Square, received 3.7 billion forints for its work but because of procurement irregularities 2.5 billion forints (€8,067,751) should be returned.

Another politician who, although not mentioned by name, was most likely involved in the metro case is László Puch, former financial director of MSZP, whose company Media Magnet Kft. just purchased the ailing Népszava and Vasárnapi Hírek. Media Magnet, according to the OLAF report, received 331 million forints (€1,068,110) from Siemens for advertising. The report notes that “this company was in charge of the campaign of the political party which was in a decision-making position in the case of Metro 4.” In 2010 Index reported that BKV ordered all sorts of superfluous studies from Media Magnet on such things as, for example, the state of the cable television market. There is a strong suspicion that some of this money ended up in MSZP’s coffers.

The biggest culprits will most likely be found among the representatives of the named companies and those BKV officials who were in contact with them. There’s no question that the guilty parties should be punished, but judging from the outcomes of earlier corruption cases I have my doubts that we will ever hear about all the dirt that OLAF unearthed. I’m also pretty sure that Fidesz will try its darndest to drag high-level politicians into the morass around BKV.

I see that Gábor Demszky will be represented by György Magyar, one of the “star lawyers” in the country. On February 3 Magyar announced on ATV that Demszky had signed only three contracts during the many years of construction. One was the contract between the city and the government in which the parties agreed that 79% of the construction cost would be borne by the government and the rest by the City of Budapest. The second contract dealt with a loan the City had to obtain for the project. The third was the contract that gave full authority to BKV for the implementation of the project.

Fidesz naturally wants to have a parliamentary investigation into the case, which will lead to further accusations on both sides. If Hungary had a decent prosecutor’s office and an independent chief prosecutor, it should undertake a speedy, thorough, unbiased investigation of the case. Unfortunately, this is the last thing we can hope for under the present circumstances.

February 6, 2017

Business ethics is not the strong suit of Russians and Hungarians

Almost a year after the City of Budapest decided that the Russian company Metrovagonmash would refurbish the old trains of the Metro 3 line, the first reconditioned train arrived from Russia via Poland.

Originally, the city had wanted to purchase new cars, especially since the old Soviet-made trains on Metro 2 had already been replaced by new modern Alstom trains and the brand new Metro 4 line also uses Alstom cars. In the final minutes of the negotiations, however, the government announced that they would guarantee the 60 billion forint loan the city needed only if the money was used to recondition its cars, not for the purchase of new cars. Once that was decided, the choice was between Metrovagonmash and Skinest Rail, an Estonian company. Skinest’s offer was lower by 9 billion forints, it offered a 30-year guarantee instead of 25, and its motor design would have ensured savings in energy use. But Skinest was excluded from the bidding process because it had eight “formal” mistakes in its bid. These so-called “formal” mistakes always come in handy when Hungarian authorities want to bar someone from the bidding process.

Already at that point Erzsébet Gy. Németh, the only DK member of the city council who alone voted against the Metrovagonmash contract, suspected a connection between the Russian loan to build the Paks II Nuclear Power Plant and the Russian firm’s winning tender. Antal Csárdi, the only LMP member of the body, said at the time that “all signs point to the likelihood that Viktor Orbán during this trip to Moscow in February 2015 promised Putin that the Russian company would get the job.” He told Magyar Nemzet that Alstom sold new metro trains to Paris for less money than Budapest was paying the Russians for refurbished ones.

So, the first train arrived and with it the great surprise. There is a good likelihood that the train, consisting of six cars, is not the one sent to Russia to be reconditioned but a product that Metrovagonmash began manufacturing in 2009. Since the train’s arrival, experts who have examined it are coming to the conclusion that the Russians didn’t touch any of the old trains, described by many as wrecks. Instead, they got rid of some of their older, unsold trains sitting in their warehouses.

The first reburbished/new metro cars / MTI / Photo: Zoltán Máthé

The first refurbished/new metro cars / MTI / Photo: Zoltán Máthé

But why would the Russians resort to such deception? According to those who are convinced of the deceit, the Russians couldn’t possibly compete with manufacturers like Alstom with their less modern, technologically less advanced trains and therefore would most likely have lost in an open bid. But if that is the case, the Hungarian government is also implicated. After all, it was the Orbán government’s decision about the loan guarantee that forced BKV to sign a deal for reconditioned trains and thus enabled Metrovagonmash to get rid of 37 trains with 222 cars. It is likely that BKV, the city’s transit authority, was also complicit in the deception because immediately after signing the contract, the Hungarian side came up with new requirements, possibly to match the model the Russians were planning to send to Hungary.

