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Sole tobacco concession draws fire

The government on June 25 rejected an unsolicited HUF 6 billion bid to distribute tobacco in the country from a consortium of three multinational cigarette manufacturers. In doing so, it confirmed that the number of tobacco distributors would be dramatically reduced – essentially to one consortium.

The latest decision to give the sole concession for tobacco distribution to a partnership formed by British American Tobacco (BAT) and Hungary’s Tabán Trafik had critics charging that the government is acting in an untransparent manner that hurts competition. The three excluded multinationals, Imperial Tobacco Magyarország Kft., JTI Hungary Zrt. and Philip Morris Magyarország Kft., noted that the concession, announced on June 11, was given without a tender, and so the group chose to unilaterally submit a bid for the right to distribute cigarettes, which was rejected within 24 hours. The partnership chosen by the government to handle distribution is to pay HUF 600 million for exclusive distribution rights for 20 years; the rejected bidders offered HUF 6 bln and say they would not have demanded a monopoly on distribution.

The European Commission says it will be investigating the deal, as well as the law, passed in December, which made it possible.

“There are tobacco monopolies elsewhere in Europe as well, but nowhere is it so conspicuous that only companies that are in a good relationship with the government can sell tobacco,” Elżbieta Bieńkowska commissioner responsible for internal markets was quoted as saying.

On request from the Budapest Business Journal, the Commission gave the following statement: “In December 2014 Hungary again amended the system for the distribution of tobacco products in Hungary. The Commission is examining whether the newly introduced changes related to the system for the taxation and distribution of tobacco products in Hungary is compatible with EU law. In particular, the new rules should not violate the principle of the free movement of goods laid down in Article 34 TFEU. We are in contact with the Hungarian authorities to seek further information concerning certain legal aspects of these new changes.”

Process questioned

But the rejected bidders maintain that the government did not even follow the law, which stipulates three possible methods for choosing the body responsible for tobacco distribution: the state itself can carry out the activity, a reliable partner can be chosen based on criteria set in the law or there can be an open tender. “We believe none of the above mentioned processes were applied,” Imperial Tobacco Hungary’s General Manager Lóránt Dezső told the BBJ. “We believe that the government should have called an open tender for carrying out the distribution for tobacco retail in a transparent and discrimination-free manner.”

Dezső said that the companies had been waiting for the government to call the tender after the law was passed late December. But, in the end, no tender was called, and the concession was announced on June 11.

In rejecting the unsolicited bid by Dezső and his partners, the Ministry of National Development said in a statement sent to the three companies: “It is immediately and clearly apparent that it does not fulfill the legal requirements and is unsuitable to be accepted by the Minister of National Development pursuant to Section 10/D of the Concession Act.” The ministry said it “has no choice but to return without acceptance the Bidder’s [the three companies] proposal to Bidder as invalid and uninterpretable. The ministry emphasizes that although the concession contract for the service has already been concluded with regard to the whole territory of the country, and therefore it would be forced to reject Bidder’s proposal anyway, the proposal is unsuitable for acceptance regardless of this circumstance.”

Despite the ministry’s rejection Dezső said that the consortium “stand by their offer”, adding that they “can undertake what the offer contains”. He noted that it is open for negotiations in order to establish a market model that is sustainable in the long-term.

“The decision made by the Hungarian government forces us to transfer control over the sales and distribution of our own products to another company, and to share our sensitive business information on pricing, inventories and new market activities, and eventually to let our two competitors deliver our products,” Dezső said. “This situation is unacceptable for us, therefore we ask the Hungarian government to reevaluate its decision and reopen the concession granting procedure again with the involvement of every tobacco company present in Hungary.”

Commenting on the huge difference in the concession fee that the three companies jointly offer of HUF 6 bln and the fee of HUF 600 mln by Tabán and BAT, Dezső said that the larger fee his group proposed to pay is based on “real calculations” and is “well-founded considering the current economy”. He said that, according to their calculations, the winner of the concession could make an annual profit of HUF 16 bln.