From hungary-report-owner Sun Apr 2 00:35:01 1995 Received: from localhost (daemon@localhost) (fnord) by nando.yak.net (8.6.5/8.6.5) id AAA02801; Sun, 2 Apr 1995 00:35:01 -0800 Received: from localhost (strick@localhost) (fnord) by nando.yak.net (8.6.5/8.6.5) id AAA02787; Sun, 2 Apr 1995 00:34:20 -0800 Received: from strick () via =-=-=-=-=-= for hungary-report@hungary.yak.net (2785) Received: from localhost (strick@localhost) (fnord) by nando.yak.net (8.6.5/8.6.5) id AAA02784 for Hungary-Report@hungary.yak.net; Sun, 2 Apr 1995 00:34:13 -0800 Date: Sun, 2 Apr 1995 00:34:13 -0800 Message-Id: <199504020834.AAA02784@nando.yak.net> From: Magyar Cyber Publications Subject: The Hungary Report, No. 1.01, 4/5/95 To: Multiple recipients of list hungary-report Sender: owner-hungary-report@hungary.yak.net Precedence: bulk Reply-To: hungary-report@hungary.yak.net ======================== The Hungary Report Direct from Budapest, every week No. 1.01, April 5, 1995 ======================== ====== BRIEFS Copyright (c) 1995, Rick E. Bruner ------------ GENERAL NEWS: Austerity program keeps emotions high The government clarified plans for proposed cuts on state financed maternity leave and child allowances last week, key issues in its controversial austerity plan announced March 12 in an effort to save the 1995 state budget HUF 170 bn (US$1.4 bn). In the beginning of the week, Finance Minister Lajos Bokros tried to calm people's anxieties saying only the wealthiest 20% of families would lose universal payments the state now makes for every child in a household (around US$60/month) and maternity leave equivalent to 70% of a woman's former salary for two years. Later in the week, the government spelled out that both payments would be discontinued for with before-tax earnings of HUF 25,000 per family-member. That is, a family of four with gross earnings more than HUF 100,000 (US$833) per month is deemed not in need of assistance. [Editor's note: prices in Hungary are not what they used to be. A liter of petrol is nearly US$1; a liter of milk is US$0.60; a pair of Levi-Strauss jeans is US$60; a single yellow pepper -- a Hungarian staple -- at my neighborhood market this month is US$0.50.] The Budapest Sun newspaper quotes the head of the US Gerber baby food company's Hungarian subsidiary as saying the austerity measures will be disastrous for his firm. The cons: Three thousand teachers protested against education funding cuts in front of the Finance Ministry and another 1,000 demonstrated in the central Hungarian city of Kecskemet. Educators, along with other state administrations, are facing staff cuts of up to 15% as part of the austerity plan. Their protests follow those of tens of thousands of students across the country last week decrying the introduction of HUF 2,000 (US$16) a month tuition for higher education from next September. Employees of state companies, meanwhile, learned not to expect raises above 10% this year (compared to projections of more than 30% inflation). Management of loss-making firms won't be entitled to raises at all. The pros: Economic experts, on the other hand, continue to laud the reforms. The well-respected local Economic Research Institute (GKI) concurred with the IMF's pronouncement the week before that the measures were better late than never and may still save the deeply indebted economy from insolvency. GKI warned against spiraling inflation this year and predicted zero GDP growth, a 6-7% decline in real income, and a 2-3% decline in domestic consumption. Also, a federation of the 43 biggest banks and Salomon Brothers consulting firm publicly supported the government's plan as best for the economy. State TV desperate, facing 1,000 layoffs A new strike committee at the state television (MTV) says it will appeal to the Constitutional Court and is threatening massive strikes if it is forced to cut its workforce by nearly a third, laying off 1,000 employees immediately, as the government is demanding. Critics object to the layoffs before the passage of five-year-delayed Media Law (as always, due through Parliament "real soon now"), and MTV president Adam Horvath says he will resign if forced to implement layoffs without a plan to restructure the institution. The National Association of Hungarian Journalists (MUOSZ) also protested the proposed layoffs. Insiders, meanwhile, say the state television -- which broadcasts the only two national channels -- is grossly over-staffed. In an excellent article in the Budapest Business Journal, reporters quote two ranking MTV staffers who say 1,500-2,000 of the 3,600 employees could go without consequence. CNN television, says the BBJ, employs only 2,300 worldwide. Supreme Court sets drug limits Hungary's highest court decriminalized narcotics to some degree this week in defining "insignificant" quantities of illegal drugs. According to the court, amounts less than 10-times the lethal dose of a given street drug would be deemed insignificant as regards court procedures. "This will allow the courts to issue more lenient sentences in the cases of those growing, producing, storing or purchasing drugs for their own consumption," wrote the news service Hungary Around the Clock, paraphrasing Nepszabadsag. Exact figures were not reported after the ruling, but earlier in the week the National Society for Narcotic Studies advised the court that under 2.25 grams of heroin and 30 grams each of cocaine and cannabis be judged insignificant. Fewer than 20 drug users went to prison in 1993. -------------------- BUSINESS & ECONOMICS: Candy, Cars and Cola General Motors, Stollwerck and PepsiCo all announced new investments on top of each of their already sizable operations in the country. GM plans to put DM 257 million into its Opel Astra plant in Szentgotthard (W Hungary) later this year. The investment will increase annual engine production to 460,000 by 1996, create 220 new jobs and move GM into the number one foreign investor position, with DM 700 million spent in Hungary. The German confectioner Stollwerck will spend DM 30 million on a new cookie (biscuit) factory in Szekesfehervar (SW Hungary), employing 200-250 to produce up to 10,000 tons of cookies per year. Fizzy drinks maker PespiCo, meanwhile, is rounding out the taste sensation committing $10 million to Hungary's salty snacks market. Pepsi, claiming 50% of the drinks market, has already invested $135 million to date. ING out of Budapest Bank tender The Internationale Nederlanden Groep (ING), recent savior of the UK's Barings Bank, has bowed out of the privatization contest for Budapest Bank. One week earlier, former front runner Credit Suisse made the same surprise announcement, leaving ING to inherit the most-favor contender position. ING officials said the recent huge acquisition of Barings has caused it to review other investments. Allied Irish Bank is the only remaining of the state's preferred three potential investors for a stake in the Hungarian bank. US still tops foreign investment Foreign investment last year totaled $1.3 bn last year, according to the economic weekly Figyelo, the lowest in three years. Figures in previous years were $2.5 bn in 1993 and $1.7 for both '92 and '91. According to a summary of the article in Hungary Around the Clock, the leading investors by nation of the $8.5 bn to date were the US (27%), Germany (34%), Austria (13.4%), France (6.8%) and 4.8% each for the UK and Italy. The top 25 foreign investors were Deutsche Telekom, Ameritech (telecom), General Motors, Suzuki, US West (telecom), 1st Concession Motorway Rt, Audi, the EBRD, Pannon GSM (telecom), Siemens, Fotex (mostly US institutional investors in retail trade), Allianz (insurance), Ford, Sanofi (pharmaceuticals), Guardian Glass, Prinzhorn (paper), First Hungarian Fund (portfolio), Hungarian Investment Association (portfolio), Sarah Lee, Unilever, Aegon (insurance), IFC (investment arm of IMF), Ferruzzi (vegetable oil), Amylum (alcohol) and Alcoa (aluminum). Ministry proposes environmental product fees The Ministry of Environment has proposed issuing new fees to be paid by traders of rubber tires, packaging materials and refrigeration equipment. To be introduced January 1, 1996, the fees would be paid to the Environmental Protection Fund, so far composed of an existing fee on petrol products and various environmental fines. ----------- SHORT TAKES: CALL-BACK SERVICES, where foreign-based phone companies (mostly in the US and UK) undercut local rates for international calls by rerouting the origination of the connections, are under fire in Hungary, with the Hungarian Telecommunications Authority calling for a ban of the practice. An attempt by the Czech government to protect its telecom monopoly from the same threat failed last year. THE STATE AIRLINE, MALEV, lost HUF 500 million (US$.1 m) last year, far off projected profits of HUF 69 m. Company officials blamed rescinded tax-exempt status. HUNGARHOTELS, the infamous state hotel chain whose privatization has been thrice aborted in scandal in five years, is causing controversy anew. Top tourism bodies have reported back to the government with a plan to sell only a minority stake to foreign interests, with further shares sold on the stock exchange and the 15 hotels remaining the "national" chain. ARECO SOFTWARE COMPANY, distributor of the Californian FTP Sofware firm, has won the right to supply government ministries with networking and email communication software. ---------------- NUMBERS CRUNCHED: * Budapest District V. average office rental sqm/month: DM 47 * Registered unemployed, February: 550,500 * Bankruptcies plus liquidations started last year: 5,900 * Value of fake brand clothing & electric products confiscated since January: HUF 200 million (US$1.7 m) ------------- EXCHANGE RATE: March 30, 1995 (National Bank of Hungary): US dollar - 118.52 (buying), 120.66 (selling) Deutschemark - 85.79 (buying), 87.21 (selling) -------------- WACKY AS USUAL: Aliens can't phone home -- from the street, anyway Want to call Mom in Iraq, Nepal, Vietnam or Guyana? Don't try it from a public phone. The phone company cut off access to those locations and others thanks to your friendly phone phreak, or rather Hungarian counterfeiters who have been mass producing disabled public phone cards that last forever, sold for around $50 on the black market. Other forbidden telephone destinations include Hong Kong, Yemen, Jordan, Kuwait, Lebanon, Saudi Arabia, Oman, The Arab Emirates, Bahrein, Bhutan, Israel, Katar and China, according to Econews. Of course, long distance phone scams are nothing new here; back in 1990 it was common to see long lines of foreign students from countries such as the above in front of "magic" public phones, which, due to the phone company's own fault back then, simply worked for free. A Pope plus a Patriarch equals a Magyar abbot What do you get when the Vatican meets Russian Orthodoxy? A Hungarian, obviously. Asztrik Varszegi, Chief Abbot of Pannonhalma (W Hungary), has been selected to "mediate" between Russian Orthodox Patriarch Aleksiy