The asphalt tax: Lajos Simicska is not taking it lying down

A few days ago 444 reported that the government is planning to levy extra taxes on companies that have received large government contracts for road construction over the past few years. The reason for these new taxes is a large fine that the Hungarian government is expecting from the European Union. Apparently, ever since 2007  Hungarian governments have insisted that only construction companies that had asphalt mixing plants close to the job sites could bid for contracts. The European Union objected to this constraint which, in their opinion, restricts free competition.

The argument between Budapest and Brussels has been going on for some time, and it looks as if the Hungarian government has reconciled itself to the fact that it will have to pay a heavy fine, perhaps as much as 100 billion forints. Although the current Hungarian government spends money quite freely, it either doesn’t have the money for such a fine or doesn’t feel like paying it from funds it would rather spend on stadiums or the purchase of private enterprises. In any case, the government came up with a splendid idea: let the companies pay for something that is clearly the Hungarian government’s fault.

Although the public usually hears only about Lajos Simicska’s company Közgép, the firm that receives most of the government orders, there are others. Apparently, there is a company called Duna Aszfalt that lately has become a true competitor to Közgép. In addition, there is a French company called Colas, the Austrian Strabag and Swietelsky Magyarország, Magyar Aszfalt, and Hídépìtő Group. Each of these companies has had more than 100 billion forints worth of government orders and thus would be obligated to pay a 15% tax on its gross income.

According to an article that appeared in HVGKözgép was the greatest beneficiary of the Orbán government’s largesse. Since 2007 it won bids for projects to the tune of 132 billion forints, which would mean a retroactive tax of 20 billion. But in the last two years Duna Aszfalt–which is in fact situated in Tiszakécske–has grown tremendously. In 2012 it received government work amounting to 28 billion forints, whereas in 2013 this amount was 54 billion and its profits almost quadrupled. The two owners received 1.8 billion forints in dividends. It was Duna Aszfalt that built the road from Makó to the Serbian border.

road construction

Soon after the first report of the possibility of an extra levy on these companies, the Hungarian government denied any such plan. The denial, however, was carefully worded. On HírTV János Lázár said only that “in the last few months the topic has not even been mentioned in cabinet meetings.” That is not a categorical denial of the existence of such a plan, especially since Lázár during the same interview admitted that Brussels “has formulated doubts and misgivings concerning road construction worth about 500 billion forints.” He added that “it was probable that Hungary will have to pay a significant fine.” For the time being Lázár couldn’t say how and to what extent this fine will affect the companies that were the beneficiaries of the contracts, but he claimed that the “Hungarian government will defend the Hungarian people and the Hungarian companies.” He added that “this defense will not be extended to foreign companies.”

That is clear enough. The Hungarians will not have to pay or will have to pay less while the Austrians and the French will pay through the nose. Therefore, it might seem surprising that Magyar Nemzet today wrote a scathing article against the government’s plan in defense of the construction companies. One must keep in mind, however, that Lajos Simicska and Zsolt Nyerges, his close business partner, have a stake in the newspaper. The publisher of Magyar Nemzet is Nemzet Kft, which used to be called Mahir Kft; this was Simicska’s first business venture.

The title of the article is: “How will a 100 billion forint tax become a 1.2 trillion deficit?” The article claims that if the companies have to pay such a large amount, their own future business activities will be in jeopardy. The contention is that the companies’ profit margin is nowhere near 15%. In fact, the spokesman for Strabag talked about a 3% profit margin on road construction. The author thus calculates that the loss to these companies would be unbearable. Moreover, these companies haven’t even received all of the money the government owes them: “in brief, the money that the government wants to collect is nonexistent.” The consequences will be serious, the article warned. There will be liquidity problems that will result in these companies not being able to pay their workers and their subcontractors; they wouldn’t even be able to buy material. In brief, their current projects will come to a screeching halt.

And that’s not all. Even the slightest delay might mean that these firms could not finish the construction jobs before the December 31, 2015 deadline, in which case the country would have to pay back all of the subsidies received from Brussels. That would mean a loss of 1.2 trillion forints. Further, the article warns about possible bankruptcies, which may result in the loss of 90,000 jobs. Problems in the construction sector could seriously affect Hungarian economic growth. In the first quarter of 2014 GDP was 3.5%, and the construction sector contributed 0.5% to that figure. As a result, it can easily happen that Hungary’s deficit may exceed 3%. If that happens, Hungary could be placed under the excessive deficit procedure, which would mean a suspension of all EU subsidies.

The construction lobby is pushing hard, using Magyar Nemzet to describe the worst case scenario if the “asphalt” tax is imposed. It may persuade the government to go light on Hungarian companies, as Lázár already intimated the government would. But I don’t know what Brussels will think if Hungary implements a two-tiered tax: one for domestic companies and the other for foreign companies. Such a solution would definitely restrict free competition, which was Brussels’ objection in the first place.

