B.) REVIEW AND REDUCTION OF
STATE SUBSIDIES

3. Elimination of Subsidies of Activities Harmful to Health and Environment, Dependent upon Non-renewable Natural Resources and with Low Efficiency
3.1. Reviewing and Publishing Exceptional Treatment
3.2. Review and Transparency of Extrabudgetary Funds and Ministry Budgets
3.3. Control of State Guarantees and Borrowings
3.4. Control of Disciplined Banking Activities
3.5. Promoting Foreign Capital Inflow that Favours Hungary
3.6. Debt Service
3.7. Cancelling Subsidies for Motorway Construction
3.8. Suspension of Underground Construction*

3.1. Reviewing and Publishing Exceptional Treatment

Exceptional treatment is a common way of granting indirect financial support. Exceptional cases are not transparent, especially because they are often one-off deals and decisions are made on each case individually. It is very unfortunate that exceptional treatment is not at all "exceptional" with activities that pose risks to the environment. (A typical example is the tax waiver normally applied to foreign trucks, which has been discussed in previous chapters of the document.) Furthermore, the lack of publicity and transparency leaves room for corruption. Having been granted the financial support, foreign companies operating in Hungary have a higher amount of income that they can repatriate, which in turn, deteriorates Hungary’s balance of payments.

Financial support and exceptional treatment by all means should be restricted. Their abolishment, however, is not possible. In some cases they might be even beneficial for the society, as in the case of certain environmental subsidies. "A potential means of reducing the harm they cause is to attach a list of all financial support and cases of exceptional treatment to the state budget both in the phase of planning and that of settling accounts. … A list of all details is a must so that politicians could see and assess real movements in the budget. A legally binding measure to prepare that list could make sure that financial support is under control and calculations are made in gross terms." – says in his book titled Torn Canvas the former Deputy Finance Minister Csaba László; p. 217.

The Ministry of Economic Affairs should be informed of support of any kind (favoured customs duties, tax relieves, public utilities support, local taxes, direct support, etc.) granted to businesses. The Ministry should keep records of the support provided, process them and make them available for the public. It should also be obliged to publicise a uniform report every year, and send it to the parliament.

3.2. Review and Transparency of Extrabudgetary Funds and Ministry Budgets

Extrabudgetary funds and ministry budgets (covering other than operating costs) often finance activities and projects that are of low efficiency and harmful to the environment. The management and the allocation of those funds are partly out of control, which is the seedbed of corruption. Their existence and distribution may even hurt market principles and competition under equal terms in some events. Their review, stricter control and transparency are by all means necessary as soon as possible.

There are issues that require support and financial assistance, but those issues need to be regulated by law. It is also unquestionable that one-off allowances will be granted in the future as well. What is important here is to reduce their number as much as possible, and make sure that they are made public, transparent and efficiently used.

We support the government’s decision to incorporate the independent state funds (with the exception of two) into the central budget.

1. These funds have functioned distinctly from the state budget, which has made budget movements difficult to understand and monitor. The decision makes the budgetary system more straightforward and transparent.
2. Since the funds have not been given subsidies from the budget but have managed their own resources, there have been no guarantees that sufficient support is provided to accomplish the tasks. The funds might have been insufficient, or in other events, they might have been greater than required. By incorporating the funds into the state budget, the parliament will be given the chance to allocate the funds according to the needs.
3. Their sheer existence is against the spirit of Act XXXVIII of 1992 on General Rules of the State Budget which has the objective "to sustain the balance of the budget … by creating guarantees to measure the efficiency of using public funds in a complete, detailed, authentic, uniformed, transparent and easily accessible manner." By implementing the government’s decision, that objective can be achieved.

Legislation on the individual funds (such as Act LXXXIII of 1992 on State Funds, Act XXIII of 1993 on the National Culture Fund or Act XXX of 1992 on the Road Fund) has attempted to make their operation more efficient, transparent and controlled. Some of the funds have been terminated, but their tasks and activities remain. It would have been more fortunate if the parliamentary legislation had been used for regulating those tasks instead of decrees or other regulations of lower power that, on the one hand, can be more easily modified, and on the other hand, represent less the interests of the government and the parliament to obtain the most value for the society. The only exception is the National Culture Fund, where the government has adopted our proposal and its continued operations are regulated by law. We hope that government and ministerial decrees will follow that could ensure efficient and clear use of available funds of the successors. (We elaborated detailed proposals for such a ministerial decree for the Ministry of Environment.)

