EC formally suspends road development funds, assesses huge penalty on Hungary

July 16, 2015

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The European Commission has officially suspended funding for road construction projects in Hungary because of anti-competitive rules used by the Hungarian government to decide which construction companies may bid, reports Hungarian news site 444.hu.  

In January 2014 the European Commission objected to the manner by which public road construction tenders were awarded in Hungary involving some HUF 600 billion (USD 2.15 billion) of EU development grants–a figure that was later reduced to HUF 360 billion (USD 1.3 billion).

Penalties assessed by the EC are based on the amount of development grants used in a given project or operative program.  In cases of serious, systemic abuse, in addition to assessing penalties and suspending payment of development grants within a given Regional Operative Program (ROP), Brussels can demand that development funds used to reimburse EU member states for completed projects be repaid in full.

According to the European Commission, the vast majority of public tenders in Hungary awarded over a period of seven years stipulated that only companies with asphalt mixing operations within 50km of the proposed project site(s) could submit tenders. The Commission found this stipulation overly restrictive because, for example, companies with mobile asphalt mixers were prevented from taking part in the tender.

Such restrictive rules stretch back even to the Socialist governments of Ferenc Gyurcsány and Gordon Bajnai, and the Commission has assessed a penalty equal to 25 percent of the total value of the road construction projects in question.  This is considerably higher than the 10 percent penalty reported in the press at the beginning of 2014.

The size of the penalty indicates that, in the EC’s opinion, the government substantially overpaid when awarding public road construction contracts.  Many of the contracts were reportedly awarded to companies or consortia led by companies owned entirely or in part by Fidesz oligarch Lájos Simicska.

The Hungarian government points out that multinational companies were among those awarded road construction projects and claims public road construction tenders in other EU member states contained similar (though not identical) conditions.  Furthermore, it objects to the penalty being assessed on projects completed over a period of seven years, arguing that if the EC objected to certain practices, it should have stated so earlier.

Deputy state secretary for communications Nándor Csepreghy says the EC’s decision is prompted by a desire to collect money.  “We know the European Commission has liquidity problems,” he told Olga Kálmán Wednesday night on ATV’s Egyenes Beszéd without offering any details.

444.hu reports that the government has been trying to negotiate with the Commission to reduce the penalty for the past year and a half, but to no avail. At one point the government of Hungary even considered using revenues from a special tax to be levied on the road construction companies with retroactive effect.

Csepreghy told ATV that the Hungarian government has no intention of paying the HUF 90 billion (USD 320 million) penalty assessed by the European Commission and will instead challenge it in court.   444.hu reports that in this case the danger exists that Brussels will insist on the return of all development grants used in the construction of the roads in question.

Referenced in this article:

Brüsszel hivatalosan is befagyasztotta a magyar útépítéseket, 444.hu; 16 July 2015.