FOREIGN INVESTORS JITTERY OVER ACTIONS OF FIDESZ

C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 000909 SIPDIS STATE FOR EUR/CE JAMIE MOORE. NSC FOR JEFF HOVENIER. COMMERCE FOR ITA/OECA/CSE SILVIA SAVICH. E.O. 12958: DECL: 12/30/2014 TAGS: PGOV ECON EINV KCOR FR HU SUBJECT: FOREIGN INVESTORS JITTERY OVER ACTIONS OF FIDESZ MAYORS REF: A. BUDAPEST 760 ¶B. 08 BUDAPEST 954 Classified By: Political Counselor Paul C. O'Friel for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY. Two recent actions by opposition party Fidesz mayors against private utility companies have rattled Hungary's foreign investors. Senior Fidesz advisors claim these are local incidents and emphasize their party has no policy to re-nationalize privatized utilities. END SUMMARY. ¶2. (SBU) Two recent, apparently unrelated, actions by opposition party Fidesz mayors have sent a chill through Hungary's investment community. In mid-October, the newly elected Fidesz Mayor of Pecs, Zsolt Pava, ordered the occupation of the local water supply company's headquarters, locking out French investor Suez Environment (ref A). The mayor claims he is canceling the contract because Suez took out large loans and siphoned out profits without informing the majority local government owner. Suez claims they met the requirements of the privatization agreement, and regards the occupation of the headquarters as illegal. (Note: Pava was mayor in 1995 when the water company was first privatized.) ¶3. (SBU) The second case involves Demasz, a subsidiary of Electricite de France (EDF),which supplies electricity to southeastern Hungary. The Hungarian newspaper Nepszava reported on December 9 that the Fidesz mayor of the southeastern town of Hodmezovasarhely refused to meet the Damasz CEO, who had requested a courtesy call. The paper printed a letter from the mayor, Janos Lazar, which informed the Demasz CEO, "I have no intention to meet you now or anytime in the future." Lazar continued, "In the course of 2010 the new (Fidesz) government and the new Parliament will change the legislation regulating the energy sector so that they protect the interests of small and large customers. As mayor and MP, I consider it extremely important that the legislation regulating your pricing and activities be changed. I hope that in the future a new political philosophy will be prevalent which defends the national interest instead of the commercial and foreign interests." ¶4. (C) Privately, Demasz CEO Thierry Le Boucher confirmed the newspaper report. He said he was "taken aback" by the tone of the letter from Mayor Lazar, who also serves as Chairman of Parliament's Defense and Law Enforcement Committee, but added that he did not want to make too much of it. Let's wait and see what happens after the elections, Le Boucher said. ¶5. (C) The foreign diplomatic community is not as sanguine. At a private lunch with leading Fidesz economist (and former IMF Assistant Director) Gyorgy Szapary hosted by the French Ambassador, the UK Ambassador wondered if Pecs was "a laboratory for testing out new ideas," while the Belgian Ambassador said both Pecs and Hodmezovasarhely conveyed "a worrying message." The French Ambassador urged Fidesz to clarify its intentions, adding if there were some unhappiness about contracts and rates, it was a question of sitting down and negotiating. A clearly uncomfortable Szapary said he did not agree with the language of Lazar's letter and believed Pecs was an individual case. "I am not aware of any (Fidesz) nationalization program," Szapary stated. ¶6. (C) We raised the question of Pava's and Lazar's actions in a private conversation with Fidesz senior foreign policy advisor (and rumored future Foreign Minister) Janos Martonyi. Martonyi agreed that some of the Fidesz language regarding foreign investment was not helpful. "It has been a little careless, and not the way I would have phrased it," he said. Martonyi noted that he had supported foreign utility sector investment in Hungary for more than 25 years, adding "I helped negotiate some of these agreements." Observing that "times change and deals change," Martonyi said some of the older utility agreements may need renegotiation. However, he stressed, any renegotiation must take place within the rule of law. "We need to be careful, clear, and transparent about what we are doing; we can't just get it 100 percent right, but have to get it 110 percent right." Martonyi stated that he understood jittery foreign investors needed reassurance about Fidesz intentions, and said he would be willing to meet with a select group of commercial counselors early in the New Year to clarify what was and what was not Fidesz policy. ¶7. (C) COMMENT. Our Commercial Counselor is following up with Martonyi on his offer. While these incidents apparently represent the actions of individual mayors, we view the BUDAPEST 00000909 002 OF 002 events in Pecs and Hodmezovasarhely with concern. The United States, France, and Germany are the three largest investors in Hungary's private utility sector. LEVINE