Conflict of interest and links between business

and politics at local level

Koncsik Anita

koncsik.anita@k-monitor.hu Athens, 25.02.2016.

Conflict of interest – negligence or a hidden agenda?

A delicate topic in today’s Hungary:

Benign interpretation: legislators treat the phenomenon with generosity and goodwill or

Sceptic interpretation: legislation during the last few years has been institutionalizing a twisted form of state capture:

Pattern (hypothesis): cronies of the reigning party alliance can benefit from tailor-made legislative amendments shaped to meet their personal needs

Examples of the affected legislative pieces

Act CXCV of 2011 on Public Finances

Act XXXVI of 2012 on the National Assembly

Act CXLIII of 2015 on Public Procurement

Landscape of local municipalities

Municipal elections took place in the autumn 2014 where transparency NGOs

conducted a joint research trying to estimate the real campaign cost of the

parties (5:1)

Landscape of local municipalities

As to the elections: no (comprehensive) regulation (at all) about spending limit or subsidies to

parties and candidates from the central budget.

Facts also showed that there was no strict distinction between state (governmental) and party

campaign on local level

Asset declarations of municipality council-members => every municipality regulates the issue

itself

Common (and legally accepted) practice: „untouched, closed envelopes”

Local budget suffers from lack of transparency and is not easy to understand even for council-

members

Political finance shows strong correlation with public procurement corruption

Danger: contracting authorities using public contracts as pay out hidden donors of

political finance

and sport finance issues

Anomalies around tenders of local municipalities

?Regulatory loopholes in the pp act combined with tailor made procurements

equals

public contract worth more than 35 million EUR in 2 years

Anomalies around tenders of local municipalities

Anomalies around tenders of local municipalities

Tender

Owner

NP

A B

C

Owner

NP

Preparatory phase

Contributor

Winner

Anomalies around tenders of local municipalities

Details:

Paragraph 24 of the Act CVIII of 2011 on public procurement (relevant coi provisions):

every contributor called in by the contracting authority can be excluded because of conflict of interest only when its (personal) contributions could result in distorting fair competition.

Conflict of interest in the preparatory phase only could affect the contributing ventures and not their closely tied partners (vague exclusion criteria)

Besides, the company was awarded (many times as a solely bidder) through tailor made procurement calls:

specific references required by the contracting authorities (ia EU-funded projects asreferences)

even the subject of the tender was “overspecified” by the tenderer in order to have one bidder with one particular subcontractor to fulfill the given requirements.

This praxis inspired 2 of the indicators of the recently developed redflag IT-tool[www.redflags.eu]

Procurement risk assessment in action – redflags.eu

Automatized

Ex ante monitoring enabled

Risk-forecast

Not „judging”, weighing or validating

Built upon a formal algorithm-system

Pre-programmed filters used for scouring the wording

of the procurement notices

Customized combinations of filters

Ex post refining of filters

uncertain quantity

restricting geographical

requirements

EU-funded contract as a

reference

requirement of a reference performed

within one contract

timeframe to submit bids is

too tight

Construction of red flags

From 60 identified indicators more than 40 implemented [32 – 9]

Contiguous updates (Tenders Electronic Daily) - 15 500 notices (contract notice, contract award, additional information)

Thematic focus

Compliance with the legal rules

explicit breaches of the law

loopholes, bad practice

Other risk factors

Cartel - NCA

K-Monitor DB

Users can subscribe to alerts

Redflag-system in action

Results - statistics

Indicator correlations – the NIF study

In the case of one contracting authority (amongst the top 10 spender) more than 50

cases showed the same pattern:

The subject of procurement falls into an area of suspected cartel.

Estimated value of work contracts is too high.

Regarding contracted experts, too many years of professional experience is required.

Geographical requirements are listed within the scope

of technical-professional capacity.

The required revenue from the subject of the procurement

exceeds the estimated value of the procurement

Future plans

Extending the scope of examined notices (Hungarian practice below EU-threshold)

Targeting applicability in other EU Member States – „core indicators”

Machine (deep) learning for refining the components of tailor-made procurement

calls

Pattern analysis, sophisticated weighing

Integrating other databases

incl. data from the company register

market share

Interconnections described by „theNetwork” of K-Monitor

Future plans – integrating other databases

Databases - targeting excavation of conflict of interest:

Data from the company register or interconnections described by „theNetwork”

(Ex)

Owner

Executive

officer

Member

of SC

A

B

Winner

C

Contarct award Contract noticeCompany register

Contributor

(ID)

Regulatory see-saw with conflict of interest

Amendments to the new act on Public Procurement

Originally, immediate relatives of politicians and other high-level public officials

were prohibited by law from taking part in public procurements as bidders.

The amendments to paragraph 25 of the act enabled with retroactive effect for

immediate relatives to enter into tender procedures - only excluding relatives

living in the same household.

Amendments to the act on Public Finances:

2014 => legally approved state aid to organizations that officially have ties to or

had cooperation with political parties within 5 years.

2015 =>Sports clubs and federations under the control of members of the

government, state secretaries, deputy state secretaries, (lord) mayors, presidents

of county councils or their immediate relatives do not fall under the scope of

conflict of interest anymore and can be beneficiaries of state aid

Regulatory see-saw with conflict of interest

Transparency implications of the sport subsidies

The current corporate tax reduction system gives spaces to opaque lobbying (TI-Hungary)

1. sports clubs issue a certificate of subsidies, which entitles the donor companies to reduce

their corporate income tax by the amount of the subsidy (1)

2. sports clubs are not obliged by law to publish a detailed report on the apportionment of

the subsidies (2)

3. the identities of the donors can remain in the shadow and company offerings are treated

as pure private donations (in spite of the fact that they stand by nature closer to public

funds) (3)

4. biased selection of eligible sports clubs can be observed (4):

Only 5 government selected spectator team sports can apply for subsidy =>

application for authorization at their respective sports federations in order to be

eligible for subsidies. (eligibility process suffers from lack of transparency)

“

”

What people nowadays call corruption, is practically the most

important policy of FIDESZ

Chairman of the Board of Trustees of Századvég Foundation

koncsik.anita@k-monitor.hu

Thank you!