At the end of August, the first clouds gathered menacingly on the horizon with Mol (the Hungarian Oil and Gas Company) announcing a price increase on diesel of HUF 6.25 (USD 0.02), blaming the situation on the world market.
There had been no price hikes since May, and the company felt compelled to take action. If the world market price for fuel continued to rise, then by the end of the year, diesel could cost upwards of HUF 10 to 20 (USD 0.03 to 0.06) more per litre, pushing up inflation by 0.6 to 0.7 per cent.
László Geszti, sales director, noted that it was in Hungary's interests for the world market trend to be reflected gradually in prices and to take the edge off the blow a further increase would mean. Mol's pricing policy was unique in this respect, as it was not interested merely in squeezing the maximum profit margin out of struggling consumers.
A drastic increase would be counterproductive: oil companies in Hungary had already witnessed a seven per cent drop in consumption compared to the forecast four to five per cent rise. In July alone, when petrol prices had soared to record heights, consumption had fallen by 13 per cent measured against the previous year. In the meantime, the cost of diesel had only gone up by one per cent.
Mol was committed to compensating for the fluctuations in world market prices for as long as it proved possible to do so. Having said that, the company was not in a position to influence retail prices. A minimum of customs duties was imposed on imported oil products and so it was up to the traders themselves to make up their minds about which refinery in the region they wished to purchase their oil from. Petrol price increases were already seen as unavoidable.
The other shoe drops
It was not until 14 September that the inevitable occurred with Mol ushering in increases of HUF eleven and six for diesel and petrol respectively. The Prime Minister was adamant about there being no opportunity to cut excise duties to ease the burden on car owners as such a move would only push up inflation the following year. Whereas France was prosperous enough to afford itself that luxury, Hungary would be forced either to borrow money or to introduce budget spending cuts if it were to follow suit, an unenviable choice. In an attempt to avert undue pessimism, Orbán pointed out that there was every indication that oil prices would go down a few months hence.
The prospects of immediate relief were not exactly bright: the forint's weakness against the dollar merely exacerbated the situation (on 13 September, one dollar was worth 304 forints) and Mol would have been perfectly justified in charging HUF 21 more for diesel and ten for petrol (not including taxes).
The price at the pumps would not necessarily show such restraint, however. According to calculations carried out by Mol, the rate of devaluation could go up by one per cent as a result of the fuel prices increasing, mainly due to the importance in the economy as a whole of major transport and haulage companies such as MáV (the Hungarian Railways), Mahart (Hungarian Shipping Company) and local Volánbusz operators (a network of regional bus services), all of which were major buyers of diesel.
Not so greedy
In order to avoid a plummeting in demand, Mol in its infinite wisdom had decided to put up its wholesale prices by a mere HUF 4.8 instead of 10 for petrol and 8.8 instead of 21 for diesel. At the same time, sales had not improved as anticipated, with Mol only able to tread water rather than offloading more of its products.
Nor did Mol benefit from the price increases as much as the average punter might care to believe. It looked upon buyers on the fuel market as partners rather than golden geese, expressing its hope that the client base would reciprocate in its relations with the company.
MáV, Mahart and the Volán firms staunchly resisted the temptation to put up fares and prices in spite of the prominent role played by fuel prices in determining what level they should be placed at. Malév was the odd one out, but had proclaimed its planned fare increases (as of 1 January 2001) previously. Such philanthropy came easy to MáV, where 80 per cent of locomotives run on electricity as it is (annual consumption of diesel
|
| [Photo by FreeFoto.com] |
As far as the Volán firms were concerned, the ongoing fuel price increases could also be compensated for. A quarter of the total costs incurred by the group of firms were due to fuel (they use up about 200 million litres per annum), but putting up the fares would not solve anything as it would serve merely to undermine their competitiveness, inducing potential passengers to switch to private cars.
Mahart's arguments against boosting tariffs echoed that of the Volán firms with retention of the competitive edge over Dutch and German ship owners given top priority. In the first six months of the year, Mahart had spent HUF 200 million more on diesel compared with the same period in 1999. On a short-term basis, tariffs would have to go up, and ten per cent would be the requisite figure.
