Hungary: Privatization of the Hungarian Electricity Industry

Last Updated: 15 November 1995
The privatization of the HUF 600 billion Hungarian electricity industry to be launched in the near future is an appealing project for many foreign investors. Interested investors need to be prepared to inject capital into this industry branch, however, in order to modernize it. The other goals to consider during the privatization process are (i) the goal to generate more profits and (ii) to provide opportunities for Hungarian contractors.

MORE PROFIT

Currently the Hungarian electricity industry has substantial losses at the end of each fiscal year. The reasons for such losses are numerous, one of which is the periodically occurring price increase of gas, coal and other raw materials used for producing electricity with the price of electricity having remained stagnant prior to September, 1995. Additionally, the Hungarian electricity industry is in the process of repaying loans with high interest rates. All of the above induced the Hungarian government to raise the price of electricity as of September, 1995 and to continue to effect periodic raises until 1997. According to projections and calculations, in this industry branch an 8% profit margin means that investors merely break even with their investment. Investors may not look to high profit rates in the future either, in view of the new price regulations becoming effective as of January 1, 1997, which provide that if the profits in any given year amount to 12%, part of such profits must be redistributed among the population.

MODERNIZATION

Pursuant to the tender rules of the Hungarian Privatization Agency ("APV Rt") investors must undertake in their bids to modernize the over 20 year old equipments and installations. This will result in the discharge of employees, although it is expected that successful bidders will have to retain a predetermined % of the existing staff.

Modernization is also needed due to more and more stringent environmental rules. All of the above will require the injection of about USD 3-4 billion (equalling HUF 500 billion) by several investors.

In the case of electricity generating companies (power stations) about 3000 megawatt capacity needs to be withdrawn from operations and within the next 15 years about 4000 megawatts need to be reinstated in its place. Mainly power stations operating with coal need to be modernized, but equipments operating with carbo-hydrogen are also in urgent need of such modernization.

USE OF HUNGARIAN CONTRACTORS

The tender rules prescribe the use of Hungarian contractors in the modernization process. The Hungarian industry for electronic machinery and equipment is competitive worldwide, so it is logical for the Hungarian government to promote its participation in Hungary's modernization of its own electricity industry.

OWNERSHIP STRUCTURE OF THE HUNGARIAN ELECTRICITY INDUSTRY

The current structure of the Hungarian electricity industry is rather complicated. A brief summary is set out below for ease of reference.

Magyar Villamos M-vek Rt ("MVM Rt") the company in charge of the wholesale of electricity, its export-import, the main electricity network and systems-development owns 50% of the shares of companies distributing electricity, of Orszagos Villamos Tavvezetek Rt, of OVIT Rt and owns about 34-50% of the shares of electricity generating companies.

APV Rt, Hungary's Privatization and Asset Handling company owns about 47,8% of the shares of the companies distributing electricity and about 45,8% of the shares of electricity generating companies.

Municipalities own about 0,2% - 8,4% of the shares of both companies distributing electricity and of electricity generating companies.

Szenbanyaszati Szerkezetatalakito Kozpont ("SZESZEK")

[Szeszek - Center for Coal Mining Structure Transformation] is a shareholder in four electricity generating companies (Bakony Eromu_ Rt, Matrai Eromu_ Rt, Pecsi Eromu_ Rt and Vertesi Eromu_ Rt).

Pursuant to the above structure, MVM Rt is the determinative company of the electricity industry.

CHANGES EXPECTED FROM PRIVATIZATION

After the impending privatisation taking effect, both the electricity generating companies from which MVM Rt will purchase electricity and the companies distributing electricity, to which MVM Rt will sell such electricity will be operating as independent private companies. The present close interrelationship of the market participants, also reflected in their interrelated shareholding, will cease to exist and their relationship will be merely contractual. All market participants will have to respect the regulations of the Hungarian Energy Office (Magyar Energia Hivatal).

The Hungarian state will hold a so-called "gold share" in both companies distributing electricity and electricity generating companies which will provide voting priority to the Hungarian state, thereby insuring that the Hungarian state's strategic interests are respected at all times. The Hungarian state's interests will continue to be ensured by its authorities issuing operating licences for all participants of the electricity industry, as well. Also, the majority of the shares of MVM Rt, in charge of the whole system of electricity shall remain in state ownership. The fact that the majority of the shares of Paksi Atomeromu Rt and of OVIT Rt will be held by MVM Rt provides an additional guarantee for the Hungarian state's interests. The above will take place by APV Rt acquiring 50% of the shares currently owned by MVM Rt in companies distributing electricity and APV Rt in turn putting the state's shares in Paksi Atomeromu_ Rt and OVIT Rt to MVM Rt's disposition.

EXPECTED PRIVATIZATIONS IN 1995

In 1995 the following privatizations are expected to take place:

1. 46,15% - 49,23% of the shares in the six electricity distributing companies will be sold. The successful bidder(s) shall also acquire the right to purchase a majority shareholding in the six electricity distributing companies during the second stage of privatization until December 31, 1997.

2. 34-49,71% of the shares in the seven electricity generating companies will also be sold. Successful bidders will have to undertake to make substantial capital injections/investments.

3. 24% of the shares in MVM Rt will also be sold during the first stage of privatization. Those investors will be favoured here, who undertake to make capital injections into the seven electricity generating companies. Successful bidders shall also acquire the right to purchase an additional 15% of the shares in MVM Rt during the second stage of privatization.

In both stages of the privatization process the majority shareholding of the Hungarian state will remain unaffected. Municipalities and employees will also own shares in MVM Rt. Some shares will be acquired by compensation coupon-holders.

The tenders for the above privatizations have already been published in the September 19, 1995 issue of PRIVINFO, the official gazette of APV Rt. Bids will have to be submitted by November 30, 1995 at APV Rt's headquarters (at 1133 Budapest, Ujpesti rkp. 31-33 VIII. em. 808).

TERMS AND CONDITIONS OF SUCCESSFUL BIDS

Successful bids must comply with the following terms and conditions:

- purchase price must be paid in one lump sum, in cash;

- a business plan demonstrating the expected overall business development of the company must also be submitted;

- the continued employment of a certain number of employees must be ensured;

- bid offers must remain valid for 90 days from the date of their submission;

- bids must be submitted in five English and five Hungarian language versions in closed, unmarked envelopes;

- the submission of bids will be certified by a notary public;

- the issuer of the tender retains the right to declare the bidding process unsuccessful and not to enter into an agreement with any of the bidders.

The Information Memorandum consists of two volumes. The first volume contains the general description of the electricity industry and costs USD 25,000 + 25% Value Added Tax ("VAT"). The second volume contains the detailed introduction of each company to be privatized and costs USD 5,000 + 25% VAT with respect to each company. The Information Memorandum may be obtained at the Customer Information Office of the issuer of the tender after the bidder executed a Confidentiality Declaration and provided a bank transfer certificate evidencing the payment of the purchase price of the Information Memorandum to issuer's bank account held at the National Bank of Hungary (account number: 217-93132). The Information Memorandum may be obtained from October 16, 1995 each business day between 9 a.m. and 16 p.m.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information please contact: Beiten Burkhardt & Mittl Wegener Lawyers, Jozsef Nador ter 9, H-1051 Budapest, Tel: (36)(1)2661881, or enter a text search "Beiten Burkhardt Mittl and Wegener" and "Business Monitor".

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