Foreign investors in Hungary beware: Pécs and Suez Environment

The whole story is so bizarre that I don't even know where to start, and I'm not at all sure whether I will be able to give a coherent description of what happened in Pécs with the hydroelectric company and its minority shareholder Suez, a well-known French company. At 3:30 on Monday morning security men occupied the headquarters of the firm on the orders of the mayor, and when the employees arrived they prevented thirteen people belonging to the upper and middle management of the company from entering.

So what is behind this "lock-out"? A minority stake in the city's hydroelectric plant was sold in 1995 to the French company that supplies water to about 70 million people worldwide. The city kept the majority stake (52%) but the actual management of the company was in French hands together with 48% of the shares. The jointly owned company, everyone concedes, provides good service, employs 360 people, supplies water to forty additional villages and towns nearby, and has put more than 6 billion forints into improvements and modernization since 1995. The city's only complaint was the price of water, which is apparently high.

At issue, it seems, is that Suez, in addition to its ownership stake, received a management fee of 120 million forints a year. The city thought that by buying out Suez it would save the 120 million forints and that somehow a company owned by the municipality alone could provide cheaper water. What this assumption was based on I don't know, but I have the feeling that the city fathers were less than well informed. It is unlikely that there were serious studies proving that a city-run company would be a great savings either to the city or to the customers. However, already in 2004 the then socialist-led city council was thinking about buying out Suez.

The fleeting idea of buying out Suez was dropped. Perhaps it became clear that such a transaction would cost more money than the city could afford. But now the new/old mayor, Zsolt Páva, decided to act upon that old idea. The ironic thing about this "hostile takeover" is that it was the same Zsolt Páva who signed the contract with Suez in 1995. Suez was so happy about the deal that it rewarded the mayor and two other city officials with an all-expense-paid trip to Caracas to attend some conference. Páva doesn't seem to be the grateful sort!

Páva, surely with the knowledge of Fidesz headquarters in Budapest, decided to act. He did approach Suez a few weeks ago about the city's intention to negotiate a buy-out, but he was far too impatient to wait for negotiations. According to all the accounts I read, such a business deal may take months to conclude. But Páva wanted immediate results. Last week with the city council's blessing (including that of the socialist members) a new company was set up. Tettye Forrásház (Tettye is a picturesque part of the city where originally Pécs's water came from) was established with a capital base of–and now listen carefully–five million forints! The monthly salary of the chairman of the Hungarian National Bank is over seven million! But that wasn't enough. Páva suggested as CEO none other than Tamás Winkler, whom one Hungarian paper called "Ur-Fidesz." Indeed, he was one of the founders of the party who had several high-profile jobs during the Orbán period. The socialists in the city council were a bit taken aback and finally balked when they heard that the city would pay him a salary of almost one million forints a month; they refused to approve it.

Suez was stunned and called the occupation of its headquarters "forcible entry." The firm made a statement to Reuters in which the head of the company stated that "without prior announcement, the City of Pécs took control of the company, Pécs Water Works, by force." The company "is preparing legal proceedings to enforce its rights." The employees were dumbfounded and Mayor Páva had to talk to them to soothe their nerves. He ensured them all will be well. Tettye Forrásház will take over, but they will all be employed with the same salary they received previously. This was too hasty an announcement because it is unlikely that Tettye Forrásház will be able to pay the weekly salaries of 360 employees from their "riches" of five million! Security men may occupy the building, but the city has no access to the firm's bank account!

As for buying out Suez, that will not be an easy matter either. Páva first talked about 1-1.5 billion forints but by today the estimated sum was between 2 and 5 billion. The CEO of Pécs Water Works is talking about more like eight billion! The company currently has yearly revenues of 4.5 billion forints and is generating profits of 250-300 million. The contract in 1995 was signed for twenty-five years. Thus there are still eleven more years to go on the contract. So, try to figure it out. It is doubtful that the greatly indebted Pécs will be able to come up with this kind of money.

And then there is the method by which Mayor Páva with the help of Tamás Winkler, the new CEO, and a lawyer representing the new company handled the whole thing. As the sales manager of Pécs Water Works said: "If twenty commandos arrive at 3 a.m. and occupy the firm's building this is not a European solution and is undoubtedly illegal." The staff at the company had to sign a declaration that they are on a two-week paid holiday, after which they will be employed by the new company.

