Use subsidies as icing on the cake, not key ingredient

 

For all its laudable aims, the practice of awarding subsidies is not only controversial, but raises many critical questions. Nils Blunck, who has worked successfully in this field for 15 years, addressed these questions in an interview with The Budapest Times.

What is the situation currently with regard to EU subsidies?

A total of EUR 25 billion in European Union subsidies was available to Hungary from 2007 to 2013. In late summer 2012 there were estimates that up to a third had not yet been used. At the end of April the National Development Agency (NFÜ) reported that 95 per cent of the funds have been used. Calls for proposals for the still-available funds were to be announced by the end of the first quarter. At the end of March a notice was then published according to which the period for re-announcing the programmes for business development would be extended to the end of the first half of 2013.

In other words, those seeking to obtain subsidies need to be patient.

Yes, unless it concerns companies that are planning an investment of EUR 10 million and intend to create at least 50 new jobs depending on the region and the industry. In such cases the subsidies will be awarded by an individual government decision. Proposals are expected to be able to be made in this category until the end of May. Small companies, however, have to wait. Among our customers alone, we have around 30 that are marking time with planned investments.

How did this bottleneck in economic development happen?

The business development programmes were well received by companies and have generally been well utilised. It’s my understanding that the Hungarian state has allocated the majority of the still-available funds to the state sector. The field of business development has now received little in the way of additional funds. Essentially, however, the state must first create clarity about the still-available funds. In the second step the state can then regroup or apply for regrouping of funds not yet used to programmes where there is great need. For a time there was also a shortage of experts capable of planning programmes, issuing calls for proposals and monitoring the implementation of the programmes appropriately. In addition, fundamental changes to the administrative structure have again been announced. The central planning institution, the NFÜ, will hand over competences to the various ministries. All that takes time.

What if the announcement of the current programmes is further delayed?

The available funds that have not yet been used for the period ending in December would be lost. It would be better to use all the funds of the current period if only to strengthen Hungary’s negotiating position for the next period between 2014 and 2020.

Why can’t the funds be regrouped quickly?

For one thing, staff are needed for the planning and documentation. The Hungarian government can regroup funds independently within a specific sector, such as business development. However, the approval of the EU is required in order to move funds from one field, such as agriculture, to another, such as business development. The speed and success of negotiations also depend, however, on the relationship between Brussels and Budapest, which, as we know, is not the best at the moment. If, however, Brussels is overly critical towards proposals from Hungary, then more time is needed for negotiations.

Some investors complain that they can only embark on an investment if the proposal for the entire project has been submitted to the competent authority and been approved by it, which can drag on.

The principle is: submit first and then invest. Unfortunately there were and are different rules as to when it is possible to embark on the investment. There have been programmes where it was possible to begin one day after submitting the proposal, while with others it was necessary to wait for a letter confirming receipt. With still others it’s necessary to wait for written confirmation that the proposal fulfils certain formal criteria. Of course in the first case mentioned above it is possible to get going with the investment immediately after submitting the proposal but at your own responsibility and risk. It is certainly possible for the proposal to be rejected after a waiting period of several months, and then it’s not permissible for it to be improved and re-submitted. That’s why many businesspeople wait until approval has been given but that can take time. We had one case where it took nine months.

For innovative companies, especially in the highly dynamic automotive sector, having to wait up to nine months must be a great test of patience. Aren’t the regulations out of touch with reality?

That depends on your perspective. For companies it’s naturally out of touch with reality. That also applies to obligatory production targets, which in a period required by the authorities are in part speculative. But that’s what happens when administration and the free economy come into contact. For the subsidies administration it’s about planning and managing programmes and ensuring that the funds are not misused. There’s a desire to “tick off” projects, so it’s welcome if precisely the amount announced is called up and exactly under the agreed conditions. That creates the impression that the officials think in terms of pigeon holes and are overly bureaucratic and formalistic. If something changes during the implementation of a project, then it gets complicated.

In some cases entirely banal things are objected to, for example if a production hall was photographed from the wrong angle. What’s the reason for the pedantry? Is it fear of Brussels?

It’s all very formalistic and bureaucratic because the officials want to ensure that the rules are complied with precisely. We have hardly a single investment that proceeded as it was initially planned. That’s the way life is. It’s possible to speak with the ministry but there’s a lot of red tape. Many businesspeople are irritated by incomprehensible requirements. That can lead to investors having to wait up to two years for subsidies to be paid out. That’s not easy for businesspeople to get their head around.

Why doesn’t the administration do its utmost to create jobs, the highest priority of the Fidesz government?

Unfortunately I don’t know the reason. I wish it were the case but unfortunately it isn’t. We have investors who would create hundreds of jobs but run up against a wall with their investments, together with us. We have customers who have been excluded from funding for specious reasons.

Another source of frustration is the far too short period for which programmes are open, which in some cases is just a few days. Less well informed companies are automatically excluded from the outset. How long does it take to put a complete proposal together?

It depends on what requirements the programme makes of the investor and the project, how many criteria need to be met and how advanced the project of the investor already is in terms of planning. A period of two to six weeks is realistic, which is longer than some programmes are open for. It’s naturally frustrating when we are asked in retrospect by a customer why we didn’t submit a proposal for such programmes. How should we explain to them that a programme typically devised for two to three months is closed after two or three days? And then we are informed by the ministry that it’s in order because a sufficient number of high-quality proposals were submitted.

But it’s evident that something is rotten in the state of Denmark. Doesn’t that worry anyone in Brussels?

