Tag Archives: Hungary

The Hungarian Cabbage Tax Policy

I was watching my gulyas leves cook and reading through George Lang’s well written cookbook, George Lang’s Cuisine of Hungary, when I came across the section on ‘Potted Cabbage: Pickled or otherwise.’ The opening passage struck me. It turns out that understanding Hungarians’ passion for cabbage is also a great way to understand the current economic policies that are being implemented by the still relatively new Fidesz Government.

Every small nation must be chauvinistic in order to survive. There was a Hungarian professor, one Horvath by name, who carried this chauvinism to the extreme of trying to show that everything originated in Hungary, including Paradise. He even tried to provide a native etymology for cabbage, and that is not too strange when one considers that Hungary has probably invented more ways to prepare cabbage than any other nation. However, the Hungarian word for cabbage come from the Latin caput, meaning “head” (George Lang’s Cuisine of Hungary: p281, 1971).

I think we would all welcome the idea of Paradise in Hungary, but that does seem a little remote for the moment. Rather, it is an era of re-emerging nationalism. Characterized by the borderline chauvinistic national candor of the Hungarian Prime Minster,  Viktor Orban. In assessing his second economic plan for the country, it is clear that there is now the creation of a ‘native etymology’, not for cabbage, but for taxes.

I try not to place too much importance on politicians and nationalistic discourse, as economic policy and even the larger society can often carry on as normal (although that is a loaded statement – space is limited). What is emerging in Hungarian economic and social policy is this nationalistic chauvinism that directly effects the economic prospects of the country. And this has me concerned.

The introduction of new corporate taxes and the altering of the normal financial management of pensions is tinged with a nationalistic flare. This ‘reorganization’ appears both the expression of national chauvinistic interests and the attempt to create yet another new economic system.

Orban has already been noted for outlining the decline of neoliberal capitalism, that led us into our current financial crisis. The firm attitude against the IMF – in favor of international market financing of the country’s debt – while contradictory, also matches what is emerging as a decisive management style. With no public-private-partnerships currently being allowed, and the significant banking tax and now the taxes on other key economic sectors. Things appear black and white. If they are black they are cut down – even if they will impact those in the white.

The proposals this week for taxes on the energy, telecoms and retail chain stores is also part of a wider economic program that includes a flat personal income tax starting in 2011. Emerging this past week was also the freeze on the transfer of private pension contributions, which the state will hold onto for the time being (or until private pension plans are abolished in favor of a single state system).

Hungary, just as for the cabbage, is coming up with new taxes and financial arrangement that no one else could have dreamed of. Who could think of a special tax on grocery stores? Who implements a policy to prevent the transfer of pension payments? Now that it is getting colder out will there be a special tax on any product containing cabbage too? What kind of caput thinks of these policies and the astronomical tax rate (profit margins on retail chains are below 5%)?

I don’t mean to make light of the dire financial situation Hungary is in, or the radical economic restructuring that must be instituted in Hungary. But these taxes and financial arrangements are for short term gain and only provide long term instability for economic growth and business investment. The creative taxing plans create heightened uncertainty for other sectors, which could be affected if more tax revenue needs to be found. If the government does not operate  along EU rules (telecom’s tax illegal under EU rules),and does not apply a coherent long term tax structure enabling firms to create predictable financial and investment plans, then economic growth will not just stagnate but fall. The Government says the emphasis is now on SME’s for providing Hungary’s economic growth, but can they grow if the banks, because of the banking tax, are not lending money ?

Serving a good sauerkraut in Hungary takes months to prepare. George Lang recounts how families would prepare the cabbage in a large barrel in the kitchen then place it in the cellars for months before eating.

The good day’s hard work was amply rewarded a few months later on a snowy winter Sunday when the family sat around the table to enjoy the aroma, color and taste of a Transylvanian cabbage made with perfectly pickled sauerkraut (George Lang’s Cuisine of Hungary: p282, 1971).

Creating the right economic environment to foster long term investments takes longer than creating a tasty pickled sauerkraut. Building a national economy based on predictable economic and tax policies is what leads to job creation and long term economic growth. Creating new Hungarian recipes for higher tax revenues will taste like sauerkraut gone bad- even for German investors.

Bulgaria: Oh – I have to pay for the pipeline?

Will that be cash, credit or debit?

Bulgaria appears to be ahead of most countries signing up for gas projects. Probably only for the fact that they are the only ones that might be able to squeeze a little extra money out of others. Sofia now wants a little extra help from the EU to finance its pipeline construction to connect to Nabucco. I guess a transit pipeline is not much help if you can’t get the gas out of it. Seriously, though this raises two flags.

