France is the third largest investor in Hungary, making up 10 percent of all foreign direct investment in 2002. Of this, according to the French-Hungarian Chamber of Commerce, 31 percent was by water distribution companies, the largest two being Veolia Water and Suez Environnement. As large as their stake is in Hungary, local municipalities still retain control over the operation of these public services.

Onyx Holding Kft., part of the larger French Veolia Environnement Group, had been operating the waste treatment company, Biokom Rt., in Pécs with the local government since 1995. But after failing to buy out the council in mid-December for a controlling stake in the company, Onyx pulled a surprising move by turning around and selling its 49 percent share back to the local council.

“Onyx did not want to stay in the company as a minority stake holder because it was not assured that the company would be run the way we would like, which is to control the company or the management. We couldn’t get either of them,” says Balázs Tölgyesi, Onyx’s financial officer.

In the privatization process, local governments and private businesses have at times gotten into swordfights over how to run public utilities. While other European countries have widely accepted and encouraged a greater role for private companies in public services, Hungary is still hesitant to open its doors all the way.

“In France, it is widely accepted that municipalities will give 10-12 year, 100 percent ownership contracts,” says Tölgyesi. “In Hungary, because of its past, municipalities are afraid to award 100 percent contracts because they feel its puts the city at risk.”

Strict regulations on procurement for other public services have also made it difficult for companies to get controlling stakes from Hungarian local municipalities. This has proved problematic for private firms who are trying to wrestle for a greater say in how their money is spent.

“Most municipalities prefer to have a larger ownership in these waste collection or waste management companies and the Hungarian state has a big word in the pricing,” says László Perneczky, project manager for Hungary with the Regional Environmental Center (REC). “But investment has to come from the outside, because local governments are not rich and do not have enough money to invest. How can a private company though, get enough revenue when it cannot define its own prices?”

The water plant in Pécs is partly owned by French firm Suez Environnement

Hungarian law currently prevents private firms from having a majority stake in municipal or state water and wastewater utility firms; ensuring that the basic infrastructure, such as the pipes, remain in the hands of the state. This means that private firms control only about 20 percent of the water and wastewater market in Hungary, while the figure is reversed in countries like the Czech Republic. In Hungary, local and state governments own the remaining shares.

Pressure from environmental firms, however, is beginning to produce some changes. The large investments that Hungarian utilities will need in order to comply with EU standards has also had an influence. The Hungarian Government, through the National Water Directorate, is currently drafting a law that is expected to go to Parliament in early 2004, which will outline conditions for increasing the privatization of water and wastewater firms, some which are completely controlled by the state. I will also create a uniform pricing system, but will not, however, give private firms a controlling share in the utilities.

Continuing with the trend, last June the Ministry of Economics and Transport initiated a public-private partnership (PPP) program in order to encourage more investment in state projects. PPPs differ from the traditional state investment projects that companies like Veolia and Suez are currently involved in. Generally, PPPs are operations that are contracted out to private firms for a longer term, usually 20-30 years, in exchange for a fee paid by the state.

However, the Hungarian Environmental Ministry has yet to submit a project under the scheme. Having the concept work in Hungary could take some time.

“The market is not matured and not ready for these partnerships. One main element of the situation is that the market is inhomogeneous and we cannot expect to have everything immediately clear cut,” says Zoltán Csorba, managing director at Suez Environnement Hungary. “It will take convincing and promoting of the concept to let the partners understand what the advantages of cooperation are.”

But as French environmental companies look for a bigger share, they say they also want to maintain a partnership with the state, to make it a more efficient alliance. Companies are generally supportive of the idea that the Hungarian Government should continue to control the infrastructure assets and that the private firms provide the services and control the operational framework.

“Waste management is not a simple service and should also involve the municipality,” says Attila Martin, country manager of A.S.A. Hungary, a waste management company controlled by Electricite de France (EDF). “The normal thing is that who gives the money should have the security and should get to make the decisions too.”