Canada’s Airport Development Corporation’s (ADC) venture in Hungary has turned into one of the most bewildering cases of expropriation and expulsion; rekindling memories of the nationalization by communist regimes of the past.

Canadian real estate developer, TrizecHahn, built Budapest’s West End City Centre

ADC originally came to Hungary to develop and operate a new and modern, USD 120 million, passenger terminal at Budapest’s Ferihegy Airport. It was agreed that once ADC completed construction, the airport development firm would recoup its investment by operating the new 2B terminal, along with the Hungarian Government, for 12 years through the joint venture Ferihegy Airport Development Kft. (FUF).

But in late 2001, with 10 years still left on the contract, the Hungarian Government suddenly transferred all rights from FUF to the newly founded Budapest Airport Rt. - effectively locking out ADC and canceling the internationally-binding contract.

The case has left a black mark on the investment climate in Hungary – a sign that things are not as they should be. ADC has since filed a lawsuit with the International Center for the Settlement of Investment Disputes in Washington D.C against the Hungarian Government for USD 90 million. It is expected to be a lengthy and onerous litigation trial.

The entire debacle has transformed itself from a promising international project, to a claim by ADC of “nationalization without compensation.” It is a move that could only discourage and hinder future investment into the country.

“If a company wanted to make a big investment into Hungary, I would tell them to look very carefully,” says Hungarian-Canadian Béla Danczkay, director of ADC.

Weslin Automotive Industries in Oroszlány

Remarkably, this is not the only case of seizures and lawsuits for a Canadian company in Hungary. KCE Food Production and Training Kft., a company spearheaded by Canadian-Hungarian investors Judy and George Zafir, claim they were suddenly locked out of a vegetable processing plant they purchased: Kecskemét Canned Food Factory Rt. (KK) – one of the biggest vegetable processing firms in the region. George Zafir, who also owns the Canadian refrigeration company Coldmatic Building Systems (CBS), orchestrated the purchase of the factory from American firm H.J. Heinz Company in 1999. The Zafirs hoped to turn the failing cannery around after the collapse of the Russian export market.

But less than a year later, Heinz cancelled the contract, claiming only half the purchase price was paid. Heinz then sold the cannery factory and its assets to European Food Limited (EFL), a company registered in Belize. Zafir says that the factory was then seized by management at KK Rt., leaving KCE out in the cold.

“I’ve never experienced anything like this before, this is a total shock,” says Judy Zafir. “One day everything is fine and the next day we are locked out of our factory.”

Instead of a promising foreign investment, this story has also turned into a messy litigation nightmare. The case has gone back and forth between lawsuits and counterclaims.

While an out-of-court settlement has been reached between KCE and KK, George Zafir says they are in litigation with Heinz, and are preparing to sue the Hungarian Government for allowing the seizure and lockout to have occurred in the first place. A 1993 bilateral trade agreement between Hungary and Canada aims to promote and protect a transparent regime that protects investors in both countries.

While other Canadian firms might still have the keys to their businesses, some say they are also frustrated as they see the context of the business environment into which they ventured, change overnight.

Ownership of Kecskemét Cannery was disputed

Weslin Automotive Industries, a car parts manufacturing company established as a joint venture in 1999 by two Canadian companies, Linamar and Wescast, has the biggest Canadian industrial investment in Hungary. Murray Angus, Weslin’s finance director says the firm is perturbed over the Hungarian Government’s negotiation of the competition chapter of the acquis communautaire. Although Hungary's chief EU negotiator, Endre Juhász, said the EU was highly generous in the deal, Angus says the government gave up too much - and that the tradeoff will cost Weslin over USD 10 million.

“The principle of law was overturned and the contracts we had just became void. It’s a bit concerning, because we don’t know what we’re negotiating now and whether it will be valid in the future,’’ says Angus. “They changed the rules pertaining to the investors that were here at the time. It totally disrupted our business model by changing the tax holiday law both at a municipal and national level and put a maximum on the incentives that are available.”

“This has put a bad taste in our mouth more than anything,” adds Angus.

Not all Canadian investment problems, however, have been because of political interference, but simply a drying-up of opportunities and investor strategies.

Canada-Hungary investments
Hungarian-Canadians, such as real estate magnates Peter Munk and Béla Fejér, have launched important development projects in Hungary. In order to encourage further investments, Canada and Hungary signed a framework agreement in mid-November to encourage exports between Hungrian and Canadian firms. Canadian trade with Hungary has risen to USD 56 million in exports and USD 126 million in imports in 2002, according to Statistics Canada.

Canadian multi-billion dollar real-estate giant TrizecHahn Corporation, backed by Canadian-Hungarian Peter Munk, came to Central Europe in the late 1990s, announcing an ambitious and aggressive pan-European development strategy. It established the joint venture TriGránit Development Corporation, and completed a string of grand retail complexes that included the West End City Centre and the Pólus Shopping Centre in Budapest. However, in a surprise move in 2000, Trizec suddenly decided to divest itself of its European assets and concentrate solely on its US office portfolio.

While Trizec’s Hungarian investments had been very successful, the firm soon found that the real-estate pool in Central Europe was too shallow. Todd Cowan, CEO of TriGránit, told Canadian Mosaic magazine that the firm quickly realized Central Europe’s secondary cities were too small to yield a major investment, and too difficult to find investors who would buy them. While their massive shopping centers certainly made a splash on Hungarian culture, Cowan said at the time that Central Europe’s capital cities had become saturated. In the matter of just a few short years, the view from shareholders was that the real-estate potential for TrizecHahn in Europe went from boom to bust.

Claims of appropriation and lockouts will not help Hungary attract more Canadian investment. EU accession, however, may speed up the process of resolving these issues, and give Canadian investors the confidence to finally move forward.