One, Bulgarian finances are tight, but so are the other CEE countries – Romania, Hungary, how will these countries be paying, not only to build the actual Nabucco pipeline but the connections for the off-take? Will MOL and Transgaz be able to self finance these portions? For me, this is a significant point as it indicates that the other countries will be coming out with similar requests for financial help or maybe even a reduction in their share of financing portions of the project. If things are financially tight now, for companies and governments alike how will they raise the needed capital in time to begin construction in the next few years?

Point, 1.1 For Bulgaria, Serbia and Hungary it also must be asked:

– What about financing of South Stream connections?

– What about financing for South Stream pipeline portions that are more directly connected to state participation?

Two, we have a on Trend.az, of Bulgaria getting ready to join AGRI. Georgia is keen to export Azeri gas via tanker to Bulgaria. However, while the whole AGRI project remains speculative, it becomes even more unsure when it appears that Bulgaria can’t finance key aspects of the Nabucco project. Security of supply can be increased for each country, but participation in every new gas pipeline project that is announced seems dubious.

And three, what will also appeal to Hungary and Romania, is Bulgaria request to shift Nabucco costs out of national budgets – i.e. debt levels will not be seen.

Overall, the financial crunch is emerging for these projects. While countries continue to sign up and support all alternative routes – the deeper questions of who is going to pay for this still needs to be asked. In addition, if these pipelines/LNG facilities are built how much will gas cost for consumers? Will the cost be so high, as to reduce demand making these projects over ambitious?

AGRI another Gas Acronym and White Elephant for CEE

Supply diversification for securing energy is based on long term persistence. The recent agreement by Hungary to establish a project company to assess the viability of the LNG based Azerbaijan-Georgia-Romanian Interconnector (AGRI), may be an initial attempt. However, current gas projects cast doubt on the viability of this project.

The project company is held with a 25% stake by each of the countries. The plan is to create LNG facilities on the shores of the Black Sea, emminating from Azerbaijan, then transport the gas via upgraded pipelines to storage facilities in Hungary, or onward to points west.

The viability of this project falls flat when you consider the other pipeline and LNG projects that are at more advanced stages, and provide equal or higher supply diversification.

First, the LNG facility under development on the island of Krk, Adria LNG, which at the moment does not have a direct investment from either the Hungarian government or MOL or its Croatian subsidary INA, is a cheaper and more effective option at supply diversification. The cost of the facility is substantial, so much so, that RWE recently pulled out. Leaving a gap that Hungary/MOL/INA can fill. The high cost of one facility to construct with 4 other partners would be substantially cheaper than building two facilities with limited supply diversification.

The fact that the gas that would feed AGRI is the same gas that will be feeding Nabucco or even the Edison backed IGI (if it happens), means AGRI offers very limited supply diversification. If we consider that Turkey and Bulgaria will probably be stable transport countries. Investing in a sea based transport route literally becomes a floating white elephant – with gas.

The limited supply of Azeri gas is already a problem for Nabucco and IGI. Will Hungary and Romania (already Nabucco partners) really compete against themselves for the same Azeri gas? Although it was just stated by Turkmenistan that they have huge reserves they want to export, realization of this supply, in an efficient and timely manner, remains to be determined.

Cost is another component. Can AGRI really compete against a pipeline route? Most likely not. Nabucco will cost €8 billion for 31 bcm, while the Krk facility is planned to cost $1.5 billion for 10 bcm per year. But then use this equation (LNG terminal x 2 + #tankers = expensive).   AGRI has not stated the amount the capacity. I would also assume the long term operating costs are also much lower on a pipeline operation. In addition, the facility is being designed to be expanded up to 15 bcm.

There is plenty of room just in the Adria LNG facility to off set any need in AGRI. In addition, if additional Azeri gas is what Romania and Hungary really want, this can be transported through Turkey and bottled up and shipped via LNG tanker to Krk.

The peanut for this white elephant is the Hungarian government choosing to go with MVM to be the project company. If it was a viable project MOL would become involved in it, not a generation company that already distorts market operations. But just like South Stream is a government supported project with progress now amounting to the number of intergovernmental agreements signed, but limited identification of which Russian gas fields will be used, this project will be long on talk and short on results.