3.3. Control of State Guarantees and Borrowings

It has been a fairly common practice over the past few years that the parliament authorised the government to provide "unlimited guarantee on state borrowings. In our opinion this contradicts the legislation in force. The law and parliamentary resolutions say that the purpose of borrowings needs to be specified and explained, and the use of the borrowed amount is determined by the parliament. It is especially important to involve the parliament in the decision-making process since the magnitude of guarantees and state borrowings set the limits of the budget in the following years.

"When the government provides guarantees for a large amount of borrowings, and if it has to be paid, this may threaten the balance of the state budget. It is particularly dangerous when by providing the guarantee, shirking the State Budget Bill, fixing the state expenses for each year." (From Torn Canvas of Csaba László; p. 266.)

Providing unlimited guarantees fails to comply with the following articles and paragraphs of Act XXXVIII of 1992 on the General Rules of the State Budget.

• 14. § (1) Settling debts of state budget related organisations in a way that in turn increases state debts as well as assuming, rescheduling or cancelling debts, or taking further liabilities shall only be done through their budgeting processes after the submittal of sufficient projections.
• 23. § (1) Funds of preparing and implementing key capital investments for new projects or reconstruction shall be projected in full detail in the state budget.
• 33. § (1) The parliament authorises the government to provide state-financed guarantee for well-defined purposes and within the specified limits set by the State Budget Law .
• 36. § The government … b) shall publish expected future impacts of related expenses of long-term transactions at the time of submitting the state budget bill.

Should the government be given the authority to provide "unlimited guarantees", there would be a high risk of increasing state debts without satisfactory returns. Furthermore, state guarantees are sometimes also granted for environmentally damaging projects.

We also propose that a precondition for the state guarantee or borrowing should be that of all taxes paid 30% should be labour taxes (social security tax, personal income tax, etc.).

3.4. Control of Disciplined Banking Activities

Postabank and Realbank represent the most recent examples of irresponsible lending practices in banks of Hungary. (These two large banks went bankrupt and had to be saved by the state, i.e. the taxpayers money.)The regulation of banking activities is insufficient, therefore, banks stand the risk to be associated with corruption and black economy. Korridor, a political research organisation, completed a study in February 1998. The study revealed that corruption was most typical in banks and political parties (published in Népszabadság, 12 January 1999). Risky lending practices are closely related to projects that involve serious harm to the environment, such as the construction of a shopping centre in inner Buda, destroying a park and increasing traffic in an already highly polluted area. Consequently, more severe enforcement of related legislation, including environmental laws and regulations, are urgently required, which could lead to better and more economical management of funds and reduce the likelihood of future bank consolidations, and therefore, have an invaluable impact on the state budget.

A more detailed analysis and specific proposals can be found in Appendices 7 and 8.

3.5. Promoting Foreign Capital Inflow that Favours Hungary

Direct foreign investment has seen a spectacular upturn in Hungary for years. Hungary tops the lists of both total and per capita foreign capital investment in the region (see Table 50.) Foreign capital investment is discussed in a series of studies, but most of them reflect the preferences and wishes of ministries that requested them. The studies tend to illustrate only the benefits from foreign capital.

Table 50

Direct Foreign Capital Investments in Selected CEE Countries
data collected in Hungary in February 1999 as of December 1998

Source: National Bank of Hungary, Ministry of Commerce and Trade, IMF (as of June 1998) as well as CEFTA countries and CESTAT Statistical Bulletin 1997/4
Hungary: including contribution in kind, as of July 1998
¹⁾ USD 13.3 billion at the end of 1996 (as calculated by Lebedev).

