Tag Archives: public procurement

Corruption Research Center’s analysis of Hungarian public procurement practices

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.

Source: 444.hu

Source: 444.hu

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.”

April 10, 2016

Highway robbery made lawful

A few hours ago Nyugati Fény (Western light), a relative newcomer on the Hungarian blog scene, published an outraged post about a well-hidden change of wording in a bill that allows close relatives of members of the government, the president of the Kúria, the president of the Hungarian State Audit Office, the chief prosecutor, the chairman of the National Bank, and several other dignitaries to participate in bidding for state tenders as long as they live apart from the officeholder. The author of the post predicted that this “brazen robbery” will one day seal the fate of “this gang of college buddies.”

The ruse was discovered by another blogger, who called the new law Lex Tiborcz after Viktor Orbán’s son-in-law, István Tiborcz. I devoted several posts to the highly suspicious business activities of this young man, who recently married Orbán’s eldest daughter Ráhel. Tiborcz’s company won a suspiciously high number of tenders offered by municipalities that had received EU money to modernize their city lighting. Often his company was the only bidder, or the city councils simply favored the son-in-law of the prime minister. Tiborcz’s company, as it turned out, also grossly overcharged the municipalities, or more accurately the European Union, for his services. Currently, the company is under investigation by the European Commission Anti-Fraud Office. Once Viktor Orbán got wind of the investigation, he suggested that his son-in-law sell his share in the company.

The changes in the law that was adopted today are minor on the surface. Just a couple of words: in three places “close relatives” was changed to “relatives living in the same household.” But if before these changes no close relative of a government official could participate in government procurement, how could István Tiborcz win all those tenders that made him a rich man in less than two years? The answer is simple. Since 2011 this is the third set of changes to the law on public procurement. The first one stated that only those who “issued the invitation to tender” and their close relatives were barred from bidding for a public project. Since it was not Viktor Orbán in person who issued the tender, his son-in-law could legally bid for government work.

At the beginning of last month, however, the government decided to tighten the rules governing conflicts of interest. Perhaps an overzealous public servant made the rules far too tight for the taste of this government, which by now many Hungarians consider to be a gang of thieves. The new law excluded all close relatives of the prime minister, members of the government, the president of the parliament, etc. That would have barred István Tiborcz from ever getting another job through public procurement. But someone noticed this egregious error and changed the wording of the law in such a way that relatives–including wives, sons, daughters, sons-in-law, parents, in-laws–as long as they don’t live under the same roof as a member of the government or any of the high dignitaries listed in the law can take part in the public procurement process. So, for Tiborcz and others in his position, the doors are again open to acquire lucrative government business, 90% of which is funded by the European Union.

conflict of interest

At first glance this new legislative package looked as if it dealt only with the reorganization of the National Tax and Customs Office. But, in fact, about 100 articles out of 30 different laws deal with public procurement and other matters. Members of parliament had one day to read the 58-page document, which was only one of several pieces of legislation adopted that day. I’m almost certain that no Fidesz MP bothers to read any of the legislative proposals because, almost without exception, the Fidesz caucus votes unanimously for government or individual Fidesz member proposals. As far as opposition MPs were concerned, they didn’t have to think hard about voting against a law that placed the National Tax and Customs Office under strict political control when András Tállai, a Fidesz MP, undersecretary, and deputy minister of the ministry of national economy, was appointed to be its head. And indeed, MSZP, Jobbik, and LMP MPs voted against the bill. But to everybody’s surprise Gábor Fodor, the sole member of the Liberális Párt, and the four members of Demokratikus Koalíció, apparently by mistake, voted for it.

How could that happen? As I said, several–perhaps as many as twenty–laws were adopted on that day, which were listed as they came up for a vote. László Varju, who was in charge of ensuring that the DK members voted in accordance with an earlier party decision, skipped a page and thought they were voting for an innocuous bill that had something to do with Kazakhstan. Gábor Fodor claims that he just pressed the wrong button. Such a mistake is embarrassing even if Ferenc Gyurcsány pointed out that a simple majority was enough to pass “this disgraceful bill.” In fact, 117 MPs, including the full Fidesz and KDNP caucuses, voted for the bill, which was more than enough to pass it.

The truly peculiar and suspicious aspect of this bill is that it will not become effective as of January 1, 2016 but retroactively from November 1, 2015. The suspicion lingers that there is some “good reason” for that unusual backdating. More than likely some business venture of a relative of somebody important in the government is already underway. Perhaps one day we will find out who the lucky fellow is.

One final comment. Although Zoltán Kovács, the government spokesman, insisted that this law conforms to EU legal norms, I don’t know how this new piece of Hungarian legislation will appease the European Union’s OLAF, which is currently investigating István Tiborcz’s business ventures. Or what OLAF will think when one well-placed relative after the other gets a lucrative job, mostly financed by the European Union. Somehow I don’t think that Brussels will be impressed and applaud the mental acuity of the Orbán government. I can’t believe that it will close its eyes to the incredible corruption of Viktor Orbán and his friends.