Public procurement in Hungary riddled by conflict of interest and corruption says TI

December 30, 2015


“Relatives of politicians are emerging as completely new players in the market and their revenues are being generated almost entirely by the public procurements they are being awarded.” – Miklós Ligeti, Transparency International

Towards the end of September, Hungary’s Fidesz-dominated parliament passed a law prohibiting immediate relatives of politicians and other high-lvel public officials from taking part in public procurements. The law came into force November 1st.

One month later the measure was repealed with retroactive effect by the passage of another act.

Government spokesman Zoltán Kovács attempted to justify the obvious flip-flop by explaining just how impractical it was to  restrict family members of politicians from taking part in public procurements.

Kovács side-stepped the question as to whether relatives of leading politicians stood a better chance of winning public tenders than others by claiming that Hungarian law “follows European standards” and is one of “the strictest in Europe” when it comes to preventing conflict of interest.  The spokesman warned that a law which bars too many people from engaging in commercial activities with the government may violate the Hungarian constitution by restricting competition and people’s freedom to engage in commercial activities.

(The government employed very different reasoning when stripping grocery stores of their right to sell tobacco products back in 2013 or requiring most stores to remain closed on Sundays-ed.)

Connections over experience 

Miklós Ligeti, head of legal affairs for Transparency International Hungary, says the problem with Hungary’s public procurement laws is not that relatives of politicians are winning public contracts, but that they are doing so despite their lack of experience and performance in the given area versus other market incumbents.

“I would agree that it is wrong to bar someone participating in public procurement merely because his or her relative is a high-ranking public official. If the person in question has spent years in the market building up a business in an honest and respectable manner, they shouldn’t be barred from having the opportunity to take part in a public procurement simply because their brother, sister, mother, father, uncle or aunt is a politician,” says Ligeti.

“But that’s not what we’re talking about,” he continues. “The relatives of politicians are emerging as completely new players in the market and their revenues are being generated almost entirely by the public contracts awarded them.”

Feeding at the public trough

Companies with close ties to the government, including a number owned by Hungarian oligarchs and friends and/or relatives of leading Fidesz politicians, are being propped up entirely with public funds, according to Ligeti.  “We call these kinds of companies ‘national champions’ because they exist solely because the government fattens them up with public funds,” he says.

Ligeti doubts companies owned by the likes of Lajos Simicska, Lőrinc Mészáros or István Garancsi would have enjoyed the revenues they have over the past five years had they not won virtually every public tender for which they submitted a bid.

Public procurement vulnerable to corruption

This trend hasn’t gone unnoticed. Earlier this year the European Commission made it clear that it was aware of these trends occurring in Hungary. In its 2015 country report published in March, the Commission noted (p. 55) that both “corruption in public administration” and “close contractual relations” between business and political elites in Hungary continue to be matters of concern. According to the country report,  “public procurement is particularly vulnerable to corruption”.  It further notes that “a recent legislative act eliminates restrictions on access to public funding by politically affiliated organisations and eliminates rules against conflict of interests and transparency requirements”.  Furthermore, “restrictions on public access to information effectively hamper transparency and further elevate corruption risks”, according to the report.

The government’s unwillingness to meet transparency requirements both undermines the rule of law and harms market players who have existed for many years, says Ligeti, who adds that businesses belonging to individuals with close ties to government officials are not being awarded lucrative government contracts based on performance history or market successes.

Conflicts of interest

Public procurement expert Gabriella Nagy says that public procurement in Hungary is riddled with conflicts of interest. In the case of the company owned by the Prime Minister’s son-in-law, István Tiborcz, that won a series of lucrative contracts from various municipalities to modernize public lighting, many of the municipalities had previously engaged a company to write the tender owned by one of Tiborcz’s partners.  Nagy says the public tenders were deliberately written so as to confer advantage of Tiborcz’s company and to preclude potential competitors from submitting a winning bid.

Nagy says OLAF, the European Anti-Fraud Office, actually opened an investigation into this case, but that Hungarian prosecutors have yet to open a formal inquiry into the matter.

Hungary’s laws are amongst “the strictest in Europe” but no one is ever brought to justice

While Hungary’s laws governing public procurements may be among the strictest in Europe in theory, Hungarian law enforcement agencies have yet to demonstrate how effective these laws are in practice, says Nagy.

Returned to parliament in 2010 with over a two-thirds parliamentary majority, during the second Orbán government Fidesz was able to appoint whomever it wanted to fill government posts.  As a result, virtually every official in the Chief Prosecutors Office and Public Procurement Authority (the agency responsible for overseeing public procurements in Hungary) is linked to the ruling party in one way or another.

For this reason, cases involving conflicts of interest or corruption in public procurements are rarely the subject of investigations or prosecutions.

The de facto “upper house”

Hungary’s Public Procurement Authority (the agency overseeing public procurements) is governed by a body called the Public Procurement Council. The members of this council are appointed by different stakeholders in the public procurement arena in order to represent diverse interests of the sector, at least in theory.

The government appoints seven of a total of nineteen council members, while three additional members are appointed by the Hungarian Competition Authority, the State Audit Office and the Central Bank — state agencies expected to act independently from the executive branch of government. These offices, however, are headed by the Prime Minister’s closest allies.

This creates a conflict of interest, says Ligeti, “because they all represent the same political interest… There’s no government authority one can turn to in Hungary to have cases of conflict of interest or corruption resolved in a timely and transparent manner.”

Ligeti says Hungary’s chief prosecutor, Péter Polt, seems more than hesitant to open criminal investigations into cases of alleged corruption involving members and associates of the ruling party — especially in cases involving public procurements.

Selective enforcement of modifiable rules

If Hungarian authorities aren’t willing to investigate suspicious public procurements, the European Commission may intervene if there is enough evidence on which to act. But the Commission’s hands are tied. It can only investigate cases that are still open or pending. In other words, European Union authorities have no power to deliver ex post sanctions on irregular public procurements.

For example, if a public procurement is awarded, paid for and completed, the Commission can’t intercede to prevent the public procurement from happening — regardless of how grounded the suspicion of corruption may be. An unambitious chief prosecutor and politically loyal public procurement agency can effectively run the clock out to prevent cases from ever seeing the light of day.

In the off chance that the press is able to raise awareness of unlawful public procurement, OLAF may get involved and investigate the matter. The problem here is that OLAF is not a prosecuting agency and has absolutely no power to bring cases to court. OLAF will turn its findings over to the prosecution service of a national government and leave the rest to them. It is entirely up to the country’s prosecutor to decide whether or not to file charges in cases investigated by OLAF. In Hungary, the chief prosecutor doesn’t seem inclined to take these cases to court.

While it may be true that Hungary’s public procurement laws are in harmony with EU directives, Hungary’s own methods for dealing with corruption-related issues – such as misappropriation of public funds, questionable enrichment of members of the political class, diversion of public assets, etc. – are limited to whatever is most politically expedient at the moment. And there’s nothing politically expedient about implicating friends or relatives of government officials or governing party members.

Hungary’s problem with corruption and conflicts of interest is not for lack of adequate legislation. Laws in any country are only as good as the commitment (and ability) of independent law enforcement agencies to enforce them.