It is important to try to understand why Hungary and Romania are joining this consortium if it isn’t a serious project. I still stand by my earlier assessment of why Hungary is choosing both Nabucco and South Stream. However, I’m more unsure as to the purpose of signing up to this project, maybe it is to turn up the pressure on Russia. They can both press their positions on Gazprom and see if it is serious about building South Stream.

While Gazprom dallies to sign up new partners every day, at the end of the day, it may represent a political shot across the bow towards Russia by Hungary and Romania. They may be hinting to Gazprom to get serious. Romania may be pressuring Gazprom to choose it over  Bulgaria for the Black Sea landing spot,  while the new Hungarian government might just like to throw off balance Russia/Gazprom. Either way, AGRI is not a serious project for supply diversification – rather a mouse used to scare the elephant.

Hungary’s Dual Monarchy Turns into Dual Pipelines

Note: I’m reposting this as it originally appeared in the Energy Security blog, Feb 3, 2010. It still remains relevant in light of the appearance of yet another pipeline project

The roll-out of the gas pipelines continued last week as Hungary sought to add diversity to its gas supply. Diversity in this term refers to diversifying away from the Ukraine as a transit country, but not from Russian gas. The fifth Hungarian-Russian intergovernmental joint committee meeting resulted in Hungary progressing further in its balancing act of supporting both South Stream and Nabucco. The Hungarian state owned development bank (MFB) with Gazprom set up a joint company to begin pipeline preparations. Hungary may soon be bursting at the seams with gas – but why support both pipelines?

The geopolitical balance that Hungary must strike between competing pipelines results in it choosing a dual pipeline approach: a national compromise of sorts that balances the need to anchor it with neighbors for gas supply diversification and its pragmatic trading relationship with Russia. The Austro-Hungarian Compromise of 1867 attempted to balance the need for Hungarian independence and statehood with Habsburgian dominance and, in the age of Bismarck – realpolitic.

Under the Compromise of 1867, Austria and Hungary each had separate parliaments that met in Vienna and Buda that passed and maintained separate laws. Each region had its own government, headed by its own prime minister….The suggestion for a dual monarchy was made by the Habsburgs but Hungarian statesman Ferenc Deák is considered the intellectual force behind the Compromise….He also felt that Hungary benefited through continued unity with a wealthier, more industrialized Austria (Wikipedia).

The fact that the Russian army effectively put down the 1848 Hungarian revolution combined with Hungarian ties to the Habsburg European monarchy were large influences on the Compromise of 1867. The dual monarchy, as is the dual pipeline, is a reflection of Hungary’s continual balancing act. Unable to break free from Russian influence yet striving to be ‘in’ economically successful Europe, Hungary steers a path that reflects east-west relations. The choice between South Stream and Nabucco gas pipelines reflects this same dual approach.

The support given to both projects by Hungary is genuine. The country can benefit from not just diversity of supplies (routes and sourcing) but also from transit and storage fees that both pipelines can bring to the country. In the age of financial meltdown, social tensions and falling revenue streams Hungary is ill placed to deny additional revenue. Hungary’s oil and gas group MOL, last week reaffirmed an agreement with Gazprom to begin the development of an underground gas storage site at the depleted Pusztafoldvar-Dus gas field– which can/will be utilized by South Stream. Thus even in the case of MOL which is a key partner in the Nabucco project, benefits from participating in the South Stream project can be had. In addition, the Hungarian feasibility study for South Stream will be carried out by MOL within a joint venture MOL-Gazprom company. There should be no illusions, even Hungary’s premier Nabucco partner is set to gain from the Hungarian section of South Stream. Whether MOL would also participate in the actual building of South Stream is unknown, but no other company in Hungary has the expertise.

Therefore, whether one or two pipelines are built in Hungary, MOL may also be positioning itself to be involved in these dual projects. Therefore, without undermining MOL’s position and economic interests, the Hungarian government (with MFB) has stepped in to support the ‘competing’ or ‘complimentary’ pipeline (depending on ones perspective). Politically, Hungary can maintain its international relations, balance neighborhood policy and diversify its gas supply by moving forward in a dual manner.

According to Sergei Kupriyanov, Gazprom spokesman in a March 2009 interview with a Hungarian radio station, “South Stream will be built to supply Russian gas to European consumer. The two projects are totally incomparable; Nabucco and South Stream are not rivals.” And this is where the solution for the Hungarian government may lie. Diversification for security of supply concerns, as both South Stream (non-Ukrainian transit) and Nabucco (non-Russian supply) provide justification for the acceptance and support of both pipelines.

