Transparency International and the Hungarian business community

Budapest, February 10, 2009

Transparency International and the Hungarian business community

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• Corruption and its impact on Business

• Corruption in Hungary

• Transparency International Hungary’s anti-corruption efforts

CONTENTS

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Corruption’s impact on business

Increases cost of doing business

•In countries with widespread corruption companies are coerced to spend a relatively significant portion of their revenues on bribes

Description

Distorts competition

Discourages investment

Source: Oriens, Lambsdorff

Corruption has considerable direct impact on the operation of business: it increases costs, reduces ability to compete, and inhibits investment

CORRUPTION’S IMPACT ON BUSINESS

•Corruption favors those actors which have engaged in effective corruptive procedures and helps them capture markets

•Higher uncertainty of business success caused by the secretive nature of corruption discourages investment and induces misallocation of resources

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Income level

Business freedom*

Government effectiveness**

Description

• GDP per capita on purchasing power parity

*Business freedom is measured by the Heritage foundation as a component in the Index of Economic Freedom. It is a quantitative measure of the ability to create, operate, and close an enterprise quickly and easily**The Government effectiveness index measures most importantly perceptions of the quality of public and civil services, and the quality of policy formulation and implementationSource: Oriens analysis, Transparency International, World Bank, Heritage Foundation

The most important factors determining the level of corruption are income, business freedom, and government effectiveness. The three variables together explain more than 90% of the CPI scoreKEY FACTORS DETERMINING LEVEL OF CORRUPTION

Relation with level of corruption

• The higher the income, the lower the level of corruption

Mechanism

• Higher income enables operating a more efficient bureaucracy, reducing incentives for bribing both on the supply and the demand side

• Ease of doing business

• The higher the business freedom, the lower the corruption

• The lower number of mandatory business contacts with the state lowers the number of potentially corrupt transactions.

• Quality of public services, quality of policy formulation and implementation

• The more effective the government, the lower the level of corruption

• Effective governance results in better government institutions, which in turn are harder and less profitable to corrupt

Statistical analysis:• Regression analyses with data of 65 countries between TI’s CPI, and per capita GDP PPP data from the

World Bank, Business freedom score from the Index of Economic Freedom, and Government effectiveness score from World Bank’s Worldwide Government Indicators

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CONTENTS

6Source: Transparency International

Between 2000 and 2008, the corruption situation in Hungary did not improve in absolute terms, and deteriorated relative to peers in Central Eastern Europe

CORRUPTION PERCEPTION INDEX 2000-2008Higher score implies lower level of corruption

Hungary

EU-15

CEE

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Corruption’s impact on business

Increases cost of doing business

•10% of firms spend more than 2% of their annual revenues on bribes

Evidence in Hungary

Distorts competition

Discourages investment

Source: Oriens analysis, EBRD: Business Environment and Enterprise Performance Survey, 2005, PricewaterhouseCoopers: IV. Global Crime Survey – Hungary, 2007; Gallup: Corruption in the sphere of small and medium-sized private enterprises, 2000

The negative impacts of corruption on businesses are significant in Hungary

CORRUPTION’S IMPACT ON BUSINESS

•Of 77 larger enterprises, 44% claims that failing in a tender might be a result of bribe from a competitor

•24% of firms stated they had decided not to make major investments because of fear of having to pay bribes

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*Government size score is measured by the Heritage foundation as a component in the Index of Economic Freedom. It is defined to include all government expenditures

Source: Oriens analysis, Transparency International, World Bank, Heritage Foundation

Anti-corruption efforts should focus on improving the efficiency of government, since on the basis of the size of government expenditure alone one would expect Hungary to be much cleaner

RECOMMENDED KEY FOCUS OF ANTI-CORRUPTION EFFORTS IN HUNGARY

Predicted CPI

Based on GDP PPP per capita

TI’s CPI, 2008

Based on Business freedom score

Based on Govern-ment size score*

Roots of corruption in Hungary

• Based on Government effectiveness score, Hungary’s predicted level of corruption is in line with its perceived level

• However, statistical analysis of the relation between corruption and the size of government reveals that the actual size of the government should imply a much lower level of corruption

