Corruption Risks of EU Funds
EU projects are regularly overpriced in a centralised manner – as the study “Corruption risk of EU funds in Hungary” by Transparency International Hungary (TI), presented in Budapest today establishes. The distribution of EU funds is not efficient according to the report.
Also, the public procurement reporting system (using red flags) that monitors documents and information uploaded to public procurement databases, and indicates the suspicious cases from the point of view of corruption, goes live today.
EU funds are the foundations of growth
Hungary (along with other Central-Eastern European EU Member States) has had access to external development resources in the first two budgetary cycles of its membership on a scale unprecedented in its economic history. Between 2007 and 2020, Hungary receives more than 3.5% of its annual GDP – on average a little over a thousand billion forints per year – for development purposes from the European Union’s budget. „Without this, there would be no growth and no public investments in Hungary.” – says József Péter Martin, executive director of TI-Hungary. In some areas, significantly more funds than ever before are available, which – the government specifically urges – should be spent completely.
Too little is bad, but too much is just as bad
“The abundance of funds and the pressure for the country to use these to the greatest extent possible may in itself generate corruption, as those managing these funds plan the amounts intended for applications too high, and determine the eligible costs rather generously.” – sums up the study Gabriella Nagy, the head of TI’s public funds programs. It is not in the interest of the authorities to tightly control the spending, so overpricing is practically hard-wired in the system. It is not rare to see goods purchased for five times the market price out of EU grants. A Hungarian medical centre purchased a device from a Slovak company for EUR 1.7 million partly financed out of EU funds, the purchase price of which in Slovakia was EUR 262,000 (at its assumable real market value).
Public discourse is usually centred on whether the country can spend the EU funds in its entirety, but the efficiency of developments is pushed into the background. This attitude in itself is a blow to the fight against corruption, as more thorough and tighter controls take more time, and may therefore slow down project implementation. The efficiency of Hungarian development programmes is usually low. A good example for this is the area of State aids to enterprises. In the past little over ten years, Hungary spent 2.7 times the EU average on grants to enterprises, while its competitiveness indices remained far below the EU average.
Fraud is local, and not the EU’s decision
“Funds provided by the EU are usually awarded in public procurement procedures. This is the riskiest stage in terms of corruption.” – says Gabriella Nagy. The typical method is the tailoring or finetuning of public invitations to tender to limit market competition. It is remarkable that most corruption and fraud risks related to public procurement manifest outside the institutional system in charge of the use of EU funds, at the beneficiary organisations. A characteristic example to all this is when a few months ago the Water Management Directorate of North-Western Hungary (Hun.: Észak-dunántúli Vízügyi Igazgatóság) excluded the earlier favourite, and now disgraced Közgép Zrt. from the public procurement proceedings announced for the development of the Győr-Gönyű port on the Danube citing false data reporting. They argued that the closed deck of the ferry intended by the company for the implementation of the project measured less than 500 square metres at only 452.6 square metres. Közgép used to be outstandingly successful in public procurement proceedings, and was not subject to such tight controls.
TI’s report establishes: the legislative environment and the new institutional system for the period 2014-2020 has (also) centralised corruption risks. Following the dissolution of the National Development Agency, the authorities practising operative control over developments came under the supervision of the corresponding ministries from 2014, while the central coordination function lies with the Prime Minister’s Office. The changes introduced in 2014 are on the one hand characterised by decentralisation – bringing the coordinating authorities under the control of ministries –, and on the other by centralisation – the dominant coordinating role of the Prime Minister’s Office. Direct control from the state or government has intensified, as all functions are now within the public administration system.
“The decision itself – what development grants are spent on – also carries the risk of corruption.”, stressed László Kállay, lecturer at Corvinus University, and external expert to TI. The government made a decision: 60 percent of EU funds between 2014 and 2020 will be spent on the direct development of the economy (between 2007 and 2013, the country only spent 24 percent of these funds on the same). According to earlier surveys, funds allocated to the development of the economy – direct grants to enterprises – are used with very low efficiency, while they have a high exposure to corruption.
What next? TI makes corruption transparent
TI introduced two new tools today that may efficiently contribute to the fight against corruption related to EU funds. A mobile application enables citizens who own a smart phone to evaluate the quality and usefulness of investments in their surroundings realised from EU funds. Based on the scores received, a kind of heat map will be generated that offers opportunities for further investigations.
Also, the public procurement reporting system (using red flags) developed in cooperation with K-Monitor and the IT firm PetaByte, going live today is an IT tool for monitoring documents and information uploaded to public procurement databases (currently only EU ones). The software marks all public procurement procedures with a red flag where the risk of corruption arises. Visitors of the website www.redflags.eu have access to detailed information about any suspicious circumstances in public procurement proceedings marked with a red flag. Sándor Léderer, director of K-Monitor, says, “one of the most important characteristics of the tool is that it is able to foresee the risks. Therefore, the possibly corrupt public procurement procedures can be more easily prevented.” The software was created as part of a project supported by the European Commission.