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Insight: In Hungary, a business elite thrives

By Krisztina Than and Marton Dunai

BUDAPEST (Reuters) - Like many of the powerful people around Hungary's Prime Minister Viktor Orban, Zsolt Nyerges is media shy.

The lawyer from Szolnok, a city in Hungary's east, has had a hard time staying out of the limelight in recent months because of his involvement in businesses that have secured a series of government contracts and attracted growing public attention.

Hungary itself is in the European Union's sights over media freedoms, central bank independence and a budget overspend. The EU, an important lender, has criticized changes to Hungary's laws that it says advance Orban's conservative Fidesz Party.

Nyerges is an important player in a business empire that has grown up over the past 15 years around Fidesz, according to documents reviewed by Reuters and interviews conducted for this story. Fidesz's hold on government was assured by winning a two-thirds parliamentary majority in 2010.

Among Nyerges's business interests is an advertising company that appears to be on course to take a bigger share of the outdoor market in Budapest. Another is a diversified holding company, Kozgep, that in various consortia with other companies has won over 200 billion forints ($895 million) of public contracts since 2010, according to data compiled by left-leaning journal Magyar Narancs. Reuters has verified much of the data. The value of these contracts was divided among the various participants in the projects.

Kozgep has won two big government contracts for solar energy development. One of them, a project for the University of Szeged in southern Hungary, was awarded to a Kozgep subsidiary even though the firm came third in the initial tender.

It successfully argued in a public procurement court that its competitors should be shut out of the tender, according to an October 10 ruling posted on the court's website.

That decision drew a scornful speech in parliament from Andras Schiffer, a deputy in the small, green-liberal opposition party LMP. "All this is part of a strategy," Schiffer told parliament last month. "This strategy is about creating a new system of vassals."

Nyerges is a business associate of Lajos Simicska, a high school and college friend of the prime minister who is the "eminence grise" in Fidesz, sources with knowledge of the party said. They spoke on condition of anonymity because of the political sensitivity.

Nyerges declined through a spokeswoman to be interviewed for this article. Simicska did not respond to attempts to reach him.

Orban appointed Simicska, a former Fidesz finance chief, to head the tax authority during his first term as premier in 1998. Simicska stepped down from that post a year later. He has all but disappeared from public view since then.

Some Hungarians say the economic rise of businessmen with close ties to Fidesz runs counter to the pledge that Orban, 48, made on election night. At that time Orban, arguably the most powerful politician to emerge in Hungary since the end of communism in 1989, said his party's victory meant the country had ousted "the oligarchs who abused their powers".

Denouncing his Socialist predecessors as corrupt and servile to Western interests, Orban said his government would wipe out the political connections and business deals he said were typical of the ex-communists.

"The era when politics served private interests and built private power is now over," Orban said. "We will not allow it to return ever again."

With his four-year term nearing its halfway point, businessmen close to Orban and Fidesz have solidified positions in the country's business world much as Fidesz has cemented political control. Orban has assured his party's dominance well beyond the next elections, due in 2014, by appointing loyalists to key posts in areas like the judiciary and the media.

Critics, including the European Union, have said these moves and other laws have weakened democratic checks and balances in the former communist country.

Budapest is in a tense legal dispute with Brussels over changes to its central bank law and the judiciary, which the EU says undermine their independence. This has blocked a deal on an EU and IMF loan, which Budapest needs to cut borrowing costs and potentially avoid a default in the most heavily indebted nation in Central Europe.

LOYALTY

Businessmen loyal to Orban and Fidesz now control some institutions responsible for distributing public funds, including EU money, sources with knowledge of the matter said. Among these bodies are the National Development Ministry, National Infrastructure Development Corp (NIF), the development bank MFB and the NFU development agency, the sources said.

Some state-owned companies also have been populated with Orban loyalists, including gambling monopoly Szerencsejatek and energy group MVM. In industries such as construction, energy and advertising, businessmen close to the party have gained increasing influence according to documents reviewed by Reuters and interviews with people with knowledge of these sectors.