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18 comments

  1. Even by Orbán’s standards, this does seem particularly mad.

    But at least the Fidesz economic strategy is at last becoming clear – spend what you like on what you want, and any time you can’t balance the books just invent a new tax.

    Actually, I think this approach has some merit, in a somewhat derranged way – assuming he can continue to get away with it. But that’s the big question – how long can he get away with it?

  2. @Paul

    My hopes rest on Juncker and a new team in Brussels. Barroso was Merkel’s choice. She vetoed all other candidates until, on the fifth vote, Barroso got her nod.

    But as long as Orbán keeps Brussels happy – or at least in a stage of suspended uncertainty – his business plan can go on for a much longer time than most people would like to imagine.

    So to answer your question: He can get away with it for some more years. He can even make it to after the next elections – if there are any. One of the frequent commentators on this blog told me on Thursday that he saw the “final” figures of the last election changing around midnight, and very quickly. Those changes assured the two-thirds majority. In addition, the OSCE observers weren’t too interested and wanted to go home. But this part hasn’t finished yet.

    But all in all, It’s a sad story, and I’m happy to end my short visit to Budapest on Monday morning when I fly back to Minusio.

  3. London Calling!

    Just as most Hungarian voters don’t get democracy, then Thuggesz don’t get capitalism.

    They are still locked into the ‘planned’ centralised economy – run for the benefit of the ‘elite’.

    I say ‘planned’ meaning planned to screw as much theft as possible from generous EU grants which is meant to get the economy ‘on the road’ – for the benefit of the people.

    And for the benefit of the people of Europe.

    Efficient roads – infrastructure – are key factors for winning those all important FDI contracts that are now being awarded to more efficient countries like Slovakia – as the banks and international companies and potential staff desert Hungary (ironically they are leaving to staff them in any country but Hungary).

    As we drive from Austria to Hungary the roads deteriorate rapidly. The month’s ‘vignette’ costs nearly 5000ft (£13 (gbp)) – but much more for a lorry transporting goods.

    Whilst not as costly as French tolls (where you have a choice at least) this is still very bad value and another hidden cost to the long suffering Hungarian.

    Melons (homegrown) are very heavy items and we purchased an 8kg one for about £8 (very necessary in the heat wave a couple of weeks ago in Gyor). Back in London I’ve just purchased a beautiful 3kg water melon for £1.49 – from Spain!

    What in heaven is Hungary doing with its water melon harvest?

    Chief Lieutenant Thug Lazar is certainly earning his stripes in preparation for his inauguration as PM for when President Thug moves into his castle.

    Regards

    Charlie

  4. @Charlie

    “…Thuggesz don’t get capitalism.”

    Here’s boiled down Hungarian/Russian/ex-Communist objection to Capitalism:

    “Competition? That’s for the nincompoops! Why should I compete for the ‘lowest’ price? Much better by far to limit, or destroy, my competition and to quadruple my price. How much more can I make for the same amount of work or outlay?!”

    There’s a logic to that that is incontestable; and the only requirement is a kind of medieval approach to the rest of society…

  5. @petofi

    The other medieval aspect is that without competition there is no innovation… 🙂

  6. Eva, I am worried that for least for the next 3 years (and more) we will be reading about Fidesz internal fight for power and the wider Orban’s family and their friends’ enrichment schemes. We do know by now that there are some outside criticism about the anti-democratic measures taken by the Orban/Fidesz government, and that the whole world is aware of this government’s disposition to the freedom of press, fair competition, private enterprises, religion, sex, and education. We also know that there is no viable alternative exist at the current time to offer something else. Or is there an alternative? Is there any grassroots movement that can grow for the next three years.
    I simply do not believe that DK, LMP, or MSZP has any chance. Not with their current “agendas”, and not with their current leadership. I am reading on, taking to friends, and the children of my friends, and nobody heard of anything. At least in the eighties there were some grassroots efforts happening, and we felt that something will grow out of it. THere were meetings here and there, it felt like a momentum is building. That was the moment that made Fidesz able to strike out (they were not he only ones, but they were the better organized ones). Is there anything similar happening? Does anyone heard anything? Are you aware of some fresh efforts but he younger generation to strike out? I would love to read about that.

  7. @Some1: One reason could be that in the 80s it was more difficult to leave., Those young people who really did not like what was going on at least came together, from which some kind of grassroots movement could grow out. Now many young people choose the other option and just leave.

  8. @Some1

    As the young and able see it the same way you do they are leaving the country by the thousands. The official figure is already 600’000, the inofficial probably 8-900’000.

  9. An: exactly. As long as Hungary is an EU member, people will simply choose to leave rather than fight and work for a more democratic, richer and freer country. This is one of the reasons for the anaemic opposition.

  10. @petofi

    After several years of growth, the Russian economy is now stagnating, and Russians would be starving if their country weren’t so rich in natural resources.