In Hungary there have been and are hundreds of different subsidy programmes. It is the duty of the state in the first instance to ensure legality and compliance with rules. The EU doesn’t have the capacity to get involved on a wide scale and in greater depth. The EU only monitors selectively and in the case of large scandals. Incidentally, there are repeated reports by the European Commission and the press about numerous EU member states where irregularities have occurred in connection with EU funds.

In any case, insufficiently transparent circumstances must be good for your business.

The formalised proposal procedures mean that investors need “pathfinders” like us who help to identify the relevant programmes, take care of the proposal in the national language and negotiate with the Hungarian administration concerning the project, if required, until the conclusion of the contract. The work is far from over when a proposal is approved. Payment tied to project implementation can go on for up to five years. During that time the company needs to cooperate closely with the state offices responsible for the payment of the funds and monitoring. To ensure that this not unproblematic phase goes smoothly, continued cooperation with an experienced consultancy like Blucron is recommended.

Is it worthwhile at all for companies to seek to obtain subsidies given all the imponderables and the large bureaucratic effort required?

The funding intensity in Hungary depends in part on the region, i.e. an investment in Budapest gets the least in terms of subsidies – it may be as little as 10 per cent, In Pest County it rises to as much as 25 per cent, while in particularly disadvantaged regions in the east and south it can be as much as 50 per cent. In the case of some training programmes the subsidy can even amount to 100 per cent of the investment amount. That’s naturally a great incentive and companies are willing to put up with certain things to obtain that. However, unfortunately we also have customers who simply don’t want to plan with subsidies again, although they could obtain them again, simply because they regard the associated expense and uncertainly as disproportionately high.

Some companies are simply too respectable to get up to funny business like establishing letterbox companies in villages in east Hungary or manipulating their staff numbers.

Yes, some businesspeople do in fact get up to a lot of tricks. We predominantly have customers from the German-speaking world who plan and implement their investments seriously and who don’t build castles in the air. They aren’t willing to engage in such activities as a matter of principle.

One interview partner told us that he had sufficient own funds for an investment but because of a certain rule had to have recourse partly to a bank loan, which moreover he was not allowed to repay immediately, meaning that he had additional expenses for interest and fees.  What sense does that make?

That applies only to subsidy programmes for micro-enterprises, rather than to all subsidy programmes. These programmes were conceived with the idea that Hungarian companies have problems obtaining bank loans, which is why such loans were included. That’s an interesting idea in itself. However, the possibility of not making use of it was not allowed for.

It’s supposed to be a question of supporting businesses, rather than supporting banks.

Many programmes have not been thoroughly thought through. Many well intended regulations that are somewhat detached from reality in their impact can devalue even the best programmes. You can have an investment that’s extremely deserving of subsidies, but it doesn’t meet one knockout criterion, then it stands no chance and even the best arguments won’t help. Reliable information is another point. We advise investments that are on ice because of a lack of information. It’s not even necessarily about a clear “yes”. Even a clear “no” would get things moving. No manager wants to be responsible to themselves or the shareholders for having begun an investment without subsidies, only to find out a little later, when it’s already too late, that subsidies were available. The tendency is to wait in order to be on the safe side.

Another interview partner of ours came to the conclusion, based on what he had observed, that only those companies obtain funding that don’t actually need it. What’s your view of that?

Fundamentally subsidies should be the icing on the cake of an investment. Due to the long and unpredictable waiting period and an abundance of payment risks, the project should also be able to stand alone, i.e. be capable of being implemented even without subsidies. The conclusion drawn is correct to that extent.

But isn’t that practice contrary to the purpose of subsidies?

Good question!

Currently strong companies become even stronger and weak companies become even weaker as a result of subsidies. Ultimately the support for the large companies is partly financed by weak companies who don’t even have the ghost of a chance of obtaining subsidies. Is that fair?

That’s an interesting point and it can be viewed that way.

In your many years in the subsidies field you have experience with various governments. Has the practice of awarding subsidies improved?

Every government judges that the allocation of subsidies is becoming simpler, quicker and less bureaucratic. Ultimately it depends greatly on the ministries and agencies involved. Unfortunately in Hungary there isn’t a central agency that announces, manages and monitors all programmes. Instead here are various agencies that are responsible for given sectors. For example there’s an agency for business development (Magyar Gazdaságfejlesztési Központ Zrt., or MAG), one for energy projects and one for agriculture and so on. There are some that are involved in the improvement of processes and transparency, such as MAG, which to my mind is developing very well. Then there are others such as the European Social Fund, which takes care of training and further training programmes, where you don’t have a contact person for months. In the case of agriculture subsidies, I have partly the impression of a “black hole”. You can barely obtain any information and there are no contact people. For that reason it’s very difficult to say overall how it’s developing.

In your industry there are many chancers who bombard business people with emails of varying seriousness offering their services. Currently they are somewhat less frequent. Is a shakeout in progress?

Currently there’s little to do because there are few programmes. However, since the title of investment consultant is not a protected one, it is likely that these will spring up again when programmes are announced again. There are a handful of consultancy companies that are trustworthy and have been active in the industry for years. They will survive the lean period, which has been experienced since the end of last year. The smaller, in some cases one-man, companies will seek other jobs in the meantime. I’m optimistic for serious service providers because the subsidies for the next seven years are currently being negotiated in Brussels, and Hungary will again obtain a considerable amount. While it’s expected that subsidies on the whole will be around 20 per cent less than in the previous period, in the field of business development, which is our key competence, the same or perhaps even higher sums are to be made available. I’m sure that things will look up again from the middle of 2014 at the latest. I also hope that the Hungarian government during the pre-election campaign will put pressure on the administration again to make use of all available funds before the end of the subsidy period.