One of the industries where foreign capital is dominant in Hungary is motor vehicle manufacturing. Having compared and analysed available data on the industry, we have come up with the following conclusions:

• Capital investment requires a relatively large deal of equipment and a small number of human resources. (See Table 51.)
• Motorcar manufacturing in Hungary relies on imports as a rule. (The quota of imported parts and equipment for motorcar manufacturing exceeds HUF 189 billion for 1999.) At the same time, domestic companies represent only a minor share in supplying this industry. Despite the slogans, the industry has hardly contacted suppliers hiring Hungarian employees. The four key foreign investors (Audi, Opel, Ford and Suzuki) employed a total of 5,500 people in 1997. On the other hand, Ikarus and Rába, the two domestic bus manufacturers, employ 18,500 people and have an extensive network of suppliers. The total number of people working for the two companies exceeds 50,000. (See Table 51.)
• The four investors mentioned above have brought a total of USD 311 million to Hungary (in terms of registered capital). Their profits in 1997 went up to USD 329 million, so they gained returns on their investment in a year. Granting subsidies and allowances to these companies that can easily repatriate their profits are very inconsiderate. It is especially so under critical financial circumstances where profits are withdrawn from the country to an ever-increasing extent; recently, this has doubled. (See Table 51.)
• Motorcars manufactured by the four key investors (regardless of the actual location of production) are sold and used in Hungary in large and increasing numbers. In 1997, their share reached 55%, so their investment has enabled them to have a majority share in the Hungarian market.
• Subsidies and allowances are useful means of attracting foreign capital. However, they have not proved to be beneficial in the long run because of the relatively small share of Hungarian suppliers, the large share of imports and low foreign exchange returns. Hungary’s relative disadvantage is well represented in Table 52 that provides a comparison of Opel plants in Hungary and Austria.
• Foreign capital is used for environmentally unacceptable and unsustainable production.
• In 1992 Greenpeace ordered a study from us about the car industry. We found that Suzuki and General Motors (Opel) had been granted enormous amounts of state subsidies (publicised and not) and their investment is of low efficiency at the macro level, and even cause losses due to the environmental harm and pollution they contribute to through their activities.

Table 51

Overview of Selected Vehicle and Motorcar Manufacturers

*Net Revenues from Sales
** Pre-tax Income
***data from the Tax Authorities in Hungary (APEH) for the entire industry (road vehicle manufacturing).
**** SUZUKI uses charges more on imported parts and less on motorcar exports to the EU, therefore a 10% Profits on Revenues rate is used.
*****The entire industry (combined with subcontractors) employs around 50,000 people.
Source: Dun and Bradstreet Hungária Kft. (published in a Hungarian daily Világgazdaság, 23 June 1998) and APEH annual reports

Table 52

Production Sites of OPEL in Hungary and Austria – Comparable Figures
1996 data, using 1996 as price base

Notes: FX rates are calculated using the average in 1996. Capital investment dates back to 1980 and 1990 in Austria and Hungary respectively.
¹ the main profile of both manufacturers was assembling new Ecotec* engines in 1996 the output was 832,000 and 435,000 in Hungary and Austria respectively; and additionally:
cylinder heads are made in Hungary (150,000 units in 1997), gear levers are made in Austria (839,000 units in 1996).
² Listed among the largest 100 companies by 1996 revenues in the monthly publication (Business Central Europe) of The Economist.
³ Figure calculated from international data sources and published in the official Statistics Book of Hungary of 1996 (pp. 496)
⁴ Opel extended its market in Hungary, the project opened up new markets for them
(the number of motorcars made by OPEL in 1996 was around 20,000 of which 15,000 were new.
*ECOTEC-Compact engine = economy+ecology+technology

The above analyses and findings drive us to conclude that foreign capital investment should be treated and subsidised selectively:

1. Capital investment that poses or involves damage to the environment should not be granted any subsidies. This proposal is supported by Hungarian as well as EU regulations that should be followed. Resolutions No. 28/1994 and 48/1997 of the Constitution Court of Hungary also support the idea.
2. To exploit most of Hungary’s comparative advantages, it is essential to encourage investment that involves a relatively high rate of labour, and research and development. It is common practice in other countries of Europe. In Ireland, for instance, privately owned, but formerly state enterprises are taken back by the state if the new owner lays off employees. Privatisation has long-term interests in focus and not immediate needs of cash from sales. It should be the practice in Hungary as well; subsidies could only be obtained by companies if long-term interests of employees are considered.
3. All industries that serve environmentally sound objectives should be preferred and subsidies given accordingly.
4. Capital investment in activities that improve the current state of environment in Hungary should be promoted.

3.6. Debt Service

The state budget is debited by HUF 835 billion for servicing debt in 1999.

The majority of the obligations are due interest payments amounting to HUF 768.7 billion in 1999. It is not only an additional burden to be borne by the state but also a "money drain" that re-channels assets of tax-payers into the pockets of domestic and international players of the money market. Therefore, the debt should be cut by all means, for instance, by applying for the least possible new loans. Hungary should especially avoid requesting loans for environmentally harmful projects, such as road construction.