    Hungary is characterised by a dual economy. The domestic economy is shrinking, and the country is kept afloat only by the exporting foreign-owned companies – and their tax-paying employees. Add to that the money Hungarian emigrants are sending home to their families. This also explains why Orbánistan is not about to collapse any time soon.

  11. @An, Minusio, cheshire cat: Yes. I did not think of that. So in reality Hungary will be left with people who Fidesz can offer some opportunities (some of the younger infusions), those who are not so bright with limited opportunities will go to support Jobbik, the old crowd that have already established lives.Those who are smart, and/or educated are leaving the country as they will not “sign-up” or put up with the Orban BS. I guess that is the end of Hungary as we knew it and what everyone hoped for at the end of the 20th Century. What a shame.

  12. “Those who are smart, and/or educated are leaving the country as they will not “sign-up” or put up with the Orban BS.”

    From personal experience, I would say that the main driving force behind those escaping is economic not political. Of course, indirectly, it is the regime’s policies which are creating those economic conditions but subtract the 25-30% or so Jobbik/Fidesz demographic, the 10% democratic liberals and then everyone else, including the young, is pretty much apathetic politically which suits Orban fine, I guess. Exporting anyone below 30 with a brain is one way to make sure he stays longer in power.

    Regarding any kind of mass anti-regime grassroots movement, there is not even the roots of one at the moment but did it ever really exist in post 56 Hungary? Bit before my time but even in the late 80s it seems to me that the various green and nationalist movements were pretty small in number and there was never a mass political push to change the system. Plenty of cynical opportunists, like our present Dear Leader, who sensed which way the wind was blowing 88/89 but certainly no mass political anti-communist movement like Solidarity in Poland.

  13. What I hear from our young ones:

    Many left and the others are just trying to make a living, so they are totally apolitical or rather cynical about Hungarian politics: There’s no chance to change it, so why worry and invest time.

    Of course they know what’s going on, they’re all connected to the world via internet and they access all those sites that tell the newest manoeuvres by Fidesz etc – but who really cares, there are more pressing things on their minds.

    Of course this might change if things really go down the drain!

  14. D7 Democrat
    July 12, 2014 at 12:21 pm
    …… there is not even the roots of one at the moment but did it ever really exist in post 56 Hungary? Bit before my time but even in the late 80s it seems to me that the various green and nationalist movements were pretty small in number and there was never a mass political push to change the system.

    Maybe there was not a “mass political move”, but there were many smaller cells. I know that for a fact. 1956 gained a momentum for various reasons (it was discussed many times on this blog and certainly I am neither an expert). The Young Artists “movements” were well know, and Rajk JR certainly did a lot. There were samizdats published. It is not that I was fan of Bizottsag (the band) but there were a group around them who did “protest”.
    In mid December 1980 there was a very large gathering at Heroes Square where the Security showed up. THe crowd marched down on Nepkoztarsasag Ut (Andrassy) all the way to Vorosmarty Square. They were followed by “ambulances”. They put into the ambulances the laggards one by one. There were hundreds of university and high school students there, and the crowd joined in all the way to Vorosmarty Square. On March 15 there was also a gathering a the Petofi statue, and a whole bunch of youngsters were arrested. No, they weren’t any blood or some huge revolution, but Fidesz did not “revolt” either.

  15. London Calling!

    One of the younger women in our village near Gyor said she wanted to be under the umbrella of Russia because it was so powerful.

    Her husband works in the Audi factory on a constant renewal contract that can be terminated in a thrice.

    They are desperately poor with two young children.

    I suspect they voted Jobbik.

    The younger Hungarian-speaking Romanian who built our tile stove had an’external’ vote and voted Thuggesz because he said he wasn’t as bad as Caucescu.

    So those that don’t leave listen to the village elders or watch Echo TV.

    63% voted Thuggesz in Gyor and surrounds – second only to top-Thuggesz voting Vas where 64% voted Thuggesz.

    So typically the youngsters vote the same way as the older generation which is extremely depressing – if the above is typical.

    A proper democracy is years away.

    Regards

    Charlie

  16. Charlie AUDI HUNGARIA MOTOR Kft is a typical offshore German operation in Hungary. It used to make only motors but now is making the entire Audi A3 Sedan and the new Audi A3 Cabriolet. The car starts at $30,700 in the USA only the more expensive models sold in the US are made in Ingolstadt, Germany the rest are made in Győr.

    I find it funny that upper income young professionals here in Chicago are driving around in Audi’s they think are status symbols made by German car craftsmen when they are being produced by lower wage workers in Hungary. I think to my self that when I visited Hungary in 1962 as a child I had a relative who was in the party and drove a Hungarian made Alba Regia powered by a 250cc Csepel motorcycle engine as I recall and thought they were the hottest stuff around. I remember saying to my father this car is really small is it a toy?

    Now how many Chicago yuppies would dare to drive a true Hungarian microcar, or better yet dare to try and repair one!

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