When companies become black holes for EU funds

Forrás: Direkt36 - Pethő András

In 2009, by a road crossing the industrial park of Tiszaújváros, a town in Eastern Hungary, a new sign was erected to proclaim that a factory would be built there with the support of the European Union. A company, Eko Fire Ltd., received 411 million forints (1.3 million euros) to build a plant that would produce an environmentally friendly fuel called pellet.

Now the sign is lying on the ground, surrounded by weed. Although the factory building had been completed, the plant has not started to operate at all aside from a short trial run. The company that owns it went bankrupt shortly after the construction had been finished. The building, enclosed by a barbed wire fence, is permanently watched by a security company.

The case of Eko Fire Ltd. is not unique. By analysing the databases of EU funds and business registrations data, Direkt36 found nearly 300 companies that received EU grants in the last development programme launched in 2007 and later went into liquidation or bankruptcy. Even though this is only a small fraction of the tens of thousands of companies that that were given thousands of billions of forints through the programme the amount they received is still remarkable: more than 9 billion forints (28.6 million euros).

Not all of this money can be considered wasted. Some businesses could recover from crises of bankruptcy or liquidation. In cases of several companies the EU money had been paid several years before the liquidation, possibly as a result of the 2008 economic and financial crisis, started. There was some time for these companies to innovate and contribute to the development of the Hungarian economy with the help of EU grants.

Direkt36, however, identified dozens of firms, where all signs indicate that the EU money was paid without being useful or making much sense.

It is hard to point to one factor that is responsible for these cases. The stories differ on whether the state system or the businesses bear most of the blame for squandering EU money. Some companies went into liquidation almost immediately after receiving EU funds. A firm went bankrupt even though it received not only a series of EU grants but high-value investment from other public sources. Several of these companies are investigated by the authorities because of suspected crimes committed during the liquidation.

According to EU grant contracts the grantees are “required to declare immediately” to the government agencies if there are any conditions that ”threaten the implementation of the project or reaching the aim of the fund.” Direkt36`s investigation, however, shows that several companies received money even though they had financial or other operational problems.

After a company goes bankrupt, in general it is difficult to recover the allocated EU money. According to liquidators, in many cases there is no chance for the state to get the money back, while in other cases only a part of the grant can be retrieved. Everything depends on how well the companies’ assets can be sold but – as one liquidator put it – “in a liquidation it is hard to sell at a good price” because everybody wants to buy on the cheap.

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The EU grant programmes are overseen by the Prime Minister’s Office, led by minister János Lázár. The office said that the “government does everything in its power to make sure that EU funds are used according to the rules and regulations.” In case of irregularities, the office added, they do everything they can, to retrieve the money. They claim that so far they have managed to recover nearly 75 percent of the affected grants but they did not answer the question about what the proportions are in case of grantees that went bankrupt or got liquidated.

From bankruptcy to the top of a state firm

While most of the companies and their owners identified in Direkt36’s analysis have not made headlines before, there is one exception.

In February 2015, the government appointed Norbert Szivek as CEO of the Hungarian National Asset Management Inc., one of the most important state companies. The official announcement about the appointment said that the 40-year-old businessman ”has gained extensive knowledge on corporate governance and reorganization and experience at several national and international companies.” What was not mentioned is that a company called Új Strigon Ltd., which is co-owned by Mr. Szivek and his relatives, has been struggling to survive for years and at the time of his appointment was already under liquidation.

The company has been living off the market for two decades, producing fireplaces and other metal products, but also received a large amount of public money shortly before its troubles became known to the public. In the last weeks of 2011, the firm was awarded two EU grants worth 176 million forints (560.5 thousand euros). One goal of the project was to improve the company’s premises and the firm pledged to grow its staff of more than 100 people with another 30 new employees. Nothing was achieved of this.

The company is under liquidation, the plant stopped working and most of the employees were laid off. “Maybe no more than 4 people are with the company, they are responsible for cleaning and maintenance,” said Gábor Ernst of Allego Kft., the company in charge of the liquidation.

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Új Strigon’s grant contract also included the paragraph ordering the company to “immediately report” to the government agencies “any circumstance that endangers the project’s completion or achieving the grant’s goal.” Still, the company accepted EU payments even when it was admittedly struggling with serious problems.

Records show that at a meeting of the company’s owners in May 2013, the manager said that the “company’s operation got into a significant danger”. A little more than three weeks later, on 20 June, the company received 49 million forints (156 thousand euros) from EU funds.