This ‘dual pipeline’ approach allows Hungary, as it has in the past, to walk a fine line between supporting the Russian position and economic interests while also showing support to the ‘neighborhood’ pipeline which seeks supply diversification. The dual monarchy that Hungary participated in, was not the ideal solution, nor the full expression of national sentiment – what it did, through Deák’s statesmanship, was satisfy the competing demands of the nation from internal as well as external tension. The failure of the 1848 revolution firmly placed the future state of Hungary within the Russian sphere of influence – along with the reaction (or lack thereof) of England and France – thereby relegating Hungary to the margins of Europe, where to this day, it still relies on realpolitic for economic and social development.

The acceptance of both South Stream and Nabucco demonstrates the continual balance Hungary, and its companies, play in advancing economic development and their security of supply in energy. The participation of France in South Stream while the demands of the EU (including Austria) lie with Nabucco symbolizes the geopolitical fate of Hungary.

Hungary/MOL Officially Pins Russia/Surgut

A pin, or fall, is a victory condition in various forms of wrestling that is met by holding an opponent’s shoulders or scapulae (shoulder blades) on the wrestling mat for a prescribed period of time. (Wikipedia)

In a move that the sporty Putin must appreciate, Hungary and MOL, have been judged to have pinned the likes of the (rumored) Kremlin backed Surgutneftegaz. The judges can be seen to be the international financial analysts, and myself.

“While we cannot rule out talks between Surgut and the Hungarian government continuing behind the scenes, we doubt the buyout will take place in the near term,” commented Olena Kyrylenko, analyst at KBC Securities, on Thursday. (Portfolio.hu)

Due to the tight shareholder conditions imposed by MOL and the Hungarian Energy Office and Parliament, the concerted strategy has resulted in Surgut stuck with its 21.2% stake in MOL. The Hungarian government lacks the money to retrieve the stock for Hungarian pride security of supply.  So now that they have proven that Surgut can’t really do anything with its shareholdings, Hungary can sit back and see if anything comes up they can either barter off, or raise the money to buy it outright. And for this I’m not making any prediction as to “how long the prescribed period of time” is that Hungary will be holding Surgut to the mat. Either way, they’ll probably be in this tight position for awhile. As Hungary lacks the financial resources until at least 2013! Enjoy the mat.

A bridge too far? Connecting Hungary and Slovakia

The end of summer in Central Europe, marked by cooler temperatures and rain, puts everyone to work on the gas issue. The election of Hungary’s Fidesz, this past spring, also allows us to see the emergence of a new energy policy. One suspects, more overtly diversified than the last administration. However, from what appears to be emerging, Hungary – and Orban, continue to play both sides, with the view that more routes of gas through Hungary the better – or at least until the bill comes due.

In my attempt to come up with a concise analysis, or perceive a significant shift in government policy, what emerges is simply a collection of news stories with high rhetoric and long-term contradictory plans. Although, one area does stand out and this is the efforts by the Hungarian state to buy/cajole/force its way into private energy companies operations (to be discussed elsewhere). And the long-term prognosis of this is continued high energy prices for consumers in Hungary, limited competition and limited efforts to transition to sustainable energy sources. But let me share some of the key stories this past week which make me so confused on where this is all headed.

Rivers of gas flowing to Hungary

Access to gas from the Causcauses and Central Asia could reach Hungary and Austria through the AGRI project (Azerbaijan Georgia Romania Interconnection) which will transport Azeri gas to the shores of Romania via the shores of Georgia via liquefied gas terminals. In some ways this seems more complicated than building a single pipeline connecting Azerbaijan to Europe (but then that is the story of Nabucco isn’t).

If you thought this latest plan (among a group of plans for the southern gas corridor) would be a threat to Nabucco AGRI’s project organizers state there is no competition. “AGRI won’t replace Nabucco, it is complementary to Nabucco,” said Adriean Videanu, Romania’s minister of Economy, Trade and Business Environment. And as they point out in the article “He added the project could be finalized before the Nabucco because there are no political barriers for its completion”.

Apparently Hungary agrees with this assessment, or maybe they privately see Nabucco not going anywhere. Because now Hungary has signed up to the project, as it will be able to use the upgraded gas piplelines between Romania and Hungary to bring in the gas and either store it in Hungary or transport it to Austrian storage.

