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Hungary's new nationalization plans could cost a fortune

Hungary’s plans to partly nationalize sectors of its economy have raised eyebrows, as the costs can jeopardize keeping the budget deficit at levels the European Union and the International Money Fund would like to see. BBJ  

STATE AGAINST METAL THEFT
Prime Minister Viktor Orbán announced last week plans for the government to take over metal recycling operations in a bid to curb theft and illicit trade. Fidesz MP János Pócs said metal purchasing points should be connected to the information network of tax and customs authorities and the police. Like other countries in Central and Eastern Europe, Hungary has suffered from the theft of electric cables and metal parts used in infrastructure, which are sold as scrap metal to private companies. The announcement caused a huge uproar amongst licensed metal dealers, who instead expect results against illegal metal trading through the enforcement of existing laws and the elimination of illegal settlements.

E.ON IN THE SCOPE
But the plan is just the latest in a series of the Prime Minister nationalization concepts. One week earlier, the center-right leader said the 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. His deputy, Tibor Navracsics, said such a move would fit into the government’s plan to put utilities “on a non-profit basis”. Hungary’s plan to nationalize E.ON’s local units could help Orbán win the election in 2014, said an analyst interviewed by Reuters. ‘The government wants to have the gas business in its own hands. Once they have that, they can sit down to negotiate cheaper gas tariffs in the new long-term gas deal with the Russians from 2015 onwards, and that can win elections,” Erste’s analyst József Miró told EurActiv. More than 80% of Hungary’s natural gas comes from Russia, and the supply contract with Gazprom will expire in 2015.
E.ON’s Hungarian subsidy is described as “Hungary’s leading energy provider”, supplying 2.5 million domestic gas consumers. Its gas business was purchased from Hungarian energy company MOL in 2005 in a deal then valued at up to €2.2 billion including debt. But conditions became difficult for E.ON since the elections in 2010 as the Orbán-led government 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 HUF 606 million (€2 million) in 2011.

PENSION ULTIMATUM
Amongst its first nationalization steps, the government gave an ultimatum to Hungarian citizens to move private pension fund assets back to the state system or lose the state pension. In a desperate attempt to artificially reduce the public deficit and debt under the Maastricht criteria, the government drove more than HUF 3,000 billion of privately managed pension assets under state control. People who opted against returning to the state system stood to lose 70% of their pension claim, although this was later dropped by the government. But after losing 97% of clients, most private pensions funds were forced out of business anyway.

MOL SHARES BOUGHT BACK
As part of its moves to draw the domestic energy sector into its sphere of competence, the Hungarian government bought back 21.2% of MOL from Russian oil company Surgutneftegas, paying €1.88 billion for the package. Under the purchase agreement, Hungary will pay €1.88 billion (then worth HUF 505 billion) to the Russian company, which corresponds to the average share price recorded during the last three months prior to the agreement. The transaction was financed partly from the HUF 3,000 billion gained from the privately managed pension assets.

SMALLER TARGETS
This was followed by the acquisition of 73.84% of shares in the Győr-based automotive parts maker Rába and the Budapest City Council buying out a 25% stake in its waterworks from French firm Suez and Germany’s RWE. “We bought back MOL shares from the Russians, a part of the waterworks from the French, and very soon we will buy E.ON from the Germans,” news agency MTI cited the Prime Minister as saying. “We bought back Rába from the Malaysians and Fradi from the English,” he added. The latter is a reference to Ferencváros, one of Budapest’s oldest and most popular football clubs.

But buying back private companies could prove a costly deal at a time when Hungary has been struggling to keep its budget deficit low and wants to secure a credit line (a bailout in reality) from the International Monetary Fund and the European Union. According to Texas-based global intelligence company Stratfor, the nationalization of E.ON alone is expected to cost nearly €2 billion. Several experts have pointed out that Hungary might have to use the last of its 2009 bailout reserves for the deal. EU energy liberalization legislation requires member states to maintain healthy market competition in their energy sectors in order to prevent state monopolies. Romania, for example,  is privatizing a significant portion of its national gas company Transgaz in order to comply with EU membership stipulations. Hungary is heading in the opposite direction, which could further strain the already complicated relationship between Budapest and Brussels, Stratfor notes.