EC review sees improvement on use of EU funds in Hungary, but systemic irregularities remain

The European Commission's review found that while there has been some improvement in the use of EU funds in Hungary, certain systemic irregularities are still present, Portfolio reports. The paper obtained the findings of an inspection covering the funding period between 2014 and 2020.

Some of the funds from the seven-year budget might still become available before the end of the year, as payments tend to really pick up towards the end of the budget period. Last autumn, the Hungarian government expected that at least half of the EU funds from the 2014-2020 period would be transferred to the budget in 2023.

Signals of irregularities have been largely ignored

The European Commission's probe has found some improvement in the Hungarian public procurement system, mainly in the area of investigating irregularities, while significant irregularities have also been detected. The audit aimed to identify and manage the risks related to the legality and regularity of the verified expenditures within the Hungarian operational programmes, mainly as regards the work of the department responsible for oversight at the Prime Minister's Office (The operational programmes concern the spending of the cohesion funding, and EU transfers for Hungary mostly come through these and agricultural funds).

The report underlines that in response to earlier discussions with the Commission, and in response to the audit findings, Hungary has made several legislative amendments and financial corrections. According to Portfolio, the document also notes that in exchange for a one-off (over and above the budget) access to the recovery funds, the Hungarian government has agreed to monitor and reduce the number of single tender public procurements.

However, previous audits have revealed significant shortcomings between the managing authorities and the bodies overseeing public procurement procedures when it came to addressing irregularities Portfolio writes. The EC noticed a lack of proper cooperation in that

the managing authorities (which are responsible for the implementation of operational programmes at the national level, and which is in Hungary primarily done at the Prime Minister's Office) regularly ignored reports of suspected irregularities coming from the ministry responsible for overseeing public procurements as well as other bodies.

As a result, 70 percent of the cases with reported irregularities were closed without substantive investigation.

The document highlights one of the procedures audited, where a managing authority failed to carry out the necessary irregularity investigation, citing a lack of legal authority. Only 30 percent of the 737 reported irregularities were checked, which the European Commission finds worrying. It has recommended that procedures for dealing with irregularities be urgently improved and these ideas have been accepted by the Hungarian authorities.

The European Commission has also

proposed penalties. The total amount of financial corrections for all the investigated procedures amounted to around 3.5 billion forints (or more than €10 million),

which, according to the body, highlights the detrimental impact these irregularities have on the use of EU funds in Hungary. (Financial corrections mean that the EU will not cover the irregular invoices concerned, but other projects from the 2014-2020 period may be brought in instead – if there happen to be some due to over-declarations – so this does not necessarily mean a loss of EU funds.)

The audit also found that there was no appeal mechanism in place to contest negative decisions by the Public Procurement Review Department, but one has since been established, so the European Commission considers this matter closed.

The debate on advertising agency services is still ongoing

The investigation has uncovered irregularities in the public procurement of integrated advertising agency services put out to tender by the National Communications Office for the advertisements of NIF PLC. The European Commission argued that a brand-specific restriction had excluded many bidders from the procedure, making the condition too discriminatory. The Commission also criticised Hungary's price formation methodology and the inconsistent application of the same.

Due to these problems, the EU body proposed a financial correction of 10% relating to the expenditure of the framework agreement.

The Hungarian government disputed that unreasonable requirements had reduced competition. However, the European Commission maintains that the requirements of fairness, transparency and the absence of distinction in public procurement are still not being met in the procedure in question and it continues to await a satisfactory remedy from the Hungarian authorities.

Additionally, based on the audit, the legality of the public procurement procedure and the exclusive rights attached to the original contract are also under dispute. Despite the detailed responses from the Hungarian authorities, the auditors insisted that the procurement procedure for the original contract was irregular and hence, so were the subsequent contracts. According to Portfolio's summary, the case remains open.

No longer critically poor

However, in the overall conclusions of the review, the audited part of the management and control system was

no longer rated as critically poor, but it was rated as one 'needing improvement'.

The European Commission auditors concluded that

the estimated financial damage caused by the system's failings amounts to 34.87 million euros (more than 13 billion forints), but a higher correction may be necessary as only 1.34% of public procurement procedures were audited.

The auditors found that there has been some progress in the specifically audited procedures and that there are signs of system-wide improvement, but there are still many areas where they are awaiting action from the Hungarian authorities.

Portfolio points out that the investigation's impact on the procedures blocking a significant part of the EU funds which became available after 2021 remains a question.