So to keep score, Hungary now has plans for gas transport from Nabucco, South Stream and AGRI. If there is any indication as to the viability of this latest plan, it is reminiscent of Italian backed proposals to create more modest pipelines transporting Central Asian and Russian gas (ITGI, TAP and White Stream). In addition, if no new infrastructure needs to be built, it will be the cheapest way for Hungary to diversify its supply. Meaning, it must put any cost/benefit analysis of Nabucco and South Stream under even more pressure. But then when you are talking about security of supply emphasis should be on benefits over cost, or should it?

Slovakia – too expensive for MOL

Regional cooperation in gas infrastructure is essential for Hungary’s security of supply. This line of reasoning has prompted MOL to act in the past, proposing NETS to interconnect Southeast Europe, and Orban to call for a North-South gas network in Central Eastern Europe. However, it appears that when it comes down to linking Slovakia to Hungary with a gas pipeline,  cost does outweigh the benefits.

In this story, the head of Slovakia’s gas transmission company, Eustream, CEO Antoine Jourdain, says MOL ain’t fulfilling its promise to connect the two countries. As the story’s opening says,

Hungary’s FGSZ Foldgazszallito, the gas-transmission unit of Hungarian oil and gas company MOL, halted construction of a planned gas pipeline between Slovakia and Hungary.

Jourdain told the newspaper that FGSZ stopped the joint project after conducting a survey whose results suggested that such a cross-border pipeline would not be profitable.

Apparently, MOL never got to the stage to move any dirt. I also understand the profit part (which MOL does do a good job of, while simultaneously building large amounts of interconnectors), what gets me in the story is the mention of rumors.

While [the Slovak paper] quoted unnamed Slovak government sources as saying that Hungarian government pressure could have had a role.

Hmmmm….This is what I’m confused about. If it is the explicit policy of the Hungarian government and MOL to increase North-South gas interconnectors then why would such a project come under pressure from the Hungarian government to be stopped?

First we can believe that that the interest in such a pipeline may not be high to justify the cost, as FGSZ-MOL states. However, from a security of supply perspective it may be a very effective – and needed – connection for Slovakia. Because Slovakia is 100% dependent on Russian imports, and with limited storage capacity (which Hungary has).

One explanation for FGSZ-MOL withholding on building the pipeline is they are waiting for more EU/HU/SK money to be available to build it. It is an essential pipeline for security of supply, so why wouldn’t more money become available. If trading volumes are low on it, compared to the cost of construction, then holding out for a few months may be the right business strategy.

Second Reason – MOL ownership

The second reason – and this just fulfills the attempt at making connections in the weekly stories, is the Hungarian government is actually slowing down this project. The fact that Hungarian Minister of National Development Tamas Fellegy, was in discussions on Aug 27th with Russian first deputy Prime Minister Viktor Zubkov, may hold some link.

Hungary is attempting to regain Surgutneftegas’s 21% holding in MOL. However, as everyone knows Hungary has no money. Therefore, Hungary has to find some leverage, or something to trade for this stake. I would suspect that Hungary would even take neutral activity on the part of Surgutneftegas until Hungary can find the money to purchase the shares. Therefore, is it possible that Hungary is using this interconnector as leverage? Weak, I know. But then the Hungarian bargaining position is also weak.

But this may not be so weak if you consider that Poland is now under EU pressure to cancel the ‘Gazprom Clause,’ as it most likely infringes on the conditions of the Third Energy Package. Contracts with Gazprom generally restrict the reselling of surplus gas to other countries. This has the effect of constricting the formation of regional and EU wide gas markets. Therefore, the EU Commission may take antitrust action against Poland. If Hungary were to build this interconnector, it would fall under a similar situation – since it too is dependent on Russian gas.

Gazprom/Russia would be opposed to a North-South gas pipeline as it reduces their monopolistic and direct connections it has developed with each CEE/SEE country.  They are interested in transmission pipelines and supply countries directly, not feeding into a competitive and robust European gas market. Or rather, a gas market in the CEE/SEE region that is competitive and robust. Western Europe with Russia’s gas allies (France and Germany) and the much lower market concentration, is not something Gazprom believes it can achieve a monopoly over – like in the CEE/SEE region.

Delay, delay…

The non-development of an actual physical gas pipeline compared to agreeing to another distant scheme to bring gas to Hungary stands out. It is all well and good to bring to Hungary some hypothetical frozen gas, from expensive still-to-be constructed terminals, but another to actually build a pipeline 100 km long. Now it is not clear the complete connections here, but regardless, slow movement by the Hungarian government on greater neighborhood cooperation, in actual projects, serves its own purpose as does agreeing to large transit volumes moving through Hungary. The winter heating season may be creeping up on us, but true supply diversification, at this point, looks as unattainable as a snowman in July.