Mayor István Tarlós doesn’t find anything wrong with this fraud concocted between the Russian and Hungarian governments, Metrovagonmash and BKV. His first reaction was that the opposition’s favorite pastime is hairsplitting. “Let’s suppose for the sake of argument that these cars are new. Then when did the city get a better deal? When for its money it gets refurbished ones or completely new ones?” He has no problem with the Russian and Hungarian governments’ trickery as long as, in his opinion, the city ended up on the winning side.

But did the city do well on the deal? Figures provided by media outlets differ greatly. Origo states that the city paid 69 billion forints for reconditioning the old cars while brand new trains would have cost 90 billion forints. However, according to Origo’s calculation, the cost of refurbishing the cars in Russia actually cost 84 billion forints because the city had to borrow 9 billion forints in foreign currency and the interest for the 15-year loan is 15 billion forints. Portfolio, disregarding any added costs, comes up with €1.33 million per Alstom car as opposed to €0.98 million for the Russian ones. But even if these cars are new, Portfolio adds, their technology is obsolete.

What are the technological deficiencies? What most people will miss will be air-conditioning. The Russians installed some kind of ventilation, but it is hard to tell whether this solution will do the trick. Also, the train uses an outmoded spring instead of modern air suspension and has an antiquated ATO (automatic train operation) which, according to Index, is as if we filled a modern office with Commodore 64s. And Budapest is stuck with these trains for 30 years.

Shortly after the appearance of the Népszabadság article BKV released a lengthy statement in which it “rejects the criticism of the high-quality reconditioning” of the metro cars. It touts the “most modern components,” the “extension of the guarantee without any additional cost,” and “the early delivery of the prototype.” The statement complains about the negative attitude of some people and expresses BKV’s joy at receiving the first six-car unit. And it goes on and on. Only one thing is missing: an outright denial that these cars are new. Attila Gulyás, the head of one of the unions of BKV workers, is taking BKV’s side. He claimed in a radio interview that BKV’s representatives visited Metrovagonmash during the reconditioning phase, and therefore “there are eyewitnesses to the reconstruction.” Otherwise, Gulyás finds these cars much more attractive than the Alstom ones. I guess he likes the Russian-style design, to which he is more accustomed.

Erzsébet Gy. Németh (DK) has already decided to file a complaint based on the suspicion of corruption, fraud, and deceit. LMP is contemplating the same unless BKV within a week can come up with creditable proof that the cars that arrived from Russia are refurbished and not new. As long as the chassis is new, a vehicle is considered to be new, and it is not difficult to determine whether the chassis is forty years old or brand new. LMP’s Antal Csárdi claimed that the Russians accompanying the cars encountered some difficulties with the custom officials, who had their doubts about the identity of the cars. If true, this is an unprecedented case in the business world.

June 3, 2016

Another Russian-Hungarian deal, good only for the Russians

In the past few years passengers have been evacuated from one metro car after the next on the M3 line in Budapest because the cars started to smoke. These Soviet-made cars have been in service since 1978 without any refurbishing. The most modern metro cars nowadays are guaranteed for 30-35 years. It was high time for these old cars to be retired. Line 2, which was completed in 1970, had the same vintage Soviet cars, but they were replaced by air-conditioned Alstom Metropolis trains in 2013. It was also Alstom that provided the cars for the M4 line that opened in March 2014. Thus, it would have made a lot of sense to seriously consider Alstom’s bid to provide 37 trains with 6 cars each for the M3 line.

Well, this is not what happened. After years of often acrimonious discussions between the central government and Mayor István Tarlós, a decision was reached a few months ago. The M3 line is not getting any new trains. The Soviet cars will be refurbished, allegedly because of cost. Commentators and experts are skeptical.

But let’s start at the beginning. In order to get rid of the by now dangerous old cars Budapest figured it would have to take out a 60 billion forint loan, for which it needed the central government’s guarantee. It was a few months ago that at last the Orbán government said it would guarantee the loan, but only if the money was used to refurbish the old cars, not to buy new ones. The city’s hands were tied. They would have to settle for fixing up the old trains.

Originally 22 companies were interested in getting the job, but BKV, Budapest’s transit authority, found only five that could meet the requirements. Alstom was not among them. In the end, the competition was between two companies: the Russian Metrovagonmash, whose predecessor, the Mytishchi Machine-building Factory, produced the original trains, and Skinest Rail, an Estonian company whose owner is Oleg Ossinovski, an Estonian-Irish citizen. Magyar Nemzet learned that Skinest Rail planned to have the job done in Ukrainian Krykov Railway Car Building Works operating in Kremenchug if it got the job, which it didn’t.

