The Suez affair in Hungary: Fidesz and the foreign investors
Key findings
The decision of the Fidesz-led municipal government to unilaterally terminate a contract with French Suez Environnement, the minority owner of the municipal water works in Pécs (Baranya county), and the hostile steps against the company raise the political risks for several reasons:
- The present move of the municipality, proving to be politically successful, and supported by the leaders of the party, can serve as a precedent for further municipalities and even for a future Fidesz-government. Pécs has become a sort of “pilot project” for Fidesz, where the party can test the fallout of specific policy moves. The present step of Fidesz is in line with the articulated purpose of Fidesz at a national level to “call to account” all the allegedly suspicious political and privatisation practices at both municipality and governmental level and the will to investigate (or even abolish) the privatisation transactions of the previous years.
- The former supporter of privatisation (the Mayor of Pécs, Zsolt Páva, who signed the contract with Suez in 1995 and he cooperated in the privatisation of the Hospital in Siklós in 2007) turned against the French company for what were obviously political reasons, indicating a political shift in Fidesz. János Bencsik, Mayor of Tatabánya and the policy program-maker of water supply declared that Fidesz plan to introduce a bill that would block further privatisation and would allow recommunalisation of water supply companies.
- As we pointed out in our previous analysis[1], Fidesz in government will be unable to splurge and reverse all policy decisions passed by the Bajnai-cabinet; such steps would go against their own vested interests. But the need for drawing a symbolic frontier between the two governments, the former promises of the party, the pressure from the right-wing camp and the attacks from Jobbik can trap Fidesz and in some cases will push the party toward measures that can target foreign investors.
- The abolition of the contract by the mayor of Pécs accompanied with extremely hostile steps by the municipality (occupying the building with force, accusations of corruption and money laundering) led to diplomatic tensions between France and Hungary and caused some worry among French investors. While the PM and even the mayor tried to calm the French companies, investors will be watching the economic policy steps of Fidesz with increased vigilance in the future.
Background
The Fidesz-led Pécs municipal government unilaterally terminated a contract with French Suez Environnement, minority owner of the Pécs Water Works at the end of September. City leaders justified breaking the contract referring to high water utility rates and improper management, and filed charges against the company claiming fraudulent misuse of funds, corruption and money laundering. After the decision, the municipality had the building of the water works occupied by a security company (on 20th October, the company took back some of its offices from the municipality). The company has sued the local government for break of contract, and the case (possibly continuing in international courts) could cost the city some HUF 5 billion. This case was in line with the former decisions of the mayor: the city government in place in the past six months has executed its “reckoning” campaign aimed at the MSZP through dramatic changes provoked at the companies in the ownership of the municipality (e.g. local funeral company, public transport company) usually justified by reference to corruption charges and serving the interest of MSZP. Following the affair, the mayor wanted to calm down the investors (by saying the problem is not with French firms in general but with Suez in particular, but other politicians of Fidesz continued populist anti-capitalist rhetoric against international companies). The response of Erik Bánki, regional director of Fidesz to PM Bajnai’s criticism was: „The government supports the capital instead of the people”. The case has generated diplomatic tension: France’s ambassador in Budapest has expressed his outrage over the decision and even president Nicolas Sarkozy mentioned this case during his meeting with Gordon Bajnai on 20 October, worrying about the safety of French investments in Hungary.
The significance and possible consequences of the Suez-affair
The cancellation of the contract with the French-owned operator corresponds to Fidesz’s anti-privatization rhetoric. Since 2004, politicians of the party have harshly criticized the privatisation of every important state asset (Budapest Airport, Malév, National School Book Press, etc.) and initiated referendum against the privatisation of the hospitals in 2007 (with the same question as in 2004). There were at least two cases when the resistance of local Fidesz politicians and the reputation-damaging political campaign of the right-wing media led some investors to step back:
- After political attacks against the Indian tyre manufacturer Apollo Tyres, and an initiation of a local referendum against the factory (planning to invest € 300 million and create 900 jobs in Gyöngyös), Apollo have given up the establishment of a new unit in the city[2].
- The intense and hysteric campaign supported and stimulated by Fidesz since 2006 against the private health care company Hospinvest, a firm that privatised the management and operation of many hospitals in Hungarian cities in the countryside, led EBRD to sell its stake in the company and also to the bankruptcy of Hospinvest in April 2009.