II and Pope John Paul II at first-ever holy summit next year. Hungary is a possible venue for the meeting. ============= FEATURE STORY: Public utilities to revive Hungarian privatization By Rick E. Bruner Copyright (c) 1995 Hungary isn't through privatizing yet. Nearly a year after the Socialist-liberal coalition's election last summer, the government has produced little to meet campaign promises to speed up the sale of state assets. Rather the opposite, the country's region-leading privatization revenues, averaging nearly $2 billion a year since 1990, have dried to a trickle while the new government dallied over an economic policy overhaul. Then came January's HungarHotels debacle, where the government shocked international investors by quashing a done-deal with American General Hospitality for the sale of a large hotel chain. The tide, however, may now be turning back in Hungary's favor, say investment analysts. The government's sudden introduction of strong new austerity measures in mid-March, including a 9% devaluation of the forint and massive state budget cuts of social expenditures, has impressed many investors as being at last something decisive and well-planned. Long-awaited privatization legislation is finally before parliament and, not withstanding 200-odd proposed amendments, is likely to pass into law within a few weeks, say political experts. Leading the privatization revival will be the sales of five major utility companies: the electricity works, MVM; five regional gas distribution companies; the oil and gas company, MOL; the state broadcaster, Antenna Hungaria, and the phone company, Matav. In each case, the government is planning to sell an outright majority (in some cases more than 99%) to combinations of strategic and strictly financial partners. To aid its debt crisis, the government hopes the sales of the five properties bring in as much as HUF 800 billion ($6.6 billion) over the next three years. According to Bela Kunszler, managing director of the Industry Infrastructure section of the State Holding Company (AV Rt.), the tenders for stakes in both the regional gas companies and the gas monopoly MOL will be ready by the summer, with shares in the other utilities being offered before the end of the year. The AV Rt. is the legal owner of all of the utilities. Plans in the pending privatization bill to merge the AV Rt. with its sister privatization institution, the State Property Agency (AVU), will not interfere with the government's pressing schedule to sell its assets, Kunszler said. In the case of each utility, the first step in the privatization will be to sell between 35% and 50% (plus one share) to so-called strategic investors, i.e., companies (mostly international giants) already active in the same industrial sector. At future stages over the next three years, further shares would be made available to non-industry investors through various private and public stock options. While in some cases, the government would sell virtually 100% of its interest in the companies, it would in the case of every utility keep at least one "golden" share, which would give it "very limited" veto power, on such questions as closure of the company, said Kunszler. The state is not setting the monopolies free to private interests entirely without controls, however, as the sectors will continue to be heavily regulated on such questions as pricing. MOL and the regional gas companies First on the blocks will be the five regional natural gas distribution companies, which were separated from MOL's assets in 1992. Covering between them the entire territory of the country, the companies have a combined asset value of HUF 60 billion ($500 million), according to Kunszler. Fifty percent plus one share of each of the five gas distributors will be sold in a public tender this summer, if all goes according to plans. Ultimately, the government would sell all but one "golden share" of the distributors. The AV Rt. also plans to sell 35% of MOL this summer. With activities ranging from 350 gas stations to oil refining to international exploration, MOL is one of the biggest state companies, with an asset value of HUF 350 bn ($2.9 bn). While already modestly profitably, MOL's 1995 bottom line will benefit from January's 53% hike in natural gas prices to households. Parliament has approved a schedule whereby subsidies on natural gas and electricity prices will be completely eliminated by 1997. Mobil Corp., Texaco Inc., Royal Dutch/Shell Group, British Gas PLC and Austria's OMV are all known to be interested in MOL's privatization. The government plans to sell 75% of MOL eventually. MVM, electricity works The single largest Hungarian company is MVM, the electricity works, valued at HUF 560 bn ($4.6 bn). The existing asssets of the company will be broken into three parts for sale: production, distribution and transportation. Production consists of seven power plants, while distribution is divided into six regional centers. Each of these units will be sold separately, with the government divesting itself of everything but one "golden" share in the concerns. The distribution companies will be offered first, with 50% plus one share to be auctioned off before the end of the year. The remaining "transportation" assets will remain indefinitely 50% plus one share in state hands. Included in the transportation assets will be the country's only nuclear generator, Paks, which supplies 40% of the country's electricity consumption, as well as the national network of