Unrest
The first ominous rumblings of dissatisfaction could be heard from transport organisations with the MKFE (a Magyar Közúti Fuvarozók Egyesülete—the Hungarian Road Haulers' Association) resolving to resort to radical means if no remedy to the high prices could be found. The Presidency of the organisation agreed to put forward proposals on how to change the price structure for fuels.
Magyar Nemzet pre-emptively rushed to the government's defence by taking the sting out of the Socialist's arguments on the reasons lying behind the petrol price increases. According to Tibor Hommer laying the blame on governments is an act of demagogy, although everyone from the ministers in the oil-producing countries to the less talented of the opposition politicians indulges in it.
The Hungarian Socialists had attributed the rise to plans for raising the excise duties on fuel products by six per cent next year (in reality the figure featuring in the plan represents an adjustment to bring the tax in line with inflation). There was not a single Minister of Finance throughout Europe, however, who would not attempt to correct devaluation.
Although petrol is expensive in Hungary, the Socialist's real problem lies with the draft budget, which puts the money taken away by the notorious Bokros austerity plan back into ordinary people's pockets: the declared aim of the budget is to boost the standard of living, trespassing onto traditional Socialist territory. If the government were to pay heed to Socialist calls to maintain the excise duties at their current level the outcome would be a HUF 20 billion (USD 654 million) fall in precisely those revenues Orbán and his cabinet had earmarked for improving the standard of living!
Following the dispatch of a letter from haulers to the Prime Minister on 14 September calling for talks to be held, Orbán appealed in a radio broadcast to both the reason and the sensibilities of transport firms in an effort to dissuade them from organising copycat actions based on the Western European example of blockades and go-slows as the demonstrations had achieved nothing except damaging the countries concerned. In the wake of Mol's declaration concerning price increases, several interest groups in the transport sector had threatened to take to the streets.
The Prime Minister urged them to show patience and forbearance, as there were signs that the world market oil prices would go down in the course of the next three to four months. On the subject of the scheduled increase in excise duties by six per cent he reiterated his previous stance, emphasising that it would not boost state revenues. The government was just as adversely affected by the high fuel prices as the public at large, since the army, police force and ambulances had incurred new costs.
The government had left no stone unturned in doing its bit towards
| Read CER's ebook on the great Hungarian oil scandals |
In the letter, sent by Fuvosz (a Fuvarozó Vállalkozók Országos Szövetsége—National Federation of Transport Enterprises), KKVSZ (a Közúti Közlekedési Vállalkozások Szövetsége—the Road Transport Enterprises' Federation), MKFE (a Magyar Közúti Fuvarozók Egyesülete—the Hungarian Road Haulers’ Association) and NIT-Hungary (a Magánvállalkozók Nemzetközi Fuvarozó Ipartestülete—the International Trade Association of Private Road Haulers), the transport sector representatives struck a measured and conciliatory tone, highlighting the desirability of arriving at a common solution and showing voluntary restraint in rejecting the notion of demonstrating in favour of seeking an appropriate compromise.
László Nógrádi, Minister of Transport, was entrusted with the task of meeting the representatives.
Pumped for negotiations
Miklós Hifner, MKFE Secretary, did not preclude the possibility of wildcat actions being carried out by individual transport operators, although the organisations clearly preferred to meet around the negotiating table and the four biggest associations had submitted a set of proposals to the government to tackle the issues: that the possibility of claiming rebates on excise duties should be opened up, that at least part of the taxes paid by transport operators should be ploughed back into the sector by the government, preferably in the form of modernising the fleet of vehicles or of helping the sector to attain a similar level of standards to Western European haulage firms.
They disagreed with the government's insistence that excise duties would have to be raised in line with inflation and invited the government to reach an agreement with Mol, squarely placing the responsibility for price policy on the oil company's shoulders and expecting Mol to show greater resolve than it did at the present juncture. Finally, they condemned dual taxation, whereby VAT enters into the equation as well.
Orbán requested that negotiations take place with the relevant specialist portfolio, reiterating his argument that the only means to avoid an increase in excise duties paid on fuel would be to
|
Negotiations continued on 15 September with Orbán finally giving in and agreeing to meet the leaders of the various transport associations in person together with the Ministers of Transport and Finance (György Matolcsy). Miklós Károlyi, Secretary General of VOSZ (a Vállalkozók és Munkáltatók Országos Szövetsége—the National Federation of Entrepreneurs and Employers), who also took part in the talks, was at pains to emphasise the constructive approach taken by the haulers, who were not out for blood, but were motivated by the wish to avoid the kind of damage a strike or blockade would cause. Their restraint had been commendable.
