What can happen to investors in Hungary

It was in February 2009 that I first heard about a "gigantic investment" of half a billion euros into a tourist complex near Székesfehérvár. It was to be located on a seventy hectare stretch of land on the shore of Lake Velence on which currently only ragweed is growing. The land was owned by the Hungarian state. A group of American, Israeli, German, and Hungarian businessmen looked at this piece of land and decided that it would be the perfect spot for a tourist center, including hotels, restaurants, a water entertainment center, a golf course, and a casino. In exchange for this seventy hectare barren piece of land Joáv Blum, one of the investors, offered his 183 hectare orchard in the county of Pest. The deal was struck and construction of the complex, named King's City, was supposed to begin. (King's City because it is close to Székesfehérvár, the first Hungarian capital often called the city of the king as opposed to Veszprén, the city of the queen.)

The investment was welcomed by the government because the investors figured that about 3,500 employees would be needed to run the complex and, given Hungary's low employment figures, every new job counts. By Augut 2009 KC Bidding had even won a concession tender for the establishment and the twenty-year operation of a casino. The casino would have been "Category I," containing at least 1,500 slot machines and 100 gaming tables.

But the plans fell on hard times when the Pest County Land Office said that the regional land office "rejected for technical reasons a land transfer between the Hungarian State Holding Company (MNV) and Israeli-Hungarian citizen Joáv Blum involving property on the shore of Lake Velence."

It seems that initially some locals in Sukoró, the village where the piece of land is, objected. There are a few weekend places nearby that were described by someone who saw them as "gaudy" (csiricsáré). Mind you, the mayors of Sukoró and nearby villages were very enthusiastic about the project for obvious reasons. Then after the local residents came the environmentalists, who seem to want to stop absolutely every investment that is proposed. Only a few weeks ago they managed to put an end to building a golf course on the grounds that it ruins the environment. Really!

But perhaps the King's City project could still have become reality if it hadn't been for the opposition of Fidesz. Orbán Viktor's party opposed every and all foreign investment (with the exception of the new Mercedes plant in Kecskemét, most likely because the city was in Fidesz hands and the mayor enthusiastically supported the project). Elsewhere, in Gyöngyös for example, Fidesz managed to send an Indian company flying all the way to Germany after the local Fidesz council members put so many obstacles in their way that the Indians eventually gave up.

In the case of King's City Fidesz wasn't satisfied with simply stopping the project on environmental grounds; they tried to prove that the Hungarian state was cheated out of billions of forints. According to them, even though Blum's orchard was over 2.5 times the size of the weedy plot of land, it was simply not as valuable. Therefore the whole deal must be scrapped.

Contesting the value of real estate is a favorite charge that is brought against politicians. For example, the mayor of a Budapest district has been sitting in jail awaiting trial for almost two years because according to some people he and the city council sold a few houses "under value." But according to whom? The district's assessors considered the price fair, but now there are some other appraisals that differ. Fidesz politicians attacked the head of the Hungarian Postal Service because according to them the post office didn't get enough money for their old headquarters. The president of the company says that they were lucky to get that much. Indeed, this is the easiest way to accuse someone of fraud.

But that wasn't enough. Fidesz wanted to create a case for a show trial of Ferenc Gyurcsány and Gordon Bajnai, accusing them of purposely defrauding the Hungarian state or perhaps even receiving money from the foreign investors for making an illegal deal possible. Viktor Orbán named a very stupid man with a law degree, Gyula Budai, to be "special commissioner" to investigate "suspicious" land transactions. Budai, who as far as I could ascertain knows no foreign languages, was telling the world how he found English-language correspondence between Gyurcsány and Blum and Bajnai and Blum concerning the deal which contains proof of wrongdoing. However, when pressed a little he hedged his words. He accused the two former prime ministers of perjury. Two days ago both men sued Budai.

While Budai was sticking his neck out on Orbán's behalf, it came to light that Gyurcsány and Bajnai were not the only ones to meet the investors; his boss, Viktor Orbán, also did so. Apparently, Orbán met Ronald Lauder, an American businessman and one of the project's investors, and George Pataki, former New York governor and another investor in the project, at the house of János Martonyi, currently foreign minister of Hungary, sometime in January. Apparently, the meeting was initiated by Lauder who wanted to find out why Fidesz was so vehement in its opposition to their project. Apparently the answer was that they didn't consult with Orbán and that the investors have no connection to Hungarian businesses close to Fidesz. In addition, Orbán apparently didn't like the leading role Joáv Blum played in the project. He would have preferred George Pataki. (I wonder why!)

The businessmen involved are still hopeful. Fred H. Langhammer, one of the investors, gave a press conference today in which he expressed his hope that this large project would still materialize. Perhaps Viktor Orbán will see the light and will stop his men from carrying on with the witch hunt because by now there is no need to mix economics and politics. The 3,500 jobs and the revenues from the casino could come in very handy if he wants to establish 100,000 new jobs every year as promised. Sure, it is still a far cry from that number, but it would help.

Comments

[GabeGab]

I would not be so definitive about golf courses. Usually they are not as "green" as they look. It is well known that they might have serious negative environmental impact. (Water issues, pesticides, herbicides, etc.) See e.g.
http://sierraclub.typepad.com/greenlife/2010/06/green-your-dad-the-golf-buff.html
In the US the EPA has a recommendation how to build and maintain environmentally friendly courses, but it is no way simple or cheap.
http://water.epa.gov/grants_funding/wetlands/golfenv.cfm

[Odin's Lost Eye]

Investment in Hungary is notoriously difficult.
Firstly there is the problem of ‘Opportunity’ or rather finding an ‘Opportunity’ to invest in something which will give a real honest return on capital invested.
Secondly there is the need to take on board a large number of Hungarian ‘Consultants’ and the problem of paying their ‘fees’. Many of them do not want (and will not)give invoices you for their services. They want ‘cash’ either as ‘folding money’ or as transfers into an offshore account. This causes problems because western accounting principles, laws and auditors are designed to minimise the risks of fraud, graft, bribery and tax evasion. The U.S. government is after many European firms because of commission payments made ‘agents’ to get round these problems.
In Hungary it is different. Not only do the ‘consultants’ want their ‘fees’ they also demand a ‘slice of the action’. These ‘slices’ when combined can by up to 75% of the total profits before taxes. All of this means that reputable investors just rapidly disappear over the horizon when Hungary is mentioned. Those that do try to invest usually give up and cut their losses and run as more and more ‘Consultants’ appear out of the woodwork with their hands out. To the outside world Hungary is known as both the ‘rip off’ centre of Europe and the ‘land of the waving palms’. I wonder why?

In the matter of the forthcoming ‘Show Trial’ of Messrs Gyurcsány, Bajnai. ‘et al’ will probably be scheduled as follows
The arrests will occur either just before this autumns local elections if the public opinion polls for the local elections warrant it or if the polls show that Fidesz will get a landslide victory then the arrests will happen later in the second year of their term in office. Late in the third year unsubstantial snippets of evidence will be leaked to bolster Fidesz’s populatityand increase its chances of an election success. The trial will begin so that the evidence for the prosecution will be presented during the election campaign. After that the trial will slow down to a very slow crawl the main thing is to hold all the ‘Defendants’ in the lock up as long as possible. Or until the ‘cough up’ a huge sum of money as a fine and an even larger sums and property as ‘dropsy’ –bribes-.