Something is rotten...

How much is corruption now a thing of the past and to what degree is it still an unpleasant fact of life for international companies active in the real estate sector in this part of the world? ‘Eurobuild CEE’ takes a look at the current situation and asks what needs to be done

Nathan North, Mladen Petrov

Corruption, and the damage it does, manifests itself in a number of ways. Corrupt practices harm society by creating unequal opportunities, in that access is restricted to services that people are entitled to – unless they have the financial resources to pay for them. Corruption undermines faith in government, leading people to become more sceptical about the democratic process and thus less likely to be good citizens. Moreover it hinders economic growth, rendering markets less competitive.

Mutual assistance

There is a strong correlation between corruption and economic development and growth. While in recent years, the main markets in the region have been steadily growing, they have also been showing good progress on the indices related to this problem (eg. Transparency International’s Corruption Perception’s Index and Jones Lang LaSalle’s Global Transparency Index). However, there is still some way to go before the situation could be described as satisfactory. Noémi Alexa, executive director of Transparency International Hungary, characterizes CEE countries as “mid-corrupt” – a reflection of the economic progress achieved so far, with the more established EU states (eg. Poland, the Czech Republic) having made more headway than the more recent members (Bulgaria, Romania). But she goes on to add that there is “one special feature of the CEE region, and that is that there is a culture of ‘mutual favours’. There can exist a network of ‘friends’ that you need to be a part of to operate in a market. A country can be said to be corrupt when the economic and political elite is based on such a network.”

How much such a set-up can deter foreign investment is difficult to assess. Noémi Alexa is of the opinion that: “Short-term profits can be made in this sort of situation, but most investors do think short term. If an investor is thinking long-term, then non-transparent and unpredictable, corrupt governments are very off-putting. Usually they regard such countries as very risky locations for investment, and so the economic development of a country can itself be endangered.”

A stink along the Danube

Hungary is a CEE country where everyone seems to agree that there is a corruption problem, but when asked to talk on the record, developers prefer to keep a low profile. The country, which was ranked by Jones Lang LaSalle as semi-transparent (27th position, with a slight improvement in transparency over the last two years), is no exception from the rest of the CEE countries when it comes to the need for having “good relations” with local government. It is a well-known fact that these advantageous personal connections may significantly cut the waiting period necessary to get a project running. As in Bulgaria, “the best way is to commission the architectural designs to a company that has direct local contacts, which speeds things up immeasurably,” one builder told ‘Eurobuild CEE’. There is, however, a cultural twist to this – in Hungary, having personal relations has always been part of doing business. Therefore, unless money is actually being passed under the table, it is simply not regarded as corruption. However, according to some experts, foreign investors are tending to steer away from Hungary, feeling disadvantaged by their lack of connections. The biggest, state-level issue regards the manner in which Hungarian central funds are distributed. The distribution system simply lacks clarity, which is painfully underlined by the national reports published by Transparency International. According to the organization, corruption is a systemic phenomenon in Hungary. The country has slipped five places in one year to 47th position on the organization’s Corruption Perception Index, published in late September. It is the common view that there is little effective control over state spending, with big deals hardly ever involving independent consultancies to determine the market value of a saleable asset. As a result, there is no way to determine whether the transactions involved are conducted based on real property values. Another, somewhat more worrying phenomenon, is how potential development projects are subject to party political interference. It is a matter of some concern that in Hungary the ruling party in a given area should have such a decisive impact on how projects, and the firms hoping to carry them out, are assessed.

A little bit of politics

In Noémi Alexa’s experience of the Hungarian market, real estate is regarded by companies as a very corrupt sector, and the most problematic and risky areas of activity concern public contracts. Across the region, since the transition to democracy there have been legislative measures against corruption and a greater access to information enshrined in law. Noémi Alexa believes these to be “positive developments and well-intentioned, but they are not being strictly implemented. For example, in Hungary according to the Freedom of Electronic Information Act of 2005, every city is required to publish data about the operation of the institution and its finances. Most public institutions do disclose the data about their operations. However, data about the finances of the institutions is rather scarce, which is a problem, because this data would allow for real public control. But the thing is, if a city fails to disclose this data, then it is not sanctioned at all. This situation is caused by both a lack of political will and a tolerance towards corrupt practices by society at large.”

Doing well, but could do better

Romania is often perceived as the second most corrupt country in the EU, with only Bulgaria seen in a worse light. Off the record, foreign investors active on the Romanian market admit that they have been receiving various “offers for help” by the representatives of local authorities. The amount of paper work required to get a project up and running is one of the reasons why corrupt practices often take place. As in Bulgaria, however, those guilty of corruption seem able to carry on with impunity. One rare example of measures being taken against the corruption was the removal of Bucharest’s chief architect. The mayor of Bucharest, however, notably failed to make an official statement about his former employee. “Corruption obviously exists in Romania, but no one speaks about it,” was something we were told several times, always off the record, when working on this story. Romania was ranked 36th in the Jones Lang LaSalle Real Estate Transparency Index, while Bulgaria took 35th position. However, the study shows that Romania made the greatest progress in terms of transparency, moving from the group of countries in the low transparency category to having semi-transparent status. Romania is actually the largest mover on a scoring and ranking basis within the whole of Europe, and second only to Dubai globally. What still needs to be improved? The EU is so far unsatisfied with the pace of reform in the judical system, which has yet to contribute to rooting out the problem of corruption.

Keeping schtum

It must, however, be stressed that progress is being made. For example, in Slovakia a special corruption court has been established that takes its duties very seriously, while in Poland the perhaps misconceived “corruption squads” set up by the last government to arrest culprits live on television, have at least served to push the issue up the agenda. Poland is supposedly one of the