Hungarian government may slash overheads for businesses
Government may intervene again
The Hungarian Chamber of Commerce and Industry (MKIK) is calling on the government to review and align fixed-price energy contracts with the market price level for businesses. It argued that the majority of domestic small and medium-sized enterprises signed fixed-price contracts at high prices last year and cannot bear the high costs in the long run. Later on, the President of the Chamber, László Parragh, made several statements on the subject.
He explained to business daily Világgazdaság that MKIK's initiative is aimed at SMEs, which signed fixed-price contracts last year at the height of the energy crisis, leaving them "vulnerable to the energy crisis that was peaking at the time, and in many cases to energy suppliers".
"From one moment to the next, through no fault of their own, they found themselves in a vulnerable situation. For a long time they didn't get any offers, and when they did, they were able to contract for electricity and gas at exorbitant prices. Had they not signed up, they would have gone out of business," he added to the paper.
Parragh also said that there is an important condition for the reduction of overheads for companies: the Chamber proposes that companies should incorporate the resulting cost reductions into their prices and pass them on to consumers.
He said that this would substantially reduce end-user prices, which could have a significant dampening impact on inflation.
The scheme would apply specifically to fixed-price energy contracts, primarily electricity. The reason for this, according to Parragh, is that in this case there is a significant gap between the current market price level and the contracted fixed price.
The Chamber proposes that gas contracts should also be settled in parallel with electricity or in a subsequent round. "Electricity has to be done, and for gas we suggest it should be considered," Parragh said.
"We are proposing cooperation and collaboration between economic actors, which will also benefit society. The Chamber is committed to checking and monitoring the effectiveness of this. Let's free companies from their bad utility contracts, but in return we ask that the freed money be put back into the economy", the President of the Chamber explained.
The paper noted that
in principle, the government can intervene in these agreements by law, but this is a sensitive issue, as it raises questions of legal security and the rule of law.
"The state of danger legal order can provide the necessary legal room for manoeuvre, and it is also worth adding that the majority of energy suppliers are state-owned. It is therefore a matter for the government to decide what steps these companies are willing to take to support the stakeholders at the expense of their own financial management", the paper says, but it is unclear whether László Parragh is also proposing this form of implementation.
Relief could be automatic
The paper also writes that, if the legal background is created, a group of companies of a certain size (the article talks about tens of thousands of companies) would automatically have their overheads reduced without having to apply for it.
The portal has drawn up three possible scenarios:
- "Firstly - and this is the most likely option - it would be based on the share of energy costs within total operating costs. A percentage threshold would be set above which government intervention would be triggered.
- "Secondly, they might consider that government assistance would be merited above a certain annual energy demand, but this would be hardly pro-competition.
- "Thirdly, the legislation could be a combination of these, even with sectoral/industry specific clauses, for example, singling out bakeries for the support".
The article also suggests that we may not have to wait long for a specific proposal. The Chamber has been in talks with the government on the issue since February, and Parragh says the process has now reached the stage where a solution can be found. He stressed that the official government decision has not been made yet, but he believes that the proposal of the Chamber will be well received and that
the government's approval could be obtained very quickly, possibly within a week.
"If we had come up with the [solution to the] problem last December, we could only have predicted. But now we have real economic processes to go by, so the basis for a decision is there. Getting companies out of bad contracts they are stuck with can be done and we can give them more favourable market conditions," explained the MKIK president.
László Parragh was also a guest on an evening programme of commercial broadcaster ATV on Monday evening. He said that businesses that signed long-term contracts with suppliers were at a great disadvantage when energy prices surged, so now the Chamber of Commerce is asking the government to review these contracts and adjust them to market prices.
He also drew attention to the fact that some service providers are state-owned, and that the government can act in the capacity of the owner or use regulatory instruments, such as the application of an administrative price or the option to modify contracts.
He thinks that such measures are forced by life, that there is a constraint to intervene. He believes that if the government does not act, it will have even worse side effects. "There is no other way, we have to intervene, these steps have to be taken," the President said, explaining the proposed measure that is extraordinary from various aspects.
In addition to short-term government assistance, they also want the cabinet to encourage companies to modernise their energy supply.
He also said that there is no need to , and that the current economic policy must be continued in order to prevent the country from falling behind its European economic rivals.
There were harbingers
It is also fair to say that the suggestion is not entirely without a harbinger; something similar has been in the air for weeks. Already in April, there have been more numerous complaints from businesses that being permanently stuck in high-tariff energy contracts entails hefty costs.
"We need to look at how many people are locked into contracts that do not "get repriced", i.e. are unable to benefit from the impact of falling gas and electricity prices," Minister of Economic Development Márton Nagy told Inforádió's Arena programme at the time.
As regards the private market contracts already concluded, he added: "it is not easy to intervene in market processes, but there may be force majeure situations where intervention should be considered". On energy prices, the minister said it was important to note that there had been a sharp decline in gas prices, for example, from €300 to around €50 per megawatt hour.
But the minister said the key question is when this will be priced in, with the fact that many people have locked themselves into higher rates with long-term contracts, while spot market buyers are now better off. Nagy was firm at the time that they were only assessing the situation for the time being. "We need to look at the circumstances carefully," he said.
By issuing a government decree, the cabinet has already lowered overheads for a group of companies. These are those that were excluded from the universal service last summer, becoming part of the 'last resort' regime from August and then the emergency service from January this year. In light of recent Chamber proposals, it now looks like the government is preparing a similar move for a wider range of businesses.
In the light of government's track record, we would not be surprised if the Chamber's proposal were followed up by relatively swift government action. It has been typical in recent years that in many cases the President of the MKIK was the first to herald a certain economic policy intention, which was finally implemented in a form that the Chamber was also pushing for.
In recent years, the government has pursued a policy of active intervention in the market economy, especially when it comes to consumer prices. Just think of the fuel price cap, the food price freeze or the reduction of utility bill tariffs for households.
So in the light of this, government intervention would not be unusual. The question is what other consequences (beyond the visible benefits for SMEs) this would have.
The proposal would treat existing and valid contracts as null and void, which raises legal certainty concerns even though the government is expected to be able to resolve issues of legal technicalities simply by what it has been doing for years: ruling by decree.
It will also be an interesting question who will ultimately bear the cost of all this unilateral state intervention.
Cover photo: MTI/Lajos Soós