HUPX: National interest or MVM’s interest?

Has the light bulb come on for MVM or has it decided to play another game on the Hungarian market? This was the question dominating the workshop organized by the new HUPX company with participation of EPEX Spot, a European power exchange company on April 7th. The day-ahead power market will be coming to Hungary by July 1, 2010. A reference price for the Hungarian market may finally be created.

First, it should be stated that a day-ahead market in Hungary meets the pent-up demand of energy traders and the market along with paving the way for a more efficient operation of the electricity market in Hungary and in the CEE/SEE region.  However there does remain skepticism and many questions as to the role that MVM will play on the market and MVM’s overall strategy.

To create a liquid tradable market exchange you need sufficient buyers and sellers participating. But the problem in Hungary is there is an elephant in the country – MVM. It is the (state owned) dominant market player. It has signficant production capacity, plays a market intermediary role and owns the TSO, MAVIR and now there is a growing interest in distribution companies, in addition to all this it is the owner of HUPX; in other words it is a big fat elephant that if it decides to sit down, then no one is going anywhere.

Gabor Szorenyi director of the Hungerian Energy Office stated at the workshop, this is essentially what happenend over the past two years, politically, and to the benefit of MVM, nothing has occured that would loosen MVM’s grip on the Hungarian electricity market to promote greater market liquidity. Now the possibility exists that some liquidity will develop. But how much is the question?

And this was THE question by participants. To what extent is MVM going to participate in HUPX, since it is the main company that can create liquidity on the market? The strange thing about the workshop was that while the representatives from HUPX and EPEX were there, no one from MVM showed up to explain how they would participate. A representative from the trading arm of MVM Partners was there to explain that yes, MVM was planning to participate. While we also learned that MVM was looking at optimizing the times on its power plants so it could participate the extent of participation is unknown.

There are examples in the CEE/SEE region that can prompt skepticism about the extent that MVM has seen the benefits of an open and transparent market. The Romanian market is a good example where an active exchange operates, but due to control by the state in the generation market and the portfolio arrangement of these companies, the market remains sticky.  That is cheap hydropower can be sold on an international bilateral basis, outside the exchange, while more expensive generation is kept for both the regulated consumers and for the power exchange.

This shifting of generation assets to different domestic and foreign markets is an option that MVM holds. Their current study into asset optimization should be seen as a warning signal for the regulator and other market participants that some generation assets may not be available on the power exchange. How this plays out, whether expensive generation assets are retained for the free market or the ‘regulated’ market remains to be seen – or even its daily availability. Asset optimization may just translate into profit optimization for MVM and not optimization of the market.

Another key issue is the control that MVM exerts over MAVIR. I actually have a favorite part in the presentation from the CEO of HUPX. In extolling the benefits of HUPX, the slides states,

100 % Hungarian ownership guarantees national influence

Hungary’s international influence will be strengthened

This is great. Now I buy my share of Unicum, but is there a place for “national influence” in what will develop into a regional exchange? Soon HUPX should function on an interregional basis as effectively as on a national basis. The regional role of energy traders and energy companies with their regional generation portfolios and their attempts to optimize these at the regional level leaves little room for more national interests to be asserted. The chronic under investment into Hungarian generation and transmission along with current high prices are the result of ‘national interests’ being pursued.

The role that MAVIR can play in concert with HUPX in protecting Hungary’s national interest would actually be horrible for Hungary’s true national interests. Hungary’s true national interest lies in integrating its national electricity market into the CEE and SEE regions for both security of supply benefits, meeting climate change commitments and diluting MVM’s influence in the Hungarian generation mix.

Ahh, did I just write that… regional market integration would dilute MVM’s influence on the Hungarian market? Yes, I did. Imagine, rogue traders would be buying and importing power to the detriment of MVM’s higher priced facilities – or whatever it chooses to charge. Now would that be in the national interest? Could MAVIR help the situation by restricting access to and from the Hungarian market (e.g. Bulgaria)? Will there be underinvestment into cross border infrastructure? What will the be the NTC and ATC values? How much do you trust MVM to participate in HUPX in good faith with its monopolistic control? Will it operate in Hungary’s national interest or in MVM’s own interest?

