Background


 

István Tarlós, the governing Fidesz party’s brand-new mayor of Budapest, announced plans for a swift and wide-ranging review of private companies’ ownership contracts in city utilities. Tarlós, who took office October 6, said city officials will target utilities with mixed public-private ownership; this includes the water works, the sewage system and the gas works. "We won’t be joking around,” the mayor said. “If foreign owners do not modify these contracts in a way that is significantly more favorable for the city, then our legal team will go after people who broke the terms of their contract, and they will not stop until they find them.” (Hír TV, October 24, 2010) He added that the review would also cover the utilities’ tax-payment histories.

 

Political Significance


 

While fears of a mass re-nationalization are greatly exaggerated, Prime Minister Viktor Orbán’s government clearly supports municipalities that want to review the sales of ownership stakes in public-utility companies, as Political Capital noted in an earlier analysis.

 

The day before the 2010 municipal elections, Orbán said:

 

Fidesz has already implemented similar policies in Pécs, where authorities literally kicked out the private utility owner, Suez Environnement SA, one year ago. After Fidesz won control of Pécs in a spring 2009 by-election, party leaders decided to use the city as a “pilot project,” (as Political Capital noted in an earlier analysis). Fidesz could test out its ideas and then apply the successful ones to the entire country after winning the 2010 elections. The “re-municipalization” of the Pécs Water Works played well among city residents, who were promised lower water rates.

 

Fidesz is now considering reviewing privatization contracts in areas where it can make political mileage. Public utility companies are Exhibit A: “Let's protect the people from rapacious foreign owners” is an extremely popular message.

 

Such plans can be problematic in at least three areas:

 

1) Financial Problems.  It seems practically impossible that the heavily indebted City of Budapest can buy up private companies’ stakes in utilities. Budapest cannot even service the debt at its public transport company, BKV; that is why Orbán promised to earmark HUF 12.5 billion (€45.5 million) for BKV’s consolidation in November.

 

France’s Suez Environnement SA and Germany’s RWE Aqua GmbH jointly own more than 25% of the Budapest Water Works Zrt. RWE Gas International BV owns nearly 50% of the Budapest Gas Works Zrt. A consortium of Germany’s Berlinwasser Holding AG and the French Veolia Environnement owns more than 25% of the shares in Budapest Sewage Works Zrt. Buying even a fraction of these stakes would drive Budapest to financial collapse.

 

Until last year, Budapest had little problem financing itself from the markets. Then in April 2009, the Moody’s agency cut its rating on Budapest’s forint- and foreign currency-based debt to "Baa1" from “A3." In July 2010, Moody’s forecast that another downgrade of Budapest’s debt might be on the way.   

 

Two scenarios seem plausible: (1) Fidesz is bluffing. Tarlós is threatening to go after unidentified “contract breakers” as a means of pressuring the private utility owners into slashing their rates; (2) Fidesz-related business interests may want to participate in the utilities’ re-privatization.


2) Diplomatic Tensions. Privatization reviews are popular domestically, but Fidesz may not be prepared to deal with the resulting diplomatic strife – especially since Hungary will assume the European Union’s rotating presidency in January 2011. If Hungary chases away French and German investors, Orbán would be crossing the most powerful states in Europe. Fidesz knows that privatization reviews can generate diplomatic friction; if party leaders indeed plan to terminate contracts, they probably have a plan to make amends through other means. If this plan fails, Hungary may find itself in the company of some angry EU partners that may hamper the success of its EU presidency. 


3) Legal and Political Security. Privatization reviews will seriously undermine the political and legal security of foreign companies in Hungary and damage the countries business environment. (This would be in line with earlier Fidesz measures such as surtaxes on banks, telecommunications companies, chain stores and the energy sector – all profitable business sectors that are dominated by foreign companies). Furthermore, the government’s decisions are embedded in strong rhetoric against international capital. This can make potential investors skittish and undermine Hungary’s attractiveness as an investment target.