Tag Archives: Strabag

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

The European Union has had enough: No money for a 110 billion project already underway

Not only does Quaestor’s collapse and the government’s involvement in this scandal weigh heavily on the third Orbán government. Viktor Orbán just heard officially that the European Union is refusing to finance a 30 km section of a new Hungarian superhighway, the M4, that would be 230 km long and would lead all the way to the Romanian border just north of Oradea/Nagyvárad. This is a first. And this time there is no possibility of any further negotiations. The project must either be abandoned or be built from purely Hungarian sources. Trying to resubmit the same project based on another, lower bid seems pretty hopeless since the European Union considers the whole project a “luxury item.”

I would be hard pressed to recall all the dates that were mentioned in the press about the imminent beginning of work on the project. It was in 2003 that civil engineers and experts on transportation came up with a 15- and a 30-year plan which included two much-needed superhighways, M8 and M4, that would transverse the country from the Austrian border to Romania. The point was to avoid Budapest, which has for far too long been the epicenter of the Hungarian transportation system. By 2005 it looked as if both M8 and M4 would be built.

In December 2012 Index reported that work on the planned 30 km section of M4 between Abony and Fegyvernek would begin in 2013. At that time people familiar with the price structure of Hungarian highways predicted that it would cost “tens of billions of forints,” but by the end of 2014, when all the bids were in, the cost was 110 billion or almost 4 billion per kilometer. That is four times the price of similar road construction in Western Europe where wages are considerably higher. Such a blatantly overpriced project was too much for the European Union. Moreover, they suspected price fixing. But what is really devastating for the Hungarian government is that the EU didn’t just stop this particular section of M4 but refused to finance the entire 230 km of M4 during the 2014-20 budget period.

An unfulfilled dream: "M4's construction began at Abony / szolnoknaplo.hu

An unfulfilled dream: “M4’s construction began at Abony” / szolnoknaplo.hu

The European Union’s decision about the Abony-Fegyvernek section of M4 couldn’t have come as a surprise to the government. Although by January 2014 all necessary permits were obtained and therefore work could begin, the green light from Brussels wasn’t forthcoming. In December 444.hu learned that in general there are problems with the Hungarian projects waiting for approval in Brussels. “Among other reasons, the European Commission did not pay because the officials consider the prices submitted too high.”

Benedek Jávor (PM MEP) turned to OLAF (European Anti-Fraud Office) to initiate an investigation into the M4 highway project. He wanted to know whether there were any signs of corruption, specifically any possibility of kickbacks to parties by the five firms involved in the construction of the project. Colas USA and the Austrian Swietelsky were to build 13.4 km for 46.76 billion forints. Lajos Simicska’s Közgép together with another Hungarian company, Híd, was entrusted with a short 2.4 km section, but it had three bridges, including a new 756 meter-long bridge across the Tisza River. For this work they signed a contract for 32.5 billion. For the rest Strabag International was to receive 31.5 billion.

The Hungarian government was so eager to launch the project that in January they began construction, which means that about 30% of the project has already started. It is not at all clear what the government will do in light of the EU decision. After all, it is not the fault of the companies involved that the Hungarians decided to begin construction without the final okay of Brussels. If, however, price fixing can be proven, Nándor Csepreghy, assistant undersecretary in charge of communication on matters related to the European Union, said, the construction companies will be responsible to the Hungarian taxpayers for the loss of 110 billion forints.

Although the Hungarian government now echoes the EU and says that the construction costs are too high, back in 2013 when Benedek Jávor first began his investigation of the case neither Mrs. László Németh, then minister of national development, nor János Lázár found anything wrong with the winning bids. In fact, both insisted that they “were not irrationally high.” But now, suddenly they’re talking about price fixing. It is hard to escape the conclusion that Benedek Jávor’s suspicions about possible kickbacks to individuals and perhaps also to Fidesz’s coffers are well founded.

As far as I know, up to this point it was only Simicska’s Közgép that reacted to Csepreghy’s threat of passing the lost EU money on to the companies involved. Közgép published a statement in which they explained that it was Közgép that offered the lowest price in a proper bidding process and that their job was not simple road building but the construction of three bridges. The new Tisza bridge will require 8,500 tons of steel. In addition, two smaller bridges, on either side of the Tisza, must be built over wetlands. Közgép called attention to the fact that the January issue of the Official Gazette announced that the government would finance from domestic sources a road that “connects M5 with M4.”

Indeed, János Lázár only recently reiterated the “government’s long-standing desire to have at least a four-lane highway between M5 and Szolnok.” Apparently, it is for political reasons that the Orbán government wants to make this road a priority. It was in Szolnok last September that Viktor Orbán announced his ambitious plan for building four-lane highways that would connect each county seat to the larger superhighway system of the country. Moreover, he planned this expansion of the roads not from EU money but from domestic resources. Such a road would “bring spectacular economic development to the city,” said Ildikó Bene, a Fidesz member of parliament. Budapest could be reached from Szolnok in less than an hour, she promised.

As for the charge of cartel activities and price fixing, I’m not sure that this is the real reason for the extraordinarily high prices asked for the job. Colas-Swietelsky bid 3.49 billion/km and Strabag 2 billion/km. Közgép is a different story because their work consists mostly of building bridges. I’m almost sure, however, that officials demanded kickbacks. A conversation between Nándor Csepreghy and Egon Rónay of ATV on Friday morning supports this supposition. When Csepreghy went on and on about the cartel activities of the firms involved, Rónay asked him why Hungary had to wait for the European Union to suggest that price fixing might be behind the high prices. Why didn’t they investigate these suspiciously high prices themselves? Csepreghy refused to answer. He tried every which way to bypass the question until Rónay said, “Well, you just refuse to answer my question.” Probably a wise decision.