At the same time, the current case goes beyond the practices previously pursued by Fidesz before as far as in this instance the leaders of the city (supported by the local MSZP as well) deliberately resorted to illegal means when taking control of the overall company and seizing its assets. There is a risk that this move (gaining huge attention in the international media) can deteriorate French-Hungarian trade relations and the FDI inflow from France, which has showed an improving tendency in recent years.
The municipality has justified its move with irresponsible financial operations of the company, but the reasons were mainly political:
- The step is in line with Zsolt Páva’s rhetoric, decisions and steps so far to reveal the malevolent practices of his predecessor and the socialists. While the partial privatisation of the water supply company happened during the last term in power of Páva himself, it is the obvious continuation of changes at municipality-led companies initiated for political reasons. This process can be regarded as the preparation to the “accounting” and punishing the responsible after the future government change at national level by Fidesz. The party wants to benefit from blaming the previous governments, their bad economic policies and rampant corruption for the unpopular steps in government. Spectacular and definite policy moves and putting corruption cases in the window are also important for demonstrating that a „new era begins” in governance (the recipe of Boyko Borisov Bulgarian PM).
- The decision obviously meets public approval (the city council has ordered an opinion poll from a pollster close to Fidesz which indicated 94% backing for breaking the contract with Suez). The city leaders promised to cut water utility rates after the decision, which will ensure the popularity of this step and thus can counterweight the possible financial losses.
Breaking the waves?
At the same time, this issue reveals the strategic dilemma of Fidesz preparing for governance. The diversity and heterogeneity of the political ideas and programs in Fidesz will become much more visible and problematic when in government. The contradictory relations have become obvious in the privatisation policy as well in recent years. While, for example, leaders of the party generally oppose privatisation in the healthcare sector, some local and national politicians supported it in the background – or had direct business interests in it, competing with each other for the privatisation of some institutions.
Once in government, Fidesz will have to turn to economic realism instead of the simplified attacks against reform steps and privatisation. The urgent need of reforms in some sectors (education, healthcare, public transport) to ensure the fiscal sustainability raises the necessity of privatisation of some services, and can place Fidesz in a more cautious position. The leaders of the economic policy in Fidesz and the programs approach the topic of privatization in a moderate, more sophisticated way.
- „Our Future”, one of the economic programs of Fidesz, introduced by Viktor Orbán and ex-, and future economic minister György Matolcsy last year[3] defines the privatisation policy of Fidesz with the following slogan: „Competition-strengthening privatisation: yes; sales for covering debts: no”.
- While in some sectors (e.g. public transport, the energy sector, and communal water-supply) the party categorically rejects the possibility of any further privatisation, there are some plans of the liberal groups within the party for a „share for the people” privatisation program, similar to the New Ownership Program that was planned to be introduced by Ferenc Gyurcsány in 2008.
- István Mikola, a leader of healthcare policy in Fidesz made a statement recently that consolidation of the healthcare system is urgent and unavoidable”, which can also refer to the purpose of letting the private capital into the healthcare system (in government, between 1998 and 2002, Fidesz supported controlled healthcare privatisation).
The main problem for Fidesz will be how to turn into the governmental position from its populist-left wing, anti-privatisation economic political standpoint without losing credibility, and how to harmonize the needs of the following interest groups:
- Investors and the international environment, calling for market-friendly policy steps, low budget deficit, continuation of the path of Bajnai and urgent reforms,
- Hungarian public opinion, extremely interventionist and paternalist, rejecting all kind of privatisation,
- the press and intellectuals supporting Fidesz, following the mainstream rhetoric of the party in the last years, becoming extremely and aggressively anti-privatisation (and, in some ways, anti-globalisation and anti-capitalist), and regarding „reforms” as a synonym for destruction.
The far-right Jobbik - expected to get into parliament with a significant faction and attack any move of privatisation as the „selling the national property to the aliens” from the opposition - and they can also pose risks and can push the party towards the revision of the privatisation practices of the last years.
[1] No economic policy shift expected in Hungary following the election. 27th July 2009. http://www.riskandforecast.com/post/hungary/no-economic-policy-shift-expected-in-hungary-following-the-election_82.html
[2] See our previous analysis on this topic: The Apollo-affair: Fidesz and the "alien capitalists",.21st August 2008 http://www.riskandforecast.com/post/risk-watch/the-apollo-affair-fidesz-and-the-alien-capitalists-_64.html
[3] The party has ignored its own document at some parts when rejecting some measures of Bajnai-program (e.g. introduction of the property tax, raising VAT), which were written in their program as well.