Norbert Szivek was also present at the meeting where the company’s troubles were mentioned but he declined to answer questions about the EU grant or the debt his company owes to the state. The Hungarian National Asset Management’s communication department said that Szivek is only a minority shareholder in the company and “he has never participated in its management and its daily operations.”

The Prime Minister’s Office has not answered the question whether it was known to the authorities that Új Strigon was having difficulties at the time of the payment of 49 million. The office did not answer those questions either how they try to avoid similar situations and what they do to make sure that the EU grant contracts are followed.

Another two months after the payment of the 49 million, it became clear that Új Strigon’s troubles were unmanageable. In August 2013 the company filed for bankruptcy, which later turned into liquidation. Both procedures are a sign of a company’s financial difficulties but there is a significant legal difference between them. Bankruptcy is always initiated by the firm with the hope of rescuing the company. Liquidation is launched by a creditor who sees no other way to retrieve its money from the company.

The firm’s decline was caused partly by the effects of the 2008 financial crisis, said Gábor Ernst, an employee of the liquidator company. Company records show, however, that it was also caused by a conflict among the owners that broke out after the death of Norbert Szivek’s father, the company’s main shareholder. After his death, the rest of the owners, mostly members of the Szivek family, disagreed on how to divide the shares and how to operate the company.

The assets of Új Strigon have been put on auction twice but no serious bidders appeared, according to the liquidator. The Hungarian government can retrieve the EU funds only once the properties and tools of the company are sold. The liquidator said that there is a good chance for a partial recovery of the EU money because some of the companies’ assets were collateral for the awarded sum. If those assets could be sold and there are no other creditors with collateral rights most of the money will go to the state.

Everything happened so fast

In the case of Norbert Szivek’s company, there was less than two months between the receiving of the EU fund and the start of bankruptcy proceedings, but there are other companies where even less time passed between the payment and the bankruptcy or liquidation.

The Dél-Békési Falukép Social Cooperative received more than 17 million forints (56 thousand euros) in order to renovate a building with the employment of disadvantaged people. They won the tender despite the fact that, according to the business registry, an executory procedure initiated by the tax agency had been in place when the cooperative won the EU grant.

The National Tax Authority has not responded to our questions about the procedure. Krisztina Boldog, former manager of the cooperative, said that they had a tax debt when they applied for the EU grant but the tax agency gave them a relief by letting them pay in instalments. In theory, those with tax debts cannot get EU money but this relief made it possible in the case of the cooperative, Boldog said.

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Still, according to the former manager it was a dispute with the tax authority that led to the cooperative’s end. In early 2012, the authority launched an investigation into the dealings of the organization with the suspicion of irregularities. According to Boldog, the cooperative’s books were taken by the inspectors which made it impossible for them to continue their work. She claims that the agency’s suspicions were unfounded.

The cooperative received the last EU payment on October 9, 2012 and in just over two weeks, on October 24th, the liquidation began. It was completed this year in April with shutting down the cooperative.

The Prime Minister’s Office has not answered the question whether the government tried to get back the money paid to the cooperative. Boldog is not aware of any attempts by the government to retrieve the EU funds. “I don’t know about anything like this. Although sometimes those are the last ones to learn about these events who are concerned,” said the former manager.

Only 15 days passed between the last EU payment and the start of the liquidation process in the case of Deka-Hyb Hústermelő Ltd as well. This company received 172 million forints (548 thousand euros) to develop a “natural-based new growth promoter to trigger antibiotics” but on March 5, 2014 – just over two weeks after the final payment – the liquidation procedure began. It has continued ever since and the liquidator already launched the auctioning of the company`s assets, indicating that the company might not be able to recover from this crisis.

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Deka-Hyb’s liquidator has not responded to questions from Direkt36. The Prime Minister’s Office has not answered the question whether the government is trying to get back the EU money paid to the firm.

Showered with public money

There is a company that has received lucrative grants not only from the EU, but also from the Hungarian state.

Liatech Ltd. – a manufacturer of concrete blocks – won 5 EU tenders between 2008 and 2012. As a result of these, it received more than 124 million forints (395 thousand euros). In addition, in December 2009, the state-owned Small Business Development Company Ltd (KvfP) provided a capital injection to Liatech. Through a capital increase of 99 million forints (315 thousand euros) KvfP became an owner holding 48.7 percent of the shares.