Instead of corruption being reined in - a stipulation of EU membership - the problem has become more pronounced over the past eight years. When Hungary joined the EU in 2004 it ranked 42nd in Transparency International's Corruption Perceptions Index. By 2011 it had slipped to 54th place. In a report last week, Transparency International singled out political parties as the biggest corruption risk in Hungary and urged more rigorous rules on party financing.

Even people friendly to Fidesz see a need for change.

"For the time being, the era of oligarchs does not seem to be over," said Peter Heim, chairman and chief executive of investment firm Atticus Investments. Heim is chairman of think tank Szazadveg Economic Research Institute, which is close to Fidesz. "A domestic elite should not be built by helping businessmen on the basis of loyalty," he added.

A government spokesman said an important goal for the cabinet was eradicating corruption.

"Under the Socialist and liberal governments political corruption became a systemic institution deeply undermining the credibility and social legitimacy of the political elite," the spokesman's office said. "It is the government's prime goal to create 'Corruption Free Hungary'."

FOREIGN FIRMS OUT IN THE COLD?

Hungary's government actively supports foreign manufacturers like German auto makers Audi and Daimler that create jobs. Other foreign companies have been less favored.

"We should not support foreign firms who come here only to use their capital might to squeeze out Hungarian entrepreneurs from domestic markets and then repatriate their profits back home," Orban said last month.

"We stand by Hungarian small and medium enterprises and Hungarian capital, because they are the ones who will always be with us, who will always be ready to give jobs to the people."

His government imposed windfall taxes on energy, telecoms and retail firms in 2010 and also imposed Europe's biggest tax on the country's banks, most of which are foreign-owned. An area where foreign firms' market share has shrunk is outdoor advertising. Budapest's streets are awash with ads on billboards, backlit eye-level posters and placards.

Public transport company BKV has some of the city's prime advertising locations on its buses and underground station walls. BKV receives about 2 million euros per year in exchange for advertising space. Contracts and other documents show that companies that pay BKV a fixed fee to sublet that space can make large profits.

For instance, state gambling firm Szerencsejatek Zrt paid one such company, Publimont Ltd, 250 million forints (830,000 euros) to display ads for three months on some of BKV's buses and other surfaces, contracts show.

Company registry documents show Publimont's owners include Nyerges and Simicska.

The market leader in outdoor advertising, with about a 50 percent share, is Epamedia, owned by Austria's Raiffeisen International. Epamedia gets only about 1 percent of advertising deals from the state sector, company executives said. Epamedia Chief Executives Timea Samu and Szilard Szelei said the market has been distorted since Fidesz took power.

"If your media has the right type of owner you will get the revenue from state deals," Szelei said. "If not, the deal will be taken away and you're left with the commercial market."

Publimont now looks well positioned to take the entire BKV market in a tender the transport firm launched last year. After the first round, only Publimont and a consortium led by a firm called Euro AWK are still in the running. Euro AWK's co-owner and chief executive, Karoly Fonyo, has shared interests in the advertising market with Simicska.

Epamedia, which was shut out of the bidding, says the tender was designed to exclude firms with no ties to Fidesz and bypassed a public procurement process, so allowing BKV to set tailor-made conditions. Epamedia started legal action to have the tender declared unlawful and a new process launched.

The Public Procurement Court ruled last month that BKV had breached regulations by skipping a public procurement process and fined the company 2 million forint, but it did not order a new tender. BKV said it did not discriminate.

"We firmly reject the idea that our company would tailor the tender to fit any individual applicant," BKV said in a written reply to questions, adding it "ensured competition and allowed all firms, not only Hungarian ones, to apply."

Both Euro AWK and Publimont Executives said the companies had not influenced BKV's decision.

($1 = 223.5921 Hungarian forints)

(Corrected 5th paragraph to clarify that Kozgep has won public contracts as a member of various consortia that included other companies as well and the value of these contracts was divided among the participants in the projects)

(Editing by Michael Roddy and Janet McBride)

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