Gas distribution in Hungary hits snag

Aug. 9, 1999
The Hungarian Highest Court of Appeals handed down the sixth victory for small-town municipalities in their legal claim against the government's privatization in 1995 of Hungary's gas distribution networks.

The Hungarian Highest Court of Appeals handed down the sixth victory for small-town municipalities in their legal claim against the government`s privatization in 1995 of Hungary`s gas distribution networks.

The government allocated a 40% stake in the distribution assets to the villages at the time of privatization, in exchange for having developed the gas networks. The villages, however, say their role in the development should have garnered them a 90% interest.

The recent court decision upheld a previous one backing the villages` stance that the privatization scheme was illegal.

Legal battle
A growing alliance of small town councils claim they still, by law, own regional gas distribution systems-including pipelines, storage, and processing facilities-that were sold by the national government to foreign companies.

The group is now suing for seizure of the physical assets, as there seems no chance that the central government will compensate the small towns to the degree to which they believe themselves entitled.

The massive 1995 sell-off of gas distribution assets to Western investors such as Gaz de France and Italgas raised $460 million for the debt-ridden Hungarian state. It also convinced foreign analysts that Hungary was the regional leader in reforming away from communism.

Now, small-town activists like Ferenc Kollner, chief secretary of the National Association of Village Municipalities (Toosz), want to change the situation. Toosz represents more than 1,800 municipalities. Kollner advocates concession contracts that would enable the former owners of the gas networks to run them jointly with foreign investors.

Foreign investors are skeptical that any deal to jointly operate the distribution systems could work or could legally be imposed.

State and gas company officials are playing down the threat of any major change to day-to-day gas distribution as a result of the lawsuit. Hungary`s government has reportedly conceded that there was illegality in the 1995 privatization, however.

The villages have rejected compensation offers from the central government as inadequate in comparison to what they say is a $230 million difference between the value of their stake and the cost of developing the network.

In addition, Koller believes the original inequity obliges the state to ensure that the villages obtain a share of the post-1995 appreciation in the gas network`s value, even if the incremental book value is a direct result of capital spending by foreign owners like Ruhrgas and Bayernwerk, both of Germany.