• Anti-corruption efforts thus should target the efficiency of government spending, since there is a substantial potential for Hungary to reduce corruption

• Additionally, by increasing business freedom the level of corruption could decrease further

Based on Govern-ment effectiveness score

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CONTENTS

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Enhancing business freedom•TI-H has launched targeted projects to enhance business freedom

A less corrupt and thus more business friendly environment

Raising awareness of corruption as a problem• TI Hungary organizes continuous media and PR activities to

enhance the effectiveness of its targeted actions

Ongoing analysis of the corruption situation• TI Hungary conducts regular surveys applying TI International’s methods to

monitor the corruption situation

Source: Transparency International Hungary

TI Hungary has developed a wide range of mutually supportive general and targeted activities in order to most effectively combat corruption

TI HUNGARY’S ANTI-CORRUPTION EFFORTS – HOW THE VARIOUS ACTIVITIES BUILD UPON EACH OTHER

Improving govern-ment effectiveness•TI-H is actively helping the government improve its effectiveness

11Source: Transparency International Hungary

By publishing the National Integrity System and the latest CPI rankings, TI Hungary helps obtaining a comprehensive picture about corruption in Hungary

ACTIVITIES – ONGOING ANALYSIS OF THE CORRUPTION SITUATION

Past activities of TI Hungary• National Integrity System (NIS): TI

Hungary has prepared a comprehensive study on the transparency and accountability of the Hungarian institutional setting from the perspective of corruption

• Corruption Perception Index (CPI): TI Hungary has published TI’s global survey

Plans for 2009

• NIS: TI Hungary will continuously monitor the implementation of measures recommended in the NIS

• CPI: TI Hungary will update and publish the index and study for 2009


TI-H puts significant emphasis on promoting anti-corruption together with its Corporate Sponsors through mutually beneficial activities

ACTIVITIES – RAISING AWARENESS OF CORRUPTION

Past activities of TI Hungary• By its high visibility on corruption related

issues, TI-H has established itself as a key actor in policy-making and promoting anti-corruption

Plans for 2009

• Organizing Anti-Corruption and Compliance conference together with Corporate Sponsors

• Organizing Anti-Corruption Day Campaign together with Corporate Sponsors

• Setting up Advocacy and Legal Advise Center

• Airing anti-corruption ads• Establishing Newsletter• Additional PR by Fair Play Marathon


TI Hungary is planning to launch several targeted projects which aim to directly improve the business environment in which companies operate

ACTIVITIES – ENHANCING BUSINESS FREEDOM

Past activities of TI Hungary• Training of judges: TI-H has prepared a

training handbook and detailed curriculum• Whistleblowers’ protection: TI-H has

introduced the issue in Hungary, a bill is being drafted at the Ministry of Justice

Plans for 2009

• Monitoring public procurements• Launching judicial trainings• Promoting the adoption of Business

Principles for Countering Bribery by the private sector

• Promoting Integrity Pacts• Establishing a Competition Database on the

compliance of Hungarian enterprises with Competition Law


TI-H devotes significant resources to improving government effectiveness - a key area where interventions are likely to have high impact

ACTIVITIES – IMPROVING GOVERNMENT EFFECTIVENESS

Past activities of TI Hungary• Participating in policy formulation for

public procurements: the related law has been amended by TI-H’s recommendations, Integrity Pact has been incorporated

Plans for 2009

• Monitoring party and campaign financing• Taking part in anti-corruption policy

formulation• Issuing policy positions• Advocating transparent public procurement

system• Monitoring the utilization of EU funds• Monitoring state media spending

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320

Project-related expenses

Core operational costs

TI-H’s budget for 2009EUR thousand

The cost of implementing the plan for 2009 is EUR 320,000. TI-H seeks to raise EUR 60,000 of this sum, which is not yet covered in its budget, from corporate sponsors

REQUIRED RESOURCES IN 2009

Source: Transparency International Hungary

Support sought from corporate sponsorsEUR thousand

CEE Trust Core

Funding

Corp. project donors

TotalGrants and other income

To be raised from corporate sponsors

Documents

Transparency International and the Hungarian business community