Will the nationalisation of Hungary’s telecoms sector deliver on its goals?

Will the nationalisation of Hungary’s telecoms sector deliver on its goals?

Through acquisitions and shareholdings, the Hungarian government – led by Prime Minister Victor Orbán’s Fidesz party – is increasingly displaying its determination to boost the state’s role in the telecoms sector, arguing that it will deliver an economic boost to Hungary, strengthen its position on the global stage, and prove beneficial for consumers.

ABI Research’s Fei Liu noted that the Hungarian government has emphasised its “desire to boost the size of all sectors of strategic national importance under a national ownership”, adding that “telecommunication is a top priority after the energy, banking and media sector.”

The reasons for this are manifold; Liu notes that despite the significant focus from the government, Hungary’s digital transformation is progressing at a rate slower than expected. International TRADE Administration stats shows that the gross value added (GVA) from the ICT sector was estimated to be US$20 billion in 2020, suggesting the digital economy is about 20% of Hungary’s overall GVA, while Liu notes that the Covid-19 pandemic accelerated the momentum for digital transformation in Hungary.

However, on a macro level Orbán’s desire for greater national ownership in strategic sectors goes a lot deeper, and is shared by many former Eastern bloc states. As noted by the FT, many such countries sold off their Soviet-era assets in the 1990s – and then found that this degree of foreign ownership left them highly vulnerable following the 2008 financial crash. Since coming to power in 2010, Orbán’s government has introduced taxes and price caps that appeared to benefit consumers, but that had the effect of nudging foreign players out of the market. The FT notes that Hungarian ownership has climbed above 50% in sectors including banking, media and energy.

Telecommunications is another strategic sector targeted by Orbán’s government; last August, the state partnered with Hungarian IT firm 4iG to acquire the Hungarian unit of UK-based Vodafone, which has now exited the market. State investment vehicle Corvinus took a 49% holding in the unit; it has since reduced this to 30%, albeit via a share-swap with 4iG that has allowed it to take 25% stakes in both Yettel Hungary and its infrastructure unit CETIN Hungary.

At the time of the sale, Vodafone Chief Executive Nick Read noted that Orban’s government had laid out a “clear strategy to build a Hungarian owned national champion” in the ICT sector, but it was significant that Orbán’s government exempted the acquisition of Vodafone Hungary from competition scrutiny by issuing a decree to this effect - a move that underlined the concerted efforts by Orbán to move towards an environment of ‘crony capitalism’, as oligarchs with strong ties to Fidesz increase their influence in strategic sectors.

According to Jozsef Peter Martin, Executive Director of Transparency International Hungary, 4iG’s chief Gellért Jászai is one of the oligarchs closest to Orbán. While Jászai was already a successful businessman under Hungary’s previous government, with his wealth derived from real estate, he had nowhere near as much clout as he does under Orbán, and Martin cites the decree exempting the Vodafone acquisition from competitive scrutiny as an example of this.

“It’s a reflection of crony capitalism and also state capture” says Martin. “Development authorities don’t do their work - they turn a blind eye when they should oversee or investigate. The conflict of interest here is obvious – the Hungarian state has stakes in two of the three operators, the competition authority should obviously intervene.”

The Hungarian government argues that state ownership in strategic sectors will benefit the economy, and Liu notes that in theory, folding government policy into economic decision-making could result in a more competitive market. However, Martin argues that Hungary’s brand of ‘economic nationalism’ relies so heavily on EU funding that it could have the opposite effect; if multinationals leave the market, the playing field would become more uneven, raising red flags for the EU. However, if the EU then opted to apply financial pressure to Hungary’s government by withholding funds, this would also impact foreign firms in the market. Therefore, a compromise is the most likely scenario; Martin expects a limited portion of EU funding to be made available, on the condition of strict oversight.

The EU’s reaction to Hungary’s shift towards national ownership has been somewhat muted, although Martin believes that there is an increasing recognition among member states that the government’s strategy no longer reflects the union’s values. He argues that Hungary cannot be considered a western-style democracy anymore, and claims that it is more of a hybrid system somewhere between this and a dictatorship. This is perhaps reflected by an increased blurring of boundaries within Hungary, such as those between the state and the market or private and public interest. Martin notes that the economy is increasingly less autonomous, and cites his own research which shows that around 50% of its total value added comes from multinationals, while 25%-30% belongs to the ‘crony’ economy, and the remaining 20%-25% domestic market players.

There are signs that attitudes are changing. A study by the German-Hungarian Chamber of Commerce found that nearly 20% of businesses aren’t satisfied with the business environment, in a significant drop for German businesses (Magyar Telekom, the dominant player in Hungary’s mobile market, is a subsidiary of Deutsche Telekom). Martin is unsurprised: “At least in the EU, this is unprecedented – this kind of over-centralisation, this transitory nationalisation, it’s a method of huge wealth transfer from incumbent market players to crony players. It’s unprecedented both in terms of its volume, and the methods.”

These methods vary from sector to sector; surtaxes and other special charges were applied to the banking sector, as well as hostile takeovers (a savings cooperative has been created from three separate banks that were requisitioned by law from their foreign owners). Martin cites Vodafone Hungary’s sale as an example of a “friendly” takeover; there is no suggestion that Orbán’s government tightened the screws on Vodafone, and the group is currently strategically streamlining its operations so the sale makes sense - but the government’s offer of €1.8 billion for Vodafone Hungary was undeniably well above market price, and as such one that Vodafone effectively could not refuse.

Still, despite Hungary’s push for ever-greater state ownership in strategic sectors – to the benefit of Fidesz cronies - the statistics currently do not indicate that Foreign Direct Investment is decreasing; indeed, it hit a record level last year. Orbán’s strategy applies on a sector-by-sector basis depending on strategic importance, and many foreign firms in other sectors are receiving incentives to remain – perhaps to ensure a minimum level of FDI, although motives are unclear and the situation is complex. While there are theoretical upsides to increased state intervention in Hungary’s telecoms sector, it appears that neither consumers nor foreign enterprises are the current beneficiaries.

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