Affairs

Diplomacy

2010: Trouble in the heart of Europe— Budapest

Preface

As diplomatic notes go, it wasn’t exactly full of diplomacy. Nine embassies, including those of Britain, the United States, Germany, Japan and Switzerland issued a statement condemning the lack of transparency in tenders for major infrastructure projects in Hungary.

Foreign investment, Government

21 December 2009

As diplomatic notes go, it wasn’t exactly full of diplomacy. Nine embassies, including those of Britain, the United States, Germany, Japan and Switzerland issued a statement condemning the lack of transparency in tenders for major infrastructure projects in Hungary. The nine, who provide the majority of Hungary’s foreign direct investment (FDI), expressed their “great concern” at what they called “significant new instances of non-transparent behaviour affecting investors in such areas as public utilities, broadcasting, and elements of the nation’s transport infrastructure”.

Such public straight-talking from diplomats is unprecedented, but reflects a growing anxiety among Hungary’s economic partners about the country’s direction and an economic environment that has turned increasingly hostile to foreign investors.

Hungary has attracted more than €60bn in FDI since the late 1980s, the highest amount per capita in eastern Europe. That inflow of cash and expertise kick-started the Hungarian economy and produced tens of thousands of jobs, making Hungary the regional wunderkind.

But as xenophobia and anti-foreigner sentiment rise, Hungary has started biting the hand that once fed it. This autumn, the ORTT, Hungary’s media regulatory body, refused to renew the licences of two popular radio stations that were owned by foreign investors. The ORTT gave the frequencies to two new companies. Hungary’s governing socialists and opposition conservative Fidesz party rarely agree on anything but the ORTT vote went through without a hitch, and is widely believed to be a political stitch-up. So much so that the ORTT’s chairman, László Majtényi, resigned in disgust.

Earlier this year, the municipal authorities in Pécs, a picturesque city in southern Hungary, unilaterally cancelled their contract with Suez Environnement, a French firm that was managing the water company. Local officials accused Suez of corruption, mismanagement and over-charging, and sent in the heavies to take control of the offices and lock out the managers. That prompted an angry telephone call from French president Nicolas Sarkozy to Hungarian prime minister Gordon Bajnai. Suez’s local subsidiary is counter-suing but few expect results soon, given the glacial pace of Hungary’s legal system.

Last year Apollo, an Indian company, wanted to build a tyre factory in the town of Gyöngyös. The plan would have created 900 jobs, but Fidesz argued against the plant, claiming, wrongly, that Apollo wanted to use technology that was banned in the European Union. Apollo pulled out.

The embassies’ letter triggered a political scandal. László Sólyom, Hungary’s president, said it was “offensive”, telling reporters: “It’s not that we would deny there is a problem, but the way they have expressed the problem is offensive to the country.” The situation in Hungary is not so bad as to warrant such a statement, he claimed.

It’s true that not all the news is bad – Fidesz has strongly supported a new Mercedes plant in eastern Hungary. Foreign investors brought in €4.4bn in 2008. New anti-corruption measures give whistle-blowers legal and other assistance and financial incentives. But surveys show that up to 20 per cent of public procurement funds are lost through corruption. And it’s not clear how long the monies will keep flowing when, as happened last month, the US House of Representatives passes a resolution encouraging Hungary to “respect the rule of law and treat foreign investors fairly”. In a globalised world, Hungary is increasingly no longer seen as the wunderkind of Mittel-Europa, but as a temper-prone toddler. Foreign investors can only hope that Hungary will do some rapid growing-up in 2010 and provide a stable business environment.

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