3.7. Cancelling Subsidies for Motorway Construction

Available funds for the road network should be used for the maintenance and reconstruction of existing roads, the construction of short bypass sections, and the refurbishment of railway lines. They should be given first priority since they are more cost-efficient and environmentally safer to operate than road transport. Appendix 9 presents the details and analysis of reasons why we are against building motorways.

The construction and the extension of the M3 motorway in north-eastern Hungary is taking priority at present. The company managing and operating the motorway is expecting subsidies of HUF 3.8 billion in 1999, which, in our opinion, should be cancelled. Our reasons are as follows:

• The support would partly mean the spending of public funds on buying land from speculative sellers. (We also propose the parliament should review the subject.)
• The costs of the construction and tolls are charged to inhabitants and business owners in the region, which would aggravate the already difficult situation of the region. There is a danger of further isolation of the region from the West. It can be precisely expressed with numbers. Motorcars are expected to pay a toll of HUF 9 a kilometre, lorries – HUF 22.5 and heavy trucks – HUF 31.5. On average those vehicles consume 8, 15 and 40 litres per 100 kilometres respectively. Given the distance of 120 kilometres between Budapest and Füzesabony the further isolation is 80 kilometres for motorcars, 140 for lorries and 70 for heavy trucks.
• Construction of further sections of the motorway to Polgár would cost another HUF 100 billion, or rather, it would add to the debt of construction since the investment would never repay itself. Money is wasted on a project that even the World Bank has found unacceptable; and it prevents the region from developing because the funds are improperly spent.
• Foreign countries have already experienced the impacts of creating road links between a developed and an under-developed region: it drains resources from the less developed one. The local economy of the under-developed region is unable to compete with products and services flowing in from the developed area. Therefore, the already existing gap between the West and the East of Hungary would only widen after the motorway is completed.
• Toll roads mean heavier traffic in neighbouring towns and villages, with all the negative impacts it implies. Inhabitants regularly protest against introducing tolls on nearby roads since it is them who pay the price of unbearable traffic and environmental conditions. In lack of revenues from tolls, the construction of new motorways is getting less and less feasible.
• The planned motorway would run parallel to a main railway line that is not used to full capacity. Road transport on the motorway would lower the use of that capacity even further; the railway line would require more state funds to survive, and its revenues would decrease.

We also propose that the subsidies set aside for completing the northern section of the M0 motorway (between M3 motorway and Road 11) should be removed from the budget. The investment requires a total of HUF 60 billion, and is not justified by economic, transportation or environmental considerations.

• The northern section would severely damage the surrounding areas. Air pollution, noise, heavy traffic and destroyed green areas would endanger the health of the inhabitants. The construction would also jeopardise the survival of the shrinking resort areas near Budapest.
• The motorway would run above the largest drinking-water reservoir of Budapest. Any investment that endangers the chief water reserves that provide three million people with potable water must be suspended.
• The new road would generate enormous extra traffic, as it is proven by the southern section of M0.
• Even if the new section would not generate extra traffic, it would result in a less than 1% decline in the traffic of Budapest. Supposing that HUF 60 billion need to be invested, and transport improvements in Budapest would continue in a similar manner, the complete solution of the problem would require over HUF 6,000 billion. We believe that other solutions such as improving public transport services, expanding control on car parking, traffic calming, etc. would be much more efficient.
• Even optimistic estimates (that give reasons for doubt) say that the new northern section would provide better travel (driving) conditions for 20-30 thousand people only. The same amount, which equals the annual budget of the Budapest Public Transportation Company, could improve travel conditions of 1.5 million people in Budapest if it were invested in public transport.

3.8. Suspension of Underground Construction

The government has adopted our proposal to suspend the construction of a new underground line (line 4) in Budapest. In lack of sufficient funding, significant increase in fares would have been necessary to finance the project, so the government’s decision has prevented Budapest from a total collapse of its reknown public transportation system, a severe crisis in Budapest’s transport and environment. At the same time, resources should be used for the maintenance, refurbishment and improvement of existing means of public transportation, as well as environmentally acceptable development of transport outside Budapest, primarily in Eastern Hungary.

Arguments for suspending the underground construction and proposals of improvement of transportation in Budapest can be found in Appendix 10.