Hungary accepts gigantic financial correction to keep EU funds flowing

Portfolio
Hungary has agreed to a penalty of nearly 700 billion forints to make sure the European Commission does not put a stop to the flow of EU funds to the country, former member of the European Parliament Benedek Jávor wrote in a blog post, citing answers to his questions by the EU executive. The actual funding content of the penalty relating to the mismanagement of EU funds is about HUF 590 billion, more than 7% of all allocations available for the country in the 2014-2020. Therefore it is no wonder Hungarian authorities are trying to disburse at least this much more funding from EU projects via over-allocation.
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Portfolio was among the first to report in September that in order to ensure the uninterrupted flow of EU funds Hungary has conceded to massive financial sanctions. At that time, the penalty was estimated at around HUF 300 bn. A few weeks ago, a source told local news portal 24.hu that the penalty would be over the HUF 300 bn mark, while former MEP Benedek Jávor has blogged that the financial sanctions will amount to nearly HUF 600 bn. His conclusion was based on replies he received from the European Parliament’s Budgetary Control Committee to his inquiry.

The highlights of Jávor’s findings (supplemented by Portfolio’s views) are the following:

In 2018, the Commission did not need to impose any financial corrections but Member States agreed to apply themselves some flat rates corrections to address risks of irregular past expenditure. The most relevant was the Hungarian case.

In 2018, out of 30 programmes in reservations for 2014-2020, eight were in Hungary and six in France.

For the 13 other Member States only one, more rarely two programmes were concerned by reservations.

Systemic irregularities were found in the public procurement processes of seven Hungarian operational programmes. The Commission recommended a 10% financial correction on HUF 5,600 bn worth of procurements. One of the most important new information presented by Jávor is that Hungary accepted this flat rate fine, for it made no sense to check the procurements one by one. This does the smallest damage probably. Jávor estimates that this will cost Hungary HUF 560 billion.

The answers to Jávor’s questions also revealed that in addition, other flat-rate financial corrections were applied in Hungary. One of these is a 25% financial correction on framework agreements in the water sector in the Environment and Energy Efficiency OP due to public procurement irregularities. Out of the HUF 420 bn framework the cabinet accepted the penalty on HUF 260 bn worth of allocations, i.e. the cost of this penalty is HUF 65 billion, Jávor estimates.

In addition, there will also be a 10% flat-rate financial correction in the Territorial and Settlement Development OP due to deficiencies during the project selection. According to Jávor, this penalty will amount to HUF 60-80 billion.

The three items above add up to HUF 695 billion worth of financial sanctions. Given that the ratio of EU funding in these projects is generally 85%, the actual penalty will be cc. HUF 590 bn. This corresponds to 7.4% of all allocations in the seven-year programming period, and the cabinet strives to over-allocate by at least this much.

The financial correction or penalty does not mean the loss of EU funds, only that the Hungarian budget will need to finance that much more of the projects so that the allocations promised by Brussels could be actually drawn.

In layman’s terms, the HUF 700 bn expenditure is to be borne by Hungarian taxpayers, because more developments will need to be carried out in the country than what had been planned originally.

When does the EC apply flat rate penalties?

In general, the Commission services propose to apply flat rates where it is not possible to quantify precisely the amount of irregular expenditure. This may occur in two situations:

  1. In case of serious deficiencies in the functioning of the management and control system not linked to individual irregularities. In this case the Commission services propose the application of flat rate corrections between 5% or 100% taking into account the relative importance of the serious deficiency, the frequency and extend of the serious deficiency and the degree of risk of loss for the Union budget (Article 31 of Commission Delegated Regulation 480/2014);
  2. In case were the financial impact of an irregularity cannot be quantified precisely. This is typically the case for public procurement irregularities where it would not always be proportionate to correct the entire amount of a contract affected by an irregularity.
  3. In case were the actual extent of an irregularity is not known precisely.

In all cases, the regulation gives the Member State the opportunity to demonstrate that the actual extent of the irregularity is less than the Commission’s assessment. In practice, the application of a flat rate is often preferred because it also entails less administrative cost and allows closing the procedure quicker, for the Member State to re-use the allocations for eligible operations and avoid de-commitments under N+3.

Flat rate financial corrections for Hungary

Following an horizontal public procurement audit, that identified serious deficiencies in the functioning of the management and control system in relation to the control of public procurement procedures, the Hungarian authorities were requested to either

  1. analyse all contracts in all Operational Programmes and identify whether the same irregularities identified by the Commission auditors are present, and apply the necessary financial corrections on the contracts affected by an irregularity; or
  2. to apply a 10% flat rate financial correction on all contracts awarded under the deficient management and control system. After different litigations and an interruption of payments by DG REGIO on a considerable number of Hungarian programmes, the Hungarian authorities opted for the application of the 10% flat-rate financial correction.

Cover photo: European Union, European Council media library. Photo taken at an EU summit in Brussels on 17 October 2019, and shows Hungarian Prime Minister Viktor Orbán conversing with European Commission President Jean-Claude Juncker.

This article is part of the work programme titled "The impacts of EU cohesion policy in Hungary - Present and Future" which is carried out by Net Média Zrt., the publisher of Portfolio.hu, between 1st April 2019 and 31st March 2020 with European Union financing. The views in this article solely reflect the opinions of the author. The European Commission as the funding entity does not take any responsibility for the use of information presented in this article.

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