It was only about a week ago that the final decision was reached: Metrovagonmash was the winner. BKV’s arbitration committee ruled that Skinest’s bid couldn’t be considered because, according to Hungarian public procurement law, it had eight “formal” mistakes. It is amazing how often a company is excluded from the bidding process because of “formal mistakes.” Skinest claims that they not only underbid Metrovagonmash by 9 billion forints but offered a 30-year guarantee as opposed to the Russian 25-year guarantee. The Skinest motor design would also have ensured savings in energy use.

Budapest ended up with a project that will cost 69 billion forints, while it can borrow only 60 billion. The balance must be found in Budapest’s very tight budget.

Napi.hu, an economic internet news site, finds the deal “inexplicable.” Everybody suspects foul play here. And not without reason when one reads that László Deák, CEO of Alstom Hungária Zrt, told Magyar Nemzet that “months ago they approached city hall saying that for 75-81 billion forints (242-250 million euros) they would deliver 37 trains with six cars each.” The difference between the 69 billion Budapest will have to pay for old refurbished trains and the Alstom’s offer for new cars is relatively small. (As a point of comparison, “the fence” will cost close to 30 billion forints.) Moreover, after negotiations the city might have been able to lower the price even further. István Tarlós, however, claims that he has no information of any such offer.

By now, Hungarian internet sites have published pictures of the likely Metrovagonmash creations by finding old Soviet-made cars refurbished by the same company. Here is one from Moscow.

Moscow metro

Compare that with the Alstom cars running in Budapest:

alstom2

The city council with its large Fidesz majority naturally voted to accept Metrovagonmash’s offer with the dutiful assistance of the MSZP members. There was only one person who voted against it: Erzsébet Gy. Németh of DK, who suspects a connection between the Russian loan to build the Paks II Nuclear Power Plant and the Russian firm’s winning tender. Antal Csárdi of LMP abstained. He was even more specific in his criticism. According to him, all signs point to the likelihood that Viktor Orbán during his trip to Moscow promised Putin that the Russian company would get the job to refurbish the metro trains. He told Magyar Nemzet that Alstom sold new metro trains to Paris for less money than Budapest is paying the Russians for refurbished ones.

As I said, BKV and the Budapest government claimed that the decision to settle for renovating the old cars was financial. In fact, Tibor Bolla, CEO of BKV, in an interview today alleged that the new trains would have cost at least 90-95 billion forints, an estimate based on prices obtained during earlier negotiations for the trains.

But that’s moot. Cost didn’t figure into the city’s current decision because the choice to refurbish the old cars instead of purchasing new ones was not in their hands. It was in Viktor Orbán’s. So, let’s assume that Orbán had an understanding with Putin about the Russian firm’s involvement with metro cars on the M3 line. Why didn’t he then simply specify new cars manufactured by Metrovagonmash? That would have meant an even a bigger chunk of money for the Russians. I suspect that he was afraid that Metrovagonmash, with its still fairly conservative design and technical know-how, might not have been able to compete successfully with, for example, Alstom. Declaring the Russian company the winner would have been too obvious. Having the same Russian company fix up the old cars that it manufactured forty years earlier looked like a much safer bet.

As it turned out, even that wasn’t entirely smooth sailing. The Russians won only on a technicality. Two days ago Skinest Rail submitted a formal complaint to the European Commission over the procurement procedure. The Estonian firm “contends that its bid was more favorable in every key aspect, as its proposal meets all modern technical requirements–asynchronous drive, disc brakes, pneumatic suspension, longer life cycle, etc.–and the eight points cited by BKV Zrt. as reasons to disqualify the Skinest bid are formal in character.” The press release further noted that “a Hungarian Parliament bill for the acceleration and simplification of certain development investment projects in Budapest was passed on the same day as the announcement of the tender winner, and was dubbed the M3 Act because of its focus on the M3 modernization project.”

Although Skinest claimed in its formal complaint to the European Commission that the bill passed by parliament “limits legal remedies available to contending bids,” according to Bolla, CEO of BKV, Skinest is mistaken, and since then they have asked for remedies in Hungary. Skinest will not, however, be able to compare the two competing tenders because of Metrovagonmash’s insistence on secrecy. I wouldn’t be too optimistic if I were Oleg Ossinovski. Estonia/Ukraine can’t beat Russia in Budapest.