There should be more indicators that MVM is changing its ways then simply setting up HUPX. MVM needs to develop a regional growth strategy – not a Hungarian national growth strategy, there are enough private players who want into the market to begin to satisfy the generation demand. If you already dominate the market, what good does it do to seek to dominate it more? Why buy into E.ON distribution? A look around at EU and (other) national policies shows that the regionalization of energy markets is occuring, a MVM concentrated on dominating the national market demonstrates a lack of vision that will be eroded over time by endless EU directives and investigations, not to mention continual underinvestment.

If you look at the US and Europe in the 1990s, companies that have expanded beyond their national base (while it was protected) did well (my PhD and recent work has been on this topic). Merger and acquistion activity, or even organic growth at a regional level can be good business – think CEZ. MVM needs to create and act on a regional business strategy – HUPX can be the start of this (although for MVM to succeed at a regional level significant internal changes need to occur).

There remains a lot of unanswered questions as to the viability and level of power that will be available on HUPX. Before the exchange begins operations and companies spend significant amounts of money to join the exchange MVM needs to state the extent that they will participate  – and how. Hopefully the day has finally arrived for Hungary to build a robust electricity exchange with multiple product offerings. This can only benefit the range of consumers in Hungary and their different types of demand. But enough questions remain that some regulatory intervention may be required to reduce MVM’s hold on the entire electricity market. Allowing it to construct a hobbled electricity exchange and expand its domestic influence should not be something it gets away with. Market participants and HEO need to step up and make their views known.

MVM:vertical integration better for milking consumers

Pursuing an earlier agreement E.ON confirmed that it is in talks with the government of Hungary and MVM. The state owned electricity company is seeking to gain a minority shareholding in the distribution assets of E.ON. Talks include discussions over asset swaps, with MVM seeking to finalize the deal by the end of 2010.

MVM, just like Romanian and Bulgarian owned counterparts, once had a strategy to become a regional player like CEZ. I’m just wondering if instead of attempting to expand outside of Hungary they have decided to concentrate on consolidating their position within the country. MVM is already in a dominate position in the generation sector.  The Hungarian system gives MVM a near monopoly on generation with it buying and selling a large majority of the power in the country. Even companies like E.ON or RWE that have generation assets have to sell their electricity to MVM then buy it back to sell to their generation company. Needless to say, profits were high once again last year.

The distortion that MVM causes on the Hungarian power market is really nothing short of scandalous. It is a middleman that does not need to exist. In fact (if I can deviate)  it reminds me of the system set up at the Hungarian Academy of Sciences library. If you want to use the library you have to do the following: Go to the coat check, get your coat check number, go to the library, say hello to the ‘library nani’ who, after looking at your library card and taking your coat check tag, gives you a seat number on a green card, then you go to the librarian to give the same number and your card, after which the librarian gives you a red card with the same number on it.  I won’t even get to the point that it all should be electronic and you can sit anywhere…but the existence of the library nani is equivalent to MVM.

While I prefer my tax money going to the library nani who plays solitaire all day, MVM, by acting as the middleman sucks money from my pocket to enrich itself and the state. The profits it makes both in its market dominant position and role as a middleman causes all consumers in Hungary to pay more for a service that does not even exist in surrounding countries. This is one reason why Hungary has the highest electricity rates in the region. In addition, MVM has played an important role in the perpetual underinvestment in generation in the country – leading again to higher electricity rates. Plus with its total control of the transmission system operator MAVIR, thus limiting exports and imports, it strangles the Hungarian market through a state approved monopolist – despite EU efforts foster a competitive electricity market.

Now, that MVM is interested in buying into the distribution assets, whether a swap or not, it will essentially recreate a vertical monopolist on the Hungarian market. Through some of my research in the past I have examined why a government would maintain a vertically integrated monopoly (Michigan has essentially done this). The reason for it is to ensure long term power investments that will result in lower prices. I fail to see how the track record of MVM or its strategy milking consumers for unnecessary services contributes to a competitive Hungarian energy sector.

The alternative to a government owned power milking machine is effective regulation with stipulated rates of return and regulated prices (for providers of last resort). Really, life can be that simple.

But just like consumers don’t think of where their milk or meat comes from, they don’t understand the complex financial transactions involved in the energy sector. This enables governments to use the sector as a taxpayer milking machine – essentially adding another tax layer to utility bills. Maybe it is time for Hungary to become power vegetarians.

Hungarian Perspective of the World

For those that haven’t seen this wonderful little map – from the Hungarian perspective – it is something to contemplate over a beer this weekend. I have no idea of the original source, but it is pretty a good representation of the Hungarian perspective.