For their part, the transport sector representatives welcomed the openness and flexibility shown by the government in acknowledging the hardships caused to the industry by the oil price increases.
Matolcsy revealed that the government was willing to explore the possibility of maintaining the excise duties at the current level or of allowing for a provisional decrease in them, although the budgetary implications would have to be reviewed scrupulously. Regardless of the conclusions reached, no inroads would be made into the money set aside for the Széchenyi Plan. He went on to explain that if the oil prices did not drop before the end of the year then devaluation would end up at eight to nine per cent instead of the planned sic to seven per cent.
László Kovács, leader of the Socialists, dripped poison in the chalice by questioning the realism of the draft budget, suggesting that the government should withdraw it. He accused the cabinet of deliberately underestimating the revenue side so that would have the surplus entirely at its own disposal. A six per cent figure for inflation (the government's working hypothesis) was unlikely and so the promises about helping pensioners and families were illusory. He also demanded that Orbán launch an extraordinary urgent procedure to reduce the taxes on petrol and diesel.
István Csurka, head of the MIÉP (Hungarian Justice and Life Party, the extreme, anti-cosmopolitan right), supported the idea of alleviating inbuilt taxes on petrol and diesel. The losses thereby sustained should be recouped from those responsible for causing the fuel crisis in the first place, the financial institutions and the multinationals. He went on to comment that the Socialists and Liberals dreamed of a new blockade paralysing the government's ability to go about its work.
The government's strategy of reasoned bargaining paid off with the weekend negotiations yielding agreement on no demonstrations. Backing down on the issue of excise duties sufficed to secure this result. As long as the world market average price per barrel of Brent crude oil remained above USD 25, the Orbán administration would refrain from submitting proposals to the Hungarian Parliament concerning an increase in the excise duties on fuel to bring it in line with inflation.
From next year onwards, the transport firms would be bolstered by tax breaks: small and micro enterprises including one-man firms would be able to decrease their tax base by a maximum of HUF ten million (USD 32,700), a concession which extended to vehicle purchase as well. They would also be entitled to tax concessions in line with the amount of interest paid on investment loans, comprising 20 per cent of the annual interest paid (though a more generous 40 per cent applied to economically backward regions). The maximum total concession would be HUF five million. In the near future the government and the representatives of service providers in the transport industry would set up a joint working party as a means of representing and assisting the profession with a view to EU enlargement.
No agreement was reached on rebates on excise duties and the establishment of a crisis fund for businesses foundering due to the oil crisis. The HUF 300 million put forward by Matolcsy and Nógrádi for such a fund was deemed too low by the transport representatives (who had requested HUF five billion). Dual taxation was likewise broached, but the two ministers did not have the authority to undertake any commitments, debate was deferred until the cabinet meeting.
Keeping the peace
In his customary radio interview on 21 September, Orbán stated that the government had not reacted with unmitigated delight to the proposals on excise duties, but he was willing to give them a try in the interests of keeping the public peace. He praised the representatives he had met with, dubbing them as honest and responsible.
Given that the higher petrol prices would lead to a fall in consumption, he was not convinced that VAT revenue would suffice to compensate for the HUF 20 billion loss to the budget the proposals would entail before going on to conclude that it would soon dawn on Western Europe that demonstrations could not bring about a drop in prices and so they were about as useful as protesting against the weather or flooding.
For the moment, Orbán's prudent recognition that posturing or flexing political muscle would alienate the transport operators, provoking the response he fears most, seems to have warded off the type of spectacle we have watched unfolding in the EU where governments have been tying themselves in knots trying to appease enraged lorry drivers and angry consumers.
One hopes this unpartisan stance will inform his decisions in future as well.
Gusztáv Kosztolányi, 23 September 2000
Moving on:
- Read Gusztáv Kosztolányi's ebook on the great Hungarian oil scandals
- Archive of author's articles in CER
- Browse through the CER eBookstore for electronic books
- Buy English-language books on Hungary through CER
- Return to CER front page
Sources:
Magyar Nemzet, Népszabadság and Magyar Hírlap, 31 August; 14, 15, 16, 18 and 21 September 2000.
