Hungary records huge EU funds inflow in May

Portfolio
Hungary has paid 108 billion forints worth of EU funds to tender winners in May, which is the largest volume disbursed since December 2018. By this the government has reached another milestone in EU funds disbursement, as it hit the HUF 6,000 billion mark, which is two thirds of the 7-year budget, Portfolio’s monthly aggregation shows. In the meantime, despite serious accounting disputes, the European Commission transferred HUF 115 bn worth of funds to Hungary, which is also the highest sum we have seen for months.
Hungary records huge EU funds inflow in May

Several hundred new tender winners

Portfolio’s database updated at the start of every month shows that more than 500 winners of EU tenders were announced in Hungary in May, most (226) in the Competitive Central-Hungary Operational Programme (CHOP or VEKOP), with new allocations reaching some HUF 6 billion. According to the funding database, nearly 200 companies won a few million forints worth of funding each for trainings, and several dozen cultural institutions received funds to improve the efficiency of public education.

The largest sum (HUF 27 bn) was allocated in the Environment and Energy Efficiency Operational Programme (KEHOP), distributed between 83 tender winners. Several larger building energy development projects by municipalities won hundreds of millions of forints in May. Budapest received billions in EU funding for energy upgrades in the district heating sector, and numerous small settlements won EU funds to work out local climate change strategies and to raise climate change awareness.

As the summary table below shows, with more than 500 tender winners in May, the number of projects allocated EU funds in the 2014-2020 programming period exceeded 125,000, with HUF 9,260 billion funds allocated. The volume of allocated subsidies rose HUF 49 bn last month.

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Besides the newly allocated funding we should also take a look at the volume of disbursements which totalled HUF 108 bn in May, the highest sum recorded this year. The volume of total disbursements reached almost HUF 6,000 bn (HUF 5,965 bn).

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As the chart below attests, a large share of the nearly HUF 6 trillion disbursement (HUF 1,423 bn) took place in the Economic Development and Innovation OP (GINOP) which has the largest envelope in any case. In its footsteps we have the Integrated Transport Development OP (IKOP) with HUF 1,264 bn worth of disbursements.

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It tells us a lot more than the nominal value of the disbursements about the progress made in the given OP if we take a look at the volume of tenders called in the given programme compared to the 7-yr envelope. This is shown in the 2nd, 3rd and 4th columns below.

The fourth column of the table below shows that the institutional system extended beyond the envelopes with its tenders invited in each programme. In fact, the sixth column shows that the allocations also exceeded 100% of the available 7-yr funding.

The last column of the table contains our estimates on the funding that has already been allocated but will need to be “given back" for the winners cannot see the projects through for some reason. In nominal terms, the largest chunks of such funds (possibly over HUF 400 bn) could be recorded at GINOP which has the largest envelope. Up to 20% of the allocated funds may return to the host (the state) this way, partly due to the impediments created by overly rapid price and wage increases.

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We should keep a close eye not only on disbursements in Hungary, but also on EU transfers, because until they arrive, the state budget needs to finance the entire process. According to Portfolio data, the European Commission transferred HUF 115 bn worth of EU funds in May at the expense of structural and development funds. The HUF 8,655 bn EU funds allocated correspond to 34% of the 2014-2020 budget.

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This also means that while the local institutional system allocated two thirds of the 7-year budget, the EC transferred only one third of the available funding.

The red arrows between the two figures are indicated by the red arrows in the charts below. The nominal gap was some HUF 3,200 bn at the end of May. The question is how and at what rate this gap could close. In the second half of May, there were reports again that consultations in serious accounting disputes were still in progress between Brussels and Hungarian authorities and that no deal was in sight yet.

Relating to oversight of public procurement tenders, Budapest tabled a proposal in Brussels in late May that would lead to a 400 billion forint financial penalty, according to local news portal 24.hu.

Portfolio’s reliable sources in Brussels claim the potential financial penalty is a lot larger than this, and until an agreement is reached no transfer can be expected, i.e. the gap will not be narrowed.

The paper also noted that the EC is unlikely to settle for a 10% financial correction of some HUF 4,000 bn worth of public procurements, and a penalty of up to HUF 1,000 billion may be proposed in the end.

The aforementioned HUF 400 bn penalty would not be a net loss of funds, provided the Hungarian authorities agree to it, rather than a second chance to “forget" the invoices of the affected projects and announce new tenders for HUF 400 bn worth of development projects.

The chart below also shows that the announced tender framework steadily remains over HUF 10,000 bn, whereas the theoretical envelope (at the latest EUR/HUF exchange rate) is HUF 9,184 bn, and total allocated funding (HUF 9,260 bn) exceeded this by nearly 1%.

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