To add a little more perspective, drawing from István Bart’s great book ‘Hungary and the Hungarians’ 2007, the definition given for ‘The French’ is:

Franciák through the course of history, Hungarians have considered the French, whom they have only known from a distance, the idealized opposites of the all too familiar neighbors the Germans – i.e. Austrians -, whom they have known to be brawny-, aggressive and narrow-minded, while the French have appeared to be refined, light hearted, easy going, and generous of spirit….

[click for larger image]

Second Wave FDI Strategy in Energy hits SCEE

The energy and consumer resources of the SCEE region are now in play for global players. Traditionally dominated by European utilities which pushed into the region when countries began to privatize their electricity and gas distribution companies, the likes of E.ON, RWE, EDF etc… now a second wave of investment may be occurring.  It may be too soon to be calling it a full wave, but there is no doubt that constrained home markets and past expansion plans by a range of energy companies have hit a wall with the global economic meltdown resulting in new strategies being deployed.

Just as the first wave of privatizations altered the energy landscape in the SEE and CEE regions, the second wave represents strategic actions that will cement companies into the region for decades. First let’s run through the slew of stories that serve as the foundation of this proposed second wave, it looks like a grab from Cold War foes.

Today there is the setting up of the joint venture between Gazprom and the Hungarian Development Bank (MFB) called ‘éli Áramlat Magyarország’. It is the company that is meant to operate the South Stream Pipeline through Hungary.  However a decision will be made in 2011.  Although you would think that MOL would actually be involved in operating a pipeline through Hungary, it is already committed to South Stream.

The Russians are still in the headlines in the noisy affair in Croatia of whether they are or are not interested in taking over INA. They continue to deny it, and MOL continues to come under political pressure for ‘corruption’ allegations over how MOL gained control of the company from the Croatian state. Nonetheless, less file this under ‘interested FDI’. As it could be seen with the previous story that if South Stream doesn’t pass through Hungary then it would pass through Croatia, thus having to deal with the technical competence of INA-MOL. Either way, MOL and Hungary stay in the South Stream story – thus the current sour grapes between MOL and Russian Surgutneftegas may go by the wayside before 2011, when actual construction decisions on South Stream (and Nabucco – with US support) are made.

But waiting to put both these pipe dream pipeline plans into disarray is Exxon Mobil, with the aid of MOL, which continue to explore the Mako gas field in Hungary. With Mako possibly holding huge potential reserves – if it can be extracted. Two earlier tests wells have failed which may have helped to prompt Exxon Mobil to buy Texas-based XTO which has expertise in shale and tight-sands deposits.  Very useful expertise for the Hungarian tight-sands, and other countries’ deposits in the CEE region. This should mean if  gas is extractable, XTO will be able to bring the technical expertise to make it happen.

Lest we forget that we are at the beginning of a green revolution, US based Fagen Inc will be setting up a bioethanol plant in Hungary. With Hungary a top 10 global exporter of corn and wheat. Hungary may be well positioned to use its natural resources to its advantage. And this is the true story of the second wave of foreign investment into the region.

This partial list of FDI, coming out within the same week, does indicate change in how foreign companies are participating in the local energy markets.  There is much more activity on the production and resource provision side then on the consumer-services side of the business chain. This represents a maturing of the business market in the region. The privatization of distribution companies was ripe for the injection of private capital which governments lacked at the time and for managerial expertise. The newest round is focused more on investments of energy resources that feed into the consumer side of the business. The result will be a new supply sources that will compliment existing sources. From a security of supply view, diversification of sources is a good thing. But part of any evaluation of security of supply are political and geopolitical elements.

The competing/complimantary projects  (depending who you talk to) of Nabucco and South Stream no doubt must be assessed from a geopolitical point of view. But I think that is for another posting. What is important is that the investments by these companies represent a long-term regional investment. The necessary skill sets will be fostered with local talent and infrastructure improved. This is a good start to what will become a larger wave of investments set to transform the infrastructure for energy production to low and zero carbon energy sources. Gas and ethanol are key in the near and mid-term transition process. Expertise and the development of infrastructure in these businesses will lead the transformation necessary to reduce the regional carbon footprint.

Update: to underscore this second wave of investments, and into renewables there is now this story:

The European Bank for Reconstruction and Development (EBRD) has decided to invest up to EUR 125 million to take a 25% stake in the Hungarian and Polish subsidiaries of Iberdrola Renovables. link