high-tension wires. Antenna Hungaria, broadcast Antenna Hungaria, while much smaller than the other utilities, with assets valued at HUF 10 bn ($83 million), consistently ranks among the country's top 20 most profitable companies. Owner of the state's large network of AM Micro retransmission facilities, Antenna Hungaria's biggest clients include the state television and radio stations. With a diversified field of activity, 40% of the company's revenue comes from sources other than broadcasting, including extensive telecom interests. By the end of the year, the AV Rt. plans to sell 50% plus one share to strategic investors, with all but one "golden share" privatized within two years. Matav, telecommunications Matav, or Magyar Bell, as it were, is already the furthest along in its privatization efforts, having sold already 30% of the company in late 1993 to a consortium of the Deutsche Bundespost Telekom and Ameritech, a Chicago-based Baby Bell, for $875 million, the single largest investment in all of Central and Eastern Europe in its day. The European Bank for Reconstruction and Development and the International Finance Corporation also together own 3% of Matav. Details of Matav's further privatization strategy are still under discussion, said the AV Rt.'s Kunszler, but a further tranche should be put up for sale before the end of the year. Shareholders have agreed, however, that no investor from the telecom industry other than the Deutsche Telekom-Ameritech consortium would be allowed more than a 10% stake in Matav, and the present consortium wouldn't be allowed more than 49% in total. ================ PARLIAMENT WATCH: Reforms strain Socialist-union ties By Tibor Vidos Copyright (c) 1995 The government's austerity measures announced on March 12 still dominate Hungarian politics. And they are certain to continue to do so for the next few months. Of the measures the government approved on March 12 only the devaluation of the forint and the introduction of an 8% customs duty have been put into practice so far. The rest of the measures - severe cuts in social spending and the introduction of university tuition fees - will have to by approved by Parliament in the coming months. Now that the measures have been announced but not implemented, this is a great time for interest groups to exert pressure on the government to "adjust its plans to reality." The most vocal pressure group is the National Federation of Hungarian Trade Unions (MSzOSz), the 800,000-member successor of the National Council of Trade Unions, the communist trade union federation. MSzOSz signed a cooperation agreement with the Socialist Party before the last elections. As a result of this agreement Sandor Nagy, president of MSzOSz, started the 1994 election campaign from the second place of the socialist national list - preceded only by party president and current prime minister, Gyula Horn - and walked safely into Parliament followed by about a dozen trade union functionaries. Nagy has become the chairman of the Auditing Committee of Parliament and chaired the Tax and Finance Committee of the socialist caucus until a few weeks ago, when he resigned in protest against the privatization policies of Lajos Bokros, the new minister of finance. Observers and even the Alliance of Free Democrats (SzDSz), the minor coalition partner in the current government, criticized the heavy trade union presence in the socialist caucus on the grounds that government and trade union functions should be separated. In return Sandor Nagy openly expressed his dissatisfaction with SzDSz as a coalition partner and suggested the Christian Democratic Peoples Party - a member of the governing coalition between 1990 and 1994 - as an alternative partner. Following the announcement of the austerity measures the cooperation between MSzOSz and the Socialist Party seems to have come close to the breaking point. The eyes are fixed on the prime minister. Will he be able to please his pragmatic finance minister - backed by the Free Democrats and the international financial and business communities - and his trade union ally at the same time? The worst thing that could happen is if this dispute remained unresolved. But I am afraid this is the most likely outcome, as well. * * * Tibor Vidos is a lobbyist and political consultant in charge of the Budapest office of GJW Government Relations. A version of this column also appeared in the Budapest Business Journal. =========== FINAL BLURB The Hungary Report is free to readers. To subscribe, send an email message to the following Internet address: hungary-report-Request@hungary.yak.net containing (in the body of the message, not in the headers) the single word subscribe Conversely, to stop receiving Hungary Report, simply send to the same address (in the body of the message) the single word unsubscribe The entire contents of The Hungary Report is copyrighted by the authors. Permission is granted for not-for-profit, electronic redistribution and storage of the material. If readers redistribute any part of The Hungary Report by itself, PLEASE RESPECT AUTHORS' BY-LINES and copyright notices. Reprinting and resale of the material is strictly prohibited without explicit prior consent by the authors. Please contact the authors directy by email to enquire about resale rights. For information on becoming a corporate sponsor of The Hungary Report, contact Rick E. Bruner or John Nadler by email. Feedback is welcome. Rick E. Bruner John Nadler Tibor Vidos ================ END TRANSMISSION