Hungary to step up nationalisations

Hungary Budapest Parliament Picnik.jpg

Hungary has embarked on a plan to nationalise sectors of its economy, raising eyebrows in the business community. The European Commission appears to be watching these developments with concern though it is not yet ready to take action.

The Fidesz-led government of Prime Minister Viktor Orbán announced last week plans for the government to take over metal recycling operations in a bid to curb theft and illegal trade.

One week earlier, the centre-right leader said he planned to transform energy distribution in the household sector into a "non-profit activity". He later said government would "buy back E.ON from the Germans momentarily", without specifying whether he meant the German utility’s gas trading and storage units or its broader business in Hungary.

Orbán's government has nationalised other assets, including pre-funded pension schemes, which were taken over in an attempt to artificially reduce the public deficit and debt under the Maastricht criteria. The Hungarian government also nationalised the company responsible for a huge toxic sludge spill in October 2010.

Since it came to power in April 2010 (see background), Orbán’s government has often been at odds with Brussels over policies such as Europe's highest bank levy and hefty windfall taxes on some businesses.

A Reuters analysis said Hungary's plan to nationalise E.ON's local units could help Orbán to win an election in 2014.

His deputy, Tibor Navracsics, was quoted as saying that such a move would fit the government's plan to put utilities "on a non-profit basis".

Asked by EURACTIV to comment on the announced nationalisation plans in the energy market, Commission spokesperson Olivier Bailly said the EU executive had no reaction because it had not received formal notifications from Hungary.

However, he confirmed reports in the Hungarian opposition press that an infringement procedure had been launched against Hungary on 21 June for its plans to nationalise waste management.

Joe Hennon, spokesperson for Environment Commissioner Jan Poto?nik, said the Commission believes Hungary may have failed to properly carry out policies on the handling of electrical and electronic waste. 

Natural gas targeted

Analysts say the government probably has its eyes on E.ON's gas wholesale or storage units, most likely both, as part of its strategy to increase the role of the state in the energy sector.

"The government wants to have the gas business in its own hands. Once they have that, they can sit down to negotiate about cheaper gas for the new long-term gas deal with the Russians from 2015 onwards, and that can win elections," said Jozsef Miro, an analyst at Erste in Budapest.

More than 80% of Hungary’s gas comes from Russia and its supply contract with Gazprom expires in 2015. The price of natural gas has always been an important political issue in Hungary.

Hungary’s energy company MOL sold its gas business to E.ON in 2005 in a deal then valued at up to €2.2 billion including debt.

There have been reports E.ON wanted €1.2 billion for its gas units and Hungary had offered less during talks which have been going on for some time.

Orbán's government has made conditions difficult for E.ON since 2010 when it froze gas prices for the majority of households and capped the return on capital.

E.ON Földgáz Trade Zrt posted an after-tax loss of 606 million forints (€2 million) in 2011, the company reported.

Recycling business

In addition, the Hungarian press reported that the government plans a bill on nationalising the purchase of recycled metal, in an attempt to curb theft and illegal trade.

Fidesz MP János Pócs said metal purchasing points should be connected to the information network of tax and customs authorities and the police.

As other countries in Central and Eastern Europe, Hungary has suffered from theft of electric cables and metal parts used in infrastructure. These were sold as “waste metal” to private companies.

Can Hungary afford the cost?

Buying back private companies is expected to be a costly deal at a time when Hungary has been struggling to keep its budget deficit low and wants to secure a financing backstop from the International Monetary Fund and the European Union.

According to Stratfor, the Texas-based global intelligence company, the operation is expected to cost nearly €2 billion. Some experts have pointed out that Hungary might have to use the last of its 2009 bailout reserves.

EU energy liberalisation legislation requires member countries to maintain healthy market competition in their energy sectors in order to prevent state monopolies. For example, Romania is privatising a significant portion of its national gas company Transgaz in order to comply with EU membership stipulations.

Hungary is doing the opposite, which could strain the already complicated relationship between Budapest and Brussels, Stratfor notes.

Hungarians voted overwhelmingly in April 2010 for a radical change in leadership, sending the ruling Socialists into opposition and giving the centre-right a qualified majority in parliament.

The election marked the biggest victory for any political party in a general election since the fall of communism 21 years earlier. However, several measures put in place by the new government have since fuelled controversy.

A  controversial new constitution that entered into force on 1 January brought tens of thousands of protestors. They believe it undermines the independence of the central bank, the judiciary and the news media. Critics also say that the new measures represent an assault on religious freedom by cutting down the number of recognised religious groups from 300 to 14.

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