"Suez management are considering taking the case through diplomatic channels," said the firm's spokesman. That was yesterday. By today it had already become an international scandal. The French ambassador in Budapest René Roudaut told Magyar Rádió (MR1) that he wrote a letter to Zsolt Páva asking for an explanation but received no answer. But that is not the end of the story. Gordon Bajnai happens to be going to Paris on October 19, and it is almost certain that the question of this "occupation" will come up in talks with President Nicolas Sarkozy. According to the ambassador they "can't act as if nothing has happened."

I heard an interview with Páva yesterday who uttered this great one-liner: "We didn't occupy, we just stepped into ownership." According to him they were not moving into the building illegally because inside of the complex there is a "dispatching center" that is owned by the city. I heard another interview with a socialist member of the city council who seemed to be either stupid or naive. When asked why he and his fellow socialists voted for the takeover, he protested. They voted only to start negotiations with Suez. However, when pressed he admitted that they let Páva "handle" the whole thing. So they gave him carte blanche.

The more I listened to these guys the more I became convinced that they are country bumpkins who don't have the foggiest idea about the seriousness of their act and the grave consequences that will follow. Meanwhile I read somewhere that a website providing news of Baranya County had a quick poll that inquired whether the citizens of Pécs consider the occupation of the firm's headquarters legal or not. Although according to Páva 94% of the population wanted to take over the hydroelectric firm (most likely because of the promise of lower rates) 65% of those asked said that it was illegal. Twenty-six percent thought that it was fine and dandy, and 9% claimed not enough knowledge to decide.

I have the feeling that Páva's honeymoon in Pécs is over.


  1. SERIOUS or what? I do not know just how many European Conventions and Directives this load of clowns has broken. On top of that there are probably several dozen Hungarian laws which have also been broken. These clowns have started something which will cost both the town of Pecs and Hungary dearly! A friend of mine form the old days works for a Jobbing company in the city (Stock Jobbers are people who buy and sell stocks and shares on their own account, Brokers buy and sell for others). He E-Mailed me yesterday over the details of a little trick we had used years ago to increase the size of some warning indicators on their portfolio database. This has to do with companies which have investments and dealings with Hungary. The bottom line is a ‘general disinvestment’ policy (get out while you can and stay out!).
    In most countries and certainly in the U.K. the elected representatives on Local Authorities can be ‘personally surcharged’ for the cost of unlawful actions! That is those who voted for a particular action have to share amongst themselves ALL the costs or losses incurred as a result of their actions. I hope this is true in Hungary.
    The Blog reports that * “The staff at the company had to sign a declaration that they are on a two-week paid holiday, after which they will be employed by the new company.” *. If I were the local Union Shop Steward/Convener I would have fused the phone wires to my Union HQ, to the ILO in Switzerland and to the Brussels. This one certainly breeches some 5 of the articles of the European Charter of Human Rights, and at a ‘push’ a sixth (forced labour).
    As to the price of water, most of the de-nationalised concerns have a clause in their de-nationalisation agreements that they must become ‘self financing’ and that the price charged to the public for their services must contain an element for ‘repairs, renewals, and expansion’. This money is ‘ring fenced’ to prevent it being absorbed into profit!
    I think this is a ‘try on’ by Fidesz to see what they can get away with. The end game I fear will make lawyers and Suez richer and the wretched citizens of Pecs a lot poorer.

  2. Nonetheless it will suffice as an election ploy for the next few months to whip up nationalistic sentiments. Pava probably calculated thusly: I shall be reelected next fall, and my party next spring. The lawyers in the meantime will stretch the legal case out for 6-8 years, by which time I should be in cushy retirement. And anyway, the 6-8 billion that the court might award to Suez will be chickenfeed 8 years from now.
    After me the deluge.

  3. “I have the feeling that Páva’s honeymoon in Pécs is over.”
    Yes, it was over as soon as he started his job. There is no honeymoon in governing that beautiful city. It was neglected for too long.
    Yes, foreign investors should be aware of the changing time and they should not enter the Hungarian market to grab only market share, exploit, and export profit.

  4. Kormos – that is such a one sided view of foreign investment. And that sort of mentality, if it reflects the average Hungarian view is why Hungary will always be in the slow lane of European development. While I don’t disagree that some unscrupulous goings on will occur, FDI has also brought benefits. Imagine Gyor without Audi for example.

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