According to the introduction on the website of KvfP, the aim of the company is to “improve the effectively functioning small and medium-sized enterprises – that are capable of development – with equity investments.” The Liatech Ltd. was not a good investment in this regard, because the company declared bankruptcy in May 2013 and later underwent liquidation, which has continued ever since.

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The company`s previous managing director, Jozsef Farkas, is still fighting to receive his and his former employees’ salary from 2-3 years ago. “Approximately 4-5 million forints (13-16 thousand euros) have not been paid. We are talking about around 20 people, including the receptionist too” – said Farkas, who thinks that the previously prospering company went into decline mainly as a result of the 2008 economic crisis. Since the construction industry slowed down, many of their clients in the construction business cancelled their orders, giving the “final blow” to the company.

The owners of Liatech could not be reached and the liquidator said that he is not willing to provide any information beyond the official announcements. These documents do not shed light on the state of the liquidation but other signs point to a chaotic procedure. The national tax authority’s Press Office for Criminal Affairs said that a criminal investigation is being conducted in connection with Liatech’s liquidation. The Press Office declined to reveal any details of the investigation.

KvfP acknowledged that they have had “only an insignificant return relative to the size of their investment”. The rest is depending on the result of the liquidation.

The same is the case with the EU grants. So far just a small fraction of the EU fund money has been recovered from Liatech. The government has demanded around 150 million HUF including interest (477 thousand euros), but according to the Prime Minister`s Office they have only received 4.3 million (13.6 thousand euros).

Nice start, bad end

Nothing could have been retrieved so far from Eko Fire Ltd., the company that received 411 million forints in 2009 and 2010 to build a pellet factory in Tiszaújváros. The government is demanding 470 million HUF with interest (1.5 million euros), but it has not received any of that yet, the Prime Minister’s Office said.

EKO Fire’s liquidator believes that the government will not get any money at the end of the process. “There is zero hope that the money will be returned” – said Csaba Török, the liquidator who has been leading the procedure for more than 3 years. This makes EKO Fire one of the most telling examples that public money can be lost despite the strict and bureaucratic grant procedures.

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The start, however, was very promising. In March 2010, even Gordon Bajnai, Hungary’s then Prime Minister, visited the construction site, walking around in a white safety helmet and talking about how the factory carried a good message that the EU funds are ”allocated to the proper places and hit their targets.”

There are several reasons why the Eko Fire Ltd. turned out to be a failure. József Kovács former managing director and co-owner said that on one hand the company suffered from a shortage of capital, and on the other hand there was also a lack of harmony among the owners. ”The business went wrong, and we didn`t have the adequate/sufficient capital. There were also debates among the owners about the appropriate division of the company’s shares”, said Kovács.

The initial capital was used for start-up costs but on the test run the factory didn`t generate enough revenue to pay all of the suppliers and creditors on time. “In autumn 2011 the payment requests already started to arrive” said Kovács, and next February the Eko Fire Ltd. underwent liquidation.

During the liquidation procedure, the disputes among the owners who were launching the business, escalated even further. Several lawsuits and criminal investigations are in progress that are all hindering the completion of the liquidation.

The result of these procedures will determine which creditors get the properties of the company, said Csaba Török. Whichever way these legal disputes end, the government cannot hope to regain any of EU fund, he said: “The government also announced its demand as a creditor, but it is so behind in the row of creditors that it cannot obtain any of its assets even if I could sell the factory for twice as much as it is actually possible.”

In collecting and processing the data we were assisted by one of our supporters, Daniel Sparing, and K-Monitor, an anticorruption organization, and CEU’s Microdata research team.

Orsolya Lehotai worked on the article as part of the mentorship program of Transparency International and the Center for Independent Journalism. The program was sponsored by the European Commission and the Norwegian NGO Fund but selecting the topic and producing the article was the sole responsibility of Direkt36. The program was co-funded by the Prevention of and Fight against Crime Programme of the European Union.


  • András Pethő

    András is a co-founder, editor and executive director of Direkt36. Previously, he was a senior editor for leading Hungarian news site Origo before it had been transformed into the government’s propaganda outlet. He also worked for the BBC World Service in London and was a reporter at the investigative unit of The Washington Post. He has contributed to several international reporting projects, including The Panama Papers. He twice won the Soma Prize, the prestigious annual award dedicated to investigative journalism in Hungary. He was a World Press Institute fellow in 2008, a Humphrey fellow at the University of Maryland in 2012/13, and a Nieman fellow at Harvard University in 2019/20. András has taught journalism courses at Hungarian universities